Mortgage Loan Originator (MLO) Licensing Practice Test 2025 - Free MLO Practice Questions and Study Guide

In the context of a High-Cost mortgage, a prepayment penalty can create significant consequences for borrowers. A High-Cost mortgage generally refers to loans that exceed certain thresholds set by regulations, designed to protect borrowers from predatory lending practices. In such cases, prepayment penalties are often scrutinized heavily.

If a borrower encounters a prepayment penalty on a High-Cost mortgage, the expectation should be that they may face restrictions or additional charges if they decide to pay off their loan early. The purpose of such a penalty is often to safeguard the lender's investment by ensuring that they receive a certain return on the loan. In some scenarios, these types of penalties can be viewed as exploitative, especially if they were not adequately disclosed to the borrower at the outset.

Therefore, although a prepayment penalty in itself is not necessarily illegal if it complies with the law, borrowers may feel compelled to report the situation if they believe the penalty is excessive or was not disclosed properly during the loan agreement process. Reporting such circumstances could be an avenue they pursue if they feel they are facing unfair practices, rather than assuming that the penalty is standard or typical.

The best understanding of the situation revolves around the implications of the penalty and the legal framework surrounding High-Cost mortgages