Mortgage Loan Originator (MLO) Licensing Practice Test

What is a common feature of high-cost mortgages?

1. They are always adjustable-rate

2. They can include a prepayment penalty provision for the first 36 months

3. They are guaranteed by the government

4. They require a larger down payment

The correct answer is: They can include a prepayment penalty provision for the first 36 months

High-cost mortgages are often associated with various consumer protections under the Home Ownership and Equity Protection Act (HOEPA). One common feature of these mortgages is the inclusion of a prepayment penalty provision during the first 36 months. This means that if a borrower decides to pay off their mortgage early within that time frame, they might incur additional fees, which can discourage prepayment and lock borrowers into higher-interest loans for longer than they might otherwise choose. This feature is significant because it can affect a borrower’s ability to refinance or pay off the loan without facing financial penalties. High-cost mortgages typically originate when the costs exceed certain thresholds, and the inclusion of prepayment penalties is a characteristic intended to provide the lender with additional security against the risk of early loan payoff. The other options do not universally apply to high-cost mortgages: they are not always adjustable-rate, they are not guaranteed by the government, and there's no requirement for a larger down payment that specifically categorizes a loan as high-cost. Understanding these nuances is crucial for individuals in the mortgage lending field as they navigate regulatory frameworks and borrower education.