Maryland Legal Alert for Financial Services
Maryland Legal Alert - June 2009
In This Issue:
- FDIC & NCUA Insurance Coverage of $250,000 Extended Through December 31, 2013
- Effective Now: New TILA Notice Obligation for Purchasers of Certain Home Loans
- Effective July 30: New TILA Disclosure Requirements for Certain Closed-End Home Loans
- Change in Maryland’s Foreclosure Process Continues
- Mortgage Loan Originator Licensing Update: Maryland and Federal Law
- Red Flags Rules: New Compliance Deadline and Template for Low Risk Businesses
- Warning to Lenders: Maintain an Arm’s Length Relationship with Troubled Debtors
On May 20, 2009, President Obama signed the Helping Families Save Their Homes Act (the “Act”), which, in part, extends the temporary increase in the standard maximum deposit insurance amount and standard maximum share insurance amount to $250,000 per depositor/member through December 31, 2013. This extension became effective immediately. The law provides that the insurance will return to $100,000 on January 1, 2014. This extension does not apply to the FDIC’s Transaction Account Guarantee Program, which provides unlimited insurance coverage for non-interest bearing transaction accounts, IOLTA (of any interest rate), and NOW accounts (with interest rates no higher than .50%) only through December 31, 2009. For more information about the extension of increased insurance coverage, see the FDIC’s Financial Institutions Letter, FIL-22-2009 and the NCUA’s media release. For more information, please contact Chris Rahl.
Section 404 of the Helping Families Save Their Homes Act imposes a new notification obligation under the Truth in Lending Act for "creditors" who purchase or take assignment of a loan secured by a consumer's principal dwelling. This new requirement became effective on May 20, 2009. Not later than 30 days after the loan is sold, transferred, or assigned to a third party, the "creditor that is the new owner or assignee of the debt" must provide a written disclosure notifying the consumer of: (i) the identity, address, and telephone number of the “new creditor;” (ii) the date of transfer; (iii) how to reach an agent or party having authority to act on behalf of the “new creditor;” (iv) the location of the place where transfer of ownership of the debt is recorded; and (v) "any other relevant information regarding the new creditor." Consumers may bring claims for a failure to comply with this notification. While there is uncertainty as to some of the information that needs to be disclosed and by whom, it is our recommendation that any person who, on or after May 20, 2009, purchases or takes assignment of a loan secured by the borrower's principal dwelling should immediately attend to this new obligation. Notifications could be required as early as June 19, 2009. For more information, please contact Chris Rahl.
Creditors who take applications on or after July 30, 2009 for closed-end consumer loans secured by a one-to-four unit residential structure (including condominium and cooperative units, mobile homes, boats, and trailers if used as residences) must change their TILA disclosures and their procedures for providing these disclosures. Final changes to FRB Regulation Z (to implement the “Mortgage Disclosure Improvement Act,” enacted July 31, 2008) were published in the May 19, 2009 Federal Register. These new rules (which were expected to become effective October 1, 2009) make three types of changes: (1) new timing for giving TILA disclosures and any required corrected disclosures; (2) new restrictions on collecting or imposing fees until the consumer has received the estimated “up-front” TILA disclosures; and (3) new disclosure language added to the TILA disclosures. A chart attached to the recent FDIC Financial Institutions Letter FIL-26-2009 is a helpful compliance guide. Stay tuned for more TILA changes, to be come effective October 1, 2009. For more information, please contact Chris Rahl.
CHANGE IN MARYLAND’S FORECLOSURE PROCESS CONTINUES
New Maryland law (introduced as Senate Bill 842 and House Bill 776), effective May 19, 2009, makes changes to the notice to occupants of residential property. The enhanced notice must be sent in connection with foreclosures of “residential property” filed on or after May 19, 2009. Another new Maryland law (introduced as House Bill 798 and Senate Bill 807), effective June 1, 2009, refines the definition of “residential property” to which Maryland’s more protective foreclosure laws apply. The changes make it clear that the property must be designed principally for and intended for human habitation, to avoid a borrower’s claim that by sleeping “in the office” from time to time, property that is clearly commercial becomes “residential property.” In our May 2009 Maryland Legal Alert we reported on new Maryland Rules regarding foreclosures. On May 26, 2009, additional changes were proposed to ensure that new Maryland foreclosure-related laws are accurately reflected in the Rules. Finally (for the moment) we mention that Title VII of the Helping Families Save Their Homes Act enacts the “Protecting Tenants at Foreclosure Act” which provides significant protections for tenants in residential properties that are being foreclosed. For more information, please contact Chris Rahl.
In our May 2009 Maryland Legal Alert we reported on new Maryland law to license individual mortgage loan originators as required by the federal S.A.F.E. Mortgage Licensing Act. Starting May 11, 2009, individuals and businesses have had access to the Nationwide Mortgage Licensing System to apply for new and renewal Maryland licenses. Guidance provided by our Commissioner’s office is attached. At long last, on June 1, 2009, the Federal Banking Agencies made available proposed rules on how employees of depository institutions and of their operating subsidiaries will register as required by the federal S.A.F.E. Mortgage Licensing Act. Comments on these proposed federal rules will be due 30 days after they are published in the Federal Register (which has not yet happened). Once the rules go final we can expect a 6-month delay in the implementation of the new federal registration requirements. So, at the moment, employees of depository institutions and their operating affiliates continue to wait for more guidance on the mortgage loan originator registration requirements. For more information, please contact Chris Rahl.
On the eve of the May 1, 2009 deadline for compliance with the federal Red Flags Identity Theft Rules, the Federal Trade Commission delayed enforcement of the rules, again. The new deadline for compliance with the Red Flags Identity Theft Rules is August 1, 2009. Please see our May 2009 Maryland Legal Alert for background on this FTC rule. The Red Flags Rules state that identity theft programs should be tailored to the degree of risk that a business may face. Therefore, the program for a "low-risk" business will be less comprehensive than a program for a business that has a high-risk for identity theft. The FTC published a template for low-risk businesses to use to develop a Red Flags Identity Theft Program. Additionally, the template provides instructions on how to determine if your business qualifies as a low-risk business for identity theft. The template can be found here. Gordon Feinblatt has assisted numerous businesses in determining whether the Red Flags Rules apply to their activities and developing Red Flags Identity Theft Programs.
Schubert v. Lucent Technologies, Inc. (In re Winstar Communications, Inc.), 554 F.3d 382, 394-400 (3d Cir. 2009) is a recent decision with potentially far-reaching lender liability ramifications. In Winstar, the United States Court of Appeals for the Third Circuit held that Winstar’s lender and strategic partner, Lucent Technologies, Inc., was a “non-statutory insider” of Winstar, thus enabling Winstar’s Chapter 7 trustee to avoid and recover a $188 million preferential transfer made by Winstar to Lucent more than 90 days prior the filing of Winstar’s bankruptcy case. The Court based its holding that Lucent was an insider on Lucent’s inequitable conduct, which consisted primarily of Lucent’s threats to terminate Winstar’s $2 billion line of credit to coerce Winstar into engaging in transactions that benefited Lucent to Winstar’s detriment. The inequitable conduct also served as the basis for the subordination of Lucent’s claims against Winstar to the claims of Winstar’s other creditors.
In considering whether Lucent was an insider, the Court found that Lucent was not a “person in control” of Winstar and otherwise did not meet any enumerated definition of “insider” under 11 U.S.C. § 101(31). Noting, however, that § 101(31) was intended to be non-exclusive, the Court held that Lucent qualified as a “non-statutory” insider because of the identified coercion. The Winstar decision is likely to serve as the basis for a host of future lender liability claims predicated on aggressive lender behavior. In this regard, Winstar should serve as a reminder to lenders and creditors that they should ensure the preservation of an arm’s length relationship with distressed debtors and avoid the appearance of over-reaching or exploiting the vulnerability of such debtors to obtain unfair advantage.