Federal law limits prepayment penalties to ____ during the first two years and ___ during the third year of the loan term.

The correct answer reflects the restrictions set by federal law on prepayment penalties for certain types of loans, particularly those that are covered under the Home Ownership and Equity Protection Act (HOEPA). According to these regulations, during the first two years of the loan term, lenders are permitted to impose a prepayment penalty that cannot exceed a maximum of 2% of the outstanding balance. However, in the third year, the limit increases to a maximum of 1%.

The answer options presented may not perfectly align with these figures, suggesting there may be a miscommunication regarding the terms. Nonetheless, the structure of the limits indicates that during the initial two years, the penalties are more substantial and gradually decrease as the loan matures. This progression is designed to reduce the financial burden on borrowers over time.

Understanding these limits is essential for borrowers to ensure they are aware of any potential costs associated with paying off a loan early and to comply with federal mortgage law. These laws aim to protect borrowers from excessive fees when they choose to refinance or pay off their mortgages ahead of schedule, thus promoting fairness and transparency in lending practices.