Alston & Bird Consumer Finance Blog

Mortgage Loans

Maryland Secondary Market Imperiled by Sweeping Regulatory Change Requiring Licensure for All Assignees of Mortgage Loans

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What Happened?

A development with far-reaching consequences for the secondary market, on January 10, 2025, the Maryland Office of Financial Regulation (“OFR”) issued guidance that requires mortgage trusts and their assignees to be licensed in Maryland. The OFR based its guidance on its interpretation of the case, Estate of Brown v. Ward, 261 Md. App 385 (2024). The case involved a home equity line of credit (“HELOC”) that was made subject to Maryland’s credit grantor provisions. The court would not consider existing Maryland case law that provides that a securitization trust with a national bank trustee is not subject to licensing because those cases did not involve the credit grantor provisions. The OFR took the opposite approach and reached the conclusion that all assignees, including passive trusts of residential mortgage loans are subject to licensing. OFR issued regulations to accompany the guidance, which are effective immediately, but enforcement will be delayed until April 10, 2025.

The OFR’s unduly expansive interpretation of Estate of Brown and its mandate that all assignees of residential mortgage loans be licensed under the Mortgage Lender Law (“MLL”) or Installment Loan Law (“ILL”) is a radical departure of how Maryland regulates secondary market assignees of residential mortgage loans. Prior to this change, the licensing requirements of both the ILL and the MLL applied exclusively to original creditors and primary market participants, such as brokers and servicers, not their assignees. Up to now, the OFR did not require secondary market purchasers of loans, trusts, and other securitization vehicles to obtain licenses in Maryland. However, the guidance would appear to require licensing for all subsequent assignees, including whole loan purchasers, trusts and other special purpose entities, absent an exemption. This licensing requirement will create a logistical nightmare for the secondary market, especially securitization trusts, and unless Estate of Brown is reversed by the Maryland Supreme Court and the OFR’s regulation and guidance is withdrawn, it could adversely impact the availability of credit to Maryland consumers. While the OFI has suspended enforcement of the regulations until April, the regulations apply to impacted entities as of January 10, 2025. Therefore, these entities should not foreclose on Maryland residential loans without first obtaining an MLL license.

The Maryland Appellate Court Decides Trusts and Other Assignees of Certain Loans Must Be Licensed

In Estate of Brown, a Delaware statutory trust acquired a HELOC on residential real property located in Maryland and sought to foreclose. The personal representative to the borrower’s estate raised several challenges to foreclosure, including that the trust was not properly licensed as the assignee of the HELOC. On appeal from dismissal of those challenges, the appellate court of Maryland reversed and held that the licensing requirements under the Credit Grantor Revolving Credit Provisions (“OPEC”) apply not only to original credit grantors but also to assignees of revolving credit plans. The OPEC subtitle provides that “[a] credit grantor making a loan or extension of credit under this subtitle is subject to [] licensing ….”

The underlying HELOC included an election stating that “[t]his loan is made under Subtitle 9, Credit Grantor Revolving Credit Provisions of Title 12 of the Commercial Law Article of the Annotated Code of Maryland.” The court held that persons, including the Delaware statutory trust, that acquire revolving credit plans made under OPEC are subject to the licensing requirements of that subtitle.

The Maryland appellate court reasoned that OPEC defines a “credit grantor” to include any person who acquires or obtains the assignment of a revolving credit plan made under OPEC. The Court opined that an assignee inherits the rights and obligations of the original lender, including the duty to be licensed.

Maryland Office of Financial Regulation (“OFR”) Seeks to Expand the Maryland Appellate Decision

Although Estate of Brown dealt solely with OPEC, there is also a companion statute for Credit Grantor Closed End Credit Provisions (“CLEC”) found at Md. Code, CL § 12-1001, et seq. Like OPEC, under CLEC, a license is required under ILL and/or MLL, unless exempt, for a credit grantor making a closed-end loan or extension of credit under CLEC. In both instances, the licensing requirement is only triggered if the loan is expressly made under OPEC or CLEC. In order for a loan to be subject to OPEC or CLEC, the lender ordinarily makes a written election to do so in the agreement, note, or other evidence of the extension of credit. Md. Code Ann., Com. Law §§ 12-913; 12-1013.

In industry guidance issued by OFR, noting the identical licensing obligations under the two statutes, OFR concluded that a license is required for an assignee of both an OPEC and a CLEC loan. However, OFR also took the extraordinary step of stating that a license is required for ANY assignee of a mortgage loan, even if no OPEC or CLEC election is made. OFR concluded as much despite the Estate of Brown case relying on the licensing requirement applicable to credit grantors, as that term is defined by OPEC and CLEC. The court in Estate of Brown expressly stated that it did not matter that MLL does not impose an independent licensing obligation on an assignee because the “licensing argument is founded entirely on the Credit Grantor Revolving Credit Provisions subtitle. Specifically, [the argument] relies on CL § 12-915 as the source of the licensing obligation.” While OPEC and CLEC define credit grantors to include assignees, the definition of lender for both ILL and MLL is limited to the person making a loan. For example, MLL only requires a license for a “mortgage lender” which is defined as any person who: (1) is a mortgage broker; (2) makes a mortgage loan to any person; or (3) is a mortgage servicer. Md. Code, FI § 11- 501(k)(1). Clearly, an assignee of a loan is not included in the definition of a mortgage lender.

The Guidance and Emergency Regulations

OFR states that persons that acquire or obtain assignments of any mortgage loan, including but not limited to mortgages made under OPEC or CLEC, are subject to licensing, absent an exemption under the ILL and MLL. However, an entity licensed under the MLL and engaged solely in mortgage lending business does not also need an ILL.

In addition to guidance, OFR promulgated emergency regulations applicable to MLL licensing. The regulations define “passive trusts” to include mortgage trusts that acquire, but do not originate, broker, or service, mortgage loans and allow a passive trust to designate the trustee, or a principal officer of the trustee if the trustee is not a natural person, as the passive trust’s qualifying individual. The regulations also allow a passive trust to satisfy the statutory net worth requirement by providing evidence of assets, such as securitized mortgage pools, that will be held within 90 days of licensure.

Why Does it Matter?

The guidance is troubling for several reasons. First, it is inconsistent with the law. Across the nation, secondary market participants recognize that a license is only required if the licensing statute specifically applies to assignees, but the OFR has upended this long held convention by boldly proclaiming that all assignees must carry the same licenses that are required of originators. As a result, based on regulations from OFR, it now appears that all assignees of mortgage loans must obtain a Mortgage Lender License, unless exempt.

Second, its rationale is not limited to mortgages. Although the guidance focuses on mortgage loans, and the regulations only address the MLL, the interpretation suggests that assignees of installment loans must also obtain an Installment Lender License. While the guidance suggests that a license under the ILL will be needed at least for an entity obtaining installment loans, unlike the MLL, there are no corresponding regulatory amendments signaling how a trust may comply with the licensing provisions of the ILL.

Third, it is not clear if an assignee of a mortgage loan could need another license. The OFR’s guidance indicates that an entity licensed under the MLL, and solely engaged in mortgage lending, does not need an ILL license. While it appears that OFR intends for an assignee of mortgage loans to only obtain an MLL license, “mortgage lending” is defined narrowly. A passive holder of mortgage loans would not be engaged in lending, brokering, or servicing as those terms are defined by the MLL. Accordingly, an assignee who is not making, brokering, or servicing mortgage loans is arguably not engaged in mortgage lending, leaving open the possibility that secondary market participants could need to obtain both licenses rather than just the MLL license.

Overall, the licensing process is onerous. Trusts will need to designate a principal officer who meets qualifications such as having three years of experience in mortgage lending. The officer will also be subject to a credit report check, a criminal background check (including fingerprinting), and must submit a resume. Additionally, trusts must obtain a surety bond, register as a foreign entity in Maryland, and provide a business volume statement for the past 12 months. These requirements may impose significant costs and administrative burdens, particularly if bank trustees must become involved. Additionally, licensees are subject to the substantive requirements set forth in the applicable law and regulations.

The OFR’s actions are part of a growing assertiveness by state and federal governments to regulate the secondary market and trusts in particular. For example, the CFPB has successfully asserted the power to investigate and bring enforcement actions directly against securitization vehicles and on October 1, 2024 settled a long standing action against National Collegiate Student Loan Trusts (“NCSL Trusts”), as well as the Pennsylvania Higher Education Assistance Agency (“PHEAA”), the primary student loan servicer for active student loans held by the NCSL Trusts, arising in connection with the NCSL Trusts’ and PHEAA’s alleged improper servicing practices.

What Do I Need to Do?

 Trusts and any entity that acquires Maryland loans should review their portfolios to determine if a license is required under the MLL and/or ILL. Notably, the licensing requirement is effective as of January 10, 2025, although enforcement is paused through April 10, 2025. During this period, entities should become familiar with what it means to be a licensee and gain familiarity with the mortgage lender application requirements that require, among other things, the appointment of a “qualifying individual” who has three years’ experience in mortgage lending.

Industry participants and trade groups should work together closely to advocate against these startling changes, provide comments to the OFR’s regulations, and provide additional pushback against this attempted regulatory overreach.

Alston & Bird’s Consumer Financial Services Team is actively engaged and monitoring these developments and is able to assist with any compliance concerns regarding these sweeping changes to Maryland law.

New York Passes New Removal Procedures for Officers, Directors, Trustees, and Partners of Any Entity Regulated by Department of Financial Services

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What Happened?

On December 21, 2024, New York Governor Kathy Hochul, signed into law, S7532, which repealed the existing section of the Banking Law addressing the removal of officers, directors, and trustees of banking organizations, bank holding companies and foreign banks (“covered individuals”), and enacted a new section providing a clearer process for removing such individuals and expanding the scope of the removal authority to apply to all entities regulated by the New York Department of Financial Services (“the Department”).

Repealed Section:

The former provisions regarding the removal of covered individuals were limited to banking organizations, bank holding companies, and foreign banks.

The Superintendent of the Department (“the Superintendent”) was authorized to bring an action to the Banking Board (“the Board”) to remove an officer, director, or trustee whenever it found that such individual:

  • violated any law or regulation of the Superintendent of financial services, or
  • “continued unauthorized or unsafe practices . . . after having been ordered or warned to discontinue such practices.”

Note that the Banking Board has not existed since the Department of Financial Services was created in 2011.

The Board would then serve notice of the action to the covered individual to appear before the Board to show why they should not be removed from office. A copy of this notice would be sent to each director or trustee of the banking organization and to each person in charge of and each officer of a branch of a foreign banking corporation.

If after a three-fifths vote by the Board members the Board found that the individual committed such violations, an order would be issued to remove the individual from office.

The removal became effective upon service of the order. The order and findings were not made public, and were only disclosed to the removed individual and the directors or trustees of the banking organization involved. Any such removed individual that participated in the management of such banking organization without permission from the Superintendent would be guilty of a misdemeanor.

Newly Enacted Section:

The new provision expands the removal authority of the Superintendent to apply to all entities regulated by the Department (“covered entities”), including: banks, trust companies, limited purpose trust companies, private banks, savings banks, safe deposit companies, savings and loan associations, credit unions, investment companies, bank holding companies, foreign banking corporations, licensed lenders, licensed cashers of checks, budget planners, mortgage bankers, mortgage loan servicers, mortgage brokers, licensed transmitters of money, and student loan servicers.

The Superintendent is authorized to bring an action to remove such individuals whenever it finds reason to believe that they:

  • caused, facilitated, permitted, or participated in any violation by a covered entity of a law or regulation, order issued by the Superintendent or any written agreement between such covered entity or covered individual and the Superintendent;
  • engaged or participated in any unsafe or unsound practice in connection with any covered entity; or
  • engaged or participated in any willful material act or omitted to take any material act that directly contributed to the failure of a covered entity.

The notice and hearing provisions were changed to allow the Superintendent to serve a statement of charges against the covered individual and a notice of an opportunity to appear before the Superintendent to show cause why they should not be removed from office. A copy of such notice must now be sent to the affected covered entity, instead of the directors or trustees of the covered entity and persons in charge of foreign bank branches.

Additionally, the threshold for removal was changed. Instead of being removed by a three-fifths vote of a board that no longer exists, the covered individual may be removed if, after notice and hearing: (1) the Superintendent finds that the covered individual has engaged in the unlawful conduct, or (2) if the individual waives a hearing or fails to appear in person or by authorized representative.

The order of removal is effective upon service to the individual. The order must also be served to any affected covered entity along with the statement of charges. The order remains in effect until amended, replaced, or rescinded by the Superintendent or a court of competent jurisdiction. Such removed individual is prohibited from participating in the “conduct of the affairs” of any covered entity unless they receive written permission from the Superintendent. If the individual violates such prohibition, they are guilty of a misdemeanor.

Furthermore, the Superintendent is now authorized to suspend the covered individual from office for a period of 180 days pending the determination of the charges if the Superintendent has reason to believe that:

  • a covered entity has suffered or will probably suffer financial loss that impacts its ability to operate in a safe and sound manner;
  • the interests of the depositors at a covered entity have been or could be prejudiced; or
  • the covered individual demonstrates willful disregard for the safety and soundness of a covered entity.

The suspension may be extended for additional periods of 180 days if the hearing is not completed within the previous period due to the request of the covered individual.

Why Does it Matter?

Prior to the update, the Superintendent only had the power to remove individual officers, directors, or trustees from office in various bank organizations. The new law expands this removal power to all entities regulated by the Department.

The amended statute creates an additional penalty for individuals who caused, facilitated, permitted, or participated in the violation of the Banking Law in their positions of power of a regulated entity. Such individuals may be removed from their positions and prohibited from participating in the management of any regulated entity, until they receive written permission from the Superintendent. If they violate the prohibition, they are guilty of a misdemeanor, which can be punished by imprisonment for up to 364 days or by a fine set by the Superintendent.

What Do I Need To Do?

Entities regulated by the Department that are now covered under this section should be aware that violations of law by a licensee may also lead to the removal of certain high-level individuals within the organization. If removed, such individuals would also be prohibited from managing any regulated entity until the Superintendent provides written permission to do so. Affected entities and individuals should take care to ensure compliance with the law to avoid these new penalties.

FHFA Announces UDAP Compliance Expectations

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What Happened?

On November 29, 2024, the Federal Housing Finance Agency (“FHFA”) released Advisory Bulletin AB 2024-06 (the “Advisory Bulletin”), which sets forth FHFA’s expectations and guidance for Fannie Mae and Freddie Mac (the “GSEs”) and the Federal Home Loan Banks (collectively, the “Regulated Entities”) regarding compliance with the prohibition against unfair and deceptive acts or practices under Section 5 of the Federal Trade Commission Act (“FTC Act”). The Advisory Bulletin follows the FHFA Final Rule on Fair Lending, Fair Housing, and Equitable Housing Finance Plans published in the Federal Register in May 2024 (“Final Rule”).

Why It Is important?

While the Advisory Bulletin applies directly to the Regulatory Entities, any company that does business with the GSEs or the Federal Home Loan Banks should take note, as there likely will be downstream implications. The Regulated Entities are required to certify compliance with Section 5 of the FTC Act.  The Advisory Bulletin, however, raises several concerns.

First, the Advisory Bulletin conflates Section 5 UDAP compliance and fair lending principles. The Bulletin cautions that Regulated Entities are not only subject to the prohibition in Section 5 of the FTC Act against “unfair or deceptive acts or practices in or affecting commerce” but also the Fair Housing Act, the Equal Credit Opportunity Act (“ECOA”) and implementing regulations. To that end, the Final Rule requires the Board of Directors of Regulated Entities to bring their operations into compliance with these obligations in their “oversight of the [R]egulated [E]ntity and its business activities.” However, while the stated intent of the Advisory Bulletin is to provide guidance to the Regulated Entities consistent with the FTC Act, the Advisory Bulletin lumps together UDAP and discrimination, reminiscent of the CFPB’s similar attempt in 2022. In carefully worded language, FHFA states that its UDAP expectations “complement FHFA’s expectations regarding compliance with applicable fair lending laws.” And, specifically with respect to “unfairness,” FHFA states that its “duty to affirmatively further fair housing” may be considered when determining whether an act or practice is unfair. Yet any rule or bulletin by the FHFA providing that a violation of Section 5 of the FTC Act may be a violation of other federal and state laws (including fair housing, fair lending, and other consumer protection laws) undoubtedly extends fair lending laws beyond the bounds carefully set by Congress. See American Bankers Association, Unfairness and Discrimination: Examining the CFPB’s Conflation of Distinct Statutory Concepts (June 2022).

Second, the Advisory Bulletin suggests various theories of liability for violations of Section 5 of the FTC Act. In particular, the Advisory Bulletin points out that, in addition to direct liability for UDAP violations, the Regulated Entities may be held vicariously liable for UDAPs resulting from the conduct of their employees, agents, or third parties (depending on the Entity’s control or other legal responsibility over the third party’s conduct) regardless of whether such Entity knew or should have known of that conduct consistent with agency law. Moreover, the Regulated Entity may be liable for failing to take prompt action to correct UDAP violations in certain circumstances. Here again, the Advisory Bulletin conflates UDAP with fair lending, as the Bulletin delves into liability principles typically applicable to the Fair Housing Act and ECOA.

Finally, given the potential liability to the Regulated Entities for the conduct of its agents or other third parties, the Advisory Bulletin may serve to further incentivize the Agencies to act as de facto regulators in their oversight of single-family and multi-family seller servicer relationships. Not surprisingly, the Advisory Bulletin reminds the Regulated Entities of the importance of “assessing, monitoring, and taking corrective action related to legal, compliance, and reputation risks associated with potential sellers and servicers, including risks associated with compliance programs, records of compliance, and other relevant information related to compliance with all applicable laws.” Yet, if the GSEs were to exit conservatorship, it remains uncertain what kind of authority they would have to enforce and remediate compliance deficiencies.

What Do I Need To Do?

The Regulated Entities are directed to identify, assess, monitor, and mitigate risks associated with UDAP, including legal, compliance, operational, strategic and reputational risks. Given that the Regulated Entities are required to certify compliance with Section 5 of the FTC Act, companies should expect downstream implications and should work to ensure it has sufficient controls in place to mitigate UDAP risks and avoid unwelcome repurchase demands or rep and warrant breaches.

Carter State Funeral is not a “Legal Public Holiday” for Purposes of Certain Regulation Z Disclosure Requirements

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What Happened?

President Biden has proclaimed January 9, 2025, a federal holiday for the state funeral of former President Jimmy Carter; as a result, Federal government agencies and departments will be closed that day.  Is this federal holiday proclaimed by executive order a “legal public holiday” for purposes of certain disclosure timing requirements of Regulation Z?

Why is it Important?

Under the Truth in Lending Act (TILA) Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure Rule (TRID), generally, the creditor is responsible for ensuring that it delivers or places in the mail the loan estimate (LE) no later than the third business day after receiving the consumer’s application. Further, a creditor must ensure that the consumer receives the closing disclosure (CD) at least three business days before consummation of the transaction. In addition, for certain refinancings, Regulation Z permits the consumer to rescind (cancel) the transaction within three business days after consummation.

For purposes of providing the LE, a business day is a day on which the creditor’s offices are open to the public for carrying out substantially all of its business functions. However, the term “business day” is defined differently for other purposes, such as counting days to ensure the consumer receives the CD on time and the consumer’s exercise of the right to rescind the transaction. For these purposes, “business day” means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. § 6103(a): New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.

What to do Now?

Because the Carter state funeral on January 9, 2025, is not a “legal public holiday” within the meaning of 5 U.S.C. § 6103(a), it is a business day for counting days to ensure the consumer receives the CD on time and for the consumer’s exercise of the right to rescind the transaction.  Further, January 9, 2025, is also a business day for purposes of providing the LE as long as the creditor’s offices are open to the public for carrying out substantially all of its business functions.

Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup highlights recently enacted measures of potential interest from three states:

Delaware: 

  • Effective August 9, Senate Bill 245 amends mortgage foreclosure provisions of the Delaware Code.  Principally, the measure updates the content of the pre-foreclosure notice that a mortgagee must send – as set forth in Section 5062B of Title 10 of the Code – to reflect that the Delaware State Housing Authority is the appropriate group to contact for financial assistance, and to permit alteration of the statutory language as recommended by the administrator of the Residential Mortgage Foreclosure Mediation Program.  The measure also eliminates the previously scheduled January 1, 2025, expiration date of provisions including Sections 5062A (loss mitigation affidavit), 5062C (Residential Mortgage Foreclosure Mediation Program), and 5062D (complaints) of Title 10; those sections now apply to any foreclosure action initiated on or after January 19, 2012.

Illinois: 

  •  Effective August 9, 2024, Senate Bill 3550 amends the Consumer Installment Loan Act by: (a) clarifying that licensees thereunder have authority to make a loan with a maximum principal amount of $40,000 and to charge, contract for, and receive an annual percentage rate of no more than 36% (rather than charges at an APR of more than 36%); and (b) amending disciplinary provisions, including those applicable to persons engaged in unlicensed activity.  The measure also establishes the “Financial Institutions Act” (20 ILCS 1205/1) from existing provisions of the Financial Institutions Code.
  • Effective January 1, 2025, Senate Bill 2919 amends the Mortgage Foreclosure article of the Illinois Code of Civil Procedure to provide for online foreclosure sales, among other topics.  First, the measure amends Section 15-1507 to permit a mortgagee to request that a judge, sheriff, or other person to conduct the sale of a foreclosed home either in-person and/or online, and to add corresponding content to the public notice of sale that the mortgagee must provide.  Second, the measure adds Section 15-1507.2 to establish procedures for the conduct of online judicial sales, addressing applicable fees, bid procedures, proper information security controls, and the engagement of third-party purchasers.  Finally, the measure adds Section 15-1510.1, prohibiting the charging of any fee beyond the winning bid amount to a third-party bidder or purchaser who is not a party to the case in a residential real estate sale.
  •  Effective January 1, 2025, Senate Bill 3551 amends the Residential Mortgage License Act of 1987 (RMLA) and the Residential Real Property Disclosure Act (RRPDA).  First, the measure adds the term “shared appreciation agreement” to the definitions section of the RMLA, and amends related terms (“mortgage loan”, “residential mortgage loan”, and “home mortgage loan”) to “include a loan in which funds are advanced through a shared appreciation agreement.”  Second, the measure adds to the RMLA a new section addressing counseling and disclosure requirements for shared appreciation agreements.  Third, the measure adds to the RRPDA provisions relating to counseling, such that: (a) counseling is required to be provided in person, or by remote electronic or telephonic means, with the permission of all borrowers; (b) counseling must be provided in a private session; and (c) the counselor must verify the identity of each borrower, as well as document the counseling session, subject to any implementing regulations.

New Hampshire: 

  • On August 23, New Hampshire Governor Chris Sununu signed into law House Bill 1241, which amends provisions of the New Hampshire statutes relating to the regulation of money transmitters and mortgage licensees, among other topics beyond the scope of our reporting.   First, effective October 22, the measure repeals New Hampshire’s existing money transmission laws and adopts the model Money Transmission Modernization Act.  The Act requires the licensing of persons engaged in money transmission and establishes licensing application requirements, licensee reporting obligations, and enforcement provisions, among others. Second, the measure amends Chapters 397-A and 399-A with respect to license renewals for mortgage loan originators; mortgage bankers, brokers, and servicers; small loan lenders; and debt adjustment services. Going forward, a license term will run from the date of approval of an application December 31 of the year in which the license term began; however, if the initial license date is between November 1 and December 31, the initial license term will run through December 31 of the following year.