Academic journal article ABA Banking Journal

Do We Need to Notify Customers If We Remove a Pre-Payment Penalty Clause?

Academic journal article ABA Banking Journal

Do We Need to Notify Customers If We Remove a Pre-Payment Penalty Clause?

Article excerpt

Q: We recently acquired another financial institution. Its loan portfolio contains home equity loans with pre-payment penalty clauses. We would like to remove the pre-payment penalty clause or not charge borrowers the pre-payment penalty. If we can do either, are we required to send a notice to all affected borrowers that the pre-payment penalty will not be charged if they pay off the loan early? Or, since this practice will be more favorable to borrowers, can we just forego notice and not charge customers if they payoff early?

A: No, you are not required to send a notice about the removal of the prepayment penalty provision and yes, you may simply not charge customers who repay early.

Under [section]1026.40(f)(3)(iv) regarding limitations on home equity plans, creditors may "make a change that will unequivocally benefit the consumer throughout the remainder of the plan." Under [section]1026.9(c)(1)(ii), creditors are not required to provide a change in terms notice "when the change involves a reduction of any component of a finance or other charge." Clearly, elimination of the prepayment penalty fee is a reduction of a charge. (Response provided Nov. 2017.)

Q: We are working with an outside attorney who is helping us with a commercial loan restructuring. The loan will be secured by commercial real estate and equipment. The attorney has offered to order the appraisal. Can the attorney order the appraisal for us?

A: It depends. Attorneys may order the appraisal if the bank is the client, but they may not if the bank's client is the attorney's client. Even if outside attorneys working on behalf of the bank are permitted to order the appraisal, it does not mean that they should in all cases. It may depend in part on how the attorneys are compensated. If they are compensated on a per-loan or per job basis, then they are part of the loan production function, and their independence may be questionable.

According to the Interagency Appraisal and Evaluation Guidelines: "Because the appraisal and evaluation process is an integral component of the credit underwriting process, it should be isolated from influence by the institution's loan production process. …

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