Maryland Legal Alert for Financial Services

FORECLOSURE AND RESIDENTIAL MORTGAGE LAWS EFFECTIVE IMMEDIATELY

On April 3, 2008, our Governor signed bills resulting in three new Maryland laws affecting the residential mortgage industry. As emergency actions, they are now in effect. Below you will find very brief synopses of the new legislation, as well as a fourth mortgage lending bill that we expect to be signed soon, with a focus on issues that need your most immediate attention. Shortly we will provide more details on all the provisions of these new laws. Please contact Chris Rahl if you have any questions.

We note that these represent only the first of many anticipated new laws affecting the Maryland financial services industry. Stay tuned!

Senate Bill 216/House Bill 365(Residential Mortgages and Foreclosure Process)

Chapters 1 and 2 of the 2008 Laws of Maryland mandate that security instruments (deeds of trust or mortgages) secured by “residential property” contain certain information about the involved mortgage brokers and lenders. The Commissioner of Financial Regulation is required to issue regulations to implement these provisions, including the consequences for failure to include this information in the mortgage or deed of trust. The law provides that until the Commissioner adopts regulations, failure to include the new information required when recording a mortgage or deed of trust may not be the basis for a clerk to fail to record the instrument.

• Practice Pointer: “Residential property” means real property improved by four or fewer single family dwelling units. It is not limited to owner-occupied properties nor is it limited to consumer credit transactions.
• Practice Pointer: While there is some uncertainty as to what information is required, it appears that the security instrument must now identify: (1) if a licensed Maryland Mortgage Originator (basically, the employee of a licensed mortgage broker) originated the loan, that individual's name and license number; or if the loan was originated by an individual not licensed as a Mortgage Originator, then an affidavit by the originator to that effect; and (2) if a licensed Maryland Mortgage Lender made the loan, that lender's name and license number; or if the loan was made by a lender exempt from licensing under the Maryland Mortgage Lender law, then an affidavit by the lender to that effect.
• Action Item: Lenders' counsel need to analyze the statutory language to determine what information must be included in the security instrument. To this end, we suggest you review the Advisory published on this subject by the Commissioner of Financial Regulation.
• Action Item: Each lender needs to establish new procedures to ensure that, given its business operations (for example, is the lender exempt from Maryland Mortgage Lender licensing? does the lender accept loans from mortgage brokers? Etc.), the lender includes the required information in its security instruments. Forms need to be updated.

This new law also significantly extends the timing and changes the process for commencing a foreclosure action as to “residential property” (with the same definition as described above). Due to the new law, an action to foreclose a security instrument on residential property may not be commenced until the later of: (1) 90 days after a default that allows the secured party to foreclose; or (2) 45 days after a “notice of intent to foreclose” has been sent. The “notice of intent to foreclose” must be sent by certified and first class mail to the borrower and to the record owner and a copy must be sent to the Commissioner of Financial Regulation. The notice must be in the form that the Commissioner prescribes by regulation.

• Action Item: Each secured party that wants to begin foreclosing on residential property after April 3, 2008 must first send a “notice of intent to foreclose” and then wait 45 days. As we wait for regulations from the Commissioner that prescribe the form of notice, secured parties may develop their own form of notice based on the description in the statute of what the notice must contain.
• Action Item: While there is some uncertainty as to what information is required in the “notice of intent to foreclose,” the Commissioner has issued an Advisory that provides guidance as to the contents of the notice of intent to foreclosure during the interim period until final regulations are available.

There are new, detailed content requirements for foreclosure action filings. A foreclosure sale cannot occur until 45 days after the filed/docketed foreclosure complaint has been served on the borrower (the method of service is prescribed by the law).

• Action Item: Begin reviewing the list of documents that must be filed and served as a part of the foreclosure action so that procedures can be in place when it is time to file a foreclosure action.

Senate Bill 217/House Bill 360(Mortgage Fraud)

Chapters 3 and 4 of the 2008 Laws of Maryland make it a crime to commit “mortgage fraud,” which is defined in the statute. Both the Attorney General and the State's Attorney may prosecute cases of mortgage fraud. The statute also authorizes private causes of action for mortgage fraud and gives the court authority to award three times the actual damages.

• Practice Pointer: “Mortgage fraud” is defined with some specificity. It always requires the intent to defraud and the involvement of a “mortgage loan” as defined in Maryland's Mortgage Lender licensing law.
• Action Item: All persons engaged in any aspect of a “mortgage loan” transaction should analyze the statutory language to ensure they know what activities constitute a violation of this new law.

Senate Bill 218/ House Bill 361(Protection of Homeowners in Foreclosure)

Chapters 5 and 6 of the 2008 Laws of Maryland address problems that have arisen in implementing Maryland's Protection of Homeowners in Foreclosure Act, first enacted in 2005 to combat the growing problem of foreclosure rescue scams. Among other changes, coverage of the law is expanded. Title insurers, title insurance producers, and mortgage brokers are no longer exempt from coverage. Further, the exemptions for certain loan owners, mortgage lenders, and real estate brokers and salespersons are narrowed. The law continues not to apply to banks and other insured depository institutions or their subsidiaries or affiliates while engaged in normal business activities.

• Action Item: A careful analysis of this law should be undertaken by any business described above that is no longer exempt or fully exempt from Maryland's Protection of Homeowners in Foreclosure Act.

Senate Bill 270 / House Bill 363 (Credit Regulation - Mortgage Lending and Other Extensions of Credit)

Expected to be signed by the Governor soon after the end of this legislative session (which is midnight on April 7, 2008), this legislation imposes changes on lending and business practices of mortgage lenders and brokers in Maryland. Among other provisions, it: (1) eliminates the final vestige of a permissible prepayment penalty on consumer mortgage loans under Maryland law; (2) imposes the obligation on consumer mortgage loan lenders to consider the borrower's ability to repay; (3) requires mortgage brokers to add a provision to their written broker agreements clarifying that they are brokers and not lenders; (4) increases the surety bond amounts needed to maintain a Mortgage Lender license (which covers lenders, brokers, and servicers); and (5) imposes for the first time net worth requirements needed to maintain a Mortgage Lender license. This law is expected to become effective June 1, 2008.

• Practice Pointer: With carve outs for reverse mortgage loans and certain “government-insured” loans, “mortgage loans” subject to the analysis of the borrower's ability to repay are those included in that definition found in Maryland's Mortgage Lender licensing law.
• Action Item: All mortgage lenders and brokers need to carefully review the terms in this legislation and change operations to ensure compliance when the June 1, 2008 effective date arrives.

© 2008 Gordon Feinblatt, LLC. MARYLAND LEGAL ALERT is intended for informational purposes only and is not legal advice to any person, entity or firm. The material included in MARYLAND LEGAL ALERT is obtained from a variety of public sources.