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Consumer Credit Protection
OTHER PFR AGENCIES
AUGUSTA, Maine - Consumers who refinance their mortgages in order to get a lower interest rate are often surprised to learn that they must pay a penalty to their current lender for paying off early, say financial regulators at the Office of Consumer Credit Regulation.
Such prepayment penalties, which are designed to compensate lenders for the fixed costs of originating loans, are not prohibited for most first-lien, fixed rate mortgages. However, consumers often forget about the fees until they are in the process of refinancing.
Prepayment penalties can be very expensive. For example, a typical prepayment penalty applies for the first five years of a loan, and equals 5 percent of the loan’s balance. A lender enforcing such a clause would add $5,000 to the payoff amount owed by a consumer refinancing a $100,000 loan.
In the past two years, more than 100 consumers have contacted the Office of Consumer Credit Regulation to complain about lenders imposing prepayment penalties. However, if the penalties were clearly disclosed in the original loan documents, the state cannot force lenders to waive the charges.
“We advise consumers to negotiate for mortgages that do not contain prepayment penalties,” said Will Lund, director of the Maine Office of Consumer Credit Regulation. “Prior to committing to a lender, consumers should ask three key questions:
“If borrowers think they may be financing again within the first several years of a loan, they should consider paying a slightly higher APR in order to avoid a mortgage with a prepayment penalty,” Lund advised.
Borrowers should also carefully examine documents at closing. Some consumers have told state regulators that they signed documents disclosing a prepayment penalty, even though they were told that the loan would not contain such provisions.
Before agreeing to refinance a loan, consumers should review their current mortgages to determine whether they will be facing a prepayment penalty. Regulators say that it is better to learn of such a charge early in the process, rather than being given the bad news at the time of the refinancing transaction.
“In one extreme case, for example, a Maine consumer was told that he owed a $2,900 prepayment penalty on a loan on which he had been paying for nearly 5 years. That penalty could have been avoided if the consumer had waited just 11 more days before refinancing,” said Lund.
The Office of Consumer Credit Regulation licenses and examines non-bank mortgage lenders and responds to consumer complaints. On-line complaint forms are available at www.MaineCreditReg.org, or by calling toll-free, 1-800-DEBT LAW. The office is part of the Department of Professional & Financial Regulation, which protects Maine consumers and encourages sound, ethical business practices through its regulation of insurers, financial institutions, credit grantors and numerous professions and occupations.
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