Maryland Legal Alert for Financial Services

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Maryland Legal Alert - March 2020

IN THIS ISSUE:

PASSIVE TRUSTEE DOES NOT HAVE LIABILITY FOR LEAD PAINT POISONING

NEW MILITARY LENDING ACT GUIDANCE

REGULATORS ISSUE GUIDANCE ON HEMP BANKING

Passive Trustee Does Not Have Liability for Lead Paint Poisoning

In a recent decision, the Maryland Court of Special Appeals (CSA) held that a passive trustee of a securitization trust did not have liability for lead paint poisoning.

In this case, a bank that was appointed trustee of a securitization trust that owned a Baltimore City house acquired through foreclosure was sued in its individual capacity by the house’s former occupants for negligence as a result of lead paint poisoning. Under the terms of the trust, the trustee was given only passive duties, such as distributing cash to certificate holders and relaying information from the loan servicer. This compares with managerial duties, which were the responsibility of the servicer.

The Circuit Court for Baltimore City granted the bank’s motion for summary judgment on the basis that if the bank was to be sued, it should have been sued in its capacity as trustee, not in its individual capacity. On appeal, the CSA affirmed the circuit court’s decision.

The CSA first considered whether the trustee’s status as an “owner” under the Baltimore City code imposed personal liability on it. An owner of a Baltimore City property is responsible for compliance with all provisions of the code, including lead paint abatement. The definition of “owner” is broad and includes anyone in control of the record owner of the property.

In ruling that the trustee did not have personal liability, the CSA distinguished a 2010 decision of the Court of Appeals, Allen v. Dackman, 413 Md. 132 (2010). In that case, the Court of Appeals imposed personal liability on an individual member of a limited liability company that owned subject property for negligence arising from lead paint poisoning, because he controlled the company and no one else was responsible for management of the company or its property. Although the CSA recognized that a trustee of a trust could have personal liability in an appropriate case under trust law and the Baltimore City code for committing a tort, the trustee in this case did not have personal liability, because the evidence showed that its involvement with the property was only a passive one.

Practice Pointer: Lenders that acquire property in Baltimore City must be careful so as not to incur liability for negligence arising from the presence of lead paint in the property. While the CSA’s decision should provide some comfort to a trustee of a trust that merely owns the property, the trustee who is actively managing the property is not immune from personal liability. A state court receiver that manages a lead paint property in Baltimore City should have the same concern about personal liability although the new Maryland Commercial Receivership Act provides some relief. Under Section 24-702 of the act, a receiver may not be sued in its personal capacity unless the receivership court first approves the suit.

Please contact Lawrence D. Coppel for further information concerning this topic.

Contact Lawrence D. Coppel | 410-576-4238

New Military Lending Act Guidance

On February 28, 2020, the U.S. Department of Defense (DOD) released an updated interpretive ruling concerning the federal Military Lending Act (MLA).

The MLA generally imposes a 36% military annual percentage rate limit, requires specified disclosures and imposes other consumer protections for “consumer credit” extended to service members and their families.

The DOD previously issued MLA interpretive guidance in the form of Q&As in 2016 and 2017. A Q&A released in 2017 involved credit that is extended for the purpose of purchasing a “motor vehicle or personal property” where the creditor simultaneously extends credit in an amount greater than the purchase price of the collateral. The 2017 Q&A (#2) indicated that if a creditor financed certain ancillary products (e.g., a GAP Waiver) in connection with the purchase of a motor vehicle, that loan would not be exempt from MLA coverage. The most recent interpretive ruling withdraws previous Q&A #2 and reverts to the DOD’s 2016 Q&A #2. The 2016 version of Q&A #2 only addresses cash-out loans involving personal property without a specific reference to motor vehicles. This updated guidance provides support that purchase money vehicle loans that also finance the costs of ancillary products should be exempt from MLA coverage; however, the DOD’s release notes that the department is still studying the issue, so future changes are possible.

The updated guidance also provides a new Q&A that indicates that a dependent of a service member who does not have a Social Security number can be screened in the DOD service member database using an individual taxpayer identification number.

The updated guidance is effective immediately.

Please contact Christopher Rahl with any questions concerning this topic.

Contact Christopher Rahl | 410-576-4222

Regulators Issue Guidance on Hemp Banking

It is no secret that financial institutions face serious limitations in their dealings with cannabis companies or companies that receive profits from cannabis businesses, such as commercial landlords. Indeed, so long as cannabis remains a controlled substance under federal law, financial institutions are severely limited in their ability to provide basic banking products to cannabis-related businesses despite growing legalization at the state level.

Previously, hemp producers faced the same struggles. The 2018 Farm Bill, however, legalized hemp production under federal law. Despite this change, many financial institutions remain reluctant to work with hemp producers and sellers, given legal hemp’s close biological relationship to illegal cannabis and the narrow distinction between the two substances based on the concentration of the psychoactive THC substance. Moreover, the U.S. Department of Agriculture (USDA) did not issue its interim final rule establishing the regulatory framework for legal hemp production until October 31, 2019.

Recently, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Financial Crimes Enforcement Network and the Office of the Comptroller of the Currency, in consultation with the Conference of State Bank Supervisors, issued joint guidance to clarify that banking hemp-related businesses is now legal under federal law.

Under the USDA interim final rule, hemp may be grown with a valid USDA license or under a USDA-approved state plan. The joint guidance clarifies that because hemp is now legal, banks are not required to file a Suspicious Activity Report (SAR) on customers solely because they are engaged in legal hemp production. The National Credit Union Administration had provided similar guidance prior to the USDA’s issuance of its interim final rule.

Practice Pointer: The regulatory guidance should give comfort to financial institutions that banking hemp producers should not result in the same reporting and compliance burden that an institution would need to assume in order to bank a cannabis-related business in a state where cannabis is legal. Financial institutions should still investigate whether a hemp producer is complying with a USDA license or under a USDA-approved state plan and file SARs as they normally would if they detect suspicious activity. with any questions concerning this topic.

Please contact Bryan Mull with any questions concerning this topic.

Contact Bryan Mull | 410-576-4227