A prepayment penalty is a fee that a lender charges a borrower if they pay off all or part of the principal of the loan before its due date. This could happen if you pay off your loan, refinance, or sell your home before a certain date. The penalty is usually included in the definition of points and charges for qualifying mortgages and high-cost mortgages. Qualified mortgages (QM) are subject to additional limitations on prepayment penalties.
The QM General Final Rule removes the 43 percent debt-to-income (DTI) limit and replaces it with price-based thresholds, removes Appendix Q, and maintains “consider and verify” requirements. This means that lenders must consider and verify the consumer's current or expected income or assets, debt obligations, alimony and child support, as well as the DTI ratio or residual income in accordance with the repayment capacity requirements set out in Regulation Z. Lenders are no longer required to comply with Appendix Q to determine debt and monthly income under the new rule. The General Final Rule of QM does not prescribe a particular threshold or subscription method. However, creditors must hold loans in their portfolios for three years to maintain their “qualified” mortgage status.
This is especially important for consumers living in rural areas with low population density, where there are limits on the number of creditors and challenges of granting loans that could be sold on the secondary market. The CFPB rules prohibit prepayment penalties for most residential mortgage loans, except in some specific circumstances. The Board also requested comments on what criteria should be included in the definition of a qualified mortgage to ensure that the definition provides an incentive for creditors to make qualifying mortgages, while ensuring that consumers have the ability to repay those loans. For loans with a lump sum payment, the rules differ depending on whether the loan is a hedged transaction of higher price or not. In addition to liquidity restrictions for unqualified mortgages, commentators argued that liability and damages arising from a possible breach of TILA's ability to pay would be a disincentive for most creditors to provide unqualified mortgage loans. Requiring creditors to use the maximum interest rate would help ensure that consumers could repay their loans.
A commentator on not-for-profit loan originators also argued that including loan originator compensation in points and rates could undermine programs that help low- and moderate-income consumers obtain affordable mortgages. The proposed comment 43 (c) (ii) (C) -2 provided additional guidance to creditors as to the relevant terms of the loan to be used for the purpose of determining repayment capacity. The Board noted that exceptions include mortgage insurance premiums and charges for credit insurance and debt cancellation and suspension coverage.
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