Could someone please assist me with the following:

In the state of California for 1st and 2nd mortgages, is imposing a Hard Prepayment penalty to the borrower considered legal? This was pitched to me in a meeting by upper management, as they are considering doing a 6 month Hard Prepayment penalty.

We are currently imposing a soft prepayment penalty but as of late, all of our loans that have been sold to our investors we've had to pay back all of the profits where it has been costing us quite a bit. This comes as a result of a the borrowers buying property and 3 months later they're selling paying off their existing loan. Therefore, management's position is they would like to impose a hard prepayment penalty, as they feel if the borrower sells the property that would still cover what's owed to the investor. Appreciate your thoughts, feedback, comments etc.

Can you help me understand the difference between a "hard" and a "soft" prepayment penalty? There is no CA law stating that prepayment penalties are illegal. However, if you are a Credit Union, the NCUA does prohibit them.

Some One Else,

What a screen name. In answer to your question on the difference between a "hard' prepayment and "soft" prepayment penalty, here goes:

A "hard" or "full parity" refers to a penalty assessed for any reason if a loan is paid off or in many cases more than 20% of the outstanding balance for any 12-month period; whereas a "soft" or "partial" parity refers to a fee if a loan is refinanced or paid down more than 20% for the 12-month period. Furthermore, there would be no penalty if the property is sold.

Hence, it is reasonable to conclude as you indicated in your reply that prepayment penalties are not prohibited by the NCUA because as a Credit Union, your institution is federally chartered and therefore falls under federal preemption. Although there are no state laws in California against imposing a prepapyment penalty to the borrower, a considerable amount of other states do not permit the charging of prepayment penalties. This applies particularly if you are a state licensed non-depository mortgage lender such as the case with the company I'm employed with. I hope this helps. If you need additional info. or clarification, please send me a private e-mail. Thanks.