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This is not legal advice for your situation*

At Your Service: Maryland Prohibits Prepayment Penalties

With enactment of Maryland HB 363, which became effective on June 1, 2008 (except for Section 7 of the Bill which becomes effective on January 1, 2009), Maryland law now prohibits prepayment penalties on closed - or open - end loans regardless of loan purpose or lien priority, secured by property in Maryland that is:

  1. Owner-occupied property (O/O = yes; second home = no); or
  2. Investment property, provided the loan < $75,000 (O/O = no; second home = no)

Note that if the DocMagic user attempts to enter a prepayment penalty in the worksheet under any one of the above circumstances, an audit will appear that states:

WARNING: PREPAYMENT PENALTY PROHIBITED (MD CODE ANN., COM. LAW SECTION 12-105(d))

Stated another way, the Maryland prepayment documents will only select when occupancy status entered in the DocMagic is:

  1. A second home (O/O = no; second home = yes or O/O = yes; second home = yes); or
  2. Investment property, provided loan > $75,000 (O/O = no; second home = no)

Based on a reading of applicable law, specifically Section 11-501(k) of the Maryland Financial Institutions Code, it was unclear to DocMagic's Compliance Department whether prepayment penalties were permitted on loans secured by Maryland property that constitutes the borrower's vacation or second home.  The Compliance Department contacted the Director of Mortgage Compliance at the Maryland Department of Financial Regulation, who acknowledged that the provision was vague as it applied to second homes and advised that he would consult with the Department's counsel.  After consulting with counsel, the Director confirmed that the prepayment penalty prohibition does not apply to second homes. 

Please note that certain entities, including, but not limited to, federally chartered banks, which originate mortgage loans under federal law, may have authority to impose prepayment penalties based on federal preemption override of Maryland's Commercial Code.  Note further that the preemption from compliance with Maryland's Commercial Code may have the effect of extending to brokers, such as those who broker loans on behalf of a federally chartered bank.  If you are not certain whether you are exempt from the prepayment penalty prohibition under the Maryland Commercial Code, please consult with your own legal counsel for advice about your specific situation.

If you have any questions pertaining to the contents of this article, please contact the Compliance Department.

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*This article is distributed to provide general information about the subject matter covered and should not be utilized as a substitute for professional advice in specific situations. If you require such advice, please consult with your own professional advisers.


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