The proper way (along with the terms “Yield Maintenance” and “Call Protection”) for the lender to describe the lender’s contract-based right to receive additional compensation if the debtor pays the loan before the maturity date.
“Prepayment consideration” is to be contrasted with a phrase that should never be uttered by a lender—“prepayment penalty.”
Courts are split on whether and under what circ*mstances prepayment consideration is allowed as part of the lender’s claim. Prepayment consideration is typically calculated by determining the interest that would have been payable to the lender over the remaining life of the loan, deducting the amount the lender can realize by investing the prepaid amount at the then-prevailing treasury rate over the same term, and making a further present value deduction to take into account the lender’s receipt of its principal at the time of prepayment rather than at the time of maturity. This calculation is designed to protect the benefit of the bargain the lender struck when it negotiated for compensation (in the form of interest) in exchange for the use of its money. But prepayment consideration is criticized on various grounds, including that the calculation formula usually assumes that the money will be reinvested at the U.S. Treasury rate even where it is clear that the lender can and will be able to obtain a higher rate of return on reinvestment.
See also Defeasance, Oversecured Creditor, Prepayment Penalty.
