A Texas home equity note quotes a 2% penalty on any principal prepaid in the first 36 months. Is the proposed prepayment penalty permitted on a Texas home equity loan?
Correct Answer
C) Void as written: the loan must be payable in advance without penalty
A home equity loan is payable in advance without penalty or other charge, so a prepayment penalty may not be written into one at all. Other choices: the federal 36-month figure is a high-cost coverage test in another body of law; disclosing a prohibited charge does not permit it; and limiting the penalty to a full payoff is still a penalty on prepayment. Source: Tex. Const. art. XVI, sec. 50(a)(6)(G)
Why This Is the Correct Answer
A home equity loan is payable in advance without penalty or other charge, so a prepayment penalty may not be written into one at all. Other choices: the federal 36-month figure is a high-cost coverage test in another body of law; disclosing a prohibited charge does not permit it; and limiting the penalty to a full payoff is still a penalty on prepayment. Source: Tex. Const. art. XVI, sec. 50(a)(6)(G)
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