The Maryland Daily Record just reported that “a bill that would allow Maryland banks to collect closing costs from customers who pay off loans early moved closer to final passage … after a contentious debate.” Apparently there’s no free lunch. It makes sense, but is is legal? It will be, if this piece of legislation is passed ….

SB 347 would allow state-regulated banks to “recapture” mortgage closing costs that they pay on behalf of customers, and clearly states in the law that the practice does not amount to an illegal prepayment penalty. The bill is targeted at a legal dispute over Provident Bank’s recapture practices.

In December 2007, the Court of Appeals revived a class action spearheaded by Andrew Bednar, who challenged the $681 he was charged when he paid off his $17,000 second mortgage in less than 36 months.A lower court ruled for Provident in 2006, saying the charge was a deferred closing cost, not a prepayment penalty, which is barred by state law. The top court rejected that analysis, though. Bednar then filed suit, later amending it to allege that Provident had violated a provision of the Commercial Law article that gave consumers the right to prepay a loan at any time without being charged for it. The Senate bill made it to its final reading with no changes, and could see a final vote this week. The bill is classified as emergency legislation, and would take effect retroactively. This could put a stop to the Provident suit, but it would not affect other cases where final judgment has been issued and all appeals are exhausted.Advocates in the Senate, including bill sponsor Sen. Thomas M. Middleton, D-Charles, said the banking industry needs the legal change to keep it competitive with federally regulated banks.

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Posted in Attorneys, Residential Real Estate, Bankers, Mortgages, Regulation, Home Equity, Legal Action | 2 Comments