Maryland Legal Alert for Financial Services

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Maryland Legal Alert - November 2020

IN THIS ISSUE:

EXECUTIVE ORDER ADDRESSES REPOSSESSIONS AND RESIDENTIAL FORECLOSURES

FOURTH CIRCUIT ISSUES RESPA RULING

MORTGAGE SERVICERS AND ASSIGNEES CANNOT CHARGE VISUAL INSPECTION FEES

OCC ISSUES GUIDANCE FOR MAINTAINING STABLECOIN RESERVES

Executive Order Addresses Repossessions and Residential Foreclosures

On October 16, 2020, Governor Lawrence Hogan, Jr., issued an executive order, amending and restating his April 3, 2020, executive order. In his April order, he prohibited the following:

  • Self-help repossessions for trucks, automobiles and chattel homes;
  • Initiation of new residential foreclosures; and
  • Entry of eviction judgments where tenants established a coronavirus-related substantial loss of income.

However, in the new order, the governor lifted the ban on truck and automobile repossessions.

The new order also significantly alters the current state of residential foreclosures. The order directs the Maryland Department of Labor’s Commissioner of Financial Regulation (Commissioner) to reopen the notice of intent to foreclose online registry, which will enable the initiation of new residential foreclosures. However, the order also imposes a new notice requirement: Lenders must provide borrowers with notice of certain forbearance rights before initiating a foreclosure.

If the subject loan is covered by the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the lender must notify the borrower of its forbearance rights under the CARES Act at least 30 days before sending a notice of intent to foreclose.

If the loan is not covered by the CARES Act, the lender must notify the borrower that it has the right to request a similar forbearance as provided under the CARES Act (i.e., up to a 180-day forbearance period with the ability to extend for another 180-day period, regardless of delinquency status).

Lenders may not accrue fees, penalties or interest while a loan is under forbearance beyond those amounts scheduled or calculated as if the borrower had stayed contractually current. Lenders must also submit a certification to the Commissioner of their compliance with the new notice requirement when they submit a notice of foreclosure with the foreclosed property registry.

Practice Point: The order has several ambiguities, including:

  • Whether the order only applies to new foreclosures or those already in progress,
  • Whether regular interest accrues during a forbearance period, and
  • Whether the order applies to subordinate financing like home equity lines of credit (HELOCs).

We are continuing to monitor the order and any guidance from the Governor’s Office and the Commissioner.

Please contact Bryan M. Mull and Christopher R. Rahl with any questions concerning this topic.

For additional information on the impact of the coronavirus, visit our information hub for a list of up-to-date content.

Contact Bryan M. Mull | 410-576-4227

Contact Christopher R. Rahl | 410-576-4222

Fourth Circuit Issues RESPA Ruling

On October 2, 2020, the U.S. Court of Appeals for the Fourth Circuit held that a servicer had an obligation to pay property taxes that were due on its watch, but for which the related escrow deposit had been made on a prior institution’s watch.

The federally related mortgage loan involved an escrow account for the borrower’s property taxes and homeowner’s insurance. The loan was made in 2005 and the borrower paid all required monthly payments and made all required escrow account deposits. The original lender paid the borrower’s property taxes and insurance without incident. In 2012, the borrower refinanced the loan with the same lender and the new loan included a similar escrow account. Five years after the borrower refinanced the loan, the refinanced loan was sold by the original lender to another financial institution. The new financial institution took over servicing of the loan on October 31, 2017, and the original lender transferred the borrower’s escrow amounts to the new financial institution.

Unfortunately, the new financial institution failed to pay property taxes that were due on November 15, 2017. The property taxes were eventually paid, but not in calendar year 2017, causing the borrower to miss a tax discount and an income tax deduction for calendar year 2017.

The borrower filed suit, alleging breaches of the federal Real Estate Settlement Procedures Act (RESPA) and the terms of the borrower’s loan agreement. The new financial institution argued that it was not the “servicer” responsible for payment of the taxes at issue at the time of the payment under RESPA and the servicer succeeded in having the suit dismissed.

On appeal, the Fourth Circuit sided with the borrower and reversed the dismissal. The new financial institution argued that under RESPA, it only had a duty to pay taxes and insurance for escrowed amounts it received from the borrower — not from a predecessor lender/servicer. The Fourth Circuit disagreed and held that the new financial institution was the “servicer” under RESPA. And, as servicer, it had a duty to pay taxes and insurance that became due while it was the servicer, whether the escrowed funds for such payments came from a predecessor lender/servicer or the borrower.

Practice Point: This case is a reminder for institutions in Maryland that acquire mortgage portfolios or that service for others to be mindful of tax and insurance deadlines.

Please contact Christopher R. Rahl with any questions about this or other RESPA topics.

Contact Christopher R. Rahl | 410-576-4222

Mortgage Servicers and Assignees Cannot Charge Visual Inspection Fees

Maryland’s interest and usury law (specifically, Section 12-121 of the Commercial Law article) prohibits a “lender” from imposing a fee for a visual inspection of real property. The statute defines lender as a person that “makes” loans.

In a recent decision, the Court of Special Appeals (CSA) held that mortgage servicers and assignees fall within the definition of lenders under that statute and, thus, are subject to the prohibition against imposing a fee for visual property inspections.

In this case, a borrower obtained a mortgage loan that later was assigned to the Federal National Mortgage Association (Fannie Mae). The borrower fell behind on her mortgage payments and entered into a trial loan modification. During this process, the borrower learned that the servicer had charged her for 12 visual property inspections that it ordered after the borrower defaulted on her loan.

The borrower sued Fannie Mae and the servicer, raising several claims that all stemmed from the alleged violation of the inspection fee prohibition. The defendants moved for dismissal, arguing that the inspection fee prohibition did not apply to them since they were not lenders, that is, neither Fannie Mae nor the servicer originated the loan. The trial court granted the motion, reasoning that the plain text of the statute limited the fee prohibition to a person that makes a loan, not an assignee of the original lender or the loan servicer.

On appeal, the CSA reversed, reasoning that the legislative history and larger statutory framework suggested that the term lender was not limited to the lender at the time of origination. The court further reasoned that such a narrow reading of the statute would lead to an “absurd” result of enabling assignees and servicers to charge fees that the original lender could not.

Practice Point: Notably, this decision runs counter to several recent decisions in federal court that aligned with the trial court’s narrow application of the inspection fee prohibition. Servicers should review their processes to ensure that they are not violating the inspection fee prohibition.

Please contact Bryan M. Mull with any questions concerning this topic.

Contact Bryan M. Mull | 410-576-4227

OCC Issues Guidance for Maintaining Stablecoin Reserves

The U.S. Treasury Department’s Office of the Comptroller of the Currency (OCC) recently issued guidance for national banks and federal savings associations clarifying their authority to hold deposits as reserves to back certain types of stablecoins.

A stablecoin (popularized by Facebook’s stalled Libra project) is a type of cryptocurrency intended to maintain a stable value as opposed to cryptocurrencies that fluctuate in value, such as Bitcoin. Proponents contend that stablecoins could, as a medium of exchange, help facilitate and streamline aspects of e-commerce. Essentially, stablecoins could enable direct exchange by cutting out intermediaries, such as credit card processors. According to the OCC, some stablecoin issuers are touting that their stablecoins are backed by reserve funds on deposit with U.S. banks as a sign of the stablecoins’ reliability.

Though stablecoins may be backed by any asset, including other cryptocurrency, the OCC’s guidance only applies to stablecoins backed on a 1:1 basis by fiat currency. The OCC guidance is also limited to stablecoins stored in a hosted wallet, such that the owner does not personally maintain the digital keys to the currency.

The OCC recognized that maintaining deposits is a core banking function, and national banks and federal savings associations may maintain deposits for stablecoin issuers as reserve funds backing stablecoins. The OCC cautioned that a bank must verify on a daily basis that the stablecoin reserve account balances equal or exceed the number of such issuer’s outstanding stablecoins. The OCC further cautioned that banks’ acceptable stablecoin reserve funds should incorporate their normal compliance activities to this function and appropriate due diligence as to its stablecoin issuer customers, especially with respect to any liquidity risk.

Practice Point: This guidance letter falls on the heels of the OCC’s recent guidance concerning the provision of custodial services related to cryptocurrency. The OCC’s concerted effort to address these issues is yet another sign that cryptocurrency products are going mainstream. Traditional financial institutions should consider evaluating ways that they might adapt their services to this growing market.

Please contact Bryan M. Mull with any questions concerning this topic.

Contact Bryan M. Mull | 410-576-4227