Maryland Legal Alert for Financial Services

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Maryland Legal Alert September 2014

In this issue:

DO YOU WANT TO REVISE MARYLAND MORTGAGE LENDING REGULATIONS? JOIN US ON SEPTEMBER 30
CFPB "CHOKE POINT" ACTION INVOLVING PAYMENT PROCESSOR IMPACTS DEBT RELIEF PROVIDERS
MARYLAND BANKRUPTCY COURT DISMISSES EQUITABLE SUBORDINATION CLAIM AGAINST CONSTRUCTION LENDER
NEW REAL ESTATE COMMISSION CODE OF ETHICS PROVISION
PROPOSED REGULATIONS REMIND MINI-CORRESPONDENTS TO THINK ABOUT CURRENT HMDA REQUIREMENTS
RELATING TO REAL ESTATE

DO YOU WANT TO REVISE MARYLAND MORTGAGE LENDING REGULATIONS? JOIN US ON SEPTEMBER 30

Are there provisions in Maryland's mortgage lending, brokering, and servicing regulations that confuse you? Do you think some of the regulations are outdated? Would you like to propose changes to make Maryland's regulations more clear? Would your business benefit from making Maryland's regulations more consistent with federal and other states' laws? NOW IS YOUR CHANCE. The Office of the Commissioner of Financial Regulation is considering whether its mortgage lending, brokering, and servicing regulations might be improved. This gives us all an exciting opportunity to consider and propose changes. Please join the inaugural meeting of people interested in improving Maryland's mortgage lending regulations. The in-person meeting will begin at 8:30am EST in our Baltimore office. A conference line for call-in will be available. Please contact Margie Corwin if you are interest in participating in this effort or if you have any questions or comments.

CFPB "CHOKE POINT" ACTION INVOLVING PAYMENT PROCESSOR IMPACTS DEBT RELIEF PROVIDERS

On August 25, 2014, the CFPB announced an enforcement action against a large payment processor who provides account maintenance and payment services to debt relief providers ("DRPs"). The CFPB alleged that the processor had provided substantial assistance and support to DRPs that were charging advance fees in violation of the Telemarketing Sales Rule ("TSR"). The TSR generally prohibits DRPs from charging any fee for debt relief services until: (a) the DRP has renegotiated, settled, reduced, or otherwise altered the terms of at least one debt under a written settlement agreement; and (b) the consumer has made at least one payment under the settlement agreement. The CFPB alleged that many of the processor's DRP clients were improperly claiming exemptions from coverage under the TSR and were collecting fees (with the processor's assistance) before providing any debt relief services.

The CFPB and the processor entered into a consent order that requires the processor to: (a) pay more than $6 million in consumer relief and a $1 million civil penalty; and (b) cease processing for any DRPs collecting advance fees in violation of the TSR. The consent order requires the processor to do extensive due diligence on its current and future DRP customers, including: gathering and reviewing information concerning the DRP's business model, how it collects fees, whether it claims exemption from the TSR, complaint data, and ACH return rates. The consent order also requires the processor to do periodic monitoring of its DRP clients, file reports with the CFPB, and implement a comprehensive plan to facilitate the required due diligence, monitoring, and reporting.

The action illustrates the CFPB's continued focus on the debt relief industry and those who provide critical servicing for DRPs. This is the second recent action against a payment processor in the debt relief industry and there have been more than ten CFPB actions against DRPs and mortgage relief firms within the last two years. Please contact Christopher Rahl for more information concerning this topic.

MARYLAND BANKRUPTCY COURT DISMISSES EQUITABLE SUBORDINATION CLAIM AGAINST CONSTRUCTION LENDER

On September 9, 2014, Judge Catliota of the Maryland Bankruptcy Court dismissed a construction contractor's claim that sought equitable subordination of the construction lender's $3.3 million first lien construction loan. The contractor's complaint alleged that the bank "controlled" the debtor and engaged in "egregious behavior" by inducing the contractor to continue work on a medical center while failing to inform the contractor of insufficient funds. During the course of construction, the loan amount was exhausted and the contractor was stuck with the unpaid costs.

The court found that the bank's behavior did not amount to inequitable conduct and, thus, did not establish the first element of a claim for equitable subordination. In its conclusion, the court noted that a lender can have too much control over a borrower's decisions, e.g., by exercising managerial control; but, in this case, the lender was merely exercising its rights under the loan documents. The loan documents granted the lender the right to approve material change orders and payments to the contractor, which are normal functions for any construction lender. Moreover, the bank's behavior did not shock the conscious of the court and the bank did not have a duty to inform the contractor of the debtor's loan position. Without an allegation that the bank made an affirmative misrepresentation to the contractor, the bank's failure to inform the contractor that loan proceeds were insufficient to pay all project costs was not egregious conduct.

The lesson of the decision is that a lender whose actions are part of the normal routine of administering a loan in accordance with its loan documents, and who does not affirmatively mislead another creditor, will not be found to have engaged in egregious conduct and have its claim subordinated to other creditors. Please contact Larry Coppel if you would like to discuss further.

NEW REAL ESTATE COMMISSION CODE OF ETHICS PROVISION

Effective August 18, 2014, the Maryland Real Estate Commission regulations require realtors who choose to recommend service providers to their customers to first verify that the State licenses of service providers, such as mortgage lenders or brokers, appraisers, home inspectors, home improvement contractors, plumbers, electricians, and HVAC contractors, are current. The realtor must also give the customer the electronic link to the licensing information as well as the date on which the realtor last verified the information. If you have any questions about this new requirement for realtors, please contact Margie Corwin.

PROPOSED REGULATIONS REMIND MINI-CORRESPONDENTS TO THINK ABOUT CURRENT HMDA REQUIREMENTS

On August 29, 2014, proposed HMDA regulations were published in the Federal Register. As explained by the CFPB, these revised regulations address changes required by Section 1094 of the Dodd-Frank Act. Comments are due by October 29. It seems logical that final HMDA regulations should become effective at the beginning of a calendar year and, thus, that the CFPB is hoping for a January 1, 2016 effective date. Reviewing the proposal brings to mind that the many mortgage brokers that have recently become mini-correspondents may need to comply with HMDA data collection and reporting for the first time beginning January 1, 2015. Very simply stated (it is more complicated), most non-depository lenders must collect and report HMDA data if the lender originated at least 100 home purchase loans (which includes purchase loans and the first refinance of a purchase loan) during the prior calendar year and those originations either constituted 10% or more of that lender's total loan origination volume or equaled at least $25 million. Please contact Margie Corwin if you want to discuss whether your business activities in 2014 will trigger HMDA coverage for 2015.

RELATING TO REAL ESTATE

Last month, our Real Estate Group published its most current issue of "Relating to Real Estate," which summarizes several recent important Maryland real estate cases. Of particular interest to financial service providers with loans secured by income producing property, this publication reports on a court order we obtained in a recent foreclosure case. In the order, the court granted the lender the right to collect rents from the tenants of a multi-family project and to take over the operation of the property prior to the foreclosure sale. We sought this order because there were benefits in this particular case to being deemed a mortgagee-in-possession as opposed to having the usual court appointed receiver collecting rents on behalf of the mortgagee. If you have questions about this case or other decisions discussed in the publication, please contact Ed Levin. If you would like to be added to the distribution list for Relating to Real Estate, please click here.