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The transaction that qualifies as a high-cost mortgage under the prepayment penalty coverage test is the $125,000 mortgage with a penalty of a $1,500 flat fee if the loan is paid off before the 6-year maturity.

Under the Home Ownership and Equity Protection Act (HOEPA), a mortgage is classified as high-cost if it features certain characteristics, including prepayment penalties. One crucial factor in determining high-cost status is the term of the prepayment penalty. In this instance, the $125,000 mortgage imposes a penalty for the first six years, which is significant when evaluated against the overall term of the loan. The penalty amount of $1,500 remains consistent regardless of the loan's size, reflecting a substantial cost in relation to the mortgage value and potential repayment scenarios.

When assessing the other transactions, we must consider both the structure and the term of the penalties. The second option, a $30,000 mortgage with a $500 penalty for early payoff within 3 years, may also seem significant but is relatively small in relation to the loan amount and duration. The third option refers to a penalty tied to waived closing costs rather than a direct financial charge, which doesn’t fit the standard prepayment penalty characterization under HO