Truth in Lending (Regulation Z) 2025 – 400 Free Practice Questions to Pass the Exam

The option that best describes "prepayment penalties" under Regulation Z is indeed the one that highlights fees charged for paying off the loan early, along with specific disclosure requirements. Regulation Z, part of the Truth in Lending Act, imposes strict guidelines on how lenders can handle prepayment penalties and mandates that borrowers be informed about such fees.

Specifically, lenders can include prepayment penalties in certain types of loans, but they must clearly disclose the terms and conditions associated with these penalties to the borrower. This ensures that the borrower is fully aware of any financial implications of paying off their loans earlier than scheduled. Such disclosures are crucial for transparency and informed decision-making by consumers.

In contrast, the other options misrepresent key aspects of how prepayment penalties are regulated. For instance, the assertion that penalties cannot be charged on any mortgage loans is incorrect, as they can be charged under certain conditions with appropriate disclosures. Similarly, the notion that lenders can impose fees without notifying borrowers contradicts the very purpose of Regulation Z, which aims to protect borrowers by ensuring they have all pertinent information. Lastly, stating that penalties must be waived for all borrowers does not align with the permissible use of prepayment penalties under specific circumstances when disclosed properly.