As a mortgage lender, managing risk is a vital step in safeguarding your profits. In addition to mortgage fraud, loan buybacks, and regulatory compliance, you also have to protect your business from early payoff (EPO) penalties.
Since mortgage rates have been elevated for the past few years, EPO penalties haven’t been a top concern. However, as rates begin to decline, EPO penalties are becoming a more pressing issue. While these fees can put a significant strain on your finances, you can protect against them by leveraging the right solutions.
In this article, we’ll explain what EPOs are, how their penalties work, and how they can take a financial toll on your business. After that, we’ll explore how Cascade Alerts can help you monitor your EPO risk and avoid the devastating effects of EPO penalties.
Table of Contents
What Are Early Payoffs?
An EPO takes place when a borrower pays off their mortgage before the agreed-upon term. Borrowers may do this for several reasons, including:
- Selling their home – When borrowers sell their home and purchase a new one, they typically use the sale proceeds to pay off their existing mortgage. In some cases, borrowers may use their new mortgage as a short-term bridge loan, securing a new home before selling their current property.
- Wanting to become debt-free – Some borrowers pay off their mortgage early in the pursuit of becoming debt-free. This could involve making extra payments or using an unexpected financial windfall, such as an inheritance or legal settlement, to pay off their balance in full.
- Refinancing – Another popular reason borrowers pay off their loans early – particularly within the first few months – is to take advantage of more favorable rates and terms. While EPOs can take place in any market, your EPO risk is highest when interest rates drop and an influx of homeowners rush to refinance and lock in lower rates.
What are EPO Penalties?
EPO penalties are fees imposed by secondary market investors or government-sponsored entities (GSEs), such as Fannie Mae and Freddie Mac, on lenders when a borrower pays off their loan within the first few months. These fees compensate the investor for the premium they paid.
Investors pay loan premiums for the right to receive a loan’s future interest payments. If a loan is paid off prematurely, the investor doesn’t receive these payments. Thus, by charging EPO penalties, they can protect their investment portfolio from these types of losses.
The rate and timeframe for EPO penalties can vary from one investor to the next. However, they typically range from 1% to 5% of the loan amount and apply to mortgages that are paid off within the first three to six months after funding. For example, Freddie Mac’s EPO penalties apply to any mortgage that’s paid off within 120 days of its funding date.The Impact of EPO Penalties on Your Mortgage Lending Business
EPO penalties can be financially crippling for your mortgage lending business. Along with erasing your original revenue, they may require you to pay even more in fees. If you run a smaller mortgage lending business, you may not be able to sustain these losses for long.
If you’re a loan originator, EPO penalties can also lead to “commission clawbacks,” meaning you must pay back the commissions you earned on a closed loan. This can be especially damaging to your income, as it undermines your compensation for months of hard work.
In today’s market, where many lenders are already struggling financially, you may not have sufficient liquidity to address EPO penalties in real time. This can lead to cash flow problems and further financial strain.
EPO Penalty Example
To clarify the costly consequences of EPO penalties, let’s take a look at a real-world example:
- You approve a borrower for a $300,000 mortgage at a 7.5% mortgage rate. After closing their loan, you sell it to Fannie Mae at a 103% premium for $309,000, providing you with $9,000 in profits.
- Interest rates drop shortly after this sale, motivating your borrower to refinance their loan with a competitor just two months after closing. Their new mortgage rate is 6.5%.
- You don’t learn about your borrowers’ early payoff until it’s too late. Fannie Mae charges you a 5% EPO penalty totaling $15,000. Not only do you lose the $9,000 in profits from originating this loan, but now you must also pay an additional $4,000, exacerbating the damage to your bottom line.
As you can see, just one EPO penalty has the potential to hurt your profits. Multiple EPOs can be even more significant, potentially erasing months of profits and putting a severe strain on your cash flow.
Read More: Keeping Costs Down Despite Rising Origination Costs in 2025
How to Detect EPOS and Prevent EPO Penalties
While you can’t control what your borrowers do after they close on their loans, you can protect your business from EPO penalties. You just need to take a proactive approach.
Here are three steps for reducing your EPO risk:
- Negotiate your EPO terms – Before selling loans to investors, carefully review the EPO terms in your sale agreements. Depending on the investor, you may be able to negotiate these terms to reduce your EPO risk. For example, you could request a shorter EPO period or lower penalties per loan. Alternatively, if you’re selling loans to investors with longer EPO periods, you can adjust your pricing to account for the increased risk.
- Build strong relationships with investors – Some investors may be willing to waive your EPO penalties if you sell them large volumes of loans. Just keep in mind that they may also offer a lower price for these loans, leading you to pay the penalty indirectly through reduced revenues.
- Actively monitor your borrowers’ EPO risk – After completing a sale, one of the most effective ways to mitigate your EPO risk is by monitoring your borrowers’ credit reports for signs that they may be refinancing their loan or selling their home soon. Identifying these signs allows you to reach out proactively, increase your chances of retaining their business, and successfully satisfy their evolving financing needs.
Monitor Your EPO Risk Affordably With Cascade Alerts
If you don’t have the right tools, predicting which borrowers will pay off their loans early can be difficult. Fortunately, Cascade Alerts simplifies the process, serving as your 24/7 EPO watchdog behind the scenes.
Cascade Alerts is a continuous credit monitoring solution that can help you pinpoint potential EPO risks before they become a problem. It works by scanning your borrowers’ credit reports for any mortgage-related inquiries that suggest they may be considering refinancing or securing a new purchase loan for a home. As soon as Cascade Alerts uncovers these red flags, it can alert you within 24 hours, giving you ample time to re-engage with the borrower before they move forward with a competitor.
Some of Cascade Alerts’ standout features include:
- Real-time credit monitoring – Cascade Alerts monitors your borrowers’ credit reports continuously so you can spot potential EPO risks before they materialize.
- Custom filtering – Cascade Alerts allows you to designate your credit score minimums and GSE pass/fail requirements so you’re only notified about borrowers who meet your current eligibility criteria.
- Convenient integrations – Cascade Alerts can integrate seamlessly into your existing loan origination system (LOS), allowing you to monitor your borrowers’ information conveniently from one place.
- Personalized alerts – With Cascade Alerts, you control how and when you’re notified about new leads, whether you want to receive your alerts via text/SMS, email, or LOS notification and on a daily, weekly, or monthly basis.
- Convenient collaboration – You can’t be in the office 24/7. Fortunately, Cascade Alerts allows you to forward your daily lead lists to other loan officers at your company, ensuring your EPO notifications never fall by the wayside.
- Cost-effectiveness – Cascade Alerts is an affordable solution that pays for itself by preventing just one EPO penalty. You can also try it out risk free for one month.
- Far-reaching applications – Along with highlighting EPO risk, Cascade Alerts can help you identify borrowers who may be open to other loan products. For example, it can assess borrowers’ home equity to identify strong HELOC or home equity loan candidates. Likewise, it can alert you when your borrowers are facing rate buydown expirations so you can pitch them on a refinance before your competition.
Read More: How to Protect Your Portfolio and Retain Borrowers Amid 2022 & 2023’s Rate Buydown Expirations
Protect Your Business From EPOs By Partnering With Certified Credit
As you can see, Cascade Alerts can help you take proactive measures to retain your hard-earned business and prevent EPO penalties. It’s an essential solution for any lender who wants to protect their revenues, retain valuable borrowers, and maximize their profitability.
Looking for more ways to safeguard your revenues? As a leading mortgage solutions provider, we offer many other risk mitigation and cost-saving solutions at Certified Credit. Our current suite of products and services includes:
- Customizable credit reports
- Credit score improvement tools
- Automated prequalification
- Automated verification of income and employment (VOE)
- Automated credit supplements
- Undisclosed debt monitoring
- Property and valuation support
- Comprehensive fraud reports
- Underwriting compliance
- Settlement services
Don’t wait for an EPO penalty to disrupt your profits! Protect your mortgage lending business today by scheduling a credit consultation with our team.
Sources:
U.S. News. 2025 Housing Forecast: Will Mortgage Rates Go Down?
https://money.usnews.com/loans/mortgages/mortgage-rate-forecast
Housing Wire. EPO fees are back. How mortgage lenders can avoid them.
Freddie Mac. Recapture of premiums and reimbursement of buyup proceeds.
