A key state lawmaker is working with the banking industry's trade group on legislation that would reverse a Maryland Court of Appeals decision prohibiting certain penalties for borrowers who pay off home equity loans early.

The case involved a popular loan program at Provident Bank that enabled borrowers to tap into equity in their homes without paying closing costs as long as they kept the loan for at least two to three years.

Maryland's highest court ruled late last year that recouping the closing costs if a consumer refinances or pays off the loan before then amounts to a "prepayment penalty" that's not allowed under state law.

Banking industry officials say that without a guarantee that borrowers will pay interest on home equity loans for at least a few years, they can't afford to offer no-closing-cost products, making borrowing more expensive for consumers.

"Unless the law is clarified, then consumers in Maryland lose," said Maryland Bankers Association President Kathleen Murphy. "If consumers want to get a home equity loan from a state-chartered bank, they will have to pay an additional $500 to $1,500 to get the loan."

The trade group approached Sen. Thomas M. Middleton, chairman of the powerful Finance Committee, for help. He has filed a bill to make it clear that recapturing closing costs is not a prepayment penalty.

But the lawyers who brought the class action case against Provident are crying foul, saying the bank clearly violated a consumer protection law. The lawyers include John A. Pica, who was in the General Assembly for nearly 20 years, and M. Albert Figinski, who argued the appellate case. They work for the Peter G. Angelos firm, a top personal injury law firm in Baltimore.

"This is a very, very bad example of how lobbyists can overwhelm legislative will," Figinski said. "This is a rather raw attempt to overturn a very straightforward, well-reasoned, clearly analyzed opinion of the Court of Appeals which was predicated on the precise language of the Maryland statute."

Middleton noted that the banks were relying on opinions from two former state commissioners of financial regulation who found that the later assessment of closing costs - including appraisals and titling fees - in cases when a borrower pays the loan early would be allowable and a benefit to consumers. He said his bill would not apply to subprime loans, which come with high costs and have gotten many borrowers into trouble.

"The banks moved in good faith on this," he said. "The court just puts out its own interpretation of what the law is. You can change the law. It happens all the time."

Dozens of Maryland banks offer the no-closing-cost deal. If the court ruling were allowed to stand, state banks say they would be at a competitive disadvantage to federally chartered banks that are generally exempt from state regulations and would be able to offer the loan product.

The bill would also limit lender liability if a court determines that certain costs associated with home equity loans are not allowed and that lender had previously obtained regulatory approval for passing on those costs, Murphy said.

Provident could be on the hook for a "huge" monetary penalty beyond returning the closing costs if the legislation isn't passed, said Robert Davis, the bank's general counsel. He said that would be "simply unfair." The case has been remanded to Baltimore Circuit Court.

Figinski said they would continue to press their case.

"Even if they pass this piece of junk, they will not solve their problem because we are going to get them," he said.

He declined to elaborate on his strategy.

laura.smitherman@baltsun.com