A number of customers have called within the past month to inquire about the California prepayment penalty addendum and rider that DocMagic defaults to when a DocMagic user indicates that a prepayment penalty will apply to a loan where the secured property is located in California. Particularly, customers have asked about the applicability of the following paragraph in the prepayment penalty addendum and rider:
"If the Note contains provisions for a variable interest rate, and the purpose of the loan is to finance the purchase or construction of real property containing four or fewer residential units or on which four or fewer residential units are to be constructed, then I may prepay the loan in whole or in part without a Prepayment charge within 90 days of notification of any increase in the rate of interest."
As stated in the article, "OTS Says: Parity Act No Longer Preempts Prepayment Penalties" that is posted on our website, the above provision only applies to variable interest rate loans made to finance the purchase or construction of four or fewer residential units and is based on California Civil Code Section 1916.5(a)(5). The article further provides that the limitations in Section 1916.5 do not apply to loans made by "supervised financial organizations," a defined term that includes, among others, banks, savings associations, savings banks, credit unions, industrial loan companies and CFL and RMLA licensees, but does not include DRE licensees.
Thus, if a California loan has a variable interest rate, the purpose of the loan is to finance the purchase or construction of real property containing four or fewer residential units or on which four or fewer residential units are to be constructed, and the lender is not a supervised financial organization, then the borrower will have the right to prepay the loan without penalty within 90 days of notification of any increase in the interest rate.
That said, customers should be aware of the following:
If they are a DRE licensee, this provision in the prepayment penalty addendum/rider will apply to them.
Contrary to the above article posted on our website, a prepayment penalty addendum/rider containing the above-referenced provision will always print as the default, whether the interest rate is fixed or variable (as the paragraph uses a qualifier (i.e., "If the Note contains provisions for a variable rate. . .); and
In an effort to further clarify the applicability of the subject provision, that provision will be revised as follows:
“If the Note contains provisions for a variable interest rate, the purpose of the loan is to finance the purchase or construction of real property containing four or fewer residential units or on which four or fewer residential units are to be constructed, and the Note Holder is not a 'supervised financial organization," as defined in California Civil Code Section 1916.5, then I may prepay the loan in whole or in part without a Prepayment charge within 90 days of notification of any increase in the rate of interest.”
If you have any questions concerning the California prepayment penalty addendum or rider, please contact Customer Service at (800) 649-1362.
To view all At Your Service Articles, click here.
RSS