Ben and Amy Geller have found their dream home in a suburb of Portland, Oregon,

Question

Ben and Amy Geller have found their dream home in a suburb of Portland, Oregon, and visit Western Meadow Mortgages (WMM) to obtain a loan. There, they meet Doug Burke, a loan originator who claims over ten years of experience in the industry. He explains that he used to work as a registered mortgage loan originator for a national bank, but left several years ago to work for WMM, a state-licensed mortgage company founded by his old college buddy. Fortunately, he says, he does not have to “jump through licensing hoops,” because he is a registered loan originator, making him exempt from the state’s licensing and education requirements.  

Doug tells the Gellers that he can help them to obtain the mortgage loan they need to purchase their home. They fill out an application, and he offers them a 30-year fixed-rate loan with the “standard features” of a 1% prepayment penalty in the first three years. He also explains that the lender reserves the right to refuse to accept early repayment. Ben and Amy decide to sleep on the offer, and tell Doug that they will get back to him the next day.

Explain whether Doug is or is not permitted to include a prepayment penalty provision in the Gellers’ loan, and why.

Explanation / Answer

Since the mortgage under consideration is not an adjustable rate mortgage (ARM) but a fixed rate mortgage and that too fixed rate for 30 years, it is permissible to include a prepayment penalty provision in the Geller's loan.

The usual rule is that for Qualified fixed rate mortgage, the penalty period is fixed for 3 years from loan origination and is limited to :

So the prepayment penalty provision is this case is a valid one.

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