A first-lien loan prices at 2 points over the average prime offer rate with points and fees at 2% of the loan amount. Its note allows a prepayment penalty of 1.5% of the amount prepaid, chargeable for the first 42 months after consummation. Does the permitted duration of the prepayment penalty make this loan a high-cost mortgage under HOEPA?
Correct Answer
B) High-cost: a penalty reaching past 36 months trips the third test on its own
The prepayment test has two limbs and either one trips it: a penalty that can be charged more than 36 months after consummation, or one that can exceed 2% of the amount prepaid. This penalty runs 42 months, so the loan is high-cost even though the percentage is modest. Other choices: a penalty of 1.5%, under the 2% ceiling, does not help when the duration limb fails; the APR and points-and-fees tests being nowhere near is beside the point when the three are independent; and a prepayment penalty within both limbs is permitted, so it is not any penalty that matters. Source: 12 CFR 1026.32(a)(1)(iii)
Why This Is the Correct Answer
The prepayment test has two limbs and either one trips it: a penalty that can be charged more than 36 months after consummation, or one that can exceed 2% of the amount prepaid. This penalty runs 42 months, so the loan is high-cost even though the percentage is modest. Other choices: a penalty of 1.5%, under the 2% ceiling, does not help when the duration limb fails; the APR and points-and-fees tests being nowhere near is beside the point when the three are independent; and a prepayment penalty within both limbs is permitted, so it is not any penalty that matters. Source: 12 CFR 1026.32(a)(1)(iii)
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