Prepay penalties for commercial real estate loans may include which of the following?

Study for the California Escrow Exam. Dive into detailed content with flashcards and multiple choice questions, accompanied by explanations and hints. Ensure your success on test day!

Multiple Choice

Prepay penalties for commercial real estate loans may include which of the following?

Prepay penalties are tools lenders use to guard against the loss of expected interest when a loan is paid off early. In commercial real estate lending you’ll often see several different forms of protection, and a loan can include one or more of them. Yield maintenance is a premium designed to preserve the lender’s expected yield if the loan is prepaid before maturity. The borrower must pay a charge that bridges the gap between the remaining loan balance and the return the lender would have earned had the loan run to term. A declining prepayment penalty starts high and steps down over time, becoming smaller as the loan ages, until it eventually drops away. Defeasance is a distinct way to prepay, commonly used in securitized or conduit loans. Instead of paying a simple penalty, the borrower sets up a portfolio (often of U.S. Treasury securities) to replicate the loan’s remaining debt service, effectively prepaid by replacing cash flows. Because lenders may use any of these mechanisms—or combinations of them—to protect against early payoff, “all of these” is the best answer.

Prepay penalties are tools lenders use to guard against the loss of expected interest when a loan is paid off early. In commercial real estate lending you’ll often see several different forms of protection, and a loan can include one or more of them.

Yield maintenance is a premium designed to preserve the lender’s expected yield if the loan is prepaid before maturity. The borrower must pay a charge that bridges the gap between the remaining loan balance and the return the lender would have earned had the loan run to term.

A declining prepayment penalty starts high and steps down over time, becoming smaller as the loan ages, until it eventually drops away.

Defeasance is a distinct way to prepay, commonly used in securitized or conduit loans. Instead of paying a simple penalty, the borrower sets up a portfolio (often of U.S. Treasury securities) to replicate the loan’s remaining debt service, effectively prepaid by replacing cash flows.

Because lenders may use any of these mechanisms—or combinations of them—to protect against early payoff, “all of these” is the best answer.

More practice questions