We are getting ready to do an HE Loan special in which the Bank will pay all the closing costs if the customer does a direct draft for the payment. On the LE, we will list all fees (appraisal, flood, doc prep, title) paid by the Bank. Would it be a "changed circumstance" if the customer decides at closing not to have a direct draft for the payment?

Operations would like to disclose all the fees payable by the customer on the LE and include a statement with the early disclosures that says, "If you have a direct draft for your payment, the fees will be paid by the bank." and then not have to re-disclose. I disagree with that solution.

Would it be considered a pre-payment penalty if the loan has a "closing cost recovery of $500" if paid off within the first 24 months?

Thank you for any help.

Sounds like you have two products and should disclose the one that they apply for. If they change their mind and it causes the fees subject to the tolerance tests to increase, then that would be a changed circumstance. If they tell you that they want the product with no fees, disclosing the fees on the initial LE is not going to be in good faith.

As far as the recoupment of the fees for an early payoff:

(6) Prepayment penalty. (i) Closed-end credit transactions. For a closed-end credit transaction, prepayment penalty means a charge imposed for paying all or part of the transaction's principal before the date on which the principal is due, other than a waived, bona fide third-party charge that the creditor imposes if the consumer prepays all of the transaction's principal sooner than 36 months after consummation, provided, however, that interest charged consistent with the monthly interest accrual amortization method is not a prepayment penalty for extensions of credit insured by the Federal Housing Administration that are consummated before January 21, 2015.

To make sure I'm understanding...

If the closing cost recovery covers the appraisal, flood, and title fees, it would not be a prepayment penalty. However, if it covers the bank's appraisal review and document preparation fee, it would be a prepayment penalty.

Correct, you cannot go back and collect monies to be paid to the lender. It only applies to third-party fees. You, as the lender, normally collect document preparation fees? Unless you have attorneys on staff preparing your documents, in many States, that would run afoul of the unauthorized practice of law on loans secured by real property.