Your employer analogy doesn't hold up because you have not yet tendered the services to your employer for which they would be indebted to you in the future.

A better a analogy would be your mortgage, which is in fact a debt you owe in full, a payment schedule notwithstanding.

Except the loan was paid including all interest for the lifetime of the loan. If you prepaid your mortgage that way, even on purpose, your bank would owe you a good portion of your money back.

That is incorrect - I would actually owe my bank an additional prepayment penalty, according to my mortgage structure.

I think gp meant prepayment including all future interest, which would more than cover prepayment fees.

High-lvl: prepayment fees is roughly equal to interest owed minus alternative interest options the bank has (eg someone else’s mortgage). Disclaimer: Dutch perspective.

What? Every time I try to learn what a mortgage is it seems more like a scam. The only thing a bank should say to paying more is "thank you".

It's a bit complicated financially and the details vary based on fixed vs variable terms but I'll try to offer a simplified example of why pre-payment penalties exist.

Imagine I go to a bank today and take out a $100,000 mortgage on my house at a fixed rate of 2% (yeah - that's 2020) on a 5-year term[0] with a 25-year amortization.

The bank gives me that $100,000 cash today on the expectation that they will get it back with 5 years of interest (calculation is a bit complex but should work out to just over $9k over the 5 years).

We could keep it simple and say that once you've agreed to pay a bank $9k in profit, they are in the business of making sure they get that profit. Repaying any amount of the debt ahead of schedule does not exempt you from paying that anticipated profit.

In the banks' defence, the details are a little more complicated in practice. Banks rarely lend out their own money. When I take out this mortgage, the bank just issues a $100,000 bond to an investor. The bank presumably guarantees the bond so the risk to the investor is less than the mortgage itself and, so, the bond has a lower interest rate - say 0.5%. The difference in interest rates is the actual profit to the bank.

Bonds have a couple characteristics: a) they are fixed-term (in this case, 5 years); and b) payout of both interest and principal is guaranteed (by the bank)

So if you decide to pay back your mortgage (or some amount) ahead of schedule, the bank still has to pay out their bond commitments and that money needs to come from somewhere. And the bank isn't gonna front it. Depending on markets and current interest rates, the bank may be able to re-use that bond on someone else's mortgage so your penalty may be reduced in some cases.

[0] These shorter-than-amortization terms are a thing here in Canada. Not sure if it works the same in other countries.

In the UK we commonly have 2 to 5 year fixed interest rates on a 25 year mortgage, with the remaining years at a variable base rate + X%.

I think this achieves a similar result, as anyone who leaves their mortgage unchanged beyond the fixed rate period almost always ends up on a punitive rate.

As I understand it, the logic is the bank is expecting to make a good deal of money over the life of the loan in interest. Prepaying reduces that profit, so they penalize you to discourage that behavior. Note that not all mortgages have that penalty (mine doesn't).

As with most financial things it depends on location and time and specific conditions.

Generally, its been illegal since 2014 nationwide to have a prepay penalty. In my state its been illegal as long as I've had a mortgage. In some weird but possible conditions its possible post-2014 to have a prepayment fee at the national level for a normal residential mortgage.

You'll see all kinds of random dates at the national level. From what I understand the 2010 Dodd-Frank act was the enabling legislation, the new rules came out in 2013, and went into effect in early 2014, but its all the same issue.

While it may not be an explicit penalty at time of prepayment, the risk of losing revenue due to prepayment/refinancing if interest rates drop is definitely modeled priced into the terms of the loan, just as the risk of you going bankrupt and not being able to pay is.

It depends on the conditions of the loan as well. I don’t believe any VA-backed loan can be assessed pre-payment penalties

I don’t think you understand how banks earn money. People deposit funds which they then loan to others. The interest they get from the debtors is more then the interest they pay depositors. If everyone repaid their mortgage early they have no profit, so they need to cover themselves for that. They aren’t charities.

And the bank does get the interest, for the duration for which the money is not in their hands. A "pre-payment penalty" sounds to me like the bank asking you for money while they themselves can then also turn around and loan that (now repaid, with penalty!) money out to another person desiring a loan, and get even more profit.

> The interest they get from the debtors is more then the interest they pay depositors.

The interest paid to most accounts these days is a pittance, adding less back than is lost to inflation, and many accounts have additional fees.

If you have GOOD mortgage terms, (1) any prepayment should go to PRINCIPAL and (2)there should be NO prepayment penalty.

(1)is sacred. If you don’t have (1), you are a noob.

(2)is sometimes bargained away to get a lower interest rate, often, in the form of lower points. Once again, if you have a prepayment penalty without a demonstratable financial consideration, you are a noob.

Don’t be offended, we are all noobs at one time or another. Banks are not educational institutions. Indeed, universities themselves are quite unforthcoming about the opportunity costs and ROI of their own products.

I don't believe it's all that common. Most mortgages can't even have prepayment penalties, or can only have them during the first few years of the contract.

That depends on the bank and loan. My mortgage, for example, doesn’t include a prepayment penalty.

Still cheaper than renting.

A mortgage is a scam because the richer person (the bank) can scam the poorer person (you) simply because they have the money to scam you.

And you will take it because where else are you going to get the money?

And renting is a scam because the richer person (landlord) can scam the poorer person (you) simply because they have the money to scam you.

And you will take it because where else are you going to live?

If you look at things this way, everything is a scam.

You must have a very old loan or not be in the US, because prepayment penalties aren't legal anymore on US residential loans. Also, what I mean was paying all the interest for the lifetime of the loan. That would be significantly more than the principal balance and prepayment penalty.

The prepayment penalty is instead of the interest they were expecting, not on top of it.

That is highly specific to your own agreement, and such penalties are usually only for the first 3-5 years. For myself, I have always negotiated 0 prepayment penalties.

I don't understand. You're saying if I decided to pay off my mortgage all at once, my bank would "owe" me my payoff check?

Interest accrues on a monthly basis, so if you pay it off now you won't accrue the interest on an ongoing basis.

In other words - over the life of the loan/mortgage you will pay $X in principal and $Y in interest. If you suddenly pay the whole thing back, then $Y becomes much smaller. So if you paid $X + $Y in a lump sum then you would receive some money back, is what they are saying. Because you have overpaid on the interest, because that interest never accrued.

(not sure whether in this case Citibank paid the full sum of the principal or expected interest or not, but yes, if you did that on your mortgage then you would be entitled to receive some money back)

If you calculate all the money you will put into your mortgage loan over time, add it all up, and write a check for that amount, it will be more that your principal balance because of interest.

I think op is implying the difference in non-accrued interest. IE your payment at that point would be all principle, thus negating the loan and incurring over payment.

Brigade did not provide their service either. A lender provides the service of lending money over a certain amount of time. This money is like a contractor paid by the hour, working at the borrower's service. Brigade should not be entitled to having that money back until that time has either elapsed or the borrower decides to alter the payments.

Another comparison would be me giving my wallet to a friend to buy something, then the wallet falls from his pocket into my landlord's hands, who declares this must be my next payment for rent. This does not sound fair.

> Brigade did not provide their service either. A lender provides the service of lending money over a certain amount of time. This money is like a contractor paid by the hour, working at the borrower's service. Brigade should not be entitled to having that money back until that time has either elapsed or the borrower decides to alter the payments.

That's not true. For comparison, many times a mortgage lender can call the loan at any time. The service of Brigade loaning the money had already happened.

> Another comparison would be me giving my wallet to a friend to buy something, then the wallet falls from his pocket into my landlord's hands, who declares this must be my next payment for rent. This does not sound fair.

A better comparison would be if your bank mailed a check every month to your mortgage lender, then suddenly sent a check for the exact remaining balance plus interest accrued.

this second example seems like a better analogy for the situation

Let me walk you through how this plays out.

Lawyers from Brigade and Citibank calculate Brigade's odds of winning. Let's say both sides agree it's 5%. That means the expect returns on litigating this are $8.75 million to Brigade. The cost of litigation is $2 million. The two sides discuss. They settle for anywhere between $6.75 and $10.75 million, depending on who negotiates better. That's where neither side wants to litigate.

For being a little bit douchey, Brigade walks out a few million ahead.

If sides can't agree (e.g. Citibank lawyers estimates 1% odds of winning and Brigade 10% odds), they go to court. But 9 times out of 10, it's a settlement like that.

What complicates things, and makes it more interesting, is the precarious state of Revlon.

If they declare bankruptcy and restructure the obligations while the case is pending, Brigade would have been forced to take a loss on the loan. If they try to argue for the money as repayment for the debt, a bankruptcy court could claw back the money and redistribute according to the capital structure (akin to what happened during the Madoff resolution)

It seems like that perhaps makes it more likely everyone will want to settle quickly. Settlement money shouldn't be subject to a clawback, so Revlon comes out ahead. And a clawback doesn't help Citi either -- they're out the full sum. At that point, Citi's money flows to help Revlon's creditors.

What's even more interesting is that you're right that a clawback like that might actually happen. In theory, justice is blind. In practice, lots of courts exercise deep justice jurisprudence, and it's hard to argue Citi should get its money before Revlon's employees or similarly worthy parties.

That actually plays to Brigade's benefit slightly, I think. If this risk is there, Citi will definitely want to settle quickly.

As I understand the situation from the article, Revlon is not a party to the case. It is therefore irrelevant if Revlon becomes bankrupt. Clawback provisions would not extend to a transaction between Brigade and CitiBank. IANAL

So while this dispute is ongoing, Revlon has an extra 175M of someone else's money that could be brought into play during their bankruptcy- so they actually have an incentive to declare early?

What’s the upside for Revlon in this case? I don’t think the upside outweighs the downside unless the bankruptcy is inevitable

I don't know about the case details, but Brigate might argue that Citibank paid Revlon's debt. There is nothing stopping you from clearing someone else's debt. It is as easy as doing a bank transfer.

Unjust enrichment argument would be much stronger if Citibank did not have any involvement with the parties. For example if I send my money to an account numbered 100001 but I intended to send it to 1000011, I could argue that I don't know the account holder 100001 and I sent the money by mistake.

Classical contract law is a byzantine beast, and it does not take mistakes lightly. Brigade might have thought that they secured an interest-free loan and want to use it. This would undermine Brigade's credibility and completely mess with their relationship with Citibank. But they might have thought what the hell, we get free financing.

They also might be holding this as leverage against Citibank, if Citibank needs those funds urgently, they'll have to settle.

> There is nothing stopping you from clearing someone else's debt.

But Citibank was not "someone else". Citibank was Revlon's banker.

Imagine if you used BankOfAmerica to pay off your credit card bills monthly. Now imagine that you owe your CC a large amount, but are paying it off month-by-month (using BoA, as always). One month, BoA takes all of the owed money out of your account and sends it to you CC company, thereby paying off your CC debt. How is the CC to know whether you meant it or not?

But they didn’t take the money out of Revlon’s account. They just paid it from their own funds.

That's irrelevant here. "Money" is just bits in some DB. The point is, BoA sent money to the CC company, like they always do. How is the CC company to know where the money originated from?

The same way you'd know your employer overpayed if your monthly deposit somehow skyrocketed by 10 times. No you didn't get a 10x raise, there was a mistake somewhere down the line.

Also, they know simply because BoA told them immediately. I can't believe people advocating what is clearly stealing.

Because they were told by BoA?

That's not at all appliable to this situation. If Brigade had a Due For No Reason clause, they could have called the loan in at any time, just like a bank calling a mortgage due at any time.

Even without such a clause, Brigade is owed the entire pricipal and all accrued interest, which is exactly what was paid. There was a payment plan, but that doesn't affect the actual amount owed.

This literally was a prepayment. The question is whether this was accidental or not.

Except you haven't provided the work for the next year yet. Brigade did provide the "work" in the form of the money they had already lent out.

As far as the debtor, to whom Brigade "provided work", is concerned no payment was intended to have been made. It was a mistake committed by the bank. From a news article cited in the post:

> “Revlon did not pay down the loan or any part of the loan,” a representative for [Revlon] said in an emailed statement.

https://theprint.in/economy/citigroup-accidentally-wired-900...

Maybe Revlon was planning on getting a lower interest rate loan. And that loan fell through at the last moment, and now they're claiming it was a mistake?

1) If you're refinancing a loan, you do not pay off the old one until you have the new one. This is not only common sense, but typically before you get the new loan, you don't have funds to pay off the old one even if you wanted to.

2) Revlon did not make this payment. The payment was made in error by Citibank, and Revlon was not part of it.

The conjecture of "Revlon made a bad decision and is now trying to back-track", while technically _possible_ sounds like a conspiracy theory.

Finders keepers is actually a pretty strong argument in a case such as this.

For instance, years ago, I had a business account of mine attached because an employee with signatory privileges had a garnishment against him.

The judge ruled that since the lender that seized the money already had it, and I couldn't prove that the money wasn't absolutely, definitely not the property of the signatory (who was not an owner), we could split the money.

Your "employer" argument is specious.

A more apt example is mortgage. I just prepaid my mortgage recently (as a part of refi), but it is the exact same situation: instead of making interest payments, I chose to just pay everything that was owed at once.

Maybe Revlon was thinking of getting a much cheaper (low interest) loan than what it had obtained from Brigade?

You must contact the bank first to do that, or use an automated system of theirs, but you can’t just drop the money in their account.

Yes they are being disingenuous with their comment (and commenting on every thread here with their comparison).

They sent a check with their account number to an address specifically set up to receive mortgage payments.

https://www.wellsfargo.com/mortgage/manage-account/payments

I’m failing to see how that is a disingenuous argument?

I do know that if I write a bigger-than-monthly-payment check to my bank they reduce the principal by that amount -- mortgage lenders are required by law to offer this prepayment option. I don't know if I called them up and said that I did it by mistake whether they would refund me and mark the principal back up.

"Revlon was expected to transfer a few million dollars to some of its lenders." - Brigade was owed money, and while Brigade must return funds in excess of the loan, it can't be forced to reloan the money - Citgroup would have to cure by pulling out their own checkbook to loan Revlon.