A California deed of trust on an owner-occupied single-family residence contains a prepayment penalty clause imposing a fee if the borrower pays off the loan within the first three years. Under California Civil Code §2954.9, how is this clause treated?
Correct Answer
B) It is enforceable only for the first 12 months, after which prepayment penalties on owner-occupied 1–4 unit residential loans are prohibited under California law
California Civil Code §2954.9 governs prepayment penalties on loans secured by owner-occupied residential property of 1–4 units. Under this statute, prepayment penalties are prohibited after the first 12 months of the loan for covered residential loans. A clause imposing a penalty through year three therefore exceeds what the law permits; the penalty is enforceable only within the first year and is void for the period beyond that.
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