Which statement regarding a refinancing of a negative amortization loan is incorrect?

Which statement regarding a refinancing of a negative amortization loan is incorrect?

• A. The lender must make due regard for the borrower's ability to repay the new loan.
• B. The new loan cannot be a stated income pay option arm.
• C. The lender can collect a prepayment penalty, as long as it does not exceed 1.75% of the principal balance.
• D. If their existing mortgage is a reverse mortgage, it is not considered a negative amortization loan.

Answer: (C)

The assertion that is highlighted about the refinancing of a negative amortization loan is indeed correct in identifying the nuances regarding prepayment penalties. Specifically, there are limitations in place concerning the collection of prepayment penalties on certain types of loans, especially when dealing with negative amortization loans. This is because such loans can have unique characteristics that may not support the inclusion of prepayment penalties, especially since these might further disadvantage the borrower who is already in a challenging financial situation due to the nature of negative amortization. In this context, the correct understanding is that while lenders may have some leeway in imposing prepayment penalties, these penalties must adhere to regulatory guidelines that often limit their scope, particularly in protecting borrowers from onerous fees that could exacerbate their financial burden. Other statements, while true, speak to different aspects of the borrower’s situation or lender obligations, such as ensuring the borrower has the ability to repay new loans, restrictions on certain loan products when refinancing, and clarifications on what constitutes a negative amortization loan. However, they do not address the specific regulations surrounding prepayment penalties that make the statement about the prepayment penalty limit stand out as incorrect in this context.

The assertion that is highlighted about the refinancing of a negative amortization loan is indeed correct in identifying the nuances regarding prepayment penalties. Specifically, there are limitations in place concerning the collection of prepayment penalties on certain types of loans, especially when dealing with negative amortization loans. This is because such loans can have unique characteristics that may not support the inclusion of prepayment penalties, especially since these might further disadvantage the borrower who is already in a challenging financial situation due to the nature of negative amortization.

In this context, the correct understanding is that while lenders may have some leeway in imposing prepayment penalties, these penalties must adhere to regulatory guidelines that often limit their scope, particularly in protecting borrowers from onerous fees that could exacerbate their financial burden.

Other statements, while true, speak to different aspects of the borrower’s situation or lender obligations, such as ensuring the borrower has the ability to repay new loans, restrictions on certain loan products when refinancing, and clarifications on what constitutes a negative amortization loan. However, they do not address the specific regulations surrounding prepayment penalties that make the statement about the prepayment penalty limit stand out as incorrect in this context.