Colorado limits prepayment penalties on adjustable mortgages

DENVER — Colorado regulators have imposed a new rule limiting prepayment penalties on adjustable-rate mortgages in hopes of reducing the state's high foreclosure rate.

An emergency rule announced Monday by Erin Toll, director of the Colorado Division of Real Estate, bars lenders from demanding prepayment fees after a loan is adjusted to a higher interest rate.

Stiff penalties for paying off loans early can prevent some borrowers from refinancing when interest rates rise. If they can't afford the higher rate or the prepayment fees, they could end up in foreclosure.

"Prepayment penalties are fueling what we're seeing, particularly in lower-income markets," Toll said. "Those are the folks who are most susceptible to the lure of an extremely low rate."

Toll's department is predicting a 30 percent overall increase in foreclosures in Colorado this year. The total for the first nine months alone was nearly 29,000, more than all of last year and a record for the first three quarters.

Chris Holbert, president of the Colorado Mortgage Lenders Association, said the prepayment penalties covered by the new order have already become rare.

"We understand the interest in protecting consumers and the division's response, but it's an issue the markets for the most part already have addressed."

"In today's market, that would be a difficult option to find," he said.

Toll said the rule applies only to loans made after Dec. 14, the day the order went into effect.