NMLS Uniform State Test (UST) 2026 – 400 Free Practice Questions to Pass the Mortgage Exam

Under the Home Ownership and Equity Protection Act (HOEPA), certain terms and conditions in mortgage loans are designed to protect borrowers from predatory lending practices. Among these prohibited practices are features that can pose significant risks to consumers.

Pre-payment penalties within the first two years of a loan are indeed restricted under HOEPA; however, pre-payment penalties can still be included in a loan after that initial period, making them less risky for borrowers who might otherwise be trapped in high-interest loans. Therefore, the specific provision regarding pre-payment penalties allows them beyond the two-year mark.

On the other hand, features such as balloon payments, negative amortization, and high-interest rates are explicitly prohibited under HOEPA because they can lead to situations where borrowers may struggle to repay their loans. Balloon payments can result in a large, unmanageable final payment after a series of smaller payments, negative amortization can cause a loan balance to grow rather than shrink, and high-interest rates on loans can lead to unaffordable payments.

Thus, the inclusion of pre-payment penalties after the initial two-year period makes this term permissible under HOEPA, highlighting that borrowers are not trapped by such penalties indefinitely while still being protected from riskier loan features.