The Cash-Out Refinance With a Balloon and Prepayment Penalty
Ruth, 67, lives on $2,100/month Social Security and owns a home appraised at $340,000 with a $60,000 mortgage. A broker proposes a $310,000 cash-out refinance: 10.25% fully indexed APR, 6 points ($18,600), a 3-year prepayment penalty equal to six months' interest, a balloon payment in year 5, and no escrow. Her monthly payment would be $2,775, exceeding her income. The broker says Oregon has no usury cap, so the rate is legal, and tells her the prepayment penalty 'won't matter because you'll refinance again.' She is asked to sign a broker agreement and a disclosure saying she declined counseling. The loan is classified by the broker as a 'non-prime' loan.
1. Does Oregon's high-cost home loan law apply? What facts matter?
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The analysis starts with the loan's APR and points-and-fees. Oregon's high-cost home loan rules use triggers such as an APR that exceeds the comparable Treasury yield by a specified margin, or total points and fees exceeding a percentage of the loan amount. A 10.25% APR on a cash-out refinance, combined with 6 points ($18,600 on a $310,000 loan), is likely to cross at least one trigger and may cross both. The broker's statement that Oregon has no usury cap misses the point: high-cost home loan law is not a rate ceiling; it imposes conduct and product restrictions. Even if the loan narrowly falls outside the high-cost definition, the broker must still evaluate ability to repay, avoid misleading statements, and comply with consumer protection standards. The compliance file should record the trigger calculations, not just the broker's label.
2. Which proposed terms are prohibited or problematic under Oregon law?
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Several terms are red flags. High-cost home loans in Oregon generally restrict or prohibit prepayment penalties and balloon payments, and they impose escrow and counseling requirements. The broker's attempt to obtain a counseling waiver is problematic because counseling is a protection, not a box to be waived by a borrower who has not received independent advice. The loan also appears unaffordable: a $2,775 payment against $2,100 monthly income fails a basic ability-to-repay analysis. Steering the borrower into a non-prime product with a large fee when a safer product may exist raises unfair or deceptive practice concerns. The broker should not present the loan as lawful merely because the interest rate is not capped, and should not encourage the borrower to accept a prepayment penalty based on a promise of a future refinance.
3. What should the lender or broker do before proceeding?
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The originator should stop the current structuring and re-underwrite the request. The lender must document income, debts, residual income, and the borrower's ability to repay, including taxes and insurance if escrow is waived. If the loan is high-cost, the lender must remove prohibited features, provide required disclosures, ensure counseling is completed rather than waived, and establish escrow where required. If no compliant product fits, the lender should decline or offer a smaller cash-out amount that the borrower can afford. The broker should correct any misleading statements in writing, retain the trigger analysis and counseling records, and avoid closing on a file where the payment exceeds income. A compliance review before closing is essential because later rescission or enforcement risk is high.