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My bank recently acquired another financial institution with a loan portfolio that contains HELOCs with a pre-payment penalty clauses. The bank would like to remove the prepayment penalty. Is the bank required to send a notice that the pre-payment penalty will no longer be charged?

My bank recently acquired another financial institution. Its loan portfolio contains home equity loans (HELOCs) with a pre-payment penalty clauses. The bank would like to remove the prepayment penalty clause or not charge borrowers the pre-payment penalty. If the bank may do either, is it 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, may we just forego notice and not charge customers if they payoff early?

No, the bank is not required to send a notice about the removal of the prepayment penalty provision and yes, it may simply not charge customers who repay early.

Under Regulation Z’s §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 §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. (November 2017)

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