The 2010 session of the Maryland General Assembly adjourned on April 12. Unsurprisingly, many new laws and restrictions on mortgage lending and foreclosure were adopted during this session. In an atmosphere of suspicion concerning the financial services industry, however, some positive legislation was enacted and many adverse laws were avoided. The 2010 laws present opportunities and challenges for financial institutions. Some new laws are effective now, and others are effective later. Some of these new laws may require changes to your procedures or forms.
Please call any member of our Financial Services and Government Relations Group if you would like to discuss these new laws and their effect on your business.
The Maryland Credit Grantor Law (Subtitle 10 of Title 12 of the Commercial Law Article) currently does not permit creditors to schedule a balloon payment in connection with a closed end consumer installment loan unless the loan is secured by residential real property. This law will permit a balloon payment to be scheduled on credit secured by motor vehicles if the credit amount exceeds $30,000.
Chapter 309 prohibits including or enforcing a provision in a consumer credit contract, without the consumer's prior written consent, that triggers a default or otherwise adversely affects the consumer based on a "prohibited risk factor." Prohibited risk factors mean the identity of a person from whom a consumer lawfully obtains consumer credit, goods or services or a person that makes or holds a mortgage loan on a consumer's home. Violation of this law is an unfair or deceptive trade practice.
Action Item: A review of consumer credit contracts to ensure compliance with this law should be considered.
This law governs facilitators of refund anticipation loans, requires disclosures and prohibits facilitators from charging any fees to consumers. Banks, savings and loans, credit unions and certain of their affiliates are exempt.
The predominant methods of foreclosure in Maryland are through exercise of a "power of sale" or an "assent to decree." For years, there has been a theoretical concern that a power of sale or assent to decree must be granted to an individual (natural person) in the original deed of trust or mortgage, which has made use of a corporate trustee in a deed of trust problematical. Last year, this theoretical concern became reality and some courts found powers of sale in deeds of trust that named an entity, rather than a natural person, as the original trustee (and substitution of an individual as trustee was not permitted) ineffective. This law clarifies that a clause in a deed of trust or mortgage authorizing a foreclosure using a power of sale or assent to decree method is effective even if no individual was named in a deed of trust or mortgage as an original trustee or person authorized to exercise the power of sale. The law also enables a beneficiary of a deed of trust to exercise all of its rights under the instrument if inadvertently no trustee was named in the recorded deed of trust. The law applies retroactively to mortgages and deeds of trust on record before, or recorded on or after, the June 1, 2010 effective date.
This law expands the third-party charges that may be collected by a mortgage broker directly from the borrower. In addition to the charges for a credit report and appraisal currently permitted, a broker now may collect the actual cost of any condominium document or subordination agreement document obtained by the mortgage broker at the borrower's written request. In addition, a broker may collect charges for the actual cost of any other good or service (to the extent permitted by regulations to be issued by the Maryland Commissioner of Financial Regulation) that is required to complete the loan application process and that, at the written request of the borrower, is paid by the broker to a third-party service provider.
Action Item: Mortgage brokers need to update their documents to get a written request from the borrower to charge for appraisals and credit reports. This writing should include the borrower's request that, in addition to an appraisal and a credit report, the broker obtain any needed condominium documents and subordination agreements. Costs for other third party goods or services should not be charged until the Maryland Commissioner of Financial Regulation adopts regulations.
This law creates the Maryland Reverse Mortgage Loans Act. The Act applies both to reverse mortgage loans subject to a government program, such as the federal Home Equity Conversion Mortgage (HECM) program, and to reverse mortgage loans not subject to a government program (proprietary loans). It requires lenders who offer or make reverse mortgage loans, and each broker (called "arranger of financing") who aids or assists a reverse mortgage loan borrower, to comply with the HECM rules, regardless of whether the mortgage is insured under the HECM program. However, proprietary reverse mortgage loans are exempt from certain limits on origination fees, maximum claim amounts and other loan limit restrictions and the requirement for government insurance. The Act also prohibits a lender or arranger of financing from requiring the borrower to purchase an annuity, long-term care policy or other financial or insurance product as a condition to obtaining credit. Lenders and arrangers of financing may refer a borrower to a person for such financial or insurance products only after the later of loan closing or expiration of a right of rescission. These restrictions do not prohibit a lender or arranger of financing from offering to a borrower, or referring a borrower to a person for the purchase of, title insurance, property insurance or other products that are customary for a reverse mortgage loan. The Act also requires a new written checklist to be given to borrowers at the time of application for a reverse mortgage loan, advising the borrowers to discuss with a counseling agency certain issues that could affect the mortgage. Violations of the Act subject the lender and the arranger of financing to certain penalties and, in some cases, constitute unfair or deceptive trade practices under the Maryland Consumer Protection Act.
Action Item: Before October 1, 2010, mortgage lenders and brokers that offer reverse mortgage loans on property located in Maryland must ensure their practices comply with the Act and must have the required written checklist ready for delivery to prospective borrowers.
This law requires each lender making a first mortgage loan primarily for personal, family or household purposes that will be secured by owner-occupied real property to provide the borrower with a new written notice about housing counseling. The new notice (which must be in the form specified in Maryland Department of Housing and Community Development regulations) must include a statement recommending that the borrower complete home buyer education or housing counseling and must provide information about counseling programs and services provided by certified nonprofit and governmental organizations. While we await DHCD regulations and guidance, it is likely that regulations will require this new notice to be given very early in the loan process. The lender may not close the loan unless this notice is provided. The new requirement does not apply to any lender who is otherwise required by federal or state law to refer a borrower to housing counseling, such as reverse mortgage lenders. It also does not apply to construction loans, certain seller take-back financing and certain inter-family loans.
Action Item: After DHCD publishes regulations, mortgage lenders need to incorporate this notice into their consumer mortgage loan disclosures.
Under current Maryland law, an individual debtor domiciled in Maryland is not entitled to the federal exemptions provided by 522(d) of the federal Bankruptcy Code. This law authorizes Maryland debtors to exempt personal property up to $5,000 and increases the Maryland "homestead exemption" for owner-occupied residential real property up to the amount permitted under the federal Bankruptcy Code. The homestead exemption may not be claimed by both husband and wife in the same proceeding and is only available if the individual and certain specified family members have not successfully claimed the exemption on the property in the prior 8 years.
This law enhances the protections that were enacted in 2008 for homeowners facing foreclosure to help prevent homeowners from losing their homes to foreclosure when loan modifications or other loss mitigation options may be available. Generally, the law: (1) strengthens existing disclosures (part of the Notice of Intent to Foreclose) that must be given to a homeowner at least 45 days before a foreclosure action is filed; (2) imposes new documentation requirements in connection with the order to docket or complaint to foreclose; (3) mandates completion of a loss mitigation analysis by the secured party no later than 30 days before a foreclosure sale of owner-occupied residential property; and (4) allows most homeowners to request foreclosure mediation before a foreclosure sale of owner-occupied residential property may occur. Along with an order to docket foreclosure of a residential property, secured parties must file one of two new affidavit forms that states the status of the analysis of potential loan modification or other loss mitigation that may be available to the homeowner. If the analysis has not been completed at the time the secured party files the order to docket, then the secured party may not proceed to a foreclosure sale until 30 days after a final loss mitigation affidavit is filed with the court. The homeowner must be given an opportunity, after a final loss mitigation affidavit has been filed, to request a conference (called "foreclosure mediation") with the secured party, or its representative, and an Administrative Law Judge. The foreclosure mediation, which is to occur within 65 days of the request by the homeowner, should focus on possible loss mitigation programs applicable to the homeowner's situation. If the parties do not reach an agreement about loss mitigation at the foreclosure mediation, the foreclosure sale may proceed.
Action Item: Before this law becomes effective on July 1, 2010, secured parties and foreclosure professionals must update their processes and procedures for owner-occupied residential property foreclosures.
At least one Maryland county has taken the position that the debt forgiven by a lender in a short sale should be treated as consideration and added to the price actually paid for the property by the buyer to determine the amount of the recordation and State transfer tax that applies to the new deed filed after the sale. This law clarifies that, for purposes of calculating recordation taxes and transfer taxes, the consideration payable for the property to which the taxes apply includes only the purchase price paid for the property, and does not include any debt forgiven or no longer secured by a mortgage or deed of trust on the property.
This law clarifies the rights of tenants occupying residential real property in the event of a foreclosure and, to some extent, makes Maryland law consistent with federal law. Current law provides that the purchaser at a foreclosure sale has the same rights and remedies against a tenant as the original mortgagor or grantor under a deed of trust, and that a tenant has the same rights and remedies against the purchaser as the tenant had against the original mortgagor or grantor. The new law specifies the circumstances under which a tenant may continue to occupy the premises. Where the arrangement is month-to-month or otherwise terminable by its terms, in addition to complying with other applicable laws and the terms of any lease, a purchaser who desires to remove tenants must provide tenants with 90 days' prior written notice to vacate. Where the lease is "bona fide" and not month-to-month or otherwise terminable, the tenants have the right to occupy the property through the end of the lease term. The law contains an exception where the purchaser intends to occupy the property as his or her primary residence. In that case, the purchaser may terminate the lease by providing the tenant with 90 days' prior notice to vacate. Unlike federal law (which leaves the form of notice up to the purchaser), this law prescribes the contents and form of the notice to vacate, and also makes conforming changes to existing law requiring notices from the person authorized to make the foreclosure sale.
Action Item: Secured parties should develop a form of notice that complies with this law so that removal of tenants after a foreclosure is not delayed. Please note: the notice required by this law is more specific than the notice required by federal law.
This law modifies the notice procedures a certificate of tax sale purchaser must follow prior to filing a complaint to foreclose the right of redemption. The second of two notices must be sent by first class certified mail, postage prepaid, return receipt requested and bearing a postmark from the United States Postal Service. In addition, the envelope must be marked on the outside with "Notice of Delinquent Property Tax." If the affidavit filed before the court enters a final judgment foreclosing the right of redemption attests to the fact that the affiant complied with the notice provisions and provides evidence that the second of the two notices was sent by certified mail, the notice provisions are deemed satisfied, even should the owner, mortgagee or beneficiary of a deed of trust fail to receive the required notice.
This law reflects the results of a legislatively mandated task force on the title insurance industry. Current title insurance producer law allows licensed title insurance producers to use "title insurance producer independent contractors" to provide escrow or loan closing services, but requires those contractors to hold a producer's license. These contractors are currently required to obtain their own surety bonds (or letters of credit) and fidelity bonds. This law makes the bonding requirements the sole responsibility of the principal title insurance producer. After this law goes into effect, independent contractors will be exempt from the bonding requirements and the principal title insurance producer must ensure that its surety bond and fidelity bond covers the independent contractor. This law also specifies that a title insurance producer who uses an independent contractor is that contractor's legal principal and is liable for all actions of the contractor that are taken within the scope of the independent contractor relationship. Moreover, when a title insurance producer independent contractor is used, the name, address and license number of that independent contractor must be included on or with any mortgage or deed of trust that is executed in the transaction.
Action Item: Title insurance producers that use title insurance producer independent contractors should review and, if necessary, modify their surety and fidelity bonds to ensure that these independent contractors are covered. Mortgage and deed of trust forms should also be reviewed and revised as necessary to provide the required information regarding independent contractors.
This law also reflects the results of a legislatively mandated task force that reviewed the title insurance industry. The law amends Maryland's existing anti-kickback rule to expressly require persons involved in "affiliated business arrangements," as defined in the federal Real Estate Settlement Procedures Act, to comply with RESPA's requirements for those arrangements. The legislators took this opportunity to "clean up" some outdated references and to clarify that a settlement service provider who is a participant in an "affiliated business arrangement" and receives compensation in connection with a residential real estate transaction will not violate Maryland's prohibition against kickbacks as long as the service provider complies with RESPA. A violation of Maryland's anti-kickback law is a crime.
This law enacts a new Maryland General and Limited Power of Attorney Act. The Act contains two statutory form powers of attorney and an optional form for use by an agent to certify facts concerning a power of attorney. One of the statutory forms (the "Maryland Statutory Form Personal Financial Power of Attorney") provides an agent with broad authority as specified on the form, while the other statutory form (the "Maryland Statutory Form Limited Power of Attorney") allows a principal to specifically indicate which of the various powers are given to an agent. The Act addresses, among other requirements: proper execution of a power of attorney, including acknowledgement before a notary public and attestation by two or more adult witnesses; when a power of attorney becomes effective; validity and enforceability of a power of attorney; when a power of attorney terminates; and when an agent's authority terminates.
Notably for financial institutions, the Act requires acceptance of a power of attorney that is in a statutory form and properly completed, and provides sanctions for refusal of an acknowledged statutory form power of attorney. The Act does not supersede other laws applicable to financial institutions or other entities. To the extent those other laws are inconsistent with the Act, the other laws prevail.
Action Item: Financial institutions will need to become familiar with the statutory forms of power of attorney and train personnel about the requirements of this new law. Because financial institutions must accept the statutory form, consideration should be given to whether a review fee should be imposed on customers to ensure that the POA presented is the statutory form and how existing documents should be modified to include such a review fee.
Sweepstakes, raffles and promotions are subject to several federal and state laws, including lottery laws, gifts and prizes laws and postal laws, all of which are potential landmines to promotional activities. This law authorizes state-chartered credit unions to require members to deposit funds in a share savings account to qualify the member for a chance to win a raffle, which without this law would be a prohibited lottery under state law, and is a prohibited lottery under federal law. This law similarly allows banks to offer raffles that condition participation on making a deposit into an account at the bank. Neither credit unions nor banks may offer these "savings promotion raffles" unless and until federal law is first changed.
This law imposes a new obligation on nondepository trust companies to establish security for the benefit of the Maryland Commissioner of Financial Regulation and grants stronger receivership authority to the Commissioner over nondepository trust companies. This law also makes it easier for a federal mutual savings bank to convert to a state-chartered mutual savings bank.
This law expands the CDARS program and authorizes local governments, under specified conditions, to deposit unexpended or surplus money in any federally insured bank or savings and loan association in excess of the FDIC maximum insurance coverage limit without having to pledge collateral to secure the deposits. The funds initially must be placed for deposit with a Maryland financial institution that is selected by the local government to arrange for the redeposit of the money through a deposit placement program to ensure full FDIC deposit insurance coverage of the funds at the close of each business day.
Under current law, pursuant to the Minority Business Enterprise (MBE) Linked Deposit Program, a bank that provides a loan to a certified MBE through the Department of Housing and Community Development charges interest at a rate 2 percent lower than it would otherwise charge. The State Treasurer's Office, in return, is required to purchase a certificate of deposit from the bank in an amount equal to the loan and accept a 2 percent reduction in the interest rate. This law now permits the State Treasurer to invest in any type of interest bearing account at the bank, removing the certificate of deposit limitation.
This law requires retailers (businesses that sell goods at retail to consumers present at the place of business at the time of sale) with more than 50 employees to provide a 15-minute break to employees who work between 4 and 6 consecutive hours and a 30-minute break to employees who work more than 6 consecutive hours. The law does not apply to restaurants, state, county and municipal governments, employers exempt from overtime pay requirements under the Fair Labor Standards Act, franchises with 5 or fewer employees on site, and employees covered by a collective bargaining agreement or employment policy that includes a shift break policy equal to or greater than in this law.
The Maryland Wage Payment and Collection Law has long defined "wage" to mean all compensation due to an employee, including bonuses, commissions, fringe benefits and other remuneration promised for service. This new law amends the definition to add "overtime wages." This seemingly small change will have major ramifications for Maryland employers. Under the Maryland Wage and Hour Law, employers are required to pay non-exempt employees 1.5 times their regular rate of pay for all hours worked beyond 40 hours in a work week. The Wage and Hour Law allows employees to file suit to seek payment of unpaid overtime, but does not contain a damages multiplier. By contrast, the Wage Payment and Collection Law provides for an award of up to treble damages if there is no "bona fide dispute" as to whether the "wages" are owed. Several court decisions have held that an employee seeking to recover unpaid overtime is restricted to the remedies provided in the Wage and Hour Law and cannot seek treble damages under the Wage Payment and Collection Law. By amending the term "wage" to include overtime, employees may sue under both laws and collect treble damages under the Wage Payment and Collection Law if there is no bona fide dispute that the overtime pay is due.
Action Item: Misclassifying employees as exempt from the overtime laws, and the resulting failure to pay overtime wages, is one of the most common legal errors made by employers. This change in the law makes suits to recover overtime more enticing and is likely to increase the number of claims. Because misclassification often affects a large group of employees, wage and hour suits are often brought as class actions and can be enormously expensive to resolve. Prudent employers should have employment counsel periodically audit their workforce to determine whether employees have been properly classified in compliance with the applicable state and federal laws. Employers will benefit from taking proactive steps to recognize and remedy wage and hour issues before a lawsuit is filed.
The Maryland Wage Payment and Collection Law currently provides that the Maryland Commissioner of Labor and Industry may bring a lawsuit on behalf of an employee to collect unpaid wages. Lawsuits, however, can be a cumbersome method for handling what are frequently disputes over very small amounts. Chapter 151 provides for an expedited administrative process for wage claims of $3,000 or less.
This law reduces from 90 days to 30 days the amount of time that a vessel must remain at a private dock or at or near waters' edge on private property without consent of the owner, or person in control of the property, before it may be declared "abandoned" and subject to removal.
This law authorizes car dealers to electronically transmit applications, data and fees for titling cars to the MVA.
This law requires the titling and registration of "off-highway recreational vehicles," such as all-terrain vehicles, certain motorcycles and snow mobiles, in a manner similar to automobiles. The law does not apply to any off-highway recreational vehicle purchased before October 1, 2010. The transfer of these vehicles is not, however, subject to the general vehicle inspection certificate requirement.
Action Item: A security interest in a titled vehicle may be perfected only by evidencing the lien on the certificate of title, so lenders that take security interests in off-highway recreational vehicles must develop procedures to ensure that their liens are properly recorded and perfected.
The purpose of this law originally was to deal with individuals who file false financing statements against government officials. The final law simply makes it a crime to file a financing statement or an amendment to a financing statement that the person knows contains false information. Each act of filing is a separate misdemeanor and subjects the violator on conviction to a fine not exceeding $500.
Action Item: It is more important than ever to ensure that the collateral listed on a financing statement is consistent with the collateral specified in the security agreement.
Property taxes for owner-occupied residential property are due under a semiannual schedule. However, property taxes for other types of property are payable annually. This law requires local governments to establish a semiannual payment schedule for the payment of property taxes on "small business property." Small business property is real property that has been assigned a commercial use code by the SDAT and for which the total local property taxes do not exceed $50,000 for the taxable year. The law applies to all taxable years beginning after June 30, 2011.
This law makes several positive changes to the Maryland General Corporation Law:
In 1999, the Maryland Business Trust Act was enacted to authorize the establishment of business trusts in Maryland. This law extensively revises the Act and renames it the "Maryland Statutory Trust Act." For consistency with statutory trust laws in other states, the law makes conforming terminology changes where appropriate throughout the Maryland Code. The law also clarifies many of the requirements for the formation and governance of a statutory trust, including the powers, duties and liabilities of trustees of a statutory trust and the procedures by which trustees and beneficial owners may take specified actions.
Action Item: The statutory trust may become the preferred entity for the ownership of investment real property due to the exemption from Maryland transfer and recordation taxes under certain circumstances.
Because of the one-year suspension of the federal estate and generation-skipping transfer taxes for 2010, references to those taxes in wills and trust documents of persons dying in 2010 could result in unintended distributions from an estate or trust. This law requires that for 2010, specified words, phrases and provisions that are included in wills or trusts shall be deemed to refer to the federal estate tax or generation-skipping transfer tax laws as applied to estates of persons dying or generation-skipping transfers made on December 31, 2009, unless the instrument specifically provides otherwise.
Action Item: Anyone involved in interpreting or administering wills or trusts should be aware of this unique law intended to deal with the strange state of the federal estate tax and generation-skipping transfer tax laws for 2010.
Since January 1, 2009, Maryland Mortgage Lender licensees have been required to meet certain minimum net worth requirements computed in accordance with generally accepted accounting principles (GAAP). Using GAAP to compute net worth can be costly. This new law allows those Mortgage Lender licensees that solely broker mortgage loans, and who are subject to a $25,000 minimum net worth requirement, to use an alternative basis of accounting for computing net worth. The alternative basis of accounting must be approved by the Maryland Commissioner of Financial Regulation.
Action Item: Required net worth must be satisfied at the time of application for a new or renewal license. Mortgage brokers should determine that the desired method of net worth computation is approved by the Maryland Commissioner of Financial Regulation before submitting a license application.
In Maryland, companies that provide debt settlement services are not subject to the licensing and regulatory provisions of the Maryland Debt Management Services Act if they do not hold and disburse consumer funds. This session, the Consumer Protection Division of the Attorney General's office spearheaded an effort to enact a law regulating debt settlement, which instead resulted in Chapters 338 and 339. This law directs the Maryland Commissioner of Financial Regulation, in consultation with the Consumer Protection Division, to study the debt settlement industry and report its findings to legislative committees by December 1, 2010. The Commissioner of Financial Regulation must establish a workgroup comprised of relevant stakeholders to participate in the study. The study must determine how the debt settlement industry would be best regulated.
This law prohibits a credit services business from charging or receiving a fee in connection with helping a borrower obtain a loan that, when combined with interest, exceeds the interest rate permitted by Maryland law.
We are pleased to provide our clients and friends this review of Maryland laws affecting financial service providers. In addition to the "hard copy version," this review - and reviews from years past - can be accessed as an electronic publication under "News and Resources" at our website, www.gfrlaw.com. At our website, you will also find current and past issues of our monthly eNewsletter "Maryland Legal Alert," which keeps readers updated on Maryland legal developments affecting financial services providers.
Gordon Feinblatt's Financial Services lawyers advise clients that offer financial, banking, and insurance services in Maryland. Our clients include banks, thrifts, credit unions, mortgage bankers and brokers, insurance companies and producers, HMOs, consumer finance companies, check cashers, industry trade associations, debt management and debt settlement service providers, and businesses that provide data processing and other services to the financial services sector. We regularly handle matters that include the following: