Change Effective March 25, 2006.

Current Wisconsin law prohibits the imposition of a prepayment penalty in connection with a variable rate residential mortgage loan using an approved index (for a list of approved indices, click here). That will change for variable rate, first lien loans secured by an owner-occupied one-to-four family dwelling or mobile home made on or after March 25, 2006. To view a copy of the 2005 Wisconsin Act 128 (2005 Assembly Bill 456) (codified as Wis. Stats. 138.056(3m)), click here. In order to impose a prepayment penalty on such loans, all of the following conditions must be satisfied:

1. The lender makes variable rate loans without prepayment penalties and provides the borrower with a written statement of that fact;
2. The borrower acknowledges in writing that he or she received the statement;
3. Prepayment penalties are limited to the first three years of the loan; and
4. Prepayment penalties are not charged in connection with the sale of a home.

The new law does not specify a permissible prepayment amount or formula.

Please note one ambiguous aspect of the new law: it is not at all clear whether or not the new law is meant to apply to all variable rate loans, or only to variable rate loans using an approved index. The provision of prior law pursuant to which a borrower had the right to prepay a variable rate loans not using an approved index within 30 days after notice of an increase in the interest rate has been deleted in its entirety. However, the new law by its terms applies only to variable rate loans using an approved index. In reviewing the legislative history, the original version of the 2005 Assembly Bill 456 (available here) was applicable to all variable rate loans regardless of the index. However, in the first amendment offered to the bill (available here), language was inserted that appears to limit the application of the new law to variable rate loans using an approved index. No mention is made anywhere regarding this change (see, for example, the legislative memos available here and here). It seems relatively clear that the legislative intent was that the new law would apply to all variable rate loans, but given the actual language of the new law, it is not clear what prepayment penalty, if any, is permissible. In order to accommodate this ambiguity, we will incorporate a provision into our prepayment note and rider for Wisconsin to permit the imposition of a prepayment penalty unless otherwise permitted by applicable law. With respect to all variable rate loans, regardless of the applicable index, the DocMagic software will default to the Wisconsin prepayment penalty generally applicable to fixed rate loans modified to accommodate the requirements of the new law.

Please contact the DocMagic Compliance Department, at (800) 649-1362, if you have any questions.

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