With Maryland's largest bank on the hook for millions of dollars in fees it charged borrowers who prepaid their loans, state legislators are moving quickly to protect other banks by revising the statute on prepayment charges.
A bill making its way through the state General Assembly would permit Maryland's roughly 50 state-chartered banks and thrifts to collect charges they had initially waived if borrowers prepay mortgage or home equity loans.
The legislation is in response to a Maryland Court of Appeals decision in December that found Provident Bankshares Corp. of Baltimore violated Maryland law when it collected on fees it had initially waived after customers prepaid their loans.
Though Provident still has to reimburse the borrowers, the bill would shield the $6.2 billion-asset company from punitive damages and protect it and other lenders from potential class actions in the future.
The bill's passage is a top priority for the Maryland Bankers Association, whose top executive said that if it is not passed, a number of banks with state charters could decide to switch to federal ones.
Lawmakers, too, are eager to change the law, which observers say puts state-chartered lenders at a competitive disadvantage to federally chartered banks and thrifts, as well as banks chartered in other states that are doing business in Maryland.
Those lenders are permitted to collect on fees they had initially waived if borrowers prepay their loans. The waived fees could include attorney fees, title search, appraisal fees, and taxes that the bank pays instead of the borrower, in exchange for an agreement by the borrower not to prepay the loan before a certain length of time.
House and Senate committees have overwhelmingly approved the legislation, and on Friday the full House passed its version unanimously.
The Senate and Gov. Martin O'Malley, a Democrat, strongly support the legislation.
Because it is emergency legislation, it would take effect immediately.
The court of appeals decision stems from a $17,000 home equity loan Provident Bank made to Andrew Bednar in 2003. Provident agreed to waive closing-cost fees as long as Mr. Bednar did not prepay or refinance the loan within three years of its origination.
If he prepaid the loan, "the waiver will be rescinded and the closing costs will be added to the balance of the account and will be due and payable immediately," according to the loan agreement, which was included in court filings.
In 2005, Mr. Bednar refinanced the loan with another bank and Provident collected the $681 at the settlement.
Later that year Mr. Bednar was the lead plaintiff in a class action filed in the Circuit Court for Baltimore City that said Provident violated state law by imposing a prepayment charge.
Provident argued that it did not assess prepayment penalties but was rather "recapturing" fees it initially waived but later collected on when the borrower broke the terms of the agreement. It relied on three occasions on opinions from the state's bank regulator that collecting on a fee it had previously waived if a borrower prepaid a loan was not considered a prepayment charge.
Initially the circuit court dismissed the case, but Mr. Bednar's lawyers appealed directly to the Maryland Court of Appeals, which sided with Mr. Bednar.
In a Dec. 13 ruling, Judge John C. Eldridge wrote: "Requiring the reimbursement of closing costs that were previously waived and paid by the lender, simply because of the prepayment within three years, is a prepayment charge under the broad language of" the statute. "Provident also cannot properly circumvent" the statute "by calling the imposition of the charge a 'recapturing' of permitted costs."
Albert Figinski, a lawyer in the law office of Peter G. Angelos, the owner of baseball's Baltimore Orioles, argued the case on behalf of Mr. Bednar in the appeals court. He said "recapture" is just a fancy term for prepayment charge.
"Recapture does not appear in Maryland law at any place. Maryland law … allows prepayment at any time, it allows that there may be no charge for prepayment and, it says in another provision in the law that this right cannot be waived," Mr. Figinski said. "You can call it a Cheerios. You can call it anything you want, but it is not in the statute."
The case has since been returned to the circuit court.
Kathleen M. Murphy, the Maryland Bankers Association's president and chief executive, said the appeals court ruling spooked state-chartered banks so much that many are considering switching to federal charters unless new legislation is passed.
"It's not only a possibility, but I'm aware that some of my members are doing that analysis right now," she said. "In all of my years in banking...I've never known there to be such a potential threat to the state banking charter."
Tri-County Financial Corp. of Waldorf, Md., would consider converting to a federal charter if a bill is not passed.
Michael Middleton, the chairman and president of the $600 million-asset Tri-County, said that the appeals court ruling undermines the authority of the state's banking commissioner and, as he sees it, would interfere with the commissioner's regulation of banks.
Mr. Middleton's cousin, Sen. Thomas Middleton, sponsored the Senate bill, which is identical to the House bill.
Sen. Middleton said the bills make clear that collecting on fees that were initially waived "doesn't violate Maryland's prepayment penalty law."
The bills also would retroactively protect banks that have relied on a stated opinion of the Attorney General's Office or the commissioner of financial regulations, and therefore cannot be a target of a class action for punitive damages.
Sen. Middleton, though, said Provident would not be completely off the hook if the bill became law. It still would have to repay the closing fees it charged the borrowers when they paid off their loans early.
Provident spokeswoman Vicki Cox said, "We see this as an industrywide issue." She would not comment further.
Sarah Bloom Raskin, the commissioner of financial regulations for Maryland, who did not write any of the opinions Provident relied on in the case, said a commissioner's opinions are not law, but interpretations of law, and a court could find them incorrect.
"But whether or not the commissioner of financial regulations is ultimately right or wrong," Ms. Raskin said, "if in fact an opinion has been sought it seems to me to make a lot of good policy sense to not punish with punitive damages the institution that relied on the opinion."
"We want … [banks] before they engage in certain activities to vet their ideas here," she said. "That's important so we know they're on the right path."
But Mr. Figinski, the lawyer for Mr. Bednar, does not plan to stop fighting. The General Assembly may not have a problem with retroactive clauses, but in courts of law, he said, they are "radioactive."
"Retroactivity is looked upon askance by the courts," he said.
