Division of Real Estate Director Erin Toll has issued an emergency rule restricting prepayment penalties on mortgage loans, Gov. Bill Ritter's office announced Monday.
Toll issued the rule in response to the concerns of Ritter and others that high prepayment penalties on mortgage loans will lead to an additional round of foreclosures as more adjustable-rate mortgages reset higher in coming months.
The new rule prohibits prepayment penalties that extend past the adjustment date of an interest rate, teaser rate or payment rate. The rule creates a presumption that mortgage brokers have violated their duty of good faith to the borrower if they recommend a loan product with a prepayment penalty that extends beyond the adjustment date. The rule took effect Dec. 14.
"Prepayment penalties can trap families in no-win situations where foreclosure becomes the only option," said state Rep. Rosemary Marshall, who has sponsored mortgage-related legislation in the past two sessions.
"Along with our aggressive enforcement actions against those who participate in unlawful actions that encourage foreclosures, this is another step to attempt to stem the wave of foreclosures," Toll said.
