Does anyone know if we can limit the auto application of vendor prepayments to exclude select vendors?

Out of the box, no. It's all or nothing as far as I know. Not ideal but if you don't link the Vendor Prepayment to a PO, it won't be automatically applied, I think. If you have to link it to a PO, use a custom field instead?

auto-apply works when prepayment is associated with a PO created for the vendor, if there is no PO then you have to do it manually.