Maryland Legal Alert for Financial Services
Maryland Legal Alert February 2015
• NOTICE, NOT SUIT, SUFFICIENT TO EXERCISE TILA RIGHT OF RESCISSION
• $1.5 BILLION LIEN RELEASED BY ERRONEOUS TERMINATION STATEMENT
• SURVEY OF UDAAP ACTIVITIES UNDER THE DODD-FRANK ACT
• CFPB PROPOSES EXPANSION OF "SMALL CREDITOR" AND "RURAL" DEFINITIONS
• MARYLAND COURT DECISION ON RESPA AND MARYLAND FINDER'S FEE ACT
On January 13, 2015, the United States Supreme Court unanimously held that a borrower seeking rescission under the Truth In Lending Act (TILA) extended right of rescission, codified at 15 U.S.C. § 1635(f), simply needs to provide written notice of rescission to a creditor within three years of consummation of a transaction. The borrowers in this case delivered written notice of rescission to the lender exactly three years after consummation and filed suit four years after consummation. In delivering the opinion of the Court, Justice Scalia rejected the creditor's argument that the borrower must file suit before the three year period elapsed and stated that TILA "leaves no doubt that rescission is effected when the borrower notifies the creditor of his intention to rescind. It follows that, so long as the borrower notifies within three years after the transaction is consummated, his rescission is timely." The Supreme Court's holding settled a circuit split and confirmed the position of the Fourth Circuit Court of Appeals that a borrower's written notice of rescission is sufficient if delivered before expiration of the extended rescission period. If you would like to discuss this case or TILA's extended right of rescission, please contact Margie Corwin.
As reported in our November 2014 Maryland Legal Alert, the Delaware Supreme Court, in response to a certified question from the United States Second Circuit Court of Appeals, decided that under the Delaware UCC there is no requirement for a secured party to subjectively intend or otherwise understand the effect of the plain terms of its own filing of a termination statement to authorize such a filing. The Delaware decision left open the question of whether the filing was, in fact, authorized by the secured creditor. On January 21, 2015, the Second Circuit decided the remaining issue and held that a debtor's attorney was authorized by the creditor to file a UCC termination statement which, in addition to two intentionally included liens, erroneously listed a third lien. In this case, the creditor's in-house counsel and the creditor's outside attorneys were sent the UCC termination statement multiple times and were asked for review and comment. They were also asked to review a draft escrow agreement which provided that the debtor's counsel would file the UCC termination statement once the amount due on a debt, which was secured by the third lien, had been paid. In response to receiving the termination statement and the escrow agreement, the creditor's counsel replied "nice job" and stated that the escrow agreement was fine. Although the creditor never intended to terminate the third lien, the Court held that the creditor gave the debtor's counsel actual authority to file the termination statement because the creditor's actions, as reasonably understood by the debtor's counsel, expressed the creditor's assent that the debtor's counsel file the termination statement on the creditor's behalf. Because the creditor granted the debtor's counsel authority to file the termination statement, and because a secured party does not need to subjectively intend or otherwise understand the plain terms of its own filing in order for the filing to be effective, the creditor released the erroneously listed third lien with the result that a $1.5 billion debt became unsecured. If you have any questions concerning termination statements under Maryland law or would like to discuss this case further, please contact Lawrence Coppel or Peter Rosenwald.
John C. Morton, a member of our Financial Services Group, recently co-authored A Survey of Activities Identified as Unfair, Deceptive, or Abusive Under the Dodd-Frank Act, viewable here. The survey is the third installment in a series of articles that highlight recent regulatory enforcement actions of the Consumer Finance Protection Bureau (CFPB), other recent CFPB supervisory activity, recent CFPB bulletins and guidance, and state enforcement actions. If you would like to discuss any of these topics, or if you would like a copy of any of the prior articles in the series, please contact John Morton.
On January 26, 2015, the CFPB proposed amendments to Truth in Lending Act regulations that, among other things, expand the definitions of "small creditor" and "rural area" for certain regulatory exemptions. These proposed amendments currently are found here. In brief, if these proposals become final, eligibility for "small creditor" status would apply to lenders who originate up to 2,000 (changed from 500) covered first lien loans. The 2,000 origination limit would not include loans held by the lender in portfolio. If these proposals become final, an area deemed "rural" would expand to include not only counties that meet the existing definition of "rural" but also census blocks that are not in an urban area as defined by the United States Census Bureau. There are other helpful changes as well. These changes could particularly benefit community institutions that currently are ineligible for the regulatory exemptions available to small creditors operating in rural or underserved areas. Comments on these proposed amendments are due to the CFPB by March 30, 2015. Please contact Margie Corwin if you would like to discuss these proposed changes to TILA regulations.
The Maryland Court of Special Appeals recently addressed RESPA and Maryland Finder's Fee Act issues. While it appears the decision, issued January 9, 2015, will remain unpublished, it is worthwhile reading, particularly if your business is involved in or considering an Affiliated Business Arrangement (AfBA), as those terms are used in RESPA. The Court decided that not only must the written disclosure required for an AfBA be provided but also the AfBA must not be a "sham." The Court determined that the "sham" nature of a business should be tested using the factors identified in HUD's Statement of Policy 1996-2. As to the Maryland Finder's Fee Act (FFA), the Court decided as a matter of law that an individual working for a mortgage broker company was acting as an agent for the company and the company, as the principal, is responsible for the actions of its agents. Based on this conclusion, the Court found that the individual would not be personally liable for the FFA violation by the company. Of note, the individual involved in this case not only acted as a mortgage loan originator but also was part owner of the mortgage broker company. Please contact Margie Corwin if you would like to discuss further the impact of this unreported Court of Special Appeals decision.