Two decisions in July 2014 by the U.S. Court of Appeals for the Fourth Circuit have opened the possibility for table funding in Maryland once again.
For many years, we have advised against table funding residential mortgage loans because of problems under Maryland's Finder's Fee Law.
While not defined under Maryland law, "table funding" is defined in federal regulations as a loan settlement "at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds." 12 CFR §1024.2.
Problems under the Finder's Fee Law started back in 2001 when an unpublished decision by a Baltimore City Circuit Court paved the way for borrowers' counsel to argue that table funding violates the Finder's Fee Law if the originator charges any fees. A number of trial courts, both Maryland and federal, accepted the borrowers' argument leading to unfavorable results for the mortgage industry.
On July 10, 2014, the Fourth Circuit Court of Appeals finally exposed the flaws in this argument. In Petry, et al. v. Prosperity Mortgage Co., et al., Nos. 13-1869, 13-1924 (4th Cir. July 10, 2014), the Court addressed a case brought against the lender named in the promissory note and against that lender's affiliates. The Court found that the statutory language plainly establishes the Finder's Fee Law applies only to mortgage brokers and that by law a mortgage broker is a person who, among other facts, is not named as the lender in the promissory note. Consequently, the Court held that the lender named in the loan documents was not subject to a claim under the Finder's Fee Law.
In Marshall v. James B. Nutter & Co., No. 13-1940 (4th Cir. July 10, 2014), the Court addressed a case brought against the funding source in a reverse mortgage table funding arrangement. The borrowers claimed that the funder, who arranged the table funding program with an originator, was liable for conspiracy to violate the Finder's Fee Law. As in Petry, the Court found that the Finder's Fee Law only applies to mortgage brokers. Finding the funder was not a mortgage broker, the Court held the funder could not be liable for conspiracy because it was not capable of violating the Finder's Fee Law (a necessary element for conspiracy).
Unquestionably, these two decisions are welcome results for the industry and may prompt some to begin table funding again in Maryland. However, proceed with caution. The Court pointed out that the lender in Petry charged "typical" fees (in fact, the fees charged by this lender may have been lower than fees normally charged by other lenders in similar transactions). The Court indicated that "excessive" or "inflated" fees collected by a lender might be finder's fees in disguise, leaving open a factual determination in some cases.
Please contact Chris Rahl if you would like to discuss table funding in Maryland.
In response to a certified question from the U.S. District Court for the District of Maryland, the Maryland Court of Appeals, in its decision issued July 21, 2014, advised that a failure to provide a broker agreement in violation of Maryland's Finder's Fee Law is subject to the regular three-year statute of limitations, and not a 12-year statute of limitations applicable to "other specialties."
Maryland's highest court found the 12-year statute of limitations inapplicable because failure of a mortgage broker to provide a written broker agreement, as required by the Finder's Fee Law, is part of a mortgage broker's common law duty to the borrower to disclose all facts or information that may be relevant or material in influencing the borrower's judgment or action in the loan transaction.
Because the duty sought to be enforced exists as a matter of common law and is not created solely by statute, the claim is not a specialty.
The Court distinguished this Finder's Fee Law claim from claims addressed in the 2009 decision in Master Financial, Inc. v. Crowder, where the Court concluded a 12-year statute of limitations applied to claims under the Maryland Secondary Mortgage Loan Law. Our Maryland Legal Alert discussing the Crowder decision can be found here. This is another welcomed decision for the mortgage industry (see the item above regarding table funding).
Please contact Chris Rahl with questions you may have about the murky law of statutes of limitations in Maryland.
The U.S. Court of Appeals for the Eighth Circuit recently issued a commercial funds transfer decision that is helpful to depository institutions. The decision reinforces UCC Article 4A protections for institutions in fraudulent funds transfer situations, placing responsibility on the customer if the depository institution has complied with commercially reasonable security procedures and acted in good faith. For more information concerning the decision, click here.
Please contact Chris Rahl to discuss the security procedures at your institution.
MERS serves as the named mortgagee in a huge proportion of residential mortgage loans across the country and facilitates an active secondary market in mortgage notes (and the securitization thereof) by maintaining an internal record of note transfers and the beneficiaries of the mortgages securing such notes.
Using the MERS system, it is intended that purchasers of residential mortgage notes no longer have to rush to the county court house to record their interest because MERS is the mortgagee of record and, theoretically, ensures that the proper beneficiary can enforce the mortgage when necessary.
However, on June 30, 2014, the U.S. District Court for the Eastern District of Pennsylvania found that under Pennsylvania law a note and a mortgage that secures it are inseparable, that the assignment of a note is a conveyance of the corresponding mortgage and, accordingly, ruled that assignments of mortgages are required to be recorded under Pennsylvania law. This may effectively topple the MERS electronic recording system of residential mortgages in Pennsylvania.
However, we believe this decision should not significantly impact the MERS system in Maryland as long as a deed of trust, rather than a mortgage, is used as the security instrument. In Maryland, parties to a residential real estate transaction are free to evidence a security interest in the real property with either a mortgage or a deed of trust. A person does not need to be the record holder of a deed of trust note to be the party entitled to enforce the note. Instead, the rules of Article 9 of the Uniform Commercial Code govern the enforcement of a deed of trust note. Under Article 9, a holder of a deed of trust note can enforce the rights of a holder, i.e., foreclose, without producing a record of conveyances. Thus, the MERS system appears well situated to defend against any future legal challenges when used in conjunction with a Maryland deed of trust.
To talk about the advantages or disadvantages of a deed of trust and MERS in Maryland, please contact Ed Levin.
On September 1, 2014, the American Arbitration Association (AAA) will begin to maintain an online registry where consumers can search to see which businesses have registered their consumer arbitration provisions. The AAA will require registration of any consumer arbitration provision before the AAA will serve as the administrator of any claim filed pursuant to such provision. Acceptance into the registry is subject to the AAA's review and approval. If your consumer agreements/promissory notes contain arbitration provisions that elect the AAA as the arbitration administrator, these changes will impact you. For additional information, click here.
Please contact Chris Rahl if you would like to discuss the pros and cons of the pre-review and registration process and/or to add appropriate substitute language to your arbitration provisions.