A charge a loan agreement sets for paying off some or all of the principal before a stated date. Common forms are a step-down schedule, yield maintenance and defeasance.
A prepayment penalty pays the lender for interest it expected and will not receive. The OCC’s handbook explains the reason: without one, borrowers tend to refinance when rates fall, which cuts the bank’s margin. So fixed rate loans often carry one, and its size and form are open to negotiation before you sign.
The forms differ a great deal in cost. A step-down schedule charges a percentage that falls each year. Yield maintenance and defeasance, used on agency and securitized loans, make the investor whole for the remaining term. Fannie Mae’s servicing guide describes its usual charge as the greater of 1 percent of the balance or yield maintenance.
SBA loans have their own rules. A 7(a) lender may not charge a prepayment fee, but on loans of 15 years or more the borrower owes SBA a subsidy recoupment fee when voluntary prepayments in any of the first three years exceed 25 percent of the balance: 5 percent in year one, 3 in year two, 1 in year three. Prepaying $400,000 of a $1,000,000 loan in year two costs $12,000. A 504 loan carries whatever premium its note sets.
How it shows up in the data here
Not shown on this site. Call reports, credit union filings and SBA loan rows carry no prepayment terms, and HMDA collects a prepayment penalty term only for loans under the consumer rules, which most business-purpose and multifamily loans are not. The terms are in the lender's term sheet and note, so ask each lender on your list. Start the list with loan comps, and for SBA loans with SBA 7(a) lenders.
Go further
- Loan comps: Who made loans like yours, with the median reported rate and term.
- SBA 7(a) lenders: Lenders by 7(a) loans made, by state.
- Amortization and balloon calculator: Payment, balance at maturity and interest paid, for a loan that amortizes over longer than it runs.
- SBA 7(a) or 504: which fits your loan: Both are SBA loans, and they work differently. The choice usually turns on what you are buying and how much cash you can put in.
- How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
Related terms
- Step-down prepayment penalty: A prepayment charge set as a percentage of the amount prepaid that drops on a fixed schedule, usually each year, until it reaches zero.
- Yield maintenance: A prepayment charge sized so the lender or investor earns about what it would have earned had the loan run to the end of the yield maintenance period.
- Defeasance: A way to free a property from a loan before maturity by swapping the collateral: the borrower pledges securities that make the remaining payments, and the lien on the property is released.
- Fixed rate loan: A loan whose interest rate is set at closing and does not change for a stated period, often the whole term, so the principal and interest payment stays the same.
- Term sheet: A term sheet is a short written outline of the loan a lender is prepared to consider: amount, rate, term, fees and main conditions. It is usually not binding.
- Debenture (SBA 504): The bond a certified development company issues to fund SBA's share of a 504 project. SBA guarantees it in full, and debentures are normally sold once a month.
Sources
- OCC Comptroller's Handbook, Commercial Real Estate Lending, Version 2.0 (Interest Rate Risk, p. 13), published .
- 13 CFR 120.223, Subsidy recoupment fee payable to SBA by Borrower, retrieved .
- 13 CFR 120.940, Prepayment of the 504 loan or Debenture, retrieved .
- SBA SOP 50 10 8.1, Section A, Chapter 4 (Subsidy Recoupment Fee; Prohibited Fees), effective .
- Fannie Mae Multifamily Guide, Part V, Chapter 2, Section 213, Prepayment Premium Sharing, retrieved .
Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.