In contrast to residential mortgage loans, most fixed-rate commercial mortgages do not allow borrowers to freely prepay the principal on their loan. Which of the following prepayment penalties ties the penalty that borrowers pay to how far interest rates have declined since origination?

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Yield-maintenance agreements are prepayment penalties that tie the penalty that borrowers pay to how far interest rates have declined since origination. This ensures that the lender receives the same yield as they would have received had the borrower continued to pay the original mortgage. Lockout provisions prevent prepayment altogether for a certain period, defeasance allows for prepayment but requires the borrower to substitute collateral, and curtailment allows for prepayment but with a fixed penalty amount.

In Contrast to Residential Mortgage Loans, Most Fixed-Rate Commercial Mortgages