BALTIMORE (Map, News) - A class-action lawsuit granted new life in state court could remove a widespread practice in the loan industry: “recapturing” costs to the bank waived for the borrower at closing.

A 2005 lawsuit filed by Andrew Bednar against Provident Bank alleges the bank charged Bednar a $681 fee when he refinanced a $17,000 second mortgage within three years of settlement, which he claimed was a “prepayment penalty,” illegal under state law.

Provident and state banking groups counter that the fee is only a recouping of original costs to the lender, waived as an incentive to attract borrowers in a tough market.

“It is, as Provident has described it, the practice of the majority of banks in the business,” said David Pulford, president of the Maryland Mortgage Bankers Association and Adamstown-based Worthington Overlook Mortgage Consultants LLC. “It is truly one of those situations where you can pay me now or pay me later, but you’re going to have to pay me.”

A survey conducted by the Maryland Bankers Association of its members found that at least 30 state and national banks operating in Maryland offer to waive closing costs on loans, according to association spokeswoman Alison Tavik. Those costs include reviews and appraisals of property, recording fees, and other third-party charges. However, most lenders assess the fees if the loan is paid off before a certain amount of time.

Pulford noted that the fee often applies only if the loan is actually closed — borrowers can pay off the loan in full within the time period given by the bank and avoid a charge as long as the account remains open.

But in an opinion last week, Court of Special Appeals Judge John Eldridge ruled that the fee is in fact a prepayment penalty “unambiguously and flatly” illegal under state law.

“It’s interesting, right? What’s the difference between prepayment charges … and collecting a waived fee?” said Sarah Bloom Raskin, state commissioner of financial regulation. “It’s a matter of the way you look at it.”

Raskin said the practice was commonplace, and said a state ruling would not apply to national banks and might give them an advantage.

“All the banks are competing with one another,” she said. “If a national bank can offer a product someone wants, consumers will go to the best deal available.”

If the lawsuit is successful, Pulford said consumers would be hurt as well.

“This lawsuit is not doing a service to the consumer,” he said. “To me, it does not appear that the opinion was made with full knowledge of what goes on or what the practice is.”

acahall@baltimoreexaminer.com