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Are Prepayment Penalties Permitted for QM Loans?

By: Danielle Wright

CommentFriday - March 28, 2014

Question: Are Prepayment Penalties Allowed on QM Loans?

Answer:  It depends. Federal credit unions are prohibited from charging prepayment penalties on any loan including QM loans.

State-chartered credit unions may charge prepayment penalties, but only on fixed-rate or step-rate QM loans that are not higher-priced and where the prepayment penalties are not otherwise prohibited by applicable law.  In addition, state-chartered credit unions can’t charge a prepayment penalty more than three years after loan consummation. Furthermore, the prepayment penalty cannot exceed 2 percent of the outstanding loan balance repaid during the first two years after consummation, and cannot exceed 1 percent of the outstanding loan balance repaid during the third year after consummation.

If a state-chartered credit union offers a member a loan with a prepayment penalty, it must also offer the member an alternative loan without a prepayment penalty. The alternative loan must be similar to the loan with the prepayment penalty and have the same interest rate and type (fixed-rate or step-rate) and term as the mortgage loan with the prepayment penalty. The alternative loan also must not have deferred principal, balloon or interest-only payments, or negative amortization.






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