DID YOU KNOW that Maryland law contains several provisions which govern limitations on fees and charges made by a mortgage lender licensed by the State, including prepayment penalties, and which depend on the characteristics of the particular loan. Sections 12-308(c)(1) and 12-1009(e) of the Commercial Law Article permit a borrower to prepay a “consumer” loan in full or in part at any time, without penalty. Section 12-407(d)(1) prohibits prepayment penalties for second mortgage loans. Section 12-905(b) prohibits prepayment penalties for secured, open ended credit plans,which would include HELOC loans. By contrast, 12-103(a) permits a prepayment penalty so long as the total interest and penalty does not exceed the 8% interest rate ceiling, and the penalty is limited to the restrictions set out in 12-105(b)(4) as follows: (i) that the penalty may only be imposed on prepayments made within 3 years from the date the loan is made; and, (ii) that the prepayment penalty may not exceed an amount determined by a formula contained in that section. 12-126(b) provides that the borrower whose primary residence is secured by a mortgage loan may prepay in whole or in part at any time, except to the extent expressly provided otherwise in the loan contract.
These State law prohibitions against prepayment fees place non-federally chartered mortgage lenders in Maryland at a competitive disadvantage with their federally chartered counterparts, which are not subject to State requirements. These restrictions have been preempted by the Federal Parity Act of 1982, which created an environment wherein all mortgage lenders, including state licensed or chartered institutions, may make, purchase, and enforce “alternative mortgage transactions” in conformity with applicable Federal regulations. An“alternative mortgage transaction” is defined as a loan secured by an interest in residential real property wherein the interest rate may be adjusted or renegotiated. The purpose of the Parity Act was to prevent discrimination against State chartered institutions, and to increase the overall availability of mortgages to creditors’ reliance on alternative mortgage transactions.
The Parity Act has effectively preempted those sections of the Commercial Law Article set forth above which limit the charging of prepayment fees for adjustable rate mortgage loans made by State licensed institutions. The Act does not preempt State law if the loan is a traditional fully amortized, fixed interest mortgage loan; however, Federally chartered mortgage lenders are not subject to State imposed restrictions.
