Penalty Restrictions Will Apply to High-Cost Mortgages.(Speed Watch)

Byline: Jennifer Harmon

Prepayment penalties, once the rage of mortgage originators, will soon face near demise, according to Jonathan Foxx, president and managing director of Long Beach, N.Y.-based Lenders Compliance Group, a risk management firm specializing in mortgage and lending regulatory compliance.

"Used ostensibly to offer better terms to the borrower, and not coincidentally also providing increased income to the originator, these penalties tended to lock borrowers into their loans when they wanted to refinance, making it financially infeasible for many borrowers to refinance without loss of equity. Yet there was rarely any discipline, let alone motivation, on the part of the originators to implement policies to curtail the use of prepayment penalties," Mr. Foxx recently wrote in his company blog. "The government, belatedly but finally, has said, 'Enough!'"

His opinion is that new restrictions will reduce the incentive to use prepayment penalties in residential mortgage loans. On Oct. 1, 2009, the new and final revisions to Regulation Z, the implementing regulation of the Truth in Lending Act, will take effect.

"It has taken some time (and a mortgage meltdown) for these needed changes to become the law of the land. Especially in the current economic environment, when millions of borrowers are seeking to refinance their mortgages, the debilitating aspects of prepayment penalties needed to be reduced, if not eviscerated."

Prepayment penalty restrictions will soon apply to not only "high-cost" but also "higher-priced" mortgages. The higher-priced mortgage loan, a new category created under Regulation Z, tests for rate, but not fees.

If the annual percentage rate exceeds a new index, called the "average prime offer rate" by a specific amount, the loan is considered "higher priced."