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A commercial lender wants to add a prepayment penalty on a new commercial loan (secured by residential property). In our current practice we do not charge a prepayment penalty on commercial loans, is there any issues we should consider in adding a prepayment penalty in this situation?
There are high cost home loan provisions in 360.100 that limits prepayment penalties that applies to loans made to a natural person that is for personal, family or household purposes.
There also provisions under 286.8-110 that has similar prepayment rules, but these are applicable to any mortgage loan that is for “personal, family, or household use”. That term isn’t defined, but some other key definitions are listed below.
Under 286 the following definitions apply:
“Mortgage loan” means any loan primarily for personal, family, or household use
that is secured by a mortgage, deed of trust, or other equivalent consensual security
interest on residential real property or any loan primarily for personal, family, or
household use that is secured by collateral that has a mortgage lien interest in
residential real property;“Mortgage loan company” means any person who directly or indirectly:
(a) Makes, purchases, or sells mortgage loans, or holds oneself out as being able
to do so; or
(b) Services mortgage loans, or holds oneself out as being able to do so;“Borrower” means any person that seeks, applies for, or obtains a mortgage loan;
“Person” means a natural person, or any type or form of corporation, company,
partnership, proprietorship, or association;The loan you mentioned doesn’t seem to be for “personal, family or household use” so this section wouldn’t apply. I’m not aware of any other rule that would prohibit a prepayment penalty on a commercial loan. I’ll ask Jack if he has additional info.
What about Fair Lending and UDAAP issues, since no other commercial customers have pre-payment penalties? The loan will be in a corporation’s name.
Yes, you’re exactly right! As with any lending decision/policy you want to consider fair lending and across the board UDAP/UDAAP is always a factor. I would ensure there is a policy in place for this rather than lenders making this decision on an individual basis. You would want to consistently and fairly apply pre-payment penalties according your vetted policy in order to avoid disparate treatment or impact. And you would want to ensure any fee is clearly disclosed (and when it will be applied) in a way that is easily understood.
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