Study Finds No Bias in Prepayment Penalties.

Washington -- A study for the National Home Equity Mortgage Association states that the interest rate a borrower pays on his or her mortgage loan is directly related to his or her credit risk profile.

A second study said putting a prepayment penalty in the loan agreement resulted in a lower rate for the borrowers.

NHEMA requested the law firm of Sirote & Permutt PC, Birmingham, Ala., to commission the studies, which were done by Richard F. DeMong and James E. Burroughs of the University of Virginia's McIntyre School of Commerce. The pair looked at over 961,000 mortgage loans originated nationwide during 2004 by lenders that specialize in nonprime lending.

"The question of how certain risk factors and the presence of prepayment fee clauses affect mortgage pricing came up when I testified at House of Representatives Financial Services Committee hearings last year," said Mr. DeMong in a statement issued by NHEMA.

"I had to admit I didn't know of any hard data on these issues that could help the committee members. That's when I started moving forward on these studies. They directly address the vital questions - is the mortgage market efficiently pricing loans based on risk? Are prepayment fee clauses on loans an option that really benefit consumers? Those questions go to the heart of informed consumer choice and effective policymaking."

In doing the study, the pair said they expected that if there was a prepayment fee, the higher the borrower's credit score, and the higher the borrower's monthly income, the annual percentage rate of the loan should be lower, all else being equal.

"This was the case. The higher the FICO score, the lower the APR, all other factors held constant. The other factors that were inversely related were monthly income, the presence of a prepayment fee and owner occupancy, as expected. The APR of the first-lien mortgage would be lower if ...