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Vanderbilt Law Review

First Page

409

Abstract

Borrowers often wish, for various reasons, to satisfy their indebtedness prior to the maturity of the loan agreement. Conversely, lenders often wish to prevent early payment of the debt or,alternatively, to exact a fee from the borrower for the privilege of prepaying the debt. Between seven and ten percent of the approximately thirty-two million loans secured by mortgages on real estate are prepaid each year.' At least seventy percent of these loans contain a provision in the loan agreement calling for a penalty in the event of prepayment. This Note discusses the rights of lenders and borrowers when a borrower prepays a debt and suggests a resolution of those rights that is more appropriate than the resolution provided by current law.

Part II A of this Note examines the rights of borrowers when they choose to or are compelled to pay their debts prior to maturity. Part II B examines a lender's right to refuse an early tender of payment or to exact a fee or premium, known as a prepayment penalty, from the borrower in return for allowing prepayment. Part II C discusses the arguments supporting the validity of prepayment penalties. Parts II D-G discuss the various ways in which courts, state legislatures, and federal regulatory bodies have at-tempted to adjust the rights of lenders and prepaying borrowers.Finally, Part III suggests an approach to these issues that is consistent with basic principles of law and justice and that recognizes and protects the legitimate interests of both borrowers and lenders.

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