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#2247159 - 01/05/21 12:32 AM Prepayment Penalty on LE & CD page 1?
Miss Minnie Offline
Junior Member
Joined: Nov 2015
Posts: 33
If there is a "recoupment fee" if you payoff a loan within 36 months of origination, is that considered a "prepayment penalty" in regards to third-party closing costs? This would be in regards to page 1 of the LE and CD in the loan terms box...specifically should the answer be YES to Prepayment Penalty?

The note addresses this in more detail stating that this is not a prepayment penalty, but if the loan is paid off within 36 months, you agree to pay for said third-party closing costs...otherwise calling is a "recoupment fee" on the payoff statement.

Seems like a bait and switch if you say no on the LE & CD, but yes on the note .

Thank you!!!

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TRID - TILA/RESPA Integrated Disclosures Rule
#2247161 - 01/05/21 12:47 PM Re: Prepayment Penalty on LE & CD page 1? Miss Minnie
Adam Witmer Offline
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Joined: Sep 2010
Posts: 2,622
It depends on what the terms of the "recoupment fee". Reg Z defines a prepayment penalty as:

(4) Prepayment penalty. A statement of whether the transaction includes a prepayment penalty, labeled “Prepayment Penalty.” For purposes of this paragraph (b)(4), “prepayment penalty” means a charge imposed for paying all or part of a transaction's principal before the date on which the principal is due, other than a waived, bona fide third-party charge that the creditor imposes if the consumer prepays all of the transaction's principal sooner than 36 months after consummation.

Take a look at the commentary to 1026.37(b)(4) for a number of scenarios that are and are not considered a prepayment penalty.

For example, comment 3(iii) to 1026.37(b)(4) says this:
iii. A waived bona fide third-party charge imposed by the creditor if the consumer pays all of a covered transaction’s principal before the date on which the principal is due sooner than 36 months after consummation. For example, assume that at consummation, the creditor waives $3,000 in closing costs to cover bona fide third-party charges but the terms of the loan agreement provide that the creditor may recoup the $3,000 in waived charges if the consumer repays the entire loan balance sooner than 36 months after consummation. The $3,000 charge is not a prepayment penalty. In contrast, for example, assume that at consummation, the creditor waives $3,000 in closing costs to cover bona fide third-party charges but the terms of the loan agreement provide that the creditor may recoup $4,500 in part to recoup waived charges, if the consumer repays the entire loan balance sooner than 36 months after consummation. The $3,000 that the creditor may impose to cover the waived bona fide third-party charges is not a prepayment penalty, but the additional $1,500 charge is a prepayment penalty and must be disclosed pursuant to § 1026.37(b)(4).
_________________________
Adam Witmer, CRCM

All statements are my opinion, not those of my employer, and should not be taken as legal advice.
www.compliancecohort.com

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#2247234 - 01/05/21 09:40 PM Re: Prepayment Penalty on LE & CD page 1? Miss Minnie
Miss Minnie Offline
Junior Member
Joined: Nov 2015
Posts: 33
Thank you! It seems that this scenario is falling under the example listed above...so indicating "NO" on the LE & CD in regard to the Prepayment Penalty would seem to be correct. Misleading, but correct.

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