NEWS, EVENTS, PUBLICATIONS & EMERGING ISSUES

SW&M EMERGING ISSUE
June 3, 2008

A PREPAYMENT PENALTY FEE BY ANY OTHER NAME IS STILL A PREPAYMENT PENALTY FEE

A recent Maryland Court of Appeals decision may affect financial institutions across the nation that impose prepayment penalty fees, including federal and state-chartered credit unions. Specifically, the decision involved a Maryland state-chartered bank that waived closing costs payable by the borrower at closing in exchange for the borrower agreeing to keep the loan open at least three years. However, the borrower refinanced after two years and paid the loan in full. The bank then added a fee to the payoff demand statement called a "recapture fee" equal to the closing costs amount, in an attempt to collect the closing costs initially waived. The court termed it a prepayment penalty fee, which are prohibited under Maryland law, because it was assessed upon the borrower due to early payoff.

Needless to say, the Maryland court's decision runs counter to previous legal opinion letters issued by NCUA stating that recoupment of waived closing costs do not constitute prepayment penalties. Nevertheless, we would caution our credit union clients that courts in other jurisdictions, including California, may agree with the Maryland court's decision regarding prepayment penalties.

Please contact our office if you would like further details regarding the decision or how it may affect your credit union's fee structures or charges.

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