Legal Question in Real Estate Law in California

Re: prepayment penalty

If the prepayment penalty was professionally drafted, it probably meets the tests of legality and lack of loopholes. Lenders use prepayment penalty provisions to protect their legitimate profit expectations from loans with low up-front charges. Courts do enforce them.

On the other hand, not every prepayment penalty is legal. The limits are set forth in Business and Professions Code section 10242.6 and Civil Code section 2954.9. Full details are a bit too lengthy to set forth here, but if you're not allowed to prepay up to 20% every year the provision in your loan might be illegal and you should investigate further.

Re: prepayment penalty

There is a California statute that prohibits pre-payment penalties if two conditions exist.

1. The house is being sold, not refinanced, and

2. There is a due on sale clause in the loan.

In other words, the California statute says that the lender cannot have his cake and eat it, too.

The problem is, that many lenders claim that they are protected by the Parity Act, which was passed by the Federal Government, and that the Act pre-empts State law.

I am currently researching this situation to see if there is an answer in favor of the consumers.