According to federal law, what is the maximum allowable prepayment penalty during the first two years of a loan?

The maximum allowable prepayment penalty during the first two years of a loan is set at 2% of the amount prepaid. This is outlined under federal regulations designed to protect borrowers from excessively punitive fees for paying off their loans early. By capping the penalty at this rate, the law ensures that borrowers are not unduly penalized for exercising their right to pay off their debt, which promotes transparency in lending practices.

While there are various state regulations and individual lender policies, federally mandated guidelines provide a safeguard for consumers, especially in the early stages of loan repayment where substantial interest may still be accruing. It's important to note that some loans may have no prepayment penalty whatsoever, but when penalties do exist, they are limited by federal law to avoid abusive lending practices.