What must a lender do when a borrower prepays a loan during its first year?

When a borrower prepays a loan during its first year, the lender is typically required to rebate any interest or charges that were prepaid. This is because the lender has already received funds for a period during which the borrower may no longer be using the loan. In accordance with Rhode Island lending laws and general mortgage practices, when a borrower pays off a loan early, any excess interest that has been prepaid should be returned to the borrower. This helps ensure that the borrower is not unduly penalized for paying off their loan ahead of schedule, and it aligns with fair lending practices.

In many instances, the issue of prepaid interest can also depend on specific loan terms outlined in the mortgage agreement. However, the fundamental principle is that borrowers should not be disadvantaged financially by prepaying their loans, and rebates for prepaid amounts is a common way to uphold this principle. This is why this option is the correct choice in relation to the obligations of lenders when handling early loan repayment.