Background:  My wife is being transferred from Columbus, Ohio to Fort
Worth, TX.  We just refinanced in January 2004.  We noticed that there
is a prepayment rider on our mortgage.

Can a prepayment penalty  be assessed if the loan is paid in full as a
result of the sale of the real estate that secures the loan (note:
this is a first mortgage, conventional type)?

What is the maximum amount a lender can charge for a prepayment
penalty in Ohio on a first mortgage?

Where does the prepayment penalty go, into the lenders? pockets or
applied, to some extent, against our principal?

How do I/can I get a prepayment penalty waived?

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Clarification of Question by buckeyegoingtotx-ga on 09 Nov 2004 03:31 PST

I need some clarification on this: 

Ohio Revised Code Section 1321.57 (G)(1), see here:
http://onlinedocs.andersonpublishing.com/oh/lpExt.dll?f=templates&fn=main-h.htm&cp=PORC


This states A registrant shall not charge or receive a prepayment
penalty under division (G)(2) of this section if any of the following
applies:
 
 (a) The loan is a refinancing by the same registrant or a registrant
to whom the loan has been assigned;
  
 (b) The loan is paid in full as a result of the sale of the real
estate that secures the loan;
 

The entire Ohio Revised Code (OCR)for 1321 is located under Chapter
1321 Small Loans: Second Mortgage.  How would this apply to First
Mortgages under Ohio Law.  Basically, I am asking if the same laws
apply to first mortgages as do second mortgages? Can you cite a
source?  If so, it looks like under 1321.57 (G)(2)(B) that the lender
cannot charge a prepayment penalty as a result of the sale of the real
estate that secures the loan.

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Clarification of Question by buckeyegoingtotx-ga on 09 Nov 2004 06:32 PST

Exact wording of the contract regarding the prepayment clause and
the name of the financial institution


The prepayment Rider is made this 3rd day of January, 2004 ands is
incorporated into and shall be deemed to amend and supplement the Note
of the same date given by the undersigned (the ?Borrower?) in favor of
Intervale Mortgage Corporation (the ?Lender?).

5. Borrower?s Right to Prepay.

I have the right to make payments of principal at any time before they
are due.  A payment of principal only is known as a ?prepayment?. When
I make a prepayment, I will tell the Note Holder in writing that I am
doing so.  I may not designate a payment as a Prepayment if I have not
made all the monthly payments due under the Note.

I may make a partial prepayment without paying any prepayment charge. 
If I make a full prepayment within one (1) year of the date of this
Note, I agree to a prepayment charge of 6 % of the original principal
amount of the loan; if I make a full prepayment more than one (1) year
but within two (2) years of the date of this note,  I agree to pay a
prepayment charge of  6% of the original principal amount of this
Note; if I make a full prepayment more than two (2) year but within
three (3) years of the date of this note,  I agree to pay a prepayment
charge of  6% of the original principal amount of loan.  The Note
Holder will use my prepayments to reduce the amount of principal that
I owe under this Note. However, the Note Holder may apply the
Prepayment to the accrued and unpaid interest on the Prepayment
amount, before applying my Prepayment to reduce the Principal amount
of the Note.  If I make a partial prepayment, there will be no changes
in the due date or in the amount of my monthly payment unless the Note
Holder agrees in writing to those changes. My partial prepayment may
reduce the amount of my monthly payments after the first Change Date
following my partial prepayment.  However, any reduction due to my
prepayment may be offset by and interest rate increase.

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Clarification of Question by buckeyegoingtotx-ga on 10 Nov 2004 03:54 PST

The mortgage was originated by Decision One Mortgage Company, LLC,
Servicing Agent for the Intervale Mortgage Corporation.  It was later
sold to Household Financial Services, Inc./Household/HSBC
(www.hsbcmortgageservices.com)


Decision One Mortgage (A Household International Company)
Charlotte, NC  28287
Independence, OH  44131

Household Financial Services, Inc./Household/HSBC
City of Industry, CA  91716
Brandon, FL 33509
Schaumburg, IL  60173

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Clarification of Question by buckeyegoingtotx-ga on 10 Nov 2004 04:02 PST

In addition, I found this site
(http://www.docmagic.com/compliance/prepay/penalties.jsp) and under
Ohio and Option B.  The verbage is almost exactly the as on my rider
except the conditions at the bottom seem to be conveniently absent on
my form.

buckeyegoingtotx,
1.Yes.
2. ?Prepayment penalties not to exceed 1% of the original principle
amount of the loan?
(from page 4 of download
(http://www.com.state.oh.us/dfi/app/omla_app.PDF) based on the Ohio
Mortgage Loan Act (Ohio Revised Code Section 1321.57 (G)(1), see here:
http://onlinedocs.andersonpublishing.com/oh/lpExt.dll?f=templates&fn=main-h.htm&cp=PORC
)).
3. Fee entirely to lender.
4. Unlikely to be waived.

The comments presented are the most likely outcome based on the
information supplied (although a completely accurate answer requires
the exact wording of the contract regarding the prepayment clause and
the name of the financial institution you are dealing with).

In my experience only two specific situations exist where a prepayment
fee is reduced or waived. One, where the applicable interest rate on a
loan is fixed (for a certain term) and the prevailing interest rate
has since moved up (eg. They replace your loan at say 4% with one, to
another individual at say 6%). Two, where the security is changed but
the loan continues.

The first situation is not likely and whether the second is possible,
needs to be asked of the financial institution involved.

Lastly the reason why a prepayment fee is charged is because it costs
the lender to set-up a loan. They suffer this cost on the expectation
that it will run over a particular term, over which time they recoup
their expense. When this doesn?t happen and the loan is paid out early
(note that the same reference to Ohio law, says the fee can apply for
five years from loan establishment) the cost is passed on to you.

Kind regards,
gfmaster

buckeyegoingtotx,
Thankyou for your clarifying questions, isn?t legislation just
wonderful to read (not).

To ensure accuracy I would like to frame my response after checking
available information on your lender, advised as ?Intervale Mortgage
Corporation?. This name is drawing a blank at the moment so any
further details (trading name etc) appearing on your documentation
would be appreciated.

Kind regards,
gfmaster

buckeyegoingtotx,
Thanks for the additional information and your patience in allowing me
adequate time to respond to the clarifying questions.

If I have it correctly you ask for the following:
(from clarifying questioned 9 November 2004, 3:31 PST)
1. How does section 1321 (specifically 1321.57 (G)(1)) relate to your
First Mortgage, when it is headed alternately (you say ?Small Loans:
Second Mortgage?)?
2. Do the same laws apply to Second Mortgages as first Mortgages?
3. Can a source be cited?
4. If 2. is valid doesn?t that means (G)(2) applies and (as the loan
is to be cleared from the sale of the security) no prepayment fee can
be charged?
(from clarifying question 10 November 2004. 3:39 PST)
5. My prepayment clause is similar but not the same, as the one on the
reference site. Is something amiss?

Any legislative tool has its own history. It is written once, then
revisited periodically, with parts amended, repealed or reemphasised,
to cover the different situations that arise over time, reflecting an
ever changing society. The Ohio Revised Code was written in 1918 to
implement the ?Ohio Small Loan Act? (and others) with the ?Ohio
Mortgage Loan Act? added in 1965. The intention here was to allow
?non-depository? financial institutions to enter the mortgage market,
making more funds available for Ohioan housing. Until then
institutions regulated federally (depository financial institutions),
had been the main source of funds.

So in viewing the legislation, the term ?Second Mortgage? needs to be
read as ?Second Mortgage Lenders? or those regulated by the State of
Ohio.
See here:
http://www.com.state.oh.us/dfi/cfhist.htm#hist

Next the ?Mortgage Loan Act? is located in the revised code, in
Section 1321.51 to 1321.60.
See here:
http://www.com.state.oh.us/dfi/revcodes.htm

So my comments to the first four questions are:
1. Section 1321 is not relevant, Section 1321.57 is.
2. Use of ?Second Mortgages? should be understood to mean ?Second
Mortgage Lenders?.
(Note- To a lender a Second Mortgages value relies on sufficient
equity being left in a property after taking into account the First
Mortgage. The execution of document is complicated by the involvement
of another party, with the borrower facing added fees for the higher
complexity of the matter, in addition to higher interest rates
reflecting the risk and purpose of the loan. To my knowledge the law
relating to First/Second Mortgages is basically the same, in that
property supports a loan and can ultimately be claimed if the borrower
fails to meet their commitments. The laws originated from
statue/courts. For a general article see here:
http://www.law.cornell.edu/topics/mortgages.html
For state statue see here (again):
http://onlinedocs.andersonpublishing.com/oh/lpExt.dll?f=templates&fn=main-h.htm&cp=PORC
search field:1311.14)
3. Not applicable (due to answer 1&2).
4. As I said before ?isn?t legislation just wonderful to read (not)?.
I maintain that 1321.57 (G)(1) applies because reading it in
combination with (G)(2) the lender has an option of applying either.
As you point out (G)(2) can?t be applied (because your property will
clear the loan) so they fall back on (G)(1) and can charge 1% of the
original principle.

The site referred to in the post of the 10 November 2004, 4:02 PST has
been looked at (and in combination with reading the wording of the
prepayment clause) is of concern, obviously because of the 6% fee
mentioned.

As a high degree of care should be taken in the preparation of loan
documents (in my locale, such a error would void the section entirely,
with a very outside possibility of interest being repayable by the
institution for the term over which it has been in existence) I must
raise with you a possibility that your loan is governed by regulations
not so far commented on. To set both our minds at rest, please further
look at your loan documentation, as a clause should be on it,clearly
identifying how the loan is regulated.

Some comfort can be taken from the fact that ?Decision One? (thanks
again for the further details) has been checked and at the time of
your loan, were licensed as out-of-state ?Second Mortgage (yes that
term again) lenders. This means to me the lenders ?Inverdale Mortgage
Corporation? (still haven?t found anything on them) and latter
assigned owners, Household Financial Services (HSBC etc) are bound by
the fees as commented on.
See here: https://www.d1online.com/d1/LicensingDisclosure.jst
Licence numbers SM 5662,5726,8618 checked against the State of Ohio
Commerce Department records and exists (drew a blank on SM 5726) see
here:
https://www.com.state.oh.us/dfi/fiin_apps/license/default.aspx?vType=SM

So for question 5. things look OK, but please settle the governance
issue via documentation then institution and if the loan document is
found to be incorrect this should be added to the list of things, that
may reduce the prepayment fee.

Finally a handy reference point (to have ready) may be the complaints
section of the Department. They point out that you need to try and
talk to the holder of your loan first, but they are willing to act as
a go between when needed (from researching these comments, it is
apparent the Department has taken a strong stand against institutions
not complying with their duties). See here:
http://www.com.state.oh.us/dfi/ccnondep.htm

Kind regards
gfmaster

Thanks for all the info.  I could not find where in the loan
documentation where there is a clause identifying how the loan is
regulated.