Enforceable Prepayment?

[ljohnso]

What is the name of your state (only U.S. law)? Arizona

My parents, who live in Scottsdale, AZ, have a prepayment penalty that is so vaguely worded that it doesn't seem to be a true prepay, what's more, enforceable. However, the bank is expecting a $30K prepayment penalty. The loan doc says, "PREPAYMENT. Unless otherwise prohibited by law, the Note may be prepaid In whole or In part
during the first SIXTY MONTHS, provided a prepayment penally equal to 5% of the prepaid principal balance Is paid simultaneously therewith. Thereafter the principal balance may be prepaid In whole or In part with no penally."


Is this enforceable? If not, how do my parents get the bank not to charge a prepay?
I'd be happy to provide more documentation if you feel there's a case here.
Thanks!

[Some Random Guy]

Vaguely worded? It seems rather straightforward.

It clearly states that any prepayment of principal, even a dollar, results in a penalty of 5% of the balance before prepaying. Then it says that you only get hit with a penalty once.

Not enforceable? Its a contract that your parents agreed to and signed their names on.
Please explain why its not enforceable.

[ljohnso]

Originally Posted by Some Random Guy

Vaguely worded? It seems rather straightforward.

It clearly states that any prepayment of principal, even a dollar, results in a penalty of 5% of the balance before prepaying. Then it says that you only get hit with a penalty once.

Not enforceable? Its a contract that your parents agreed to and signed their names on.
Please explain why its not enforceable.

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I ask why it's enforceable, for two reasons. First, a broker told me that if this prepayment isn't filed with the state of AZ then it's unenforceable. This was not filed with the state of AZ. Second, according to your interpretation, if my parents paid a dollar more than the base monthly payment, they'd be required to pay 5% of the principal balance, right? Doesn't that seems a bit excessive? I've never heard of that. People overpay their balance all the time, but that doesn't force them into a prepayment penalty situation. But under your interpretation, are you saying it would in this case?

Let me raise some additional thoughts, could it be interpreted to mean that the 5% is of the base monthly payment and not the principal?

Also, if it does mean 5% of the principal balance, under your original interpretation, would that mean that if during the last several years, my parents have over paid the monthly payment to the equivalent of 5% of the principal, then there would be no more prepayment due?

Thanks for your thoughts on this :-)

[FlyingRon]

Originally Posted by ljohnso

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I ask why it's enforceable, for two reasons. First, a broker told me that if this prepayment isn't filed with the state of AZ then it's unenforceable. This was not filed with the state of AZ.

What makes you think it wasn't filed?

Second, according to your interpretation, if my parents paid a dollar more than the base monthly payment, they'd be required to pay 5% of the principal balance, right? Doesn't that seems a bit excessive?

I don't think that is what he was saying. It's certainly not what the loan says. It says you pay 5% of the amount you are PREPAYING as the prepayment penalty AT THE TIME you make the prepayment. If you prepay a dollar, you have to send them a $1.05. The wierd part about the way it is worded is that once you prepay and pay the 5 cent penalty, you're free to make further prepayments without penalty.

[ljohnso]

Originally Posted by FlyingRon

What makes you think it wasn't filed?

I don't think that is what he was saying. It's certainly not what the loan says. It says you pay 5% of the amount you are PREPAYING as the prepayment penalty AT THE TIME you make the prepayment. If you prepay a dollar, you have to send them a $1.05. The wierd part about the way it is worded is that once you prepay and pay the 5 cent penalty, you're free to make further prepayments without penalty.

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I think your interpretation is what I tend to believe. So just over pay the monthly by a dollar, tack on 5% and then walla...no more prepay, right? That's what I tend to believe. As for the reason I believe it wasn't filed, the broker who looked at the loan couldn't find any evidence of a prepay...we told him there was one,but he said he couldn't find it.