Legal Question in Real Estate Law in California

Prepayment Penalties in California

Is it legal to charge a borrower a prepayment penalty if they are paying the mortgage balance due to sale of their home? I know that prepayment penalties are allowed, in general, but I have been told that when selling the home the bank should not be able to charge one. Is this true?


Asked on 7/01/04, 5:03 pm

2 Answers from Attorneys
Ken Koenen Koenen & Tokunaga, P.C.

Re: Prepayment Penalties in California

Even if you sell your home, you must charge a prepayment penalty. However, there are some ways to avoid it. The lender cannot charge the prepay if the lender accelerates the loan. In other words, if they exercise the due on sale clause of the contract, they cannot charge the prepayment penalty.

Let me know exactly what the situation is, and maybe I can help.

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Answered on 7/01/04, 5:22 pm
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

Re: Prepayment Penalties in California

No, this is not true. However, California places many limitations on the right of a lender to impose a prepayment penalty and/or the permissible size of the penalty.

To further complicate matters, one must look in at least three separate codes to find all the pieces of the puzzle. For example, find and read Business & Professions Code section 10242.6; Civil Code section 2954.9, especially subpart 2954.9(a)(2); and Finance Code sections 4970-4973, especially subparts 4973(a)(1) and (2).

I think you can find the California Codes on line at www.leginfo.ca.gov/calaw.html

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Answered on 7/01/04, 7:06 pm


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