Legal Differences Without Economic Distinctions: Points, Penalties, and the Market for Mortgages

Alan Feld, BU Law
Stephen G. Marks, Boston University


Specifically, in this essay we examine the relationship among points, prepayment penalties, and financial regulation. We show that a mortgage loan with points contains an implicit, and easily calculable, prepayment penalty. Paradoxically, however, while many states and federal agencies ban explicit prepayment penalties, all accept points. Furthermore, lenders must disclose explicit prepayment penalties to borrowers. Yet, while regulations routinely require disclosure of other implicit information, such as the true interest rate (APR) of loans with points, no regulation requires disclosure of the implicit prepayment penalties created through points.