Maryland Legal Alert for Financial Services

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New Federal Limits on Single-Family Home Purchases: What Financial Institutions Should Know

FDIC Proposes Modernized Framework for Bank Merger Reviews

New Federal Limits on Single-Family Home Purchases: What Financial Institutions Should Know

The 21st Century ROAD to Housing Act (the “ROAD Act”) is a federal law that will generally prohibit large institutional investors from purchasing, or entering into contracts to purchase, single-family homes beginning January 7, 2027. Before the law takes effect, the Department of the Treasury has issued a proposed rule (the “Proposal”) to clarify which investors and transactions are covered, how the exceptions apply, and how the prohibition will be enforced.

Who Is Covered?

The ROAD Act may apply to banks, credit unions, lenders, servicers, and affiliated investment entities that acquire homes or exercise control over entities holding significant single-family-home portfolios. Under the ROAD Act, a for-profit entity generally will be restricted from investing in single-family homes if it (1) engages in the business of investing in, owning, renting, managing, or holding such homes; and (2) directly or indirectly has investment control over at least 350 homes.

Under the Proposal, an entity is “engaged in the business of investing” when it participates in any of the covered activities described above to generate investment gains, rental income, management fees, or another form of income or financial gain. Coverage under the ROAD Act turns on more than just title ownership of a property. It may also depend on equity interests, board representation, and contractual rights to consent to, approve, or veto decisions involving the acquisition, sale, leasing, renovation, or management of homes.

Accordingly, entities should consider not only the number of homes they own, but also the nature and extent of their direct and indirect control over single-family homes. 

Key Exceptions for Financial Institutions

The Proposal preserves important exceptions intended to permit ordinary lending and servicing activities. These exceptions generally apply when an activity (i) is temporary and incidental to, and reasonably necessary for, another bona fide business, and (ii) is not part of a regular or continuing investment or portfolio-management strategy. Other exceptions include:

• Foreclosure and loss mitigation. Qualifying acquisitions made after default may be permitted if they occur through foreclosure, deeds in lieu of foreclosure, enforcement of security interests, or operation of law, provided that the acquisitions are undertaken to mitigate losses or satisfy servicing or investor obligations. To qualify for this exception, the institution may not use these activities as part of a long-term investment strategy.
   
• Debts previously contracted. An institution may acquire a home in satisfaction of a good-faith debt if it has a contractual right to repossess the property. The exception may also apply to certain indirect acquisitions resulting from a qualifying debt-satisfaction event.
   
• Temporary real estate owned holdings. Homes held temporarily and incidentally to another bona fide business may fall outside the definition of a covered business activity. Relevant considerations include the reason for the acquisition, the anticipated and actual holding period, rental income, disposition practices, and whether the properties are managed as part of an ongoing portfolio.    

Whether an institution qualifies for one of these exceptions will depend on the specific facts and circumstances, including the institution’s purpose, holding periods, disposition practices, income, and internal policies. For example, converting real estate owned properties into long-term rental inventory could undermine the institution’s ability to rely on an exception.

Lending and Investment-Control Risks

The Proposal creates two principal risks for financial institutions. 

First, a financial institution that does not acquire single-family homes itself could nonetheless be treated as exercising investment control over homes held by a borrower, fund, joint venture, or other entity. For instance, rights that allow an institution to direct, approve, restrict, or veto specific property-level decisions concerning the acquisition, sale, leasing, renovation, or management of particular homes may constitute investment control. By contrast, customary payment, information, audit, inspection, and default rights generally would not, by themselves, confer investment control. 

Second, the ROAD Act’s purchase restrictions could affect a borrower’s ability to execute its business plan, acquire eligible collateral, and repay financing that depends on continued purchases of existing single-family homes. If the ROAD Act limits a borrower’s ability to make planned acquisitions, the borrower may be unable to deploy loan proceeds, satisfy borrowing-base or collateral requirements, generate anticipated revenue, or perform its repayment obligations as expected. 

Financial institutions should evaluate both whether their governance, consent, and contractual rights could create investment control, as well as whether the ROAD Act’s purchase restrictions could impair a borrower’s ability to acquire collateral, execute its business plan, and repay its financing.

The Department of the Treasury is using a phased rulemaking process and has not finalized the Proposal. Therefore, institutions should monitor the final rule and any subsequent requirements governing compliance, reporting, recordkeeping, and enforcement.

Even as the regulatory framework continues to develop, the potential exposure is significant. Violations may result in civil penalties equal to the greater of (1) $1 million per violation, or (2) three times the property’s purchase price. Accordingly, institutions should begin assessing their ownership interests, control rights, acquisition practices, and lending relationships well before the ROAD Act takes effect.

Early preparation will position financial institutions to identify affected activities, preserve applicable exceptions, manage lending and investment-control risks, and adapt their compliance programs as the ROAD Act’s final regulatory framework takes shape.

Practice Pointers

Financial institutions should:

• Identify direct and indirect interests in single-family homes across the institution and its affiliates;
• Distinguish real estate owned properties acquired through foreclosure or servicing activities from rental or investment portfolios;
• Review governance rights, consent and veto rights, side letters, and financing covenants for potential investment-control implications;
• Document the underlying debt, default, foreclosure, servicing, and planned disposition of each acquisition;
• Evaluate the potential impact on borrowers whose acquisition strategies may be restricted;
• Review contracts and transaction pipelines that may remain in effect on or after January 7, 2027.

For more information about this topic, please contact Christopher R. Rahl, Peri L. Schuster and Christopher Azuoma.

Contact Christopher R. Rahl | 410-576-4222

Contact Peri L. Schuster | 410-576-4005

Contact Chistopher Azuoma | 410-576-4053

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FDIC Proposes Modernized Framework for Bank Merger Reviews

The Federal Deposit Insurance Corporation (FDIC) has proposed a substantial overhaul of its Bank Merger Act review framework (the “Proposal”). If finalized, the Proposal would establish faster processing timelines under the bank merger framework, modernize the agency’s competitive effects analysis, and expand the financial stability safe harbor. The changes could improve certainty and predictability for applicants and reduce regulatory burdens. 

The Proposal would establish a new subcategory of merger transactions, called de minimis merger transactions, with a five-business-day processing period for qualifying transactions. The Proposal also includes a 30-day expedited process for qualifying corporate reorganizations and a 45-day process for certain mergers involving eligible depository institutions.

The Proposal also addresses “Substantially Complete Determinations,” which establish when an applicant submits an incomplete merger filing. The FDIC would generally have 21 days after the filing to notify an applicant that its submission is incomplete. Absent such notice, the application would be deemed substantially complete, triggering the applicable processing period. 

Further, the Proposal would revise the FDIC’s competitive effects analysis to include full thrift weighting, credit union inclusion, and the reallocation of centrally booked deposits. The Herfindahl-Hirschman Index (HHI) is an economic and statistical tool used to measure market concentration. Under the Proposal, the FDIC’s HHI calculation would account for deposits held by banks and thrift institutions, centrally booked deposits, and credit union shares.

These revisions could reduce measured concentration in markets where credit unions or institutions with substantial centrally booked deposits compete with traditional banks. As a result, some transactions that present concentration concerns under the existing methodology could fall within a regulatory safe harbor under the proposed approach.

The Proposal would establish a four-prong financial stability safe harbor covering certain resulting institutions below specified risk-based categories, acquisitions of insured depository institutions with less than $20 billion in total consolidated assets, qualifying corporate reorganizations, and de minimis merger transactions. The proposed asset threshold is double the threshold historically applied by the federal banking agencies.

In addition, the Proposal would provide clearer boundaries for transactions structured as asset acquisitions. An insured depository institution’s acquisition of at least 80% of another institution’s assets during a 12-month period would be treated as a “merger in substance” requiring a full application.

The FDIC’s Proposal represents a more structured approach to bank merger review. Faster processing categories, clearer completeness deadlines, updated competition metrics, and a broader safe harbor could materially improve predictability for many transactions. However, the Proposal would not bind the Department of Justice, Federal Reserve Board, or Office of the Comptroller of the Currency, leaving open the possibility of parallel reviews that produce different competitive assessments.

The Proposal remains subject to public comment.
 

For more information about this topic, please contact Christopher R. Rahl, Peri L. Schuster.

Contact Christopher R. Rahl | 410-576-4222

Contact Peri L. Schuster | 410-576-4005

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