A fixed-rate qualified mortgage closes on 1 June 2026 with a prepayment penalty. The borrower pays the loan off in month 30, when the outstanding balance is $240,000. Assuming the loan is otherwise eligible to carry a prepayment penalty, what is the maximum permitted penalty percentage in month 30?
Correct Answer
B) A penalty up to 1% of the balance, since month 30 falls in the 3rd year
B. The third-year ceiling is 1%; a full $240,000 payoff gives a $2,400 ceiling. Month 30 is after the first 24 months but within the third year. On the stated full payoff, $240,000 × 1% = $2,400. The rule refers to the balance prepaid, not automatically the original principal. Scope and exceptions: Eligibility and other applicable prohibitions still matter, including state law. This is a regulatory maximum, not proof that the contract actually charges it; partial prepayments require their own calculation. Source: 1026.43(g)(1)–(2) — https://www.consumerfinance.gov/rules-policy/regulations/1026/43/
Why This Is the Correct Answer
B. The third-year ceiling is 1%; a full $240,000 payoff gives a $2,400 ceiling. Month 30 is after the first 24 months but within the third year. On the stated full payoff, $240,000 × 1% = $2,400. The rule refers to the balance prepaid, not automatically the original principal. Scope and exceptions: Eligibility and other applicable prohibitions still matter, including state law. This is a regulatory maximum, not proof that the contract actually charges it; partial prepayments require their own calculation.
Why the Other Options Are Wrong
Option A: A penalty up to 3% of the balance, stepping down only after year 3
3% is not the specified ceiling.
Option C: No penalty at all: a qualified mortgage may never carry a prepayment penalty
The regulation permits penalties for certain eligible transactions; the stem assumes eligibility.
Option D: A penalty up to 2% of the balance, the ceiling that runs for the first 3 years
The 2% limit does not continue throughout the third year.
Exam Tip
Check eligibility, elapsed time and the amount prepaid separately.
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