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Prepayment Penalties are Illegal in Maryland

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I didn’t know this when I bought my house but prepayment penalties are actually quite illegal in the state of Maryland. This link is to the story of a man who refinanced his home with Provident bank, who agreed to waive his closing costs (of around $700) as long as he kept the loan for 3 years. Well, he didn’t keep it for 3 years and so they dinged him for the closing costs. The lawyer’s claim is that since the only way to trigger this fee is when you prepay your loan, it’s a prepayment penalty. If it looks like a duck, smells like a duck, and quacks like a duck… it’s a duck.

I’m a little split on this because on one hand, prepayment penalties are illegal and it sure looks like a prepayment penalty. On the other hand, he knew what he agreed to when he signed his refinance documents. It looks like he discovered the payment was illegal after he signed the documents (and made the payment) and now wants to save himself the $681 and earn himself an extra $1400 plus interest… that doesn’t sit well with me.

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15 Responses to “Prepayment Penalties are Illegal in Maryland”

  1. Poor Boy says:

    I worked for an automotive extended warranty company, and one particular dealer figured out that if he purchased our contracts on his own vehicles, did any needed repairs prior to selling the vehicles to his customers and then canceled the contract within 30 days, he would get a full refund of the contract price. The guy was smart. He, unlike 99% of the rest of our customers/dealers, read and understood the contract, and fleeced the company for around $250,000 before they figured out what he was doing. Surely, what he did was unethical. But, the warranty company, just like the bank that got screwed on their closing costs, screwed plenty of people themselves. Karma can be rough.

  2. Brett says:

    Be careful here. Prepayment penalties are LEGAL in the state of Maryland if the bank is chartered in a state where they are legal. Most mortgage companies charter themselves in Delaware for this reason. As long as they lend under a federal charter and not a Maryland charter, this is legal. There are very few states where prepayment penalties are 100% illegal. The only one that I know of is North Carolina. Borrowers should also be aware that prepayment penalities are not bad in all instances. If you are planning on staying in a home for 3 years, why not take a 3 year prepay, since it will help you get a lower interest rate. Also be very careful with prepays on ARM loans, make sure that the prepay period isnt longer than the ARM period. There are plenty of unscupulous lenders out there that do this. HELOC loans can also have prepayment penalties in the form of termination fees, many lines will not charge you this if you simply pay the loan off, but if you cancel the line of credit, they hit you with $500 termination fee(normally).

  3. George says:

    I just don’t think these ever more complex financing agreements are very ethical. Most of the time the borrower gets burned by loan nuances, so I don’t have a problem with a lender getting burned by their failure to read the legal fine print of Maryland law.

  4. calvin bailey says:

    are Prepayment Penalties Illegal in Maryland why im asing i had a loan with a mortage company i was forced to pay 4000 bacause i paid my loan off befor 5 years?? i have proff i kept the papers it was 3 yrs ago if its Illegal in Maryland how do i get my money back

  5. Delores says:

    Re: “Prepayment penalties are LEGAL in the state of Maryland if the bank is chartered in a state where they are legal.”

    It seems this is also the view of others on the internet. I was able to find the following on
    the Maryland’s Department of Labor Licensing and Regulations website on this page: http://www.dllr.state.md.us/finance/consfaq.html#prepayment

    FAQ
    Are prepayment penalties illegal in Maryland?
    Not exactly. Prepayment penalties may be permissible under certain Maryland law and are subject to certain limitations. However, many Maryland laws do not permit prepayment penalties. The language in the contract governs and must be reviewed carefully. A prepayment penalty may be allowed depending on the contract.

    For a list of Maryland state chartered banks and trust companies, go to http://www.dllr.state.md.us/finance/mdbanks.html

    I would suggest finding the name of your lender on that list and reading your contract very carefully.

    I hope this helps.

  6. Wendy Wood says:

    How do you know which state’s are legal? I live in Maryland, but a New York broker did our loan. We did not read the fine print until the notary came out and iformed us of the prepayment penalty. We then had to sign as we had a brand new baby and had already signed papers for our addtitiion to be built. Can someone please respond to me question.

  7. Paula Rush says:

    I am in the middle of a lawsuit against my lender and I need to know from you who your lender was. Maybe I can help you. You would be surprised how many violations may be in your loan documents. Mine are 42 pages and 142 counts in my lawsuit. Email me so we can exchange info. My lender was American Home Mortgage.

    • anonymus says:

      I was also an American Home/Option one victim, I would be interested to speak with you. I reside in New York State another member of Topix suggested we chat. Thanks, Laura

    • felicia says:

      i am currently with american home mortgage and live in NY are there penalties for leaving them to refinance with another. They have customer service in India which is almost impossible to get thru too – I am currently on my 3rd call to them and keep getting disconnected – getting disgusted with this company

  8. James says:

    I looking for any assistance with getting rid of a pre-payment penalty or getting one reversed in the state of maryland. My wife and I really press hard at our closing and during negotiations with our lenders reps to remove penalties. Now that I’m ready to sell my home I have a pre-pay penalty that doesn’t show up on my monthly statement but only when I requested a pay off. We are two years-three months into our current mort and I find these lenders disgusting.

  9. Bridget McGee says:

    Hello James, If you are selling your home, you may not have to pay the pre-pay penalty. If you have a “hard” pre-pay penalty, you will owe it if you sell or refinance within the term of the prepay rider. If you have a “soft” prepayment, you will only owe if you refinance. Check your loan documents. It may be too late, but I will be happy help if I can.

  10. Metzger12 says:

    I am helping out a young couple who have an Adjustable rate note. They had 4 options of payment and they chose to pay the minimum for the 1st year…Oct 06 to Oct 07. On the 1st of Oct, they were required to pay the unpaid balance in full $3000, the difference below the interest accumulated for the 1st year and they are now required to make full payments(interest and principal) The interest also went from 6.9 to 7.8, I am looking into refinancing for them, but the broker who sold the loan stated there was an $8000 dollar pre-payment penalty. Does this sound right? Also there loan went from 254,000 to 262,000. If they paid the unpaid balance of $3000, then why did there principal go up this much. I can understand with interest it may climb a little, but this looks like to much. Any way to shake this pre-penalty, if not can this couple make interest only payments until the penalty expires? Please help me help them..Thanks in advance

    Dale

  11. Ryuctr69 says:

    As stated above it is NOT illegal to charge Prepay Penalties in the stated of MD… there is some grey area here. If the Bank is chartered in MD then they are subject to the State Laws concerning Prepay. However Most well known lenders are not based in MD so they can charge you but there must be FULL disclosure, There are Limits to the penalty and term.

    As for the Question Above… There is Little you can do about this unless the bank is chartered in MD. The deferred interest becomes part of the Principle and the interest is compounded… So you are charged interest on top of the Interest you didn’t pay. that is an additional 8 grand sounds about right to me know how these loans are… I haven’t taken a calculator to crunch the #’s but these monsters can grow rather quickly

  12. Dawn says:

    How do you know if you have a hard pre-payment penalty or a soft one?

  13. felicia says:

    i am currently with American Home Mortgage and want to find out if there are penalties if we leave them and re-finance with another company. Thanks to all.


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