Mortgage Loan Originator (MLO) Licensing Practice Test

Higher-priced mortgages can have a prepayment penalty. True or false?

1. True

2. False

3. It depends on the lender

4. Only in certain states

The correct answer is: False

The concept of prepayment penalties is closely linked to the type of mortgage and regulatory guidelines. Typically, higher-priced mortgages, especially those that fall under the definition of higher-priced under the Truth in Lending Act, are much less likely to include prepayment penalties. This is due to the regulatory framework that governs these loans, which aims to protect consumers from potentially predatory lending practices. In general, most lenders avoid prepayment penalties on higher-priced mortgages to ensure borrower protection. These regulations exist to promote fair lending and prevent practices that could unfairly trap borrowers in a mortgage when they might prefer to refinance or pay off the loan early. As such, the statement is true; higher-priced mortgages typically do not have a prepayment penalty, making the answer that indicates this understanding correct. Other options, such as it depending on the lender or being applicable only in certain states, suggest variability that does not align with the broader regulations governing higher-priced mortgages. Therefore, the idea that a prepayment penalty is a common characteristic of higher-priced mortgages is not accurate under the current regulatory climate.