A subprime lender originates a 2/28 adjustable-rate mortgage with a 3-year prepayment penalty of 4% in year 1, 3% in year 2, and 2% in year 3. The initial rate is 7.5%, set to adjust to index + 6% margin (currently 12.5%) in month 25. A borrower with a $220,000 balance wants to refinance in month 20 after receiving notice of the upcoming rate adjustment. What is the total financial barrier to refinancing, and which two regulatory frameworks most directly address this type of predatory structure?

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Prepayment penalty of $6,600; governed by HOEPA's restrictions on prepayment penalties in high-cost mortgages and Dodd-Frank's QM prohibitions on prepayment penalties for ARM loans Month 20 falls in Year 2 of the prepayment penalty (months 13–24), so the applicable rate is 3%. Penalty calculation: $220,000 × 0.03 = $6,600. The borrower faces a $6,600 barrier to escaping a loan about to reset to 12.5% — a classic predatory trap where the penalty prevents the borrower from refinancing before payment shock. The two most relevant regulatory frameworks are: (1) HOEPA, which for high-cost mortgages restricts prepayment penalties — prohibiting them if the rate can change in the first 4 years, or if the penalty period exceeds 2 years, or if the fee exceeds 2% of prepaid amount; and (2) Dodd-Frank's QM rules, which prohibit prepayment penalties on adjustable-rate QMs entirely. "s restrictions on prepayment penalties in high-cost..." uses the wrong year's penalty rate (should be 3% not 4%) and incorrectly limits the applicable law. "Prepayment penalty of $8,800; governed by RESPA Sect..." calculates 2% (Year 3 rate) incorrectly. "Prepayment penalty of $6,600; governed only by state..." uses the wrong rate and wrong legal framework.

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