Maryland Laws Update for Financial Services
2007 Maryland Laws Update
The 2007 session of the Maryland General Assembly adjourned on April 9. During this session, new laws on non-discrimination, privacy, "living wage," taxes, and trusts and estates were enacted that present opportunities and challenges for financial institutions. Maryland's unique ground rent system was totally revamped for residential properties and action must be taken to preserve ground rent investments. Some new laws are effective now, and others are effective later. Some of these new laws may require changes to your procedures or forms.
Bank Name Protection
SB 433 - Chapter 154 (effective October 1, 2007)
Similar to laws in at least 14 other states, this law is intended to stop the unfair or deceptive reference to a bank. It prohibits the unauthorized use of the name of a bank, or of any term or design that is similar to the name of a bank, in marketing material provided to, or in a solicitation of, another person in a way that may cause a reasonable person to be confused, mistaken or deceived that the marketing material or solicitation originated from the bank, originated from someone associated with the bank, is approved or sponsored by the bank or is the responsibility of the bank. Name is defined broadly to include the actual bank name, along with the trade names, trademarks, service marks, logos or taglines of a bank. Unlike similar federal law, this law provides significant remedies. A bank affected by a violation may bring a civil action to recover actual damages, plus either all profits attributable to the violation or $1,000 for each violation, plus court costs and reasonable attorney's fees.
Privacy And Information Security
SB 52/HB 117 - Chapters 307 and 308 (effective January 1, 2008)
Starting January 1, 2008, a Maryland consumer may freeze his or her credit report by making a freeze request to a consumer reporting agency. While a freeze is in place, the credit report may not be released. There are exceptions: the freeze does not apply to a check services or fraud prevention services company that issues reports on incidents of fraud or to a deposit account information services company that issues reports on account closures for fraud, overdraft, ATM abuse and similar information to inquiring banks to review a consumer's request for a deposit account. The freeze doesn't apply to credit reports ordered for account review or collection when there is an existing relationship. The freeze also doesn't apply to prescreening.
A consumer may temporarily lift a security freeze or may remove a security freeze. A consumer reporting agency must comply with the consumer's request within 3 business days. Beginning January 31, 2009, a consumer reporting agency must comply with a request for a temporary lift within 15 minutes.
Action item: Financial institutions will need to revise procedures and educate staff on the requirements of the new law. Staff will need to be prepared to educate customers when the law becomes effective.
SB 194/HB 208 - Chapters 531 and 532 (effective January 1, 2008)
Chapters 531 and 532 effectively impose all current federal financial institution information security, document disposal and data breach protections on all businesses that have personal information of Maryland residents, with no exceptions. All businesses must protect an individual's personal information and notify a consumer if the consumer's personal information is acquired as a result of a computer system breach. Businesses also must take reasonable steps to protect against unauthorized access or use of personal information when destroying records. A business that owns or licenses personal information of a Maryland resident must implement and maintain security procedures and practices to protect personal information from unauthorized access, use, modification or disclosure.
By January 1, 2009, service provider contracts must require third parties to implement and maintain reasonable security procedures and practices that are appropriate to the nature of personal information held and are reasonably designed to help protect the information.
Businesses must conduct a reasonable and prompt investigation of any breach of the security of a system to determine the likelihood that personal information has been or will be misused as a result of any breach. If the business determines that misuse of the individual's personal information has occurred or is reasonably likely to occur as a result of the breach, the business must notify individuals about the breach.
This law applies to all businesses, including financial institutions, and governmental agencies. However, financial institutions (and their affiliates) that are subject to and(or) comply with the federal Gramm-Leach-Bliley Act privacy provisions, Fair and Accurate Credit Transactions Act and the federal guidelines and guidance on information security and unauthorized access are deemed to be in compliance with this law.
A violation of this law is an unfair or deceptive trade practice under the Maryland Consumer Protection Act, which authorizes private actions and hefty penalties.
Action Item: All businesses, regardless of size, that have personal information of Maryland residents must institute security practices and procedures by January 1, 2008, and amend service provider contracts by January 1, 2009. This law, and its "deemer" provision, makes it even more important for financial institutions, and their affiliates, to comply with federal information security and data breach law. Otherwise, this new Maryland law - with its enhanced penalties and additional requirements - will apply. Affiliates of financial institutions that are not subject to the federal information security law, such as insurance agency affiliates, have - and should take - the option to comply with federal law, rather than Maryland law.
SB 70/HB 26 - Chapters 9 and 10 (effective July 1, 2007)
A task force to study identity theft in Maryland was established in 2005. A report was due by December 31, 2006, and the task force was to terminate on January 31, 2007. Chapters 9 and 10 extend the task force to January 31, 2008.
HB 1036 - Chapter 447 (effective October 1, 2007)
Pretexting occurs when a person falsely claims to be someone else and tries to obtain confidential information about another person. This criminal law prohibits a person from knowingly and willfully claiming to represent another person without the knowledge and consent of that person, with the intent of soliciting, requesting or taking any other action to induce another to provide personal identifying information or a payment device number.
Ground Rents On Residential Real Property
Note: All of the new ground rent laws apply only to ground rents on residential real property used for 4 or fewer dwelling units. The following is a general review of the new laws affecting ground rents. Holders of ground rents should carefully review each of these laws.
Prohibition on Creation
SB 106 - Chapter 1 (Emergency Bill, effective March 22, 2007)
This law prohibits the creation of new forever renewing ground rents on or after January 22, 2007.
Conversion of Irredeemable Ground Rents
HB 452 - Chapter 287 (effective October 1, 2007)
To encourage tenants to redeem or purchase ground rents and gain absolute fee simple title to the land underneath their homes, this law provides for the conversion of irredeemable ground rents to redeemable ground rents. To preserve the irredeemability of a ground rent, the owner must file the appropriate notice in the land records by December 31, 2010. If notice is filed, the irredeemability terminates 2020, unless another 10-year notice is filed. Once a notice lapses, the ground rent becomes redeemable.
Action Item: Irredeemable ground rent holders must file a notice of intention to preserve irredeemability no later than December 10, 2010, or the ground rent will become redeemable.
Property Owned by Baltimore City
HB 458 - Chapter 285 (effective July 1, 2007)
This law applies only to property owned by Baltimore City. It limits a ground rent landlord's ability to recover to no more than 3 years' past due ground rent on property that is abandoned or distressed. In actions brought to recover past due ground rents on such properties, the ground rent landlord is prohibited from recovering expenses associated with the filing of the action.
Remedies for Nonpayment of Ground Rent
SB 396 - Chapter 286 (effective July 1, 2007)
To eliminate the possibility that ground rent tenants could lose their homes and all of the equity in the homes due to failure to pay a ground rent, this law repeals the ability of the ground rent landlord to bring an ejectment action. Instead, the ground rent landlord's remedy for nonpayment of a ground rent is the establishment of a lien on the property or establishment of a money judgment in the amount of the ground rent due. This lien has priority from the date on which the ground rent was created (which normally is long ago). Notice requirements, including notice to mortgagees, must be met before any enforcement action may be taken. A lien may be enforced and foreclosed in the same manner and subject to the same requirements as the foreclosure of a mortgage or deed of trust not containing a power of sale. If the property is sold at foreclosure, the ground rent landlord receives from the proceeds the amount of its lien and the statutory redemption amount if the ground rent is redeemable.
In an action seeking to establish a lien for unpaid ground rent, the court may, but is not required to, award the prevailing party its court costs and reasonable expenses and attorney's fees not exceeding $500.
Action Item: Holders of ground rents will need to review this law carefully whenever ground rents are in default.
HB 489 - Chapter 291 (effective July 1, 2007)
This law repeals the statutory waiting period before a ground rent tenant may redeem a ground rent and requires the ground rent landlord to provide notice to the tenant about the right to redeem before a voluntary transfer of a redeemable ground rent to a third party. The law also requires a settlement agent to notify the borrower of the right to redeem a redeemable ground rent prior to the settlement of a loan secured by property subject to a ground rent.
Action Item: Holders of redeemable ground rents may want to consider creating a form to comply with these new notice requirements and settlement companies must educate their agents regarding the duty to notify borrowers of the right to redeem.
Notices Regarding Ground Rent
SB 398/HB 502 - Chapters 288 and 289 (effective July 1, 2007)
To enhance communication between ground rent landlords and tenants, this law requires the ground rent landlord to mail a bill for payment due to the tenant's last known address no later than 60 days before a payment is due. The bill must include certain information, including information about the property, contact information for the ground rent landlord, the consequences for failing to pay ground rent and the tenant's right to redeem the ground rent. The law also requires a contract for the sale of real property subject to a ground rent to include similar information.
Action Item: Ground rent landlords must revise their billing statements. Residential contracts of sale need to be revised as well.
Registry of Ground Rents
HB 580 - Chapter 290 (effective October 1, 2007)
To modernize the ground rent system and facilitate the timely payment of ground rents, this law requires the Maryland State Department of Assessments and Taxation to establish an online registry of properties that are subject to ground rents. Ground rent landlords must register their properties by September 30, 2010, and timely update the registration information. There is a fee for registration. If a ground rent landlord fails to register within the required time, the landlord's interest in the property is extinguished and the ground rent is no longer payable.
Action Item: Ground rent landlords must register all of their properties with the SDAT by September 30, 2010.
Release of a Mortgage or Deed of Trust using a Statutory Release Affidavit
SB 220/HB 1027 - Chapters 20 and 21 (effective July 1, 2007)
This law gives certain settlement agents the power to release real property liens. Lienholders need to pay close attention to this new procedure. It creates a new document, called a Statutory Release Affidavit, that may be recorded in the land records to release a mortgage, deed of trust or lien instrument. A Statutory Release Affidavit may be prepared and recorded only by a title producer, title insurer or Maryland lawyer who has paid off or satisfied a mortgage, deed of trust or other lien instrument. A Statutory Release Affidavit may be recorded only after the authorized person waits at least 60 days following pay off or satisfaction (to give the lienholder an opportunity to provide a suitable release) and after the authorized person has sent the lienholder a copy of the law, a copy of the proposed completed Statutory Release Affidavit and a notice that unless a suitable release is provided within 30 days, the Statutory Release Affidavit will be recorded. This new procedure is available for both commercial and consumer transactions.
Action Item: This procedure most likely will be put into action by settlement agents as soon as the law becomes effective and may well become standard procedure. Lienholders should implement processes so that the notice is not ignored and liens are not inappropriately released.
Homestead Property Tax Credit
SB 522/HB 436 - Chapters 564 and 565 (effective October 1, 2007)
Maryland law provides tax credits against State, county and municipal real property taxes for owner-occupied principal dwellings to offset increases in assessments. The credit is available for homeowners' principal residences, but current law does not provide a method for verifying eligibility. Chapters 564 and 565 require homeowners to file an application with the Maryland State Department of Assessments and Taxation to qualify for the homestead tax credit. The application must be filed for property transferred after December 31, 2007, within 180 days following the date the home is transferred to a new homeowner; or for property last transferred to new ownership on or before December 31, 2007, on or before December 31, 2012. SDAT must make available a form of application and the option of filing electronically.
Action Item: While it is not a title company's or a mortgage lender's obligation to ensure a homeowner files for the homestead property tax credit, each should consider whether it wants to make home purchasers aware of this new filing requirement.
Pilot Program for Electronic Recording
HB 331 - Chapter 234 (effective June 1, 2007)
This law authorizes the Administrative Office of the Courts to establish a pilot program for electronic recording of instruments in the land records.
Supervision of Appraiser Trainees
HB 1326 - Chapter 649 (effective January 1, 2008)
Maryland real estate appraiser trainees currently may provide appraisal services under the supervision of a licensed real estate appraiser. This law requires a supervising appraiser to be certified as either a residential or general real estate appraiser, rather than simply licensed. Certified real estate appraisers must meet more comprehensive federal and State requirements than apply to real estate appraisers who are simply licensed.
Community Development Administration - Affordable Housing
HB 1418 - Chapter 481 (effective July 1, 2007)
In recognition of the ever-increasing need for affordable housing in Maryland, the Department of Housing and Community Development pushed for this new law, which expands the criteria under which the Maryland Community Development Administration may make, participate in making or undertake a commitment for a residential mortgage loan under its Maryland Mortgage Program. Under the expanded criteria, residential mortgage loans to limited-income families outside of a community development project or a public purpose project will qualify if the loan is made to a family who has a disabled member who will reside in the dwelling, for emergency housing needs (to be determined by the Secretary of Housing and Community Development), for settlement and down payment costs or if made in conjunction with a loan that is funded with State-appropriated funds that comprise at least 20% of the total amount loaned.
Action Item: CDA-approved lenders should update program policies and procedures to reflect the additional lending criteria.
Employment And Discrimination
HB 430 - Chapter 284 (effective October 1, 2007)
This law makes Maryland the first state in the nation to require State contractors to pay a "living wage" to employees. Contractors and subcontractors with a contract valued at more than $100,000 must pay the living wage to employees who spend at least one half of their time during any work week working on the State contract. For fiscal year 2008, the living wage is set at $11.30 per hour for Montgomery, Prince George's, Howard, Anne Arundel and Baltimore Counties and Baltimore City, and $8.50 elsewhere. Contributions for health insurance and deferred compensation can reduce the hourly rate.
Action Item: Businesses with State of Maryland contracts should carefully review this law to determine if it applies to their contracts and, if so, whether they or any subcontractors already are paying the "living wage."
Civil Law Suits/Enhancement of Remedies
SB 678/HB 314 - Chapters 176 and 177 (effective October 1, 2007)
Currently, individuals may file a lawsuit in State court for employment, housing and public accommodations discrimination only in Montgomery, Howard and Prince George's Counties, and a limited private right of action exists in Baltimore County for employment discrimination claims against employers with less than 15 employees. This law amends the Maryland Human Relations Act to allow individuals and the Human Relations Commission to file suit, rather than use the administrative process. An individual may bring a lawsuit 180 days after filing a discrimination charge.
The law also adds remedies similar to those available to plaintiffs under the federal employment discrimination statute, Title VII of the Civil Rights Act of 1964. The new law provides for compensatory and punitive damages, attorneys' fees and expert witness fees. As with Title VII, the law caps compensatory and punitive damages at between $50,000 and $300,000, depending on the size of the employer. In addition, it makes Title VII remedies (except for punitive damages) applicable to non-employment cases.
SB 192/HB 878 - Chapters 529 and 530 (effective October 1, 2007)
This law makes procedural and technical changes to Maryland's commercial non-discriminatory policy, which prohibits the State from entering into a procurement contract with a business entity that has discriminated against subcontractors, suppliers, vendors or commercial customers on the basis of race, color, religion, ancestry or national origin, sex, age, marital status, sexual orientation or disability. The policy was enacted through a law passed by the General Assembly in 2006.
Captive Real Estate Investment Trusts
SB 945/HB 1257 - Chapters 583 and 584 (effective June 1, 2007, for tax years beginning after December 31, 2006)
This law eliminates the potential to avoid Maryland corporate income tax by shifting income away from Maryland through the use of a captive Real Estate Investment Trust. As a general rule, the law applies to any REIT if its beneficial interests or shares are not regularly traded on an established securities market and if more than 50% of the voting power or value of those beneficial interests or shares is owned or controlled by another entity subject to Maryland income tax. In the past, some businesses employed captive REITs to avoid state income taxes by transferring their real estate to the REIT, paying rent to the REIT for the business' use and occupancy, and then receiving dividends from the REIT. Through the use of this kind of planning, the business was often able to classify its dividends as investment income that was not part of its unitary business so that the rent paid to the REIT would be tax deductible, while the dividends from the REIT were not apportionable to any state that imposed income tax on investment income. The REIT would similarly owe no state corporate income tax because it would usually be entitled to deduct its dividends to its stockholders in calculating its taxable income as long as the states followed the special tax regime of REITs under the federal income tax. The effect of this strategy was that the consolidated group did not pay income taxes on the amount characterized as rent/dividends. This new law eliminates a tax planning strategy by disallowing, for Maryland income tax purposes, a dividends paid deduction if the corporation is a captive REIT, which forces captive REITs to pay Maryland corporate income tax.
Action Item: Businesses that own or control captive REITs should work with their accountants to review and, if necessary, revise their tax reporting procedures to ensure that income impacted by this law is properly reported. In addition, businesses that file audited financial statements with regulatory agencies, such as the SEC, and/or with stockholders should discuss with their auditors the impact of this law on their consolidated financial statements. If the impact could be material, publicly-traded institutions should consult with securities counsel to determine whether any report disclosing the impact should be filed with the SEC.
HB 776 - Chapter 433 (effective July 1, 2007)
This law allows an individual to request a withholding for Maryland income taxes from distributions out of certain deferred employee compensation plans, individual retirement plans or commercial annuities. Whether to withhold taxes is in the individual taxpayer's discretion. Withholding must be performed by the payor if the taxpayer requests.
HB 1143 - Chapter 640 (effective with respect to contracts entered into on or after July 1, 2007)
Chapter 640 repeals the requirement that a person doing business with certain nonresident contractors withhold 3% of the contract price until 30 days after the nonresident contractor has completed the contract and requested a written tax clearance certificate from the Maryland Comptroller. The repealed law applied to most contracts that called for the payment of, or could reasonably be expected to call for the payment of, $50,000 or more.
Exemption from Attachment for Alimony and Child Support
HB 422 - Chapter 238 (effective October 1, 2007)
This law adds two items to the existing list of items exempt from execution on judgment: (1) money payable or paid for child support; and (2) money payable or paid for alimony, but only to the same extent that wages are exempt from attachment (i.e., 75 percent of the disposable wages due). While it is not a garnishee's obligation to raise the judgment debtor's exemptions, garnishees and other stake-holders subject to attachment for a third party's judgment debt need to be aware of these two new exemptions.
Action Item: It is unclear how these exemptions will be established by the judgment debtor. While it may not be difficult to show that certain money on deposit was "paid" for child support or alimony obligations, how does someone establish that certain money on deposit is "payable" (arguably in the future) for those obligations?
Security for Mining Operations
SB 174 - Chapter 17 (effective October 1, 2007)
Under current law, a coal mine operator must provide a performance bond or authorized substitute collateral to the Maryland Department of the Environment before a permit for mining will be issued. Authorized collateral includes a certificate of deposit or an irrevocable letter of credit equivalent to the required performance bond amount. This law expands the types of financial institutions from which the certificate of deposit or letter of credit may be issued to include not only depository institutions physically located in Maryland, but also depository institutions that have subjected themselves to the jurisdiction of the U.S. District Court for the District of Maryland.
Vehicle Protection Products Act
HB 449 - Chapter 407 (effective January 1, 2008)
The Vehicle Protection Products Act imposes new consumer protection requirements on persons who offer or sell warranties covering vehicle protection products (including sellers of those products when the product carries a warranty), and persons who administer those warranties. A vehicle protection product is any protection device, system or service that is sold with a written warranty, is installed or applied to a vehicle and is designed to prevent loss or damage to a vehicle from a specified cause. The term includes alarms, steering locks, window etch products, ignition locks, kill switches and tracking devices. A warranty covered by the Act is sold in connection with the vehicle protection product and provides for payment of certain costs incurred by the warranty holder if that product fails to prevent the covered loss. The law does not apply to insurers who sell insurance policies to warrantors covering warranty losses. The law requires a warrantor to register with the Maryland Attorney General's Division of Consumer Protection, pay an annual registration fee, make certain disclosures to the warranty holder, keep accurate books and records relating to its warranties and maintain a warranty reimbursement insurance policy or meet certain net worth requirements.
Action Item: Businesses that offer and sell warranties in connection with vehicle protection products should review the new registration, disclosure and other requirements carefully to ensure compliance by January 1, 2008.
Trusts And Estates
SB 434 - Chapter 155 (effective October 1, 2007)
Chapter 155 amends Section 9-202 of the Maryland Uniform Disclaimer of Property Interests Act to provide that the creditors of the disclaimant have no interest in the property disclaimed. The "disclaimant" is the person to whom the disclaimed property would have passed had the disclaimer not been made. This is a significant change in what was believed to be the rights of creditors of the disclaimant. The Maryland Court of Special Appeals had ruled in Troy v. Hart, 116 Md. App. 486 (1997), that for a disclaimant's Medicaid qualification purposes, disclaimed property must be taken into account because, for a split-second, the disclaimant could have taken the property. Practitioners interpreted this to mean that a disclaimant could not avoid his or her creditors by disclaiming an inheritance. Chapter 155 reverses the effect of Troy v. Hart.
Chapter 155 also amends Section 9-212(b) of the Act, which provided that the "[f]ailure to file, record, or register a disclaimer does not affect its validity as between the disclaimant and the persons to whom the property . . . passes by reason of the disclaimer." The new law deletes the italicized, limiting language.
HB 465 - Chapter 606 (effective October 1, 2007)
This law requires a seller of real property to provide copies of any conservation easements on the property to a buyer on or before entering into the contract of sale for the property or within 20 calendar days thereafter. The contract must contain a conspicuous statement indicating that the property is encumbered by a conservation easement. Failure to give the notice provides the purchaser with the right to rescind the contract.
Action Item: Due to the right of rescission, financial institutions should ensure that sellers comply with the law if the property to be financed is subject to a conservation easement.
Maryland Small Business Development Financing Authority
HB 989 - Chapter 635 (effective October 1, 2007)
Currently, the Maryland Small Business Development Financing Authority may make loans or issue guaranties in an amount not to exceed $1,000,000.00. Chapter 635 increases this amount to $2,000,000.00.
Collection Agency License
HB 1324 - Chapter 472 (effective October 1, 2007)
A collection agency must be licensed by the Maryland Collection Agency Licensing Board. This law expands the definition of collection agency to include a person who owns and collects a consumer claim that was in default when it was acquired. The law also specifies qualifications for licensure, clarifies the grounds for denial of an application and establishes the right to a hearing before the board for persons denied a license.
Disposal of Personal Property
HB 1067 - Chapter 451 (effective October 1, 2007)
Similar to procedures already in place for personal property held by the Maryland State Police, this law requires Maryland local police departments to hold personal property until the agency determines that the property is no longer needed in connection with a prosecution, or is neither connected with, nor relevant to, the proceeding. It also establishes a process for return of the property. If a local police department has been holding the personal property for 3 months or longer, and concludes there is no continuing need to hold, the law enforcement agency must notify the owner, who has 30 days to claim the property. If the owner does not claim the property, the agency may sell the property at auction by first giving notice of sale to owners and lienholders, and publishing a notice of the sale in a local newspaper for two successive weeks.
SB 974 - Chapter 210 (effective October 1, 2007)
This new law harmonizes the timing of personal property holding procedures for the Maryland State Police with the new requirements for local law enforcement (see Chapter 451 above) by reducing the minimum holding period from 6 to 3 months before the State Police may begin proceedings to auction off the property.
District Court Jurisdiction
SB 543/HB 1336 - Chapters 39 and 40 (effective July 1, 2007)
This law authorizes the State Retirement and Pension System Board of Trustees to divest its holdings in companies that do business in Sudan after engaging those companies in an effort to encourage them to act responsibly and refrain from activities that promote or enable abuses of human rights in the Darfur region. In deciding whether to divest from a particular company, the Board must act in accordance with its fiduciary responsibilities.
Action Item: Financial institutions involved in managing SRPS investments should review this law.
If you have any questions about these laws, or need help implementing them, please call our attorneys in the Financial Services Group.
Disclaimer: This Bulletin is to inform you of current legal developments and does not constitute legal advice or opinion concerning specific factual situations.