Mortgages made in Colorado can no longer carry prepayment penalties that stretch beyond a loan’s introductory interest rate.
Erin Toll, director of the Colorado Division of Real Estate, banned the practice at the request of Gov. Bill Ritter under the new Mortgage Broker Registration Act, which regulates mortgage-lending practices in the state.
Including a prepayment penalty can lower a mortgage’s initial interest rate but leave borrowers who refinance or pay off a loan early on the hook for several months’ worth of interest.
A prepayment penalty in effect after a mortgage payment adjusts higher can complicate a refinancing and push a borrower into foreclosure.
The Center for Responsible Lending estimates that 70 percent of subprime loans carry a prepayment penalty, versus on- ly 2 percent of prime mortgages.
Chris Holbert, president of the Colorado Mortgage Lenders Association, said contraction in the mortgage markets has largely eliminated the practice targeted in the new rule.
“In today’s market, that would be a difficult option to find,” Holbert said.
Toll said the rule involves only loans made after Dec. 14 and doesn’t apply to existing mortgages.
“It is unconstitutional to enact laws retroactive in application. So it’s only on a go-forward basis,” Toll said.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
