Question: My bank plans to introduce a new home equity line of credit that allows all closing costs to be waived at closing provided the customer maintains the loan for three years, but if the customer elects to pay the loan off early, they will have to repay the closing costs. Does Indiana law allow us to contract for “conditionally waived” closing costs?

Answer: It depends. If the home equity loan (HELOC) is a first-lien mortgage, Indiana law does not limit or prohibit the conditional waiving of closing costs. In fact, because first-lien mortgages are not included within the definition of a “Consumer Loan” under the Indiana Uniform Consumer Credit Code,¹ they are relatively unregulated with respect to rates and fees under Indiana law.

However, if the HELOC is a second-lien mortgage, provided you accurately describe the fee in your note and disclosures as “conditionally waived closing costs,” the IUCCC allows a bank to charge the following closing costs and exclude them from the calculation of the maximum permissible finance charge, provided they are bona fide, reasonable in amount and not for the purpose of circumvention or evasion of the code:

1. fees for title examination, abstract of title, title insurance, property surveys or similar purposes;
2. fees for preparing deeds, mortgages, and reconveyance, settlement and similar documents;
3. fotary and credit report fees;
4. fmounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the loan finance charge; and
5. fppraisal fees.²

If any amount of the closing costs is not considered bona fide, reasonable in amount or is for the purpose of circumvention of the code, then it cannot be considered a permissible Additional Charge and therefore must be included in the finance charge calculation for purposes of IUCCC finance charge limits.

Further, if you don’t identify these fees correctly as conditionally waived closing costs in your note and your disclosures, you run the risk that they will be considered a prepayment penalty under the IUCCC and subject to the 2% prepayment penalty cap. Ind. Code § 24-4.5-3-209 provides, in part:

“With respect to a consumer loan that is primarily secured by an interest in land, a lender may contract for a penalty for prepayment of the loan in full, not to exceed two percent (2%) of any amount prepaid within sixty (60) days of the date of the prepayment in full, after deducting all refunds and rebates as of the date of the prepayment. However, the penalty may not be imposed:

• • if the loan is refinanced or consolidated with the same creditor;
  • for prepayment by proceeds of any insurance or acceleration after default; or
  • after three (3) years from the contract date …

For purposes of this section, the collection of the amount of any conditionally waived closing costs (as allowed under section 202(d) of this chapter) by a creditor, as stipulated in the loan agreement, at the time of prepayment in full does not constitute a prepayment penalty and is not subject to the limitations set forth in this subsection.”

In summary, while your bank can offer this option to customers, you will need to ensure your note, disclosures and loan policies are updated to ensure compliance with Indiana law.

This information is provided for general education purposes and is not intended to be legal advice. Please consult legal counsel for specific guidance as to how this information applies to your institution’s circumstances or situation.