Maryland Laws Update for Financial Services

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2013 Maryland Laws Update

The 2013 session of the Maryland General Assembly adjourned on April 8th. While there was no major financial services legislation, several laws favorable to real estate lending and motor vehicle leasing were enacted, and extensive changes were made to the insurance premium finance law. Some new laws are effective now, and others are effective later. Some of these new laws may require changes to your procedures or forms.

We are pleased to provide our clients and friends this review of Maryland laws affecting financial service providers. 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 also will find current and past issues of our monthly eNewsletter “Maryland Legal Alert,” which keeps readers updated on Maryland legal developments affecting financial services providers.

Please call us if you would like to discuss these new laws and their effect on your business or if you would like to have an impact on the regulations that will implement several of the new laws.

Table of Contents

REAL ESTATE LENDING

Exemption from Recordation and Transfer Tax: Transfers between Affiliates

SB202/HB372 (Chapters 452/453)
(effective July 1, 2013)

Currently, certain real estate transfers between affiliates are exempt from the Maryland recordation and transfer tax – but only if the affiliates are corporations. These include certain transfers from a corporation to a subsidiary, from a subsidiary to a parent, or between two wholly-owned subsidiaries of a parent. Chapters 452/453 make these exemptions available to limited liability companies.

Recordation Tax, IDOTs and More
SB436/HB1209 (Chapters 267/268)
(effective July 1, 2013)

This law makes several important changes to the way mortgages and deeds of trust and indemnity mortgages and deeds of trust (IDOTs) are treated for Maryland recordation tax purposes. IDOTs secure guaranties of loans.

Currently, IDOTs securing guaranties of loans of up to $1 million are exempt from Maryland recordation tax. This law increases the amount for the exemption up to $3 million. All loans in a series that are part of the same transaction must be aggregated to determine if the $3 million threshold is reached.

In addition, this law changes the definition of “supplemental instrument of writing” in the recordation tax law to specifically provide that IDOTs are instruments that may be amended by a “supplemental instrument,” even if recordation tax was not paid when the IDOT was recorded, and then provides that the recordation tax on a supplemental instrument will apply to the difference between the new loan amount and the outstanding principal balance secured by the instrument being modified “immediately prior to the time the supplemental instrument of writing is entered into.” Currently, supplemental instruments of writing are only taxable on the amount of the increase in the debt secured by the supplemental instrument. The debt secured is the amount stated in the security instrument as the maximum principal amount that may be secured.

The effect of these changes is that IDOTs and other mortgages and deeds of trust will be treated in the same way for recordation tax purposes upon refinancings. IDOTs may be supplemented and increased, and the recordation tax will be based on the amount of the increase over the principal amount of the debt outstanding just before the supplemental instrument is signed.

Example: The original loan was $100 and it was paid down to $90, and then a supplemental instrument increases the loan to $110. Under current law (effective until June 30, 2013), the recordation tax is based on $10 (which is $110 - $100) (although a number of counties base the recordation on the full amount of $110 if IDOTs are involved and some counties are basing the tax on $20 now.) After July 1, the recordation tax will be based on $20 ($110 - $90) for IDOTs and regular mortgages or deeds of trust.

The new law also permits recordation tax on an IDOT covering property within and without Maryland to be computed by comparing the value of the Maryland property to the value of all of the property that is security for the loan (as may be done with other mortgages or deeds of trust), or the tax may be calculated on the amount of debt stated to be secured by the IDOT.

Finally, the new law provides that a mortgage or deed of trust is not subject to recordation tax to the extent that it secures the refinancing of an amount not greater than the unpaid principal amount secured by an existing mortgage, deed of trust, or IDOT at the time of refinancing if the refinancing is by the original mortgagor. Currently, this exemption is available only on real property that is the principal residence of an individual borrower. This will obviate the need for lenders to sell their debt in order to reduce recordation taxes at the time of refinancings.

Refinance Mortgages – Priority Over Junior Liens
SB199 – Chapter 205
(effective October 1, 2013)

Chapter 205 eliminates the need for the owner of residential property (basically one-to-four family housing) to obtain a subordination agreement from the holder of a junior lien when the owner refinances the full amount of the unpaid indebtedness secured by a first mortgage on the property at a lower interest rate. This “automatic subordination” applies only if the principal amount secured by the junior lien does not exceed $150,000 and if the amount of the refinancing loan does not exceed the then unpaid balance of the loan being refinanced plus an amount to pay closing costs up to $5,000. Upon recordation, the refinancing mortgage will have the same lien priority as the first lien mortgage it replaces. The refinancing mortgage must include specific language, in bold or capitalized letters, as set forth in the statute. The new law applies only prospectively and will not apply to a refinancing mortgage recorded or having an effective date before October 1, 2013.

Practice Pointer: Lenders who refinance residential mortgage loans and who want to take advantage of “automatic subordination” need to be sure the refinancing mortgage or deed of trust contains the specific language required by this law.

Mortgage Assistance Relief Services Act
SB383/HB291 – Chapters 464/465
(effective July 1, 2013)

Chapters 464/465 make it a violation of Maryland law if a service provider offering mortgage assistance relief services fails to comply with the federal Consumer Financial Protection Bureau’s regulations. The same exemptions from applicability of the federal law, including exemptions for a holder of a mortgage loan and that holder’s agents and for a servicer of a mortgage loan and any agent of the servicer, apply under this new Maryland law. Chapters 464/465 give the Commissioner of Financial Regulation, the Maryland Attorney General, and Maryland State’s Attorneys investigatory and enforcement authority. Private actions also are allowed. Violations are deemed unfair or deceptive trade practices under the Maryland Consumer Protection Act.

Energy Efficiency – Regulated Sustainable Energy Contract Program
HB621 – Chapter 625
(effective July 1, 2013)

This law authorizes the Maryland Energy Administration (MEA) to create a Regulated Sustainable Energy Contract Program. Under the Program, qualified contractors provide residential renewable energy installations and residential energy efficiency measures to residential property owners under contracts of up to $30,000 that are recorded in the land records and enforceable by imposition of a lien on the property. The obligation to repay the debt “runs with the land” and remains a lien on the real property after the property is sold. The seller must give written notice to the purchaser about the purchaser’s obligation to assume payment of the regulated sustainable energy contract. MEA must perform a feasibility study before developing and implementing the Program, and then may develop and implement a test or pilot of the Program.

Importantly, the law gives holders of recorded mortgages or deeds of trust on the property the right to object in writing to the contract. If the holder makes an objection, the regulated sustainable energy contract may not become effective. The law requires the qualified contractor to notify, by first-class mail, any holder of a recorded mortgage or deed of trust on the property about the anticipated contract and of the right to object to the contact within 30 days after receipt of the notice.

MEA must adopt regulations to govern the Program and must report to the General Assembly on its progress in carrying out the requirements of the law by December 31, 2013.

Fraudulent Liens
HB941 (Chapter 656)
(effective June 1, 2013)

This law makes it a misdemeanor to file a lien or encumbrance against real or personal property in a public or private record if the filer knows that the lien or encumbrance is false or contains or is based on a materially false, fictitious, or fraudulent statement or representation. For the first violation, the penalty is imprisonment not exceeding 1 year or a fine not exceeding $10,000, or both, and for each subsequent violation, imprisonment not exceeding 5 years or a fine not exceeding $10,000 or both.

Residential Property – Prohibition on Nonjudicial Evictions
SB642/HB 1308 (Chapters 514/515)
(effective June 1, 2013)

Chapters 514/515 generally prohibit a party claiming the right to possession of residential property from taking possession or threatening to take possession of the property without first obtaining a writ of possession. A person claiming the right to possession of residential property may use the common law remedy of self-help if that person reasonably believes the resident has abandoned or surrendered possession of the property based on a reasonable inquiry into the occupancy status of the property, provides a certain specified notice, and receives no response to the notice. The new law is intended to overrule the recent decision in Nickens v. Mount Vernon Realty Group, et al., 429 Md. 53 (2012), which held that a foreclosure purchaser may use its common law self-help remedy to enter and repossess residential property and is not required to first obtain a statutory writ of possession.

MOTOR VEHICLES

Motor Vehicle Leasing – Payment of Tolls
HB420 (Chapter 113)
(effective July 1, 2013; applicable on a going-forward basis and to previously incurred tolls that are unpaid on that date)

The Maryland Transportation Authority (MTA) is responsible for toll facilities. Chapter 113 reflects use of the latest toll collection technology and processes, including open road and video tolling. The law provides that if a toll is not paid at the time a person travels through a toll facility, MTA must send a “notice of toll due” to the registered owner of the vehicle allowing 30 days to pay the toll. If payment is made within the allowed time, the person will not be considered a violator. If the toll is not paid within the time allowed, then a civil citation for unpaid toll violations along with a penalty will be issued. The citation constitutes prima facie evidence of liability for the toll violation and the civil penalty. Chapter 113 also authorizes MTA to enter into agreements with other jurisdictions for reciprocal enforcement of toll violations. MTA must adopt regulations implementing the new law before July 1, 2013. The new law applies retroactively to any previously incurred toll that remains unpaid on July 1, 2013.

Practice Pointer: This law clarifies that in the motor vehicle leasing context, a “person alleged to be liable” for tolls means either the registered owner (the lessor) or a person to whom a registered owner has transferred liability. Further, it provides that if at the time of the toll transaction the vehicle is in the possession of the lessee, and the lessor – who will receive the “notice of toll due” in the first instance – provides a copy of the lease or other “acceptable documentation” identifying the lessee to MTA within 30 days of the “notice of toll due,” then the lessee will be liable for the toll and will be sent a “notice of toll due.” Motor vehicle lessors should stay focused on the regulations mandated by Chapter 113 to ensure this process of shifting liability to lessees is clear and effective.

Titling and Registration – Transfer to Surviving Spouse
SB25 (Chapter 167)
(effective July 1, 2013)

Under Maryland law, when the interest of an owner of a motor vehicle passes to another person other than by voluntary transfer, the transferee must obtain a new title and apply for new registration for the vehicle. Chapter 167 establishes an exception when the vehicle title is in the name of married individuals as joint owners and, upon the death of one of the individuals, the interest in the vehicle passes by operation of law to the surviving spouse. The surviving spouse need not apply for a new title and the vehicle may be driven without the need to apply for new registration until expiration of the last registration in the name of the joint owners. This law also prohibits the Motor Vehicle Administration from charging a fee for the issuance of a new title to the surviving spouse.

Towing Charges
HB781 (Chapter 388)
(effective October 1, 2013)

This law prohibits a service that tows a vehicle from a parking lot from charging for providing the required notice of the tow if the vehicle’s owner or agent, insurer, or any secured party retakes possession of the vehicle within 48 hours of the vehicle being received by the storage facility. The law also increases, from 3 to 7 days, the period within which a tower must notify the owner, any secured party, and the vehicle’s insurer after towing a vehicle.

INSURANCE PREMIUM FINANCING

SB930 (Chapter 334)
(effective July 1, 2013; applies to premium finance agreements entered on and after that date)

Chapter 334 makes extensive changes to the Maryland premium finance law. It clarifies the required refund of unearned finance charge upon cancellation of the insurance contract or prepayment of the loan in full; requires the premium financing agreement to disclose in at least 12-point type specific information about the required refund; authorizes a premium finance agreement to include the costs of a motor club service contract; clarifies the maximum finance charge; and authorizes a premium finance company to charge an electronic payment fee if payment is made by electronic check. For private passenger motor vehicle insurance and personal insurance, Chapter 334 authorizes a premium finance company to assign all rights and obligations under a premium finance agreement to another premium finance company registered in Maryland or pledge a premium finance agreement as collateral for a loan. There also are numerous provisions related to financing commercial insurance premiums.

Practice Pointer: Premium finance companies should review this new law carefully and revise forms and procedures before July 1, 2013.

RENTAL-PURCHASE TRANSACTIONS

New Disclosures for Rental-Purchase Transactions
SB589/HB334 (Chapters 294/295)
(effective October 1, 2013)

Chapters 294/295 change the disclosures that must be made to consumers in connection with “rental-purchase agreements.” A “rental-purchase agreement” permits a consumer to use personal property for an initial period of at least 4 months and allows, but does not obligate, the consumer to purchase the property. An example is the musical instrument rental for school children. The current rental-purchase law includes an example of required disclosures. Chapters 294/295 add disclosures to emphasize the difference between the cash price of the item if purchased in-store at the time of consummation and the cost of the rental-purchase, including all payments made over the term of the rental-purchase agreement. Disclosures must be in English or in any other language used in advertisements for the rental-purchase.

CORPORATIONS

Corporate Document Filing and Processing
SB622/ HB702 (Chapters 67/68)
(effective October 1, 2013)

Chapters 67/68 alter the definition of “electronic transmission” in the Maryland General Corporation Law to clarify that electronic transmission of documents to the Maryland State Department of Assessments and Taxation (SDAT) includes electronic mail, facsimile transmission, and internet transmission, and to add a definition of “sign” to include manual, facsimile, conformed, and electronic signatures. The law formalizes a process by which SDAT, for a fee of $275, will review the sufficiency of a corporate filing prior to the document actually being submitted for filing. The law provides for a new level of expedited processing of filings by SDAT. For a fee of $425, SDAT will process a filing within 2 hours of receipt. The current same-day expedited processing service will continue to be offered for a fee of $50. The law authorizes SDAT to waive the filing of a resident agent’s written consent to being named in a filing if the entity making the filing certifies that the consent has been obtained, maintains a copy of the consent in its records, and provides a copy of the consent to SDAT upon request.

Conversions
SB697/ HB1140 (Chapters 527/528)
(effective October 1, 2013)

Chapters 527/528 permit a business entity to convert into a different form of business entity by filing Articles of Conversion with the SDAT. For Maryland law purposes, a converting entity is deemed to be the same legal entity before and after the conversion. Currently, conversion requires a statutory merger of the two entities in most cases. The conversion process is available to business entities formed under the law of Maryland or other states, and the converted business entity may continue to exist under the law of Maryland or the law of another state. The law addresses execution of confirmatory deeds, assignments, or similar instruments to publicize the conversion and update property records. The law does not address the applicability of transfer taxes when such documents are recorded.

Practice Pointer: Careful consideration needs to be given to the federal and state income tax consequences of a conversion. In some cases, the conversion may be a taxable event.

MANUFACTURED HOMES

Converting Manufactured Homes to Real Property
HB794 (Chapter 640)
(effective June 1, 2013)

Last year, the Maryland General Assembly passed a law establishing a process for converting a manufactured home from personal to real property. Chapter 640 alters and clarifies the lien information that must accompany certain affidavits of affixation when an owner of a manufactured home intends to convert the manufactured home to real property. Without these changes, title companies and attorneys were required, under certain circumstances, to certify that there were no liens on the manufactured home as part of the affixation process. In the event there were liens, the certification could not be made and conversion could not occur. This law corrects that problem and makes other technical corrections.

LINKED DEPOSITS

SB1072 (Chapter 345)
(effective July 1, 2013)

Chapter 345 alters the interest rate necessary for a loan to qualify under the Maryland Linked Deposit Program and the Linked Deposit Program for Small Businesses. The law also alters under what conditions the Maryland Treasurer may make an interest-bearing deposit in a financial institution under both programs. For each linked deposit program, a qualifying loan made under the program by a participating financial institution must have an interest rate that the financial institution charges on a loan for a similar purpose and a similar term that is reduced by at least the lesser of 2% or the difference between the financial institution’s rate on a 60-month certificate of deposit and the interest rate acceptable to the Maryland Treasurer for its deposits. The Maryland Treasurer is authorized to accept a rate for its interest-bearing deposits under the program that is up to 2% below current market rates and to make an interest-bearing deposit under either of the linked deposit programs without need for the security otherwise required under State Finance and Procurement Article § 6-202.

ESTATES AND TRUSTS

Slayer’s Statute
SB489/HB1211 (Chapters 485/486)
(effective October 1, 2013)

Chapters 485/486 codify the existing Maryland common law “slayer’s rule.” This brings Maryland into conformity with the majority of other states that already have codified this rule. In addition to clarifying the common law, this new law establishes procedures and protections for third parties to follow when the situation underlying the “slayer’s rule” presents itself. The law defines “disqualified person” as someone who feloniously and intentionally kills, conspires to kill, or procures the killing of a decedent and disqualifies that person from benefiting from the decedent’s death, whether by inheritance, by operation of law, or as a beneficiary of life insurance or other obligation. The person also is disqualified from receiving a general or special power of appointment conferred by the will or trust of the decedent and from serving as a personal representative, guardian, or trustee of a trust created by the decedent. Effectively, a disqualified person is treated as though he or she predeceased the actual decedent. For example, the survivorship interest of a disqualified person in a jointly titled bank account is severed at the time of death, and the property passes as if the disqualified person did not have a right of survivorship. The new law limits who is authorized to provide notice that another person is a disqualified person and the time by which that notice must be given. It also establishes how a person is determined to be disqualified through a court proceeding. The law protects third parties who make payments before receiving notice of an alleged disqualified person. The new law applies prospectively and expressly does not apply to the estate or property of a person who died before October 1, 2013.

Practice Pointer: Depository institutions, insurance companies, and other obligors should carefully review the new law to understand its requirements and protections.

IDENTITY ISSUES

Security Freezes – Children in Foster Care Settings
SB897/HB1297 (Chapters 329/330)
(effective October 1, 2013)

In recent years, the Maryland General Assembly has passed several bills enabling consumers to fight identity theft, including the placing of a security freeze on personal credit records. In 2012, the General Assembly extended the ability to freeze consumer reports to parents or guardians of children and those under guardianship, whose credit records were considered especially vulnerable to identity theft. This law establishes a process for placing security freezes on the records of children in foster care. If a security freeze is placed on a child’s consumer report, a consumer reporting agency is prohibited from releasing the child’s consumer report, any information derived from the consumer report, or any record created for the child. The security freeze must remain in effect until either the child or the Maryland Department of Human Resources requests the removal of the security freeze. The exclusive remedy of a violation of this law is a complaint filed with the Maryland Commissioner of Financial Regulation. This law also requires the Maryland Department of Juvenile Services (DJS) to evaluate and report back to the General Assembly whether it is practicable, appropriate, and necessary for DJS to be authorized to make a request for a security freeze for consumer records of children in the custody of DJS.

Identification Cards for Persons Lacking Lawful Status
SB 715 (Chapter 309)
(effective January 1, 2014)

Since 2009, in part to respond to federal requirements, the Maryland Motor Vehicle Administration (MVA) has issued identification cards, driver’s licenses, and moped operator’s permits to certain applicants even though they have an unresolved “non-match” under U.S. Department of Homeland Security regulations. Chapter 309 expands the authority of MVA to issue or renew certain driver’s license, identification card, or moped operator’s permit to applicants who cannot show lawful status or a valid Social Security number if the applicant provides evidence that the applicant, for each of the 2 preceding years, has filed a Maryland income tax return or has resided in Maryland and been claimed as a dependent by an individual who filed a Maryland income tax return. Under this new authority, the license, identification card, or permit will include a statement that it may not be used to purchase a firearm and that it is not acceptable by federal agencies for official purposes (such as boarding an airplane or entering a federal building.)

ACCOMMODATIONS

Use of Toilet Facilities by Customers
HB1183 (Chapter 148)
(effective October 1, 2013)

Chapter 148 requires retail businesses, which include banks and credit unions, to open a non-public, employee-only bathroom during normal business hours to certain individuals with certain medical conditions. The individual must be lawfully on the premises of the retail establishment, there must be 3 or more employees working at the retail establishment at the time of the individual’s request to use the bathroom, and the individual’s medical condition must be documented on a specific identification card signed by the individual’s health care provider. Maryland law continues to protect the retail establishment and its employees from liability for an injury to or death of the customer or any individual other than an employee accompanying the customer, if that customer is allowed to use a non-public bathroom. This law does not make the employee bathroom a public restroom.

Practice Pointer: Businesses that have 3 or more employees working at a location open to the public should develop a plan for accommodating individuals who present valid identification cards.

ASSET BASED LENDING

Personal Property Tax: Liens for Unpaid Tax
HB 419 (Chapter 370)
(effective June 1, 2013)

Under existing law, when a local government places a tax lien on the personal property of a business, the tax lien often includes the entire amount owed by the business for personal property taxes due on all of its personal property. Thus, when a secured party attempts to repossess certain personal property collateral, it may have to pay the entire amount of personal property taxes owed by the borrower for all of the borrower’s personal property. Chapter 370 permits a party with a security interest in personal property of a business to repossess the personal property and not pay the entire amount of personal property taxes due if it provides a notice to the county and the municipality to which the taxes are owed and pays the pro rata share of taxes owed, including the pro rata share of the accrued penalties and interest. The taxing authority can object to the pro rata payment, in which case a negotiation regarding tax payment is likely to ensue.