Under the Dodd-Frank Act, prepayment penalties on most qualified mortgages (QMs) are restricted to the first three years of the loan. During year one, the maximum permissible prepayment penalty is:

Correct answer: 3% of the outstanding loan balance

Dodd-Frank and Regulation Z allow prepayment penalties on certain qualified mortgages for up to three years. The cap is 3% of the outstanding balance in year one, 2% in year two, and 1% in year three. After three years, prepayment penalties are prohibited on QMs. Using prepayment penalties beyond these limits or on non-QMs to trap borrowers is a form of predatory lending. Note: prepayment penalties are also prohibited entirely on high-cost mortgages and adjustable-rate QMs.