Maryland Laws Update for Financial Services
2012 Maryland Laws Update
The 2012 Maryland General Assembly adjourned on April 9th. A Special Session, to address budget issues, occurred May 14th-16th. Gordon Feinblatt LLC is counsel for the Maryland Bankers Association and was involved in the legislative process for most of these laws. We are pleased to provide our clients and friends this review of Maryland laws affecting financial service providers. Please call any member of our Financial Services and Government Relations Group to discuss these new laws and their effect on your business.
Balloon Payments on Motorcycle Loans
SB258/HB730 - Chapters 202/203 (effective June 1, 2012)
The Maryland credit laws generally prohibit or restrict "balloon payments" at maturity of consumer installment loans. Chapters 202/203 permit a closed-end credit grantor under Subtitle 10 (CLEC) to schedule a balloon payment on an installment loan of more than $10,000 secured by a motorcycle. Credit grantors already are permitted to schedule a balloon payment on a loan of more than $50,000 secured by a passenger car.
Retail Installment Sales and Closed-End Credit - Debt Cancellation Agreements
SB901/HB1027 - Chapters 618/619 (effective October 1, 2012)
Chapters 618/619 alter the definition of "debt cancellation agreement" in connection with retail installment sales and closed-end credit transactions by including an agreement under which the outstanding balance or remaining loan balance payable on an installment loan is reduced by the actual cash value of a motor vehicle at the time of loss, determined under the agreement, if the buyer does not have insurance. The changes also alter the definitions of "outstanding balance" and "remaining loan balance" in connection with such transactions to exclude any deferred payments and the portion of any financed taxes or charges, including charges for credit life insurance, credit health insurance, credit involuntary unemployment benefit insurance, and mechanical repair contracts, actually refunded to the buyer or credited as a reduction to the loan balance.
Consumer Reporting Agencies - Security Freezes
SB295/HB555 - Chapters 208/209 (effective January 1, 2013)
Chapters 208/209 establish a procedure for a protected consumer's (i.e., an individual under the age of 16 years, or an incapacitated or protected person for whom a guardian or conservator has been appointed) representative to request that a consumer reporting agency (CRA) place a security freeze on the protected consumer's consumer report. The law requires a CRA to comply with such a request within 30 days of receipt. The CRA is then prohibited from releasing the protected consumer's consumer report, any information derived from the report, or any record created for the protected consumer, unless the security freeze is removed, with certain exceptions. A protected consumer's representative can remove the security freeze by asking the CRA, and the CRA must comply within 30 days of receiving the request. The CRA also may remove a security freeze or delete a record of a protected consumer if the freeze was placed based on a material misrepresentation of fact by the protected consumer or the protected consumer's representative. CRAs are prohibited from charging a fee in connection with the placement or removal of any such security freeze.
Debt Management Services
Debt Management Services - Agreement and Prohibited Acts
SB303 - Chapter 56 (effective July 1, 2012)
Chapter 56 alters a notice that is required to be included in a debt management services agreement. The notice now must state that a party to the agreement may rescind the agreement at any time by giving written notice of rescission to the other party. Additionally, the amendments now prohibit a licensee from violating any provision of federal or State law governing debt management services or other related services.
Reduction in Required Interest Paid on "Christmas Club" or "Vacation" Deposit Accounts
HB533/SB507 - Chapters 529/528 (effective June 1, 2012, for "club" accounts established on or after that date)
Under existing law, Maryland-chartered banks are required to pay at least 3% annual interest on accounts instituted for a specific purpose for a period of 1 year or less, like "Christmas" or "vacation" club accounts. Chapters 529/528 reduce the required interest rate on "club" accounts to an annual rate not less than the 6 month average dealer bid rate on nationally traded certificates of deposits, as published by the Federal Reserve in "Selected Interest Rates (Daily) - H.15," as of the first business day of the calendar year. Caution: The new lower interest rate only applies to "club" accounts established on or after June 1, 2012.
Small Business Linked Deposit Program
HB571/SB792 - Chapters 586/585 (effective July 1, 2012)
Chapters 586/585 establish a program to assist small businesses to obtain loans at lower-than-market interest rates. The Maryland Treasurer may make interest-bearing deposits in a financial institution equal to the amount of the institution's qualifying small business loans and accept a rate that is 2 percentage points below current market rates or an index selected by the Treasurer. The interest rate on the qualifying small business loans also must be 2 percentage points below market.
The new law also directs the State Treasurer to meet with Maryland banking industry representatives and stakeholders to identify impediments to financial institution participation in the procurement process for the selection of depositories for State funds, and identify possible solutions. The Treasurer must report on this issue to the General Assembly by December 31, 2012.
Sweepstakes by Banks and Credit Unions
HB786 - Chapter 393 (effective June 1, 2012)
Chapter 393 authorizes Maryland-chartered credit unions and banks with branches in Maryland, regardless of the bank's charter, to offer "savings promotion raffles." These raffles, which offer participants the chance to win prizes, are associated with certain deposit/share accounts and have the goal of encouraging savings. For savings promotion raffles offered by credit unions, participants must be eligible credit union members. Savings promotion raffles offered by banks are open to all adults who are residents of Maryland. Maryland's existing gifts and prizes law will not apply to compliant "savings promotion raffles," which should make offering these types of sweepstakes a simpler process.
Collateral for State and Local Government Deposits
HB868/SB606 - Chapters 271/270 (effective June 1, 2012)
Chapters 271/270 clarify that letters of credit issued by a Federal Home Loan Bank that meet the guidelines issued by the State Treasurer can be used as collateral for State and local government deposits. The Treasurer had taken the position in late 2011 that the existing statute was not clear whether these letters of credit were eligible collateral.
Reduction in Interest Rate Required to be Paid on Mortgage Loan Escrow Accounts
HB533/SB507 - Chapters 529/528 (effective June 1, 2012, for escrow accounts established on or after that date)
Under current law, "lending institutions" (banks, savings banks, and savings and loan associations doing business in Maryland) must pay interest of at least 3% per year on escrow accounts established in connection with first lien residential mortgage loans for the payment of taxes and insurance. Chapters 529/528 reduce the required interest rate to an annual rate not less than the 6 month average dealer bid rate on nationally traded certificates of deposits, as published by the Federal Reserve in "Selected Interest Rates (Daily) - H.15," as of the first business day of the calendar year. Lenders must adjust the interest rate on escrow accounts each year. For example, the 6 month certificate of deposit rate published in Statistical Release H.15 for January 3, 2012 (the first business day of the year) was 0.64%. Thus, for escrow accounts established on or after June 1, 2012, lending institutions now need to pay at least 0.64% (rather than 3%) annual interest. Lending institutions will need to look at Statistical Release H.15 next January 2013 (and every following January) and change the interest rate if necessary to ensure compliance with the minimum rate requirement.
Caution: The new lower interest rate only applies to escrow accounts first established on or after June 1, 2012.
Protecting the Elderly from Financial Abuse
HB1257/SB941 - Chapters 325/324 (effective October 1, 2012)
Chapters 325/324 amend Maryland's Confidential Financial Records Act to better protect "elder adults" from financial abuse. The protection applies to Maryland residents who are at least 65 years old and requires banks and credit unions to report to specified agencies known or suspected "financial abuse." In general, "financial abuse" is taking property of an elder adult for a wrongful purpose or with intent to defraud. In addition to the new reporting requirement, Chapters 325/324 require banks and credit unions to establish training programs so that employees can better recognize signs of potential financial abuse of elder adults and understand the reporting obligations. The law provides civil penalties for failing to comply with its mandates, but also provides protection from liability for making a financial abuse report or otherwise participating in an investigation or proceeding resulting from a report.
Action Item: Banks and credit unions need to establish and implement a training program as required by this new law by no later than October 1, 2012.
Savings Banks - Conversions
SB290 - Chapter 52 (effective July 1, 2012)
Chapter 52 clarifies that a mutual Maryland-chartered savings bank may convert to a capital stock Maryland-chartered commercial bank with the approval of its members and the Maryland Commissioner of Financial Regulation. Historically, Maryland-chartered savings banks have relied on Maryland's "wild card" statute to convert. Chapter 52 makes reliance on the wild card statute unnecessary. Implementation of Chapter 52 is dependent on rule-making by the Maryland Commissioner.
Password Protection Act
SB433/HB964 - Chapters 233/234 (effective October 1, 2012)
Maryland has become the first state in the nation to prohibit employers from requesting or requiring employees to disclose their social media passwords as a condition of employment. Under the new law, an employer may not request or require that an applicant disclose any user name, password, or other means for accessing a personal account, and may not discipline, discharge, refuse to hire, or otherwise penalize an employee or applicant for refusing to disclose the information. The law does not apply to user names, passwords, or other means for accessing an employer's own internal computer or information systems.
In response to business community concerns over improper use of employer computer systems, the bill was amended to prohibit employees from downloading an employer's proprietary information or financial data to an employee's personal web-site or web based account. The law also allows employers to investigate such actions based upon receipt of information about unauthorized downloading or to ensure compliance with applicable securities and financial laws, or regulatory requirements.
Limits On Right to Require Employees to Return to Work After Jury Duty
SB16 - Chapter 159 (effective October 1, 2012)
Chapter 159 prohibits an employer from requiring an individual who is summoned and appears for jury service for 4 or more hours, including traveling time, to work an employment shift that begins on or after 5 p.m. on the day the individual appears for jury service, or before 3 a.m. on the day following the individual's appearance for jury service. In other words, an employee who serves 4 or more hours on jury duty may not be required to report to work again until a shift beginning at or after 3 a.m. the day following jury service. Currently, there are no restrictions in Maryland on an employer's right to require an employee to report for work after the employee's jury service for the day that has concluded.
Workplace Fraud Amendments
SB272 - Chapter 206 (effective July 1, 2012)
Maryland's Workplace Fraud Act of 2009 (WFA) targets employers who misclassify employees as independent contractors. Misclassification allows employers to avoid paying payroll taxes and making contributions to the State's unemployment and workers' compensation insurance funds. The primary provisions of the WFA give the Maryland Commissioner of Labor and Industry the authority to investigate workplace fraud in the construction and landscaping industries because, the General Assembly found, employee misclassification occurs most frequently in those occupations. The law also created a new set of escalating penalties ranging from $1,000 per employee for first time violators who do not knowingly break the law but fail to come into compliance within 45 days of notice by the Commissioner, to $20,000 per employee for employers found to be in violation 3 or more times.
The business community was successful this year in pushing through some clarifying amendments to the law. The WFA currently creates a presumption that an employment relationship exists whenever a payment is made for services performed. Chapter 206 provides that the presumption does not apply when employers are able to produce records specified in the law that support an independent contractor relationship.
Chapter 206 also allows businesses to provide copies of records, rather than allow auditors into the place of business to inspect the records, and modifies other procedural aspects of the law.
SB797 - Chapter 304 (effective October 1, 2012)
Chapter 304 prohibits labor unions and agents of labor unions from being compelled to disclose certain information acquired in confidence from an employee in the course of the agent's professional duties. The communication must relate to a grievance of the employee and the grievance must be subject to an investigation, grievance proceeding, or a civil court, administrative, or arbitration proceeding. The privilege protects the communication itself, but not the facts underlying the communication, and survives termination of the employee's employment and the union's representation of the employee.
Estates and Trusts
Maryland Uniform Principal and Income Act - Retirement Accounts
SB787/HB772 - Chapters 301/302 (effective October 1, 2012, but see below)
Chapters 301/302 amend Maryland's Uniform Principal and Income Act concerning the computation and allocation of income from an IRA, or similar retirement asset, to a marital trust. Complex Internal Revenue regulations impose requirements for a marital trust to qualify as a designated beneficiary of an IRA and for the marital trust to qualify for a marital deduction under the estate tax laws with respect to the IRA. To obtain a marital deduction, these regulations require not only that the spouse receive the income earned by the marital trust, but that the spouse receive the income earned by that portion of the IRA retained in the IRA that year, i.e., the internal income of the IRA. If a payment is not characterized as income, Maryland law requires the trustee to allocate 10% to income and the balance to principal. Thus, if an IRA distribution were made to a marital trust, and none of that distribution were characterized as income, 10% of it would be deemed income. Without proper language in the Will or trust document, under current Maryland law, the IRA may not have qualified for a marital deduction. The new law attempts to prevent the loss of the marital deduction in this circumstance. The new law provides a mechanism for calculating the internal income of the IRA, and gives the spouse the right to demand the distribution of the internal income and to have principal reclassified as income.
Chapters 301/302 also allocate income tax between income and principal with respect to trust income related to an entity's taxable income.
The effective date, in general, is October 1, 2012. However, the effective dates of the changes concerning a marital trust are (1) the date of the decedent's death, if (i) the trust was not funded on or before October, 1, 2012, or (ii) the trust is initially funded in calendar year 2012, or (2) January 1, 2012, if the trust is not described in (1)(i) or (ii) above.
SB353/HB318 - Chapters 62/63 (effective October 1, 2012)
The property value threshold for an estate to qualify as a "small estate" for the purposes of the Estates and Trusts Article of the Maryland Code is increased by Chapters 62/63 to $50,000 from $30,000. If the surviving spouse is the sole legatee or heir, this threshold has been increased to $100,000 from $50,000. The Register's fees for small estates having a value in excess of $5,000 will now be governed by the fee schedule for regular estates, instead of the special fee schedule for small estates. Small estates with a value not in excess of $5,000 will continue to use the small estates fee schedule.
SB397/HB773 - Chapters 226/227 (effective October 1, 2012)
Expenses for a family meal and traditional funeral gatherings cannot be claimed as an administration expense for probate purposes under current law. Chapters 226/227 define "funeral expenses" that can be claimed as an administration expense for probate purposes. Perhaps most important from a practical standpoint, funeral expenses now include food and beverages for a funeral related gathering, such as a wake or shiva, and "any other reasonable expenses authorized by the decedent's will."
Additionally, in the event the court must approve an allowance for these expenses (if the estate is not solvent or the Will does not excuse the need for such a court order), current law provides that small estates are allowed $5,000, whereas regular estates are allowed $10,000. Chapters 226/227 apply a $10,000 allowance to all estates.
Foreclosed Property Registry
HB1373 - Chapter 155 (effective October 1, 2012)
Chapter 155 requires the Department of Labor, Licensing, and Regulation (DLLR) to establish and maintain an Internet-based Foreclosed Property Registry for information relating to foreclosure sales of residential property. The law also establishes the Foreclosed Property Registry Fund, the purpose of which is to support the Registry's development, administration, and maintenance. Under Chapter 155, foreclosure purchasers must submit an initial registration form containing specific information along with the appropriate fee within 30 days after the foreclosure sale of residential property. Foreclosure purchasers must submit a final registration form, with additional information, within 30 days after a deed transferring title to the residential property has been recorded. The registration fee increases after the specified 30 days. The Foreclosed Property Registry is not a public record and information in the registry is available to limited government officials and certain affected property owners and homeowners or condominium associations.
Chapter 155 also authorizes a local jurisdiction to enact a law imposing a maximum $1,000 fine for failure to register. In addition, a local government that abates a nuisance on or otherwise maintains a registered property may collect any incurred costs as a charge included on the property's tax bill, as long as specified notice requirements are met. Finally, Chapter 155 repeals state law provisions that authorize a county or municipal corporation to enact a local law requiring notice of foreclosure actions. However, it does not repeal any local law that was enacted pursuant to those provisions and that is in effect as of October 1, 2012.
Pre-Foreclosure Mediation and Expedited Sale of Vacant Property
HB1374 - Chapter 156 (effective July 1, 2012 and October 1, 2012)
Chapter 156 authorizes (but does not require) a secured party to offer to engage in mediation before a foreclosure action is filed (prefile mediation) with a residential property mortgagor or grantor. Chapter 156 requires a secured party that offers prefile mediation to include specified information and a prefile mediation application with the notice of intent to foreclose. If the mortgagor or grantor elects prefile mediation, an order to docket or complaint to foreclose may not be filed until completion of the prefile mediation. A mortgagor or grantor that elects prefile mediation does not have a right to postfile mediation.
In addition, Chapter 156 establishes a process, if a mortgage or deed of trust on residential property is in default, for a secured party to request that a county or municipal corporation issue a certificate of vacancy or a certificate of property unfit for human habitation. If a certificate is issued and is valid at the time of filing an order to docket or complaint to foreclose, a secured party may expedite the foreclosure process. However, if a challenge to the certificate is upheld, the process may not be expedited.
Chapter 156 also exempts from the State income tax any payment to an individual made as a result of a foreclosure settlement negotiated by the Maryland Attorney General.
Action Item: The tax exemption under Chapter 156 takes effect on July 1, 2012 and applies to all taxable years beginning after December 31, 2011. The remainder of Chapter 156 takes effect on October 1, 2012.
Use of Out of Country Employees
SB659/HB865 - Chapters 559/560 (effective October 1, 2012)
Chapters 559/560 require bidders on any procurement contract with an estimated value of at least $2 million to disclose whether the bidder or a subcontractor has plans, at the time the bid is submitted, to perform any services under the contract outside the United States. If so, the bidder must disclose where the services will be performed and why it is necessary or advantageous to perform them outside the country. The new law also prohibits a public employer, including the State and local governments, from knowingly entering into a contract for architectural, construction, engineering, or energy performance contract services with an estimated value of at least $2 million unless the services are to be provided in the United States, subject to exemptions.
Action Item: Institutions bidding on procurements from State and local government will have to consider this issue when responding to RFPs.
Investment in Iran
SB235/HB440 - Chapters 446/447 (operative provisions effective January 1, 2013)
Chapters 446/447 prohibit a person who is identified as engaging in investment activities in Iran - generally defined as investing at least $20 million in Iran's energy sector - from participating in a procurement with a public body in the State. The law requires the Board of Public Works to develop, by December 31, 2012, and regularly update, a list of persons who engage in investment activities in Iran. Beginning January 1, 2013, a public body in the State must require persons engaging in procurement to certify that they are not engaged in such investment activities. Persons who falsely certify are subject to civil action by the State within 3 years of the false certification. If the action is successful, the person is ineligible to bid on a public contract for 3 years and is subject to civil fines and other penalties. A lender that loans $20 million to a person who will use the credit to provide goods or services to the energy sector in Iran and who is on the list is deemed to be engaging in investment activity in Iran and is subject to the same restrictions and penalties as the person to whom it extended credit.
Local Government Investment Pool
SB542/HB575 - Chapters 536/537 (effective July 1, 2012)
Chapters 536/537 expand the list of participants that may place funds in the Maryland Local Government Investment Pool with the approval of the State Treasurer to include a unit of State government or an entity of the State if its funds are not State money over which the State Treasurer has investment authority. The new law makes clarifying technical changes regarding specified monies and also allows the State Treasurer to specify maximum amounts that may be deposited by any authorized participant.
Ground Lease - Registration and Failure To Register
HB177/ SB135- Chapters 465/464 (effective July 1, 2012)
In response to the Court of Appeals' decision in Muskin v. SDAT, 422 Md. 544, 30 A.3d 962 (2011), this law repeals legislation that extinguished a ground lease holder's interest in the ground lease property if the ground lease was not registered with the Maryland State Department of Assessments and Taxation (SDAT) by a certain deadline. While a ground lease holder's interest in the ground lease property no longer is extinguished, the ground lease holder now may only collect ground rent payments or obtain a lien on the property so long as the property is registered with SDAT and a bill for payment is first mailed to the last known address of the leasehold tenant as well as the property address. If the ground lease is not registered, the ground lease holder is prohibited from collecting any ground rent payments due under the ground lease or bringing any action against the ground lease tenant to enforce any rights under the ground lease.
Action Item: Ground lease holders must register all of their properties with the Maryland SDAT in order to collect any ground rent payments or enforce any rights under the ground lease.
InsuranceProperty and Casualty Insurance - Certificates of Insurance
SB297/HB463 - Chapters 479/480 (effective October 1, 2012)
Chapters 479/480 impose requirements for "certificates of insurance," which Maryland law defines as any document or instrument, however titled or described, that is prepared or issued by an insurer or insurance producer as evidence of property insurance or casualty insurance coverage (other than a policy of insurance or an insurance binder). A person will be prohibited from preparing or issuing a property or casualty certificate of insurance that has not been filed with and approved by the Maryland Insurance Commissioner. Exceptions to the prohibition exist for a standard certificate of insurance form adopted by the Association for Cooperative Operations Research Development or the Insurance Services Office that otherwise complies with Section 19-116 of the Maryland Insurance Article, and for any certificate of insurance form required by a federal agency that the Insurance Commissioner has designated as deemed approved. The law requires the Insurance Commissioner to disapprove any filed form that is unjust, unfair, misleading, or deceptive or that violates public policy, that fails to comply with Section 19-116 of the Insurance Article, or that violates any law or regulation. Once filed and approved, a certificate of insurance form may not be altered or modified. The Insurance Commissioner must adopt implementing regulations, including regulations that establish an approval process.
Title Insurance - Closing or Settlement Protection Practices - Study
HB866 - Chapter 683 (effective July 1, 2012)
In response to reports of monetary losses by consumers, title insurers, mortgage lenders, and other parties that resulted from theft, misappropriation, or misuse of escrow funds held by title insurance providers (and the potential for such losses), Chapter 683 requires the Maryland Insurance Commissioner to study closing or settlement protection practices of the title insurance industry, such as the mechanisms for, and associated costs of, compensating injured parties. In conducting this study, the Insurance Commissioner may consult with appropriate individuals or entities, such as title insurers and producers, mortgage lenders, the real estate industry, and governmental agencies. In addition, the Insurance Commissioner must consider such factors as fund misappropriations reported to the Maryland Insurance Administration by title insurers, fund misappropriations discovered by the Maryland Insurance Administration through the complaint process, the extent to which regulations relating to title insurers' on-site reviews of their producers have addressed the problem of the misappropriation of funds, the availability and affordability of fidelity bonds, escrow bonds, reinsurance, or other coverage to protect title insurers, and the manner in which other states and the National Association of Insurance Commissioners and/or the National Coalition of Insurance Legislators address closing or settlement protection. After the study is complete, the Insurance Commissioner must make recommendations for changes to existing practices by December 1, 2012.
Personal Automobile Insurance - Rescission of Policy or Binder
SB938/HB1059 - Chapters 626/627 (effective January 1, 2013)
This law permits an insurer to rescind a policy or binder of personal automobile insurance if the applicant's initial premium payment is made by a check or other remittance that is not honored upon presentment to the financial institution where the check or other remittance is drawn. To have this right, the insurer must have disclosed to the applicant, at the time of application, that no coverage will be in effect if the initial premium payment is not honored upon presentment. Before rescinding the coverage, an insurer must provide written notice to the applicant and any secured creditor that the coverage or binder is rescinded as of its proposed effective date because the applicant's check or other remittance for the initial premium was dishonored, that there is no coverage, and that the insurer will reinstate or continue the policy or binder without a lapse in coverage if the financial institution dishonored the check or other remittance in error and the applicant promptly notifies and provides documentation of the error to the insurer or if the applicant or secured creditor pays the initial premium within 5 business days after the insurer sent the notice. The notice must be sent by certificate of mail and, if available, e-mail or other electronic means. The insurer must reinstate or continue the policy without a lapse in coverage if the financial institution dishonored the check in error and the applicant complies with the notice and documentation requirements or if the applicant or secured creditor pays the initial premium within the 5 business day period.
HB472 - Chapter 373 (effective June 1, 2012)
In response to Jackson v. Dackman, 422 Md. 357, 30 A.3d 854 (2011), which struck down the lead poisoning liability limits for owners of residential rental properties, and the absence of insurance covering these claims, Chapter 373 requires the Maryland Insurance Commissioner to convene a workgroup to evaluate and make recommendations relating to lead liability coverage. The Commissioner must report its findings to the Governor by December 1, 2012.
Changes to Lead Poisoning Prevention Law
HB644 - Chapter 387 (effective June 1, 2012)
Chapter 387 provides that, effective January 1, 2015, rental properties built between January 1, 1950 and December 31, 1978, are subject to Maryland's lead poisoning prevention law. Under current law, compliance for these properties is optional. The new law also provides that in an action seeking damages for lead poisoning, evidence that the owner was or was not in compliance with the law is admissible to determine whether the owner exercised reasonable care regarding lead paint. In addition, Chapter 387 requires the court in such a proceeding to award reasonable costs, including attorneys' fees, against a party if the court finds that the party alleged or denied the time and place of residence of, or visitation by, the child in the property of the owner without a good faith basis.
Limited Liability Companies
Maryland Limited Liability Company Act Revisions
HB777/SB855 - Chapters 600/559 (effective October 1, 2012)
Chapters 600/559 amend the Maryland Limited Liability Company Act to include new terminology to identify the various aspects of an interest in an LLC: "economic interest" (share of profits and losses and the right to distributions), "noneconomic interest" (all rights other than the economic rights), and "membership interest" (both the economic and non-economic interests). Unless specifically permitted by an operating agreement or approved by all members of the LLC, only the "economic interest" in an LLC may be assigned. Lenders taking a security interest in more than a borrower's "economic interest" in an LLC (i.e., a lien on the borrower's entire "membership interest") must make sure that the lien is permitted under the terms of the LLC's operating agreement or that all of the members of the LLC have consented to the lien.
Under current law, a creditor may obtain a charging order against a defaulting debtor's economic interest in an LLC, and the charging order constitutes a lien against that economic interest. The law clarifies that a charging order requires the LLC to pay the creditor only those distributions that otherwise would be payable to the debtor, up to the unsatisfied amount of the debt, and that the non-economic interest of the debtor (for example, voting rights) is not affected.
The process of obtaining a foreclosure order on an LLC interest may be more contentious and costly under these amendments. Under current law, a court may order foreclosure of an LLC economic interest that is subject to a charging order at any time. Foreclosure results in the debtor losing all future economic rights without regard to the amount of the unsatisfied portion of the debt. Chapters 600/559 allow a court to order foreclosure only upon a showing that the distributions under a charging order "will not pay the amount owed to the creditor within a reasonable time." To obtain a foreclosure order, a creditor may need to prove the likely payment stream that will result from the charging order and convince the court that the amount of time it would take for such payment stream to pay off the unsatisfied portion of the debt is "unreasonable."
Manufactured Housing - Affixation to and Severance from Real Property
SB591/HB678 - Chapters 546/547 (effective October 1, 2012)
Under current Maryland law, the status of manufactured housing is confused. Manufactured housing is personal property, normally having a certificate of title (like a car), but if the housing becomes "permanently affixed to land," it will be treated as real property for some purposes. This confused situation has made it difficult for an owner of manufactured housing to sell and to obtain financing for the property. Chapters 546/547 establish a voluntary conversion process that the owner of manufactured housing may follow to establish clearly that the property will be treated as real property. To take advantage of the conversion process, the owner of the manufactured home also must own the real property to which it will be affixed. This conversion process includes recording specified information in the appropriate land records and notifying the Maryland Motor Vehicle Administration. There also is a process that may be used by an owner who has converted manufactured housing to real property to sever the property from the land and allow the property again to be treated as personal property. The MVA must develop a model affidavit of affixation for use in the conversion process and adopt regulations to effectuate the severance process.
Practice Pointer: Lenders interested in financing manufactured homes and title companies that plan to assist in manufactured home sales and financings should become familiar with the requirements in this new law.
Money Transmitters - Licensing Requirements and Participation in Nationwide Licensing System
SB545 - Chapter 78 (effective June 1, 2012)
Chapter 78 authorizes the Commissioner of Financial Regulation to participate in the establishment and implementation of a multi-state automated licensing system for persons who engage in money transmission. The system is intended to operate similarly to NMLS (or be conducted through NMLS), a web-based system that currently allows State-licensed mortgage lenders, mortgage brokers, and mortgage loan originators to apply for, amend, update, and renew a license online using a set of relatively uniform applications. The new law anticipates such a system (and related licensing requirement) being in place by November 1, 2012, unless the Commissioner has not yet joined the system, in which case licensing will be required on a date to be specified by the Commissioner. The law also establishes new disclosure requirements with respect to a money transmitter licensee's license number and unique identifier number (created as part of registration through the new licensing system) and makes some changes to the fees involved in the registration/licensing process (primarily requiring fees to be submitted through the new online system).
Licensing of Mortgage Lenders and Mortgage Loan Originators
SB546 - Chapter 254 (effective July 1, 2012)
Chapter 254 addresses operational issues that have arisen in connection with mortgage industry licensing. The new law: makes all fees submitted with original and renewal mortgage lender and mortgage loan originator license applications nonrefundable; clarifies that a mortgage lender licensee (which includes brokers) must provide proof of satisfying the applicable minimum net worth requirement every year not later than 90 days after the end of the licensee's fiscal year; establishes that a new mortgage lender license issued on or after November 1 will not expire until December 31 of the year following the year in which the license was first issued; allows mortgage lender licenses to be renewed beginning 60 (rather than 30) days before expiration; imposes on a company, even though exempt from mortgage lender licensing, the obligation to file quarterly call reports through the Nationwide Mortgage Licensing System & Registry (NMLS) if that company has Maryland-licensed mortgage loan originators (MLO); establishes a process for changing MLO sponsorship information through NMLS; and creates a process for affiliated insurance producer-mortgage loan originators to update and change their licensing status. All existing mortgage lender and mortgage loan originator licensees should review this law to ensure continued compliance with the Maryland Commissioner of Financial Regulation's requirements.
Commissioner's Expanded Powers Over Mortgage Businesses
SB302 - Chapter 55 (effective January 1, 2013)
Chapter 55 gives the Maryland Commissioner of Financial Regulation greater power over certain persons engaged in residential mortgage lending. Under existing law, the Commissioner has limited investigative and enforcement power over affiliates of banks and credit unions if those banks and credit unions have branches in Maryland. Chapter 55 makes an affiliate of a bank or credit union with branches in Maryland subject to the Commissioner's investigative and enforcement power if the affiliate carries on a business over which the Commissioner normally has jurisdiction (for example, a mortgage business). Chapter 55 also eliminates the exemption from mortgage lender licensing for subsidiaries and affiliates of national banks, federal savings associations, and federally-chartered credit unions. Finally, Chapter 55 eliminates the de minimus exemption from mortgage lender licensing for any person who makes 3 or fewer mortgage loans in a calendar year and for any person who brokers no more than 1 mortgage loan in a calendar year.
Action Item: Federally-chartered depository institutions with subsidiary or affiliate mortgage entities need either to obtain licenses for those entities or to perform all Maryland residential mortgage lending and brokering directly out of the depository institution. In addition, persons who, in the past, have relied on Maryland's "de minimus" mortgage activity exemptions from licensing either must obtain licenses or stop making or brokering residential mortgage loans after December 31, 2012.
Penalties for Taking Homestead Property Tax Credit When Ineligible
HB1081 - Chapter 701 (effective July 1, 2012, for tax years beginning after June 30, 2012)
Maryland allows certain homeowners to apply for and claim a property tax credit on their principal residences in Maryland under a Homestead Property Tax Credit Program. Chapter 701 is part of an effort to ensure that only homeowners eligible for this property tax credit actually receive it. Chapter 701 expressly authorizes collection of all property tax otherwise due (without the benefit of the credit) from a person who was granted a homestead property tax credit when not qualifying for that credit, plus, if that person willfully misrepresented the facts about qualifying for the homestead property tax credit, a penalty equal to 25% of the tax credit received. Both the delinquent taxes and the penalty will be added to the property tax bill and will become a priority lien on the property. The priority lien for the penalty may be released if the property is sold in a foreclosure action. While collection of unpaid property taxes otherwise due is permitted for all tax years, the new penalty applies prospectively, for tax years beginning July 1, 2012 and later.
Notice to Local Assessment Office Concerning the Homestead Property Tax Credit
SB123 - Chapter 461 (effective June 1, 2012)
Chapter 461 requires persons who purchase residential property at a foreclosure sale to provide a copy of the court order ratifying the sale to the supervisor of assessments for the county in which the residential property is located within 60 days after issuance of that order. The law provides some exceptions to this requirement. The purpose of this law is to allow for efficient elimination of the benefit of homestead property tax credit when property is no longer owner occupied.
Mopeds and Motor Scooters - Titling and Registration
SB309/HB149 - Chapters 210/211 (effective October 1, 2012)
Chapters 210/211 require for the first time mopeds (a bicycle operated by human power assisted by a motor) and motor scooters (a non-pedal 2 wheel vehicle with a motor rating of 2.7 brake horsepower or less and an automatic transmission) to be titled and an excise tax to be imposed if sales and use tax is not collected at the time of purchase. When the Motor Vehicle Administration issues a title, it must issue a permanent decal with a unique number sequence to be displayed on the moped or motor scooter.
The operators of mopeds and motor scooters must carry vehicle liability insurance policies and possess proof of this insurance. The Maryland Automobile Insurance Fund is required to provide insurance coverage to eligible individuals with respect to mopeds and motor scooters required to be registered with the MVA. The motor scooter or moped rider must wear protective headgear and, if the vehicle does not have a windscreen, an eye-protection device.
The MVA must waive the fee for titling a moped or motor scooter for an individual who owns the moped or motor scooter on October 1, 2012, and titles the vehicle during the first year that the new law is in effect.
Practice Pointer: Beginning October 1, 2012, security interests in loans secured by mopeds and motor scooters must be perfected by a Security Interest Filing with the MVA, rather than relying on automatic perfection.
Vehicle Laws - Salvage - Defective, Lost, or Destroyed Certificates of Title
SB487/HB435 - Chapters 76/77 (effective October 1, 2012)
Chapters 76/77 authorizes an insurance company, or its agent, that applies for a salvage certificate, to submit an affidavit of ownership for a vehicle acquired as a result of a claim settlement and a copy of the settlement check or other evidence of final payment, instead of a certificate of title, in cases where the certificate of title is defective, lost, or destroyed.
SB401 - Chapter 228 (effective October 1, 2012)
Chapter 228 implements recommendations of the Task Force to Study Motor Vehicle Towing Practices that relate to the regulation of nonconsensual towing of vehicles from private property and the disposition of towed vehicles. The new law makes the Baltimore City and Baltimore County private parking lot towing protections apply statewide. Chapter 228 establishes the towing and daily storage rates based on the limits set by the political subdivision for a public safety tower, or, if no limit is established, no more than $250 for towing and $30 per day for storage. The tower must provide a specified notice to the owner of the vehicle, any secured party, and the vehicle's insurer within 3 days (exclusive of the days the towing business is closed) after the vehicle's removal from a parking lot. The storage facility must make a towed vehicle available to the owner (or agent), secured party, or insurer, under supervision, for inspection or retrieval of personal property not attached to the vehicle.
Powers of Attorney
Power of Attorney Law Update
HB774/SB711 - Chapters 85/84 (effective October 1, 2012)
In 2010, Maryland enacted a comprehensive General and Limited Power of Attorney Act. In 2011, a few clarifying changes were made to the Act and this year, Chapters 85/84 make additional changes. This year's changes clarify that if a principal names more than 1 person to be an agent (coagents), those coagents must act together unanimously unless the written power of attorney provides otherwise. This year's law also changes the two statutory forms of power of attorney to express this coagent legal requirement. Of interest, under the law in effect prior to Chapters 85/84, the statutory form limited power of attorney ("long form") expressly states the opposite: that coagents are not required to act together unless specified otherwise. Chapters 85/84 also add language to both statutory forms of power of attorney that alerts the principal that granting the agent the authority to make gifts to certain specified persons or to designate those certain specified person as the beneficiary of retirement plans could constitute a taxable gift by the principal and a taxable event for the agent. The revised statutory forms direct the principal to expressly provide in written instructions if this is truly the principal's intention. Because the new law changes language in and, at least as to coagents, the effect of the existing two forms of power of attorney set forth in Maryland's statute, the law also provides that a power of attorney substantially in a form contained in Maryland's statute at the time the document is executed continues to be effective as a Maryland statutory form even though it will not be "substantially in the form" set forth in the statute as amended.
Action Item: Financial institutions that make form powers of attorney available to customers may need to update those forms.
Real Estate Lending
Indemnity Deeds of Trust - Recordation Taxes
SB1302 - Chapter 2 of Special Section 1 (effective July 1, 2012)
An indemnity deed of trust or mortgage (IDOT) creates a lien on real property to secure the grantor's obligations under a guaranty. Prior to Chapter 2, IDOTs given in connection with loans have been exempt from recordation tax in most Maryland counties. Chapter 2, enacted during the first 2012 Special Session, imposes recordation tax on IDOTs when the debt secured is $1,000,000 or more. Chapter 2 applies to IDOTs recorded on or after July 1, 2012.
SB130 - Chapter 181 (effective October 1, 2012)
A community association may bring an action for the abatement of a nuisance in several Maryland jurisdictions, including Baltimore City. Chapter 181 alters several provisions in the Baltimore City nuisance abatement statute. The definition of a "community association" and what constitutes a nuisance are both expanded. Chapter 181 grants standing to a community association to file a nuisance complaint for abatement when a vacant dwelling is boarded if the property otherwise qualifies as a nuisance, unless the Baltimore City Department of Housing and Community Development has provided the community association with a specified notice that the property is part of an active code enforcement plan.
Action Item: Because of the expansion of the nuisance statute, lenders with vacant Baltimore City properties should pay close attention to the condition of those properties.
Uniform Commercial Code
HB700 - Chapter 673 (effective June 1, 2012)
Chapter 673 adopts the 2001 uniform amendments to Article 1 of the Uniform Commercial Code, which provides definitions and general provisions for the UCC. Of note is that Chapter 673 modifies the uniform definition of "good faith" to retain its current Maryland definition of "honesty in fact in the conduct or transaction concerned." In addition, absent express terms, course of performance may be used to interpret a contract, along with course of dealing and usage of trade.
HB713 - Chapter 674 (effective July 1, 2013)
Chapter 674 revises and clarifies Article 9 of the Uniform Commercial Code concerning secured transactions by adopting the 2010 uniform amendments to Article 9. Article 9 was comprehensively amended in 2000 and the 2010 amendments address several perceived glitches in the uniform law note how a financing statement must provide the name of an individual and how a financing statement must provide the names of a business trust and common-law trust.
Action Item: Secured parties should become familiar with the new naming conventions, even though there is a delayed effective date. The new naming conventions affect financing statements filed before the effective date of Chapter 674 and could affect the perfection of security interests unless action is taken.