Predatory Lending Awareness Quiz

9. A prepayment penalty is an extra fee charged to you for paying off a loan early.

INCORRECT

True. A subprime mortgage carries a higher interest rate than a prime rate loan. Historically, up to 80 percent of subprime mortgage loans have had a substantial prepayment penalty. A new Federal Reserve Board rule bans any prepayment penalty if the payment can adjust during the first four years of the loan. For other high-priced loans, the prepayment penalty period cannot last for more than two years. The new rules also include other protections for subprime borrowers.

For more information, see http://www.federalreserve.gov/newsevents/press/bcreg/20080714a.htm.

Reference:
Squires, G.D. (2004). Why the Poor Pay More. Westport, CT; Praeger Publishers.