Maryland Legal Alert for Financial Services

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Maryland Legal Alert February 2016

In this issue:

APPELLATE COURT OPINES ON ABILITY TO CURE CREDIT LAW VIOLATIONS
INTEREST RATES INCREASE FOR ESCROW/SPECIAL PURPOSE ACCOUNTS
TRUSTEE NEED NOT BE (PHYSICALLY) PRESENT AT FORECLOSURE SALE

APPELLATE COURT OPINES ON ABILITY TO CURE CREDIT LAW VIOLATIONS

On January 11, 2016, the United States Court of Appeals for the Fourth Circuit issued an opinion that addresses a number of significant issues under Maryland’s Credit Grantor Closed End Credit Provisions (CLEC). In particular, the Court analyzed CLEC’s provision that allows credit grantors to cure failures to comply with CLEC and in doing so avoid liability. The Court also confirmed that if there is no liability for a violation of CLEC (for example, because the credit grantor cured the error), there can be no breach of contract claim based on the CLEC violation. These, among other legal conclusions by the Court, are good results for creditors. As background, a 2008 used car retail installment contract which elected CLEC as governing law was assigned to defendant, a finance company. The contract provided for interest at 26.99%, which exceeds the maximum rate permitted by CLEC. In 2010, finance company discovered the error. Within 60 days of discovering the error, and prior to the filing of any action or receipt of written notice from borrower, finance company took steps to cure the error by crediting borrower’s account with the amount of interest collected in excess of CLEC’s permitted maximum rate and by sending a letter informing borrower that the interest rate in the contract was not correct and that a new interest rate would apply to the contract. Sometime after receiving the notice, borrower defaulted and finance company took steps to collect the debt. Ultimately borrower sued claiming CLEC violations, breach of contract, and violations of Maryland’s Consumer Debt Collection Act. The lower court granted summary judgment in favor of finance company on all claims. The Court of Appeals analyzed many aspects of CLEC, and we recommend reading the opinion. Of practical significance, the Court focused on CLEC’s provision allowing credit grantors who discover CLEC violations to cure the errors and avoid liability. The Court opined that for this cure provision, discovery is not subject to a “should have known” standard but rather is based on actual knowledge of the violation. In the Court’s opinion, this interpretation supports “exactly what the text of the statute encourages … [to] cure any CLEC violation upon learning of it and notify the debtor, who is otherwise unaware of any problem with the loan.” In other words, the Court reads CLEC as encouraging credit grantors to self-correct. As to what information should be included in a cure notice, the Court explained that CLEC simply requires information that identifies “the substance of the mistake,” although the type of mistake (for example, a disclosure mistake compared with an interest rate mistake) could lead to the need for different information. The Court found that finance company’s cure notice was adequate for the interest rate error even though it did not provide information about the specific interest rates applied under the contract, and the Court found that finance company’s cure (crediting the borrower’s account so that the borrower does not pay more interest than permitted by CLEC) was effective to cure this error and avoid liability under CLEC. The Court affirmed the lower court’s decision granting summary judgment for finance company as to borrower’s CLEC claims and breach of contract based on CLEC. However, the Court reversed the lower court’s decision granting summary judgment for finance company as to borrower’s claim that finance company violated Maryland’s Consumer Debt Collection Act. The Court remanded the case back to the district court, concluding that a reasonable jury might find that finance company communicated with borrower in a manner that, in the aggregate, reasonably could be expected to abuse or harass borrower. Again, we recommend reading the opinion. It contains thoughtful analysis as to CLEC. If you would like to discuss this case further, please do not hesitate to contact Margie Corwin.

INTEREST RATES INCREASE FOR ESCROW/SPECIAL PURPOSE ACCOUNTS

Maryland law requires depository institutions doing business in Maryland that make first lien residential real property loans and maintain escrow accounts for those loans to pay a minimum rate of interest on the escrow accounts. Maryland law also requires Maryland-chartered banks that offer certain short term “special purpose” deposit accounts (for example, Christmas Club Accounts) to pay a minimum rate of interest on those deposit accounts. The minimum rate of interest on these accounts is based on the weekly average yield of United States Treasury Securities adjusted to a constant maturity of one year as of the first business day of the calendar year. The minimum rate of interest to be paid on these accounts for 2016 is 0.61% (i.e., the statutory prescribed rate as of January 4, 2016, the first business day of 2016). This is up from 0.25% which was the minimum rate to be paid in 2015. Please contact Margie Corwin if you have any questions.

TRUSTEE NEED NOT BE (PHYSICALLY) PRESENT AT FORECLOSURE SALE

On December 1, 2015, the Court of Special Appeals held that a foreclosure trustee need not be physically present at a foreclosure sale and that the trustee’s “constructive presence” would suffice. Additionally, the court held that actual prejudice to the party objecting to the foreclosure sale must be shown in order for the sale to be set aside. The case involved a residential foreclosure sale that was conducted by an auctioneer whom the trustees retained. None of the trustees attended the auction, but one of the trustees was in telephone contact with the auctioneer during the auction. The property was sold at the auction to the secured party for $308,000, which the borrower conceded was more than the property’s fair market value. The court noted that, while no Maryland statute or procedural rule requires the trustee to attend a foreclosure auction, Maryland case law does impose such a requirement. The court reasoned, however, that this does not necessarily require physical presence. For a complete discussion of this case, please see Seth Rotenberg’sTrustee Need Not Be (Physically) Present at Foreclosure Sale article which was published on January 19, 2016 in The Daily Record.