Can we add a provision to our junior lien mortgage agreements that would allow us to recoup any third party fees that we paid at closing, in the event that the customer pays off the loan shortly after closing (i.e., within two or three years)?

[Please note that this question was revised on August 5, 2015, to reflect a change made to Illinois law by Public Act 99-288.]

Yes, you may recoup third party fees from customers who prepay loans, provided that recoupment is possible only within the first three years after the loan closing. Both federal and Illinois law exempt recouped fees from their prohibitions on prepayment penalties, under certain conditions.

Under Regulation Z’s “high-cost” mortgage rules, there are three triggers that could cause a loan to be considered “high-cost”: (1) the interest rate trigger, (2) the points and fees trigger, and (3) a new trigger for prepayment penalties. For purposes of the prepayment penalty trigger, the CFPB’s rules will exempt most recouped charges from the definition of “prepayment penalty.” To qualify for this exemption, each recouped fee must be a “waived, bona fide third-party charge that the creditor imposes if the consumer prepays all of the transaction’s principal sooner than 36 months after consummation.” Because these recouped charges are not considered prepayment penalties, they will not trigger the Regulation Z “high-cost” loan provisions.

The Illinois High Risk Home Loan Act recently was amended to track Regulation Z’s exemption for recouped third party fees. As a result, recouped charges that qualify for Regulation Z’s exemption also will not trigger the Illinois law’s “high risk” loan provisions.

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.32(b)(6)(i) (“For a closed-end credit transaction, prepayment penalty means a charge imposed for paying all or part of the transaction’s principal before the date on which the principal is due, other than a waived, bona fide third-party charge that the creditor imposes if the consumer prepays all of the transaction’s principal sooner than 36 months after consummation . . . .”)

Regulation Z, 12 CFR 1026.32(b)(6)(ii) (“For an open-end credit plan, prepayment penalty means a charge imposed by the creditor if the consumer terminates the open-end credit plan prior to the end of its term, other than a waived, bona fide third-party charge that the creditor imposes if the consumer terminates the open-end credit plan sooner than 36 months after account opening.”)

Illinois High Risk Home Loan Act, 815 ILCS 137/10 (“‘Prepayment penalty’ and ‘prepayment fees or penalties’ mean: (i) for a closed-end credit transaction, a charge imposed for paying all or part of the transaction’s principal before the date on which the principal is due, other than a waived, bona fide third-party charge that the creditor imposes if the consumer prepays all of the transaction’s principal sooner than 36 months after consummation and (ii) for an open-end credit plan, a charge imposed by the creditor if the consumer terminates the open-end credit plan prior to the end of its term, other than a waived, bona fide third-party charge that the creditor imposes if the consumer terminates the open-end credit plan sooner than 36 months after account opening.”)