Also known as: prepayment penalty · prepayment-penalty · prepayment-penalties · prepayment premium · prepay penalty
Written by attorneys · grounded in primary & secondary sources — see below
A contractual charge imposed on a borrower for repaying a loan before its scheduled maturity date. The charge compensates the lender for lost interest income over the remaining term. Enforceability depends on the specific language of the note and applicable state law.
Premier Manufacturing obtained a mortgage from Harbor Stack to finance its new facility. After a strong sales year, Premier tendered the full principal balance five years early. The note contained no clear prepayment premium provision. Harbor Stack refused to record a satisfaction until an additional sum was paid. Premier sued to compel recording of the release.
Fremont Investment & Loan originated adjustable-rate mortgages to subprime borrowers that included substantial prepayment penalties extending beyond the initial rate period. State regulators challenged the loans as unfair. The court examined whether the penalties contributed to the overall predatory character of the products.
Select any source to read its text and confirm it supports the definition.
Full payment of the debt, including prepayment, generally discharges the mortgage and entitles the mortgagor to a release. Prepayment rights and any associated premium are governed by the note language. When the note contains no clear penalty provision, the early payment extinguishes the debt in full.
Supporting sources
Courts look to the specific language of the note. A vaguely worded clause is construed against the lender. When the note does not clearly require a premium, tender of principal and interest satisfies the debt and triggers the right to discharge.
Supporting sources
Evidence of prior negotiations is admissible to establish grounds for reformation or rescission even when a merger clause exists. The statements may show mutual mistake or another invalidating cause that justifies relief from the written terms.
Supporting sources
Substantial prepayment penalties that extend beyond the initial interest-rate adjustment period are one factor courts consider when assessing whether a loan is unfair or predatory. Regulators have challenged loans containing such features along with other high-risk terms.
Supporting sources
…frequent refinancing to maintain an affordable monthly payment and/or to avoid foreclosure; “(iv) including substantial prepayment penalties and/or prepayment penalties that extend beyond the initial interest rate adjustment period; “(vi) approving borrowers for loans with inadequate debt-to-income analyses that do not…