Maryland Legal Alert for Financial Services

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Maryland Legal Alert - February 2007

TOM PEREZ IS MARYLAND'S NEW SECRETARY OF LABOR, LICENSING AND REGULATION

Former Montgomery County Council President Thomas E. Perez is Maryland's new Secretary of Labor, Licensing and Regulation. He now oversees agencies that regulate a variety of businesses in Maryland, including the Office of the Commissioner of Financial Regulation, which is the primary regulator of Maryland's state-chartered banks and credit unions, as well as other licensed financial service providers, including mortgage lenders and brokers, installment loan lenders, check cashers, and debt management service providers, to name a few. As a member of the Montgomery County Council, Perez was the leading sponsor of the county's lending discrimination law, Bill 36-04, which would have banned lending discrimination of any kind based on a prohibited basis. As previously reported in Maryland Legal Alert, the law was struck down by the Circuit Court of Montgomery County in November 2006.

WILL CONTROLLING INTEREST TRANSFERS CONTINUE?

Commercial lenders and borrowers should take note that newly inaugurated Governor Martin O'Malley has thrown his support behind a legislative effort that would amend Maryland law to eliminate the ability to avoid transfer and recordation taxes on the sale of real property through the use of a single purpose entity (often a limited liability company) formed to facilitate the transfer of these assets. Generally, recordation and transfer taxes are paid on the value of any sale of real property in Maryland, whether commercial or residential. In a controlling interest transfer, however, ownership in the entity holding the subject real property is sold. Currently, these transactions do not trigger transfer or recordation taxes. If you have questions about this issue, please e-mail Peter Rosenwald, II.

CAREFULLY DRAFTED DEPOSIT ACCOUNT CONTRACT WINS THE DAY

We regularly advise depository institutions on the importance of carefully drafted deposit account contracts. Harby v. Wachovia Bank, N.A., published January 26, 2007, supports this advice. In a dispute with the bank, a guardian argued that the arbitration provision in the bank's Deposit Agreement and Disclosures for Personal Accounts should not be given effect. The guardian argued that because the Deposit Agreement was never signed and the arbitration provision was not mentioned in the signature card, the arbitration provision should be unenforceable. The Maryland Court of Special Appeals disagreed, pointing out that through the signature card the customer agreed to be bound by the separate but explicitly identified Deposit Agreement. The customer also argued there was no consideration for the arbitration provision because the bank reserved the right to change the Deposit Agreement in its discretion. Rejecting this position, the court found instead that there was consideration because this particular Deposit Agreement requires the bank to give 30 days' prior notice for any change adverse to the customer. The lesson: it never hurts to reread and improve your deposit agreement. For more information, please contact Chris Rahl.

ARE 'CLEAR AND CONSPICUOUS' HARDER TO ACHIEVE WHEN LOAN IS NONTRADITIONAL?

While not solely a Maryland law issue, lenders are encouraged to read Andrews v. Chevy Chase Bank, FSB, decided by the U.S. District Court for the Eastern District of Wisconsin on January 16, 2007. In this class action, the borrowers believed their mortgage loan had a fixed interest rate of 1.95% for five years. In fact, it was an “Option ARM” loan product where the initial interest rate was significantly discounted (“teaser”) and only fixed for one month, after which it adjusted to the fully indexed rate and could change monthly. The Court did not focus on what the borrowers might have believed. Rather, it focused on the “ordinary consumer” and, after carefully reviewing the lender's Truth in Lending Act disclosure statement, concluded that certain required disclosures were not “clear and conspicuous” to the “ordinary consumer.” The Court held this violation means the named plaintiffs and all class members have the remedy of rescission. The case has been appealed by the lender (which pointed out that courts are sharply divided over whether a TILA rescission class may be certified; see, for example, McKenna v. First Horizon Home Loan Corp., decided January 29, 2007 by the U.S. First Circuit Court of Appeals). Regardless of the outcome of the appeal, this case sends a wake up call to lenders: it is time to carefully reexamine disclosures because the next person to do so may be a judge. For more information, please contact Chris Rahl.