In reviewing the compliance guide, there seems to be conflicting information about the ability to assess a prepayment penalty on a high-cost mortgage loan.

1026.32(a)(1)(iii) outlines the prepayment penalty test which looks for prepayment penalties after the first 36M from consummation or greater than 2% of the amount prepaid. That seems to indicate that penalties outside those thresholds are acceptable? For example, a penalty assessed between years 3-5 or 1% of prepaid amount?

Then in looking at 1026.32(d)(6) a prepayment penalty is listed as a limitation which a high-cost mortgage shall not include. Since they're removing (d)(7) which allowed for prepayment penalty exceptions, I'm not clear as to the intent of the CFPB.

The compliance guide references prepayment penalties on several pages; including pg 19 "Therefore, the prepayment penalty coverage test below establishes the maximum prepayment penalty amount you may charge and the maximum time frame during which you may charge that prepayment penalty on a transaction that falls within the categories of loans that HOEPA covers." This is the 36M / 2% prepayment penalty test.

So I've talked myself in a circle... While 1026.32(d) appears to expressly ban any prepayment penalty, the need for a prepayment penalty test with corresponding maximums appears to only restrict prepayment penalties, similar to the old (d)(7) language. I must be missing something here.

Is a prepayment penalty restricted or banned on HOEPA loans?

Possibly clarity this AM... 1026.32(d)(6) prohibits the prepayment penalty on a high-cost loan. To get to that point, it has to be covered by HOEPA (a consumer credit transaction secured by the consumer’s principal dwelling) and have 'failed' one of the three tests under 1026.32(a) as in the APR test, points and fees test, or prepayment penalty test.

Therefore, if it's a high-cost loan the prepayment penalty is banned; if it's not high-cost but subject to HOEPA it's restricted to within first 36M and 2% of the amount prepaid.

I think - anyone want to confirm?

Good analysis. Accurate. Don't forget there are other tighter restrictions on PPPs in 1026.43(g), applicable to closed-end loans secured by a dwelling.

Thanks John, it's always much appreciated to have a guru give feedback to let us know we're on the right track!

Along the lines of 1026.43(g), one of the requirements for closed-end loans is that it's qualified as a QM. That appears to be black and white - so even if a bank were to decide to make all of their mortgage loans without the safe harbor protections of QM, they would first need to do away with any prepayment penalties?