On a California covered loan, prepayment penalties are:
Correct Answer
D) Limited to the first 36 months of the loan
California law limits prepayment penalties on covered loans to the first 36 months. After 36 months, no prepayment penalty may be charged.
Why This Is the Correct Answer
Limited to the first 36 months of the loan is correct. California law limits prepayment penalties on covered loans to the first 36 months. After 36 months, no prepayment penalty may be charged. California law limits prepayment penalties on covered loans to the first 36 months. After 36 months, no prepayment penalty may be charged.
Why the Other Options Are Wrong
Option A: Prohibited entirely
Prepayment penalties are not entirely prohibited on covered loans; they are allowed but time-limited to 36 months.
Option B: Allowed for the first 12 months only
Twelve months is too short; California covered loans may include a prepayment fee or penalty only up to the first 36 months if statutory conditions are met.
Option C: Unlimited if disclosed at closing
Prepayment penalties are never unlimited on covered loans regardless of disclosure.
Memory Technique
CA -> ca-covered-loans-high-cost-consumer-protections
Exam Tip
Covered-loan questions often test the 8-point APR trigger, 6 percent points-and-fees trigger, principal-dwelling scope, Consumer Caution notice timing, ATR, prepayment penalty limits, prohibited loan terms, and remedies.
Common Mistakes to Avoid
- -Using a national baseline answer when California has agency-specific DFPI or DRE requirements
- -Confusing CFL, CRMLA, covered-loan, usury, servicing, and DRE endorsement rules
- -Relying on legacy California state-exam or education assumptions instead of current NMLS source pages
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