Md. mortgage fee lawsuit reinstated

State high court finds against Provident Bank

December 14, 2007|By Laura Smitherman | Laura Smitherman,SUN REPORTER

A ruling yesterday from the state's highest court over prepayment mortgage charges could make it more expensive for some to obtain home equity loans, the banking industry's trade association warned.

The Maryland Court of Appeals found that state-chartered Provident Bank assessed a "prepayment charge" that's not allowed under state law. The bank had waived $680 in closing costs on a $17,000 loan to Andrew Bednar in 2003 but collected the money after the loan was paid off early when he refinanced with another lender two years later.

The ruling overturns a decision by Baltimore Circuit Court to dismiss the lawsuit against Provident.

Plaintiffs' attorneys who brought the class action lawsuit against Provident called the ruling a victory for borrowers and a validation of some of the state's most stringent consumer protection laws. Those laws are intended to prevent lenders from penalizing borrowers for paying off their debts early.

Dozens of Maryland banks offer loans under which they "recapture" waived closing costs if the loans are repaid within a certain period, according to a recent survey by the Maryland Bankers Association.

Banks argue that to make the no-closing cost deal economically feasible, they need to be able to collect interest for a minimum amount of time.

"We are very concerned about the widespread implications of this," said Kathleen Murphy, the trade group's president.

"We are concerned about the ability of consumers to get home-equity loans and potentially home-equity lines of credit without paying any closing costs."

Offered for 20 years

Robert L. Davis, general counsel for Provident Bank, said he didn't know how many borrowers have taken out such loans but that the bank has offered the deal for nearly 20 years. "It was always our belief that this product benefited the borrower," he said.

John A. Pica Jr., a plaintiffs' attorney, disputed the banking industry's contention that the ruling could harm consumers.

"Banks make money on loans; no bank is going to be able to convince me otherwise," he said. "They just have to fashion a product around what is the law in Maryland."

Murphy said banks have relied on opinions from two previous state commissioners of financial regulation, which has purview over state-chartered banks, that such loans are permissible products.

Federal banks

Because federally chartered banks are generally exempt from state regulations, they would be able to offer the loan product, putting state banks at a competitive disadvantage, she said.

About 30 state-chartered banks offer such loans, according to the trade group survey.

"Every federal as well as state regulatory agency that has looked at this type of product not just in Maryland but nationwide has concluded that the product is a benefit to the consumer and compliant with the law," Davis said. "Our Court of Appeals has decided to take a different path."

Provident argued in court that it paid the closing costs to outside vendors for appraisals and other services and that the law allows the company to collect those fees and doesn't specify when it can do so.

The bank also noted that Bednar signed a waiver of closing costs provided that the loan was maintained for three years.

But the appellate court said in its opinion that the charge was "plainly" an illegal prepayment charge because it was contingent on the loan being paid off early.

The court also asserted its prerogative to interpret the law, despite any interpretation by the commissioner of financial regulation.

Triple costs

The court remanded the case to the Circuit Court. Provident could be ordered to pay as much as three times the costs wrongly assessed to the borrowers and possibly the interest charged.

The lawsuit was brought by the Peter G. Angelos law firm, best known for its huge class actions against tobacco and asbestos companies.

"This is a very satisfying win for consumers," said M. Albert Figinski, who argued the appellate case for the firm.

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