What is the requirement for a mortgage to have a prepayment penalty under federal law?

In the context of mortgage loans, a prepayment penalty is a fee that a borrower may incur if they pay off their loan early. Under federal law, particularly the Dodd-Frank Act and the Truth in Lending Act, there are specific stipulations regarding prepayment penalties.

For a mortgage to have a prepayment penalty, it must be permitted by state law. This means that while federal guidelines set the framework for mortgage lending, individual state laws can impose additional regulations, including whether or not prepayment penalties are allowed. Some states may have outright bans on such penalties, making it impossible for lenders to include them in their loans. Therefore, if a mortgage is to include a prepayment penalty, it must comply with the relevant state legislation that governs such terms.

The other options do not accurately capture the relationship and requirements between federal law and the eligibility for prepayment penalties. For instance, while there are specific criteria for higher-priced mortgages under federal law, the imposition of prepayment penalties is primarily determined by state law rather than the nature of the mortgage itself, such as interest rates or loan terms.