Maryland Legal Alert for Financial Services

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Maryland Legal Alert November 2014

In this issue:

GARAGEMAN VIOLATES MARYLAND'S DEBT COLLECTION LAW
NEW CFPB RULE ALLOWS POSTING OF ANNUAL PRIVACY NOTICESTRUTH-IN-LENDING RESCISSION NOT POSSIBLE BEFORE CONSUMMATION
TERMINATION STATEMENT CAUSES LOSS OF LIEN, EVEN IF ERRONEOUS

GARAGEMAN VIOLATES MARYLAND'S DEBT COLLECTION LAW

A consumer brought suit against an automobile repair shop and a lien and recovery company alleging, among other things, that the defendants violated the Maryland Consumer Debt Collection Act ("MCDCA"). After having his vehicle repaired at the defendant's shop and several ill-fated attempts to pay a repair bill in the amount of $6,330.37, the consumer received a Lien Notice in the amount of $7,630.73. The additional amount included processing fees of $1,000 and storage fees of $300. The Circuit Court ruled, as a matter of law, that the processing fee was not part of the statutorily permitted garageman's lien. The jury found that the defendants violated MCDCA and, thereby, the Maryland Consumer Protection Act and awarded compensatory damages plus attorney fees.

This decision was upheld on appeal. The Maryland Court of Special Appeals held that under Maryland law a garageman's motor vehicle lien is based solely on charges incurred for repairing or rebuilding, storage, or other parts or accessories. Moreover, a garageman's lien does not encompass "cost of process" fees, i.e., the costs to auction a vehicle or institute judicial proceedings, and such fees should not be included in the amount the customer must pay to redeem the vehicle. Because the appellants in the case did not have a right to claim processing fees as part of the statutory lien, the Court affirmed the jury decision that the mechanic violated MCDCA, which provides that a collector in collecting or attempting to collect a debt, may not "[c]laim, attempt, or threaten to enforce a right with knowledge that the right does not exist." A violation of the MCDCA is an unfair or deceptive practice under Maryland's Consumer Protection Act. Please click here to view the decision. If you would like more information concerning this case or have questions concerning the Maryland Consumer Debt Collection Act, please contact Margie Corwin.

NEW CFPB RULE ALLOWS POSTING OF ANNUAL PRIVACY NOTICES

The Consumer Financial Protection Bureau ("CFPB") recently adopted a final rule permitting certain institutions to post their annual Gramm-Leach-Bliley Act ("GLBA") privacy notices on their websites. The new rule does not apply in all situations and does not cover securities and futures-related companies and motor vehicle dealers regulated by the Federal Trade Commission.

The new rule allows website posting of a covered institution's privacy policy only if the institution: (a) does not share non-public customer information with non-affiliated third parties triggering opt-out rights; (b) does not share non-public customer information with affiliates triggering opt-out rights (or has given separate FCRA affiliate-sharing opt-out notices); (c) had no change in its privacy policy (since delivery of its most recent privacy notice) other than to eliminate categories of information disclosed or third parties to whom it discloses; and (d) uses a privacy policy that follows the model GLBA form.

If a covered institution meets the above requirements, it may post privacy notices on their websites by providing a clear and conspicuous annual notice containing the following: (i) a statement that the institution's privacy policy is available on the institution's website; (ii) the website address where the privacy policy can be found (the privacy policy must be the only content at the specified website address and no log-in process can be required to access the privacy policy); (iii) a telephone number that may be used for customers to request delivery of the privacy policy by mail; and (iv) a statement that the institution's privacy policy has not changed (since delivery of its most recent privacy notice). The notice may be included on an account statement, coupon book, or other notice or disclosure permitted/required under applicable law. If a customer requests a copy of an institution's privacy policy by mail, it must be mailed within 10 days of request.

The new rule took effect on October 28, 2014 and can be found here: http://www.gpo.gov/fdsys/pkg/FR-2014-10-28/pdf/2014-25299.pdf

Please contact Christopher Rahl if you have questions about the new rule or any other GLBA privacy notice requirements.

TRUTH-IN-LENDING RESCISSION NOT POSSIBLE BEFORE CONSUMMATION

On October 23, 2014, the Maryland Court of Appeals reversed a Court of Special Appeals decision that would have let a consumer rescind a credit transaction by exercising Truth-in-Lending Act ("TILA") rescission rights before consummation of the transaction. The facts upon which the case was decided are "quite murky" but suffice it to say, the borrower submitted a rescission notice before the date on the note and deed of trust he purportedly rescinded.

Under TILA, with some exceptions, if a consumer credit transaction will be secured by a consumer's principal dwelling, the consumer has until midnight of the third business day following consummation of the transaction to rescind. The Court determined that for purposes of TILA, rescission means to cancel or to undo. Regulation Z, TILA's implementing regulation, defines "consummation" as "the time that a consumer becomes contractually obligated on a credit transaction." In the Court's view, "'consummation of the transaction' refers to closing, or, the moment when the note and deed of trust or mortgage are signed." The Court concluded that there must be a consumer credit transaction in being before the consumer can invoke a right to rescind under TILA. The consumer cannot rescind what has not yet occurred.

Accordingly, the Court held that the borrower's window for rescission would have opened when the borrower signed the loan documents and there was no TILA right to rescind the transaction before that time. To view the decision, please click here. If you would like more information about this case or have questions concerning TILA's right of rescission, please contact Marjorie Corwin.

TERMINATION STATEMENT CAUSES LOSS OF LIEN, EVEN IF ERRONEOUS

On October 17, 2014 the Delaware Supreme Court, in response to a question certified to it by the United States Court of Appeals for the Second Circuit, held that under Delaware Uniform Commercial Code § 9-513, a secured creditor lost its lien in collateral when it authorized the filing of a termination statement in the mistaken belief that the lien being terminated applied to a different loan. Prior to the borrower's bankruptcy filing one of its lenders authorized the lender's counsel to release a security interest in collateral that it and its counsel, as well as the borrower, erroneously believed secured only a $300 million obligation that the borrower decided to pay off. The borrower then filed for bankruptcy and the lender discovered that the termination statement it authorized covered collateral securing a $1.5 billion loan. The borrower's creditors' committee moved to have the bankruptcy court declare the $1.5 billion loan to be unsecured. The bankruptcy court ruled in favor of the lender and the decision was appealed to the Second Circuit. The Second Circuit certified to the Delaware Supreme Court the question of whether the lender's review and knowing approval of the UCC termination statement at the time it was filed was sufficient to extinguish its security interest under Delaware law.

The Delaware Supreme Court held that under Delaware UCC § 9-513 the lender's review and knowing approval of the filing of the termination statement was sufficient to extinguish the security interest even though it was undisputed that the lender had acted in error. The court applied § 9-513 literally. Section 9-513(d) states that "[e]xcept as otherwise provided in § 9-510, upon the filing of a termination statement with the filing office, the financing statement to which the termination statement relates ceases to be effective." In its opinion the Court stated that "[i]t is fair for sophisticated transacting parties to bear the burden of ensuring that a termination statement is accurate when filed. It would be strange and inefficient for the UCC to make the effectiveness of a termination statement depend on whether the secured party subjectively understood the terms of its own filing and the effect that the filing would have on the security interests the filing's own words addresses."

Many UCC filings are made in Delaware which is the domicile of numerous business entities. Maryland's version of UCC § 9-513 is identical to the Delaware version. As a result of the Delaware Supreme Court's decision, a lender must be especially careful that a termination statement it authorizes to be filed does not release a lien in collateral securing another loan. If a lender discovers that it unintentionally released a lien, it should immediately file a new UCC filing statement. Please click here to view the decision. If you have any questions regarding proper procedures for releasing liens or would like more information about this case, please contact Larry Coppel.