On May 13, 2014, the Department of Justice (DOJ) announced a $60 million settlement and consent order involving alleged failures by student loan owners and servicers to provide required interest rate reductions under the Servicemembers Civil Relief Act (SCRA). The DOJ alleged that the defendants failed to provide military borrowers with the interest rate reduction required by the SCRA. The SCRA applies to business and consumer loans that pre-date a borrower's military service and requires lenders and servicers to reduce loan interest rates to 6% after a borrower (1) submits a written request for relief, and (2) provides a copy of military orders calling the borrower to serve. Of concern, more than two-thirds of the settlement funds are earmarked for military borrowers who did not fully comply with their obligations to notify the lender/servicer or provide military orders. The consent order requires that once the defendants have knowledge of military service, they must attempt to verify the existence of military orders through the Department of Defense Manpower Data Center database. The consent order also requires the defendants to create and implement new SCRA policies and procedures, including a new online SCRA form for borrowers to complete and a specialized customer service group for military borrowers. The settlement resulted from a Consumer Financial Protection Bureau (CFPB) referral and CFPB officials have publicly endorsed the settlement noting that it should "serve as a warning … to all institutions that provide or service loans to the military." We recommend that lenders and servicers review the consent order and determine whether their own policies and procedures might need to be adjusted. Please contact Chris Rahl or Margie Corwin if you have questions or would like more guidance.
On May 19, 2014, the Maryland Court of Appeals decided Bartlett v. Portfolio Recovery Associates, LLC & Townsend v. Midland Funding, LLC, consolidated cases addressing a debt buyer's obligations under Maryland's Rules of Evidence. Maryland Rule 3-306 (Judgment on Affidavit) was amended in 2011 to raise the bar for a plaintiff debt buyer that wants to obtain a judgment based on the debt buyer's own affidavit (i.e., a sworn statement attesting to the validity of the debt) by requiring the debt buyer to establish its case on the basis of evidence that would satisfy the business records exception to the hearsay rule. The business records exception allows into evidence records of regularly conducted activity in the course of a person's business. However, Maryland Rule 3-701 (Small Claims Actions) directs the court to conduct the trial of a small claim action in an informal manner and makes inapplicable the formal Rules of Evidence to enable all parties to effectively participate in the proceedings without counsel. To clarify these seemingly conflicting rules, the Court of Appeals held that a debt buyer must produce documents sufficient to prove the existence and ownership of the debt under the business records exception when pursuing judgment on an affidavit, regardless of whether the debt buyer is pursuing a small or a large claim. However, once a small claim is contested and proceeds to trial on the merits, the parties are no longer constrained by the Rules of Evidence. In this manner, the Court attempted to balance the validity of the debt buyers' claims with the effective participation of parties in small claims actions. The dissent believed that debtors who elect to proceed to trial in small claims court are penalized because plaintiffs in such proceedings are not subject to the requirements of authentication and cross-examination. To address this concern, the concurrence called upon the Maryland Judiciary's Standing Committee on Rules of Practice and Procedure to examine the possibility of increasing the evidentiary requirements on debt collectors at trial. Please contact Margie Corwin if you would like to discuss this subject.
In our May 2014 Maryland Legal Alert we identified a few new Maryland laws with early effective dates. The Governor signed or vetoed all remaining bills and we now identify a few additional new Maryland laws of interest to the financial services industry. We again will prepare our annual, more comprehensive Maryland Laws Update providing insights on new laws that impact financial service providers. In the meantime, please let Margie Corwin or Bob Enten know if you have any questions about these or any other new Maryland laws.
Limitations on Actions to Recover Certain Deficiency Judgments
HB 274 (Chapter 592) (effective July 1, 2014)
For many years, Maryland law has allowed deficiency judgments resulting from foreclosure to be pursued either through a separate civil action or as part of the foreclosure process. This Act eliminates the choice. It requires that lenders who want to pursue deficiency judgments arising from foreclosures of owner-occupied residential property must do so only through a motion in the foreclosure proceeding. In addition, this Act significantly shortens the time period (from 12 years to 3 years after final ratification) during which recovery of the deficiency judgment may be sought. The Act states that it applies prospectively to any cause of action that arises on or after July 1, 2014. However, it further provides that any motion for deficiency judgment filed on or after July 1, 2014 is subject to the shorter 3 year time period (regardless of when the foreclosure sale occurred) and any motion for deficiency judgment for which an auditor's report has final ratification before July 1, 2014 must be filed within 3 years after the final ratification of the auditor's report or before July 1, 2017, whichever is earlier.
Shortened Statute of Limitations for Residential Property Promissory Notes and Mortgages
HB 274 (Chapter 592) (effective July 1, 2014)
Existing Maryland law provides a 12-year statute of limitations for certain "specialties," including promissory notes and other instruments "under seal." House Bill 274 dramatically shortens from 12 years to 3 years the statute of limitations for a civil action on a deed of trust, mortgage, or promissory note signed under seal if that deed of trust, mortgage, or promissory note secures or is secured by owner-occupied residential property. The term "residential property" includes real property improved by 1-to-4 single family dwelling units and "owner-occupied" includes any residential property where at least one of the single family dwelling units is occupied by an individual who has an ownership interest in the property and who uses the dwelling for that individual's principal residence. House Bill 274 also provides that if a foreclosure action is brought under a deed of trust or mortgage secured by owner-occupied residential property, no civil action for any deficiency balance may be brought and recovery of such a deficiency must be pursued as a part of the foreclosure proceeding (see description above). The Act states that it applies prospectively to any cause of action that arises on or after July 1, 2014. However, it further provides that any action to collect the unpaid balance due on one of the affected sealed instruments that arises before July 1, 2014 must be filed within 12 years after the date the cause of action accrues or before July 1, 2017, whichever is earlier. This effectively imposes the shorter 3-year statute of limitations for civil actions to collect debt owed on a deed of trust, mortgage, or promissory note that secures or is secured by owner-occupied residential property.
Prohibition against Acquisition of Mortgages through Condemnation
SB 850 (Chapter 561) (effective June 1, 2014)
Several cities across the country have considered using eminent domain powers to acquire mortgage loans. The concept is that through purchase of mortgage loans, the jurisdiction will help homeowners reduce their debt and will assist the jurisdiction by reducing the risks of foreclosure, blight, and falling property values. Because the legal authority for, and financial consequences of, the acquisition of mortgage loans through condemnation is unclear, the Maryland General Assembly passed Senate Bill 850 to prohibit the State or any of its instrumentalities or political subdivisions from acquiring mortgage loans by condemnation for a certain period of time (from June 1, 2014 to May 30, 2016) and to study the issue. The Maryland Department of Housing and Community Development is directed to conduct a study of methods, including the use of eminent domain by local governments, of restoring equity for underwater homeowners whose mortgage loans are held as private label securities. The results of the study are due to the General Assembly on or before November 1, 2015.
Changes to Pre-Need Contracts and Accounts
SB 415 (Chapter 497) (effective July 1, 2014)
Pre-need contracts allow consumers to purchase funeral goods and services in advance of need at market prices prevailing at the time of contracting. Senate Bill 415 and House Bill 593 require that new disclosures be included in a mortician's or funeral director's pre-need contract that clearly state, among other terms, "not all charges that may be required to be paid at the time of need are listed in this contract" and informs a buyer whether the contract is a "guaranteed contract," a "guaranteed in part contract," or a "nonguaranteed contract." Important for financial institutions, Senate Bill 415 also addresses the subject of deposit accounts into which pre-need contract payments must be deposited. It clarifies that a pre-need escrow or trust account is not an asset of the individual licensee or the licensed funeral establishment. It also specifies how such an account must be titled. The account must be established using the name, address, and social security number of the buyer and must be held in trust for the licensed funeral establishment.
Homestead Tax Credit – Eligibility and Definition of Legal Interest
SB 572/HB 227 (Chapters 526/527) (effective June 1, 2014)
The Homestead Property Tax Credit Program provides tax credits against State, county, and municipal real property taxes for owner-occupied residential properties resulting from certain increases in annual assessments. Senate Bill 572 and House Bill 227 extend the Homestead Property Tax Credit to individuals having an interest in a dwelling as a settlor, grantor, or beneficiary of a trust if the settlor, grantor, or beneficiary of the trust does not pay rent or other remuneration to reside in the dwelling and legal title to the dwelling is held in the name of the trust or in the names of the trustees for the trust. An application requesting credit must be made by these settlors, grantors, and beneficiaries of trusts to obtain the credit.