Alston & Bird Consumer Finance Blog

Mortgage Loans

Governor Moore Signs Legislation Exempting “Passive Trusts” from Licensure in Maryland

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What Happened?

In a highly anticipated and welcome development, on April 22, 2025, Maryland Governor Wes Moore signed into law the Maryland Secondary Market Stability Act of 2025 (emergency measures HB 1516 and its companion SB 1026) with an immediate effective date.  The legislation is significant as it has the effect of modifying the formal guidance issued on January 10, 2025 by the Maryland Office of Financial Regulation (OFR) requiring assignees of residential mortgage loans, including passive trusts that acquire or take assignment of residential mortgage loans in Maryland, to become licensed in Maryland by April 10, 2025—later extended to July 6, 2025.  The OFR’s January licensing mandate, which derived from the OFR’s interpretation of a Maryland Appellate Court decision in Estate of Brown v. Ward, 251 Md. App. 385 (2024), would have created a logistical nightmare for, among others, passive trusts holding Maryland loans in residential mortgage-backed securitizations. By custom, passive trusts holding residential mortgage loans do not obtain licenses, and no state legislature has required such licensure for trusts holding these loans. The OFR’s January 10 formal guidance contravenes the plain language of the licensing requirements of the Maryland Mortgage Lender Law and the Maryland Installment Loan Law that do not apply to assignees.

Why Does it Matter?

The legislation addresses the OFR’s overreach by expressly excluding “passive trusts” from Maryland’s mortgage licensing requirements. The legislation defines a “passive trust” as a

trust that

1) ACQUIRES OR IS ASSIGNED MORTGAGE LOANS IN WHOLE OR IN PART;

(2) DOES NOT MAKE MORTGAGE LOANS;

(3) IS NOT A MORTGAGE BROKER OR A MORTGAGE SERVICER; AND

(4) IS NOT ENGAGED IN THE SERVICING OF MORTGAGE LOANS, WHICH DOES NOT INCLUDE THE ACT OF TRANSMITTING OR DIRECTING PAYMENTS RECEIVED BY A MORTGAGE SERVICER.

The legislation defines “trust” as “any trust established under the laws of the State or any other state.”  Hence, the “passive trust” must be an actual trust and not a non-trust corporate entity.

The legislation also includes a “Maryland Licensing Workshop” that is comprised of members of consumer groups, the banking and non-bank mortgage industry, and others appointed by the Governor to study Maryland’s licensing statutes and make recommendations regarding, among other things, whether expansion of the existing licensing requirements to persons not currently licensed is warranted. The legislation requires the working group to report its findings to the Governor by December 31, 2025.

What Do I Need to Do?

While the legislation spares passive trusts, including trusts in existing residential mortgage-backed securitizations, from having to become licensed in Maryland, secondary market purchasers of loans that do not utilize passive trusts to acquire or take assignment of residential mortgage loans in Maryland must become licensed as Maryland Mortgage Lenders by July 6, 2025.

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:

Arkansas:

  • House Bill 1184, which we expect to take effect on or about August 8, amends the Fair Mortgage Lending Act, Ark. Code Ann. §§ 23-39-501 et seq., to address the use of mortgage trigger leads. Specifically, the measure amends Section 23-39-513 of the Arkansas Code to impose obligations on a loan officer using a mortgage trigger lead in any capacity (such as clearly and conspicuously stating in initial solicitations that the solicitation uses information purchased from a consumer reporting agency without the lender or broker’s knowledge or permission).

Idaho:

  • Effective July 1, House Bill 149 adds Section 26-31-221A to the Idaho Code, addressing consumer private in mortgage applications.  Specifically, the measure imposes obligations on an individual soliciting a consumer for a residential mortgage loan where a mortgage trigger lead is used in any capacity, to include (among other provisions): (a) clearly and conspicuously stating in initial solicitations that the solicitation uses information purchased from a consumer reporting agency without the lender or broker’s knowledge or permission; and (b) avoiding knowing or negligent use of information from a mortgage trigger lead where the consumer opted out of prescreened offers or placed his or her phone number on a federal or state “do-not-call” list.

Nebraska:

  • Effective March 12, Legislative Bill 251 amends surety bond provisions under the Residential Mortgage Licensing Act (“Act”). As amended, Section 45-724 of the Act requires a mortgage banker licensee to include its mortgage servicing portfolio (and not only its origination volume) in the calculation of its required surety bond.
  • Legislative Bill 21, which we expect to take effect on or about August 31, adopts the Uniform Unlawful Restriction in Land Records Act (“Act”). The Act will permit real property owners to unilaterally remove from any document related to the owner’s property “unlawful restrictions” (those that “purport[] to interfere with or restrict the transfer, use, or occupancy of real property”), and will prescribe the process by which an owner may amend a document to remove such restrictions.

HUD Revises Borrower Residency Requirements for FHA-Insured Mortgages

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What Happened?

On March 26, 2025, the U.S. Department of Housing and Urban Development (HUD or the Department) issued Mortgagee Letter 2025-09 (ML 2025-09), which updates HUD’s residency requirements for borrower eligibility for mortgages insured by the Federal Housing Administration (FHA). The provisions of ML 2025-09 apply to all FHA Title II Single Family forward and Home Equity Conversion Mortgage (HECM) programs.

HUD indicated that it issued its updated residency requirements in response to (and to align with) recent executive actions by the President “that emphasize the prioritization of federal resources to protect the financial interests of American citizens and ensure the integrity of government-insured loan programs.”  The Department stated that “[c]urrently, non-permanent residents are subject to immigration laws that can affect their ability to remain legally in the country,” which “poses a challenge for FHA as the ability to fulfill long-term financial obligations depends on stable residency and employment.” The update “ensures that FHA’s mortgage insurance programs are administered in accordance with [the Trump] Administration[’s] priorities while fulfilling its mission of providing access to homeownership.”

The provisions of ML 2025-09 may be implemented immediately but are required to be implemented for all FHA-insured mortgages with case numbers assigned on or after May 25, 2025.

Why Does it Matter?

ML 2025-09 removes the Non-permanent Resident sections of the FHA Single Family Housing Policy Handbook 4000.1 (the Handbook), in its entirety, eliminating eligibility for non-permanent resident borrowers, and updating the requirements for permanent residents in the following sections of the Handbook:

  • Residency Requirements (II.A.1.b.ii(A)(9));
  • Residency Requirements (II.B.2.b.ii(A)(4));
  • Non-credit Qualifying Exemptions (II.A.8.d.vi(C)(1)(a)); and
  • Special Documentation and Procedures for Non-credit Qualifying Streamline Refinances (II.A.8.d.vi(C)(5)(b)).

The mortgagee letter clarifies that the burden is on the lender to “determine the residency status of the borrower based on information provided on the mortgage application and other applicable documentation” and notes that a Social Security card is insufficient to prove immigration or work status. Rather, “[t]he U.S. Citizenship and Immigration Services (USCIS) within the Department of Homeland Security provides evidence of lawful permanent resident status.”

In addition to limiting eligibility to U.S. citizens and lawful permanent U.S. residents, ML 2025-09 clarifies that a borrower with citizenship in the Federated States of Micronesia, the Republic of the Marshall Islands, or the Republic of Palau may also be eligible for FHA-insured financing provided the borrower satisfies the same requirements, terms, and conditions as those for U.S. citizens, and the mortgage file includes evidence of such citizenship.

Under the revised guidance, individuals who may be eligible for FHA-insured loans with case numbers assigned on or after May 25, 2025 are limited to (1) U.S. citizens, (2) lawful permanent U.S. residents, and (3) citizens of the Federated States of Micronesia, the Republic of the Marshall Islands, or the Republic of Palau.

Notably, because ML 2025-09 applies prospectively to FHA-insured mortgages with a case number assigned on or after May 25, 2025, the revised requirements would not appear to impact the servicing of existing FHA-insured mortgages made to non-permanent residents, such as the availability of loss mitigation assistance.

What Do I Need to Do?

FHA-approved mortgage lenders should review their policies, procedures, and controls and make any necessary updates to implement the requirements of ML 2025-09 for all FHA-insured mortgages that will have a case number assigned on or after May 25, 2025. Alston & Bird’s Consumer Financial Services Team is actively engaged and monitoring these developments and can assist with any compliance concerns regarding these changes to HUD requirements.

 

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 two states:

California:

Effective January 1, California Assembly Bill 3108 addresses mortgage fraud.  Previously, California law defined “mortgage fraud” to include, in connection with a mortgage loan transaction, filing with the county recorder any document that the person knows to contain a deliberate misstatement, misrepresentation, or omission, and with the intent to defraud.

Taking this a step further, the measure prohibits the filing of any document with the recorder of any county that a person knows to contain a material misstatement, misrepresentation, or omission. Further, the measure expressly provides that a mortgage broker or person who originates a loan commits mortgage fraud if, with the intent to defraud, the person takes specified actions relating to instructing or deliberately causing a borrower to sign documents reflecting certain loan terms with knowledge that the borrower intends to use the loan proceeds for other uses. For prosecution purposes, the alleged fraud value must be $950 or more (the threshold for grand theft).

A mortgage lender could unintentionally find itself guilty of mortgage fraud if it simply allows a borrower to use a business purpose loan for consumer purposes or makes a bridge loan that it knows will not be used for a dwelling. California’s Penal Code § 532f(b) makes it mortgage fraud for a mortgage broker or lender to allow mortgage-related documents to be formed and filed when the broker or lender has reason to know that the borrower intends on using the loan for purposes other than for what the loan is intended.

Although intent to defraud is an element to this crime, that element can only be determined through rigorous and time-consuming investigation. If a borrower, for example, uses a business loan for consumer purposes or does not apply the funds from a bridge loan towards a dwelling, the lender will be subject to additional scrutiny unless it can prove that all efforts were made to understand the borrower’s plans for the funds.

The measure also prohibits a person who originates a covered loan from avoiding, or attempting to avoid, the application of the law regulating the provision of covered loans by committing mortgage fraud. A “covered loan” means a consumer loan in which the original principal balance of the loan does not exceed the most current Fannie Mae conforming loan limit for a single-family first mortgage loan.

The measure also amends Section 4973 of the Financial Code, which imposes certain requirements ad restrictions (e.g., the inclusion of a prepayment fee or penalty after the first 36 months) in connection with covered loans and amends Section 532f of the Penal Code (as discussed above) in connection with the prohibition on committing mortgage fraud.

New York:

  • Effective June 11, Assembly Bill 424 amends Section 35 of the Banking Law, which relates to an information pamphlet that residential mortgage lenders must provide to applicants. In place of making a physical pamphlet available to lenders, the amended section requires the Department of Financial Services to notify mortgage bankers of the posting a digital version of the pamphlet on the Department’s website (and when it makes any changes thereto). The measure also amends the pamphlet contents to reflect that a lender may provide an applicant with a good faith estimate (instead of a loan estimate), depending on the type of loan for which the applicant is applying.
  • Effective May 15, Assembly Bill 2056 amends Section 283 of the Real Property Law, which limits the amount of flood insurance that a mortgagee may require a mortgagor to maintain. Under current law, that section provides that the maximum amount of coverage a mortgagee may require is the mortgage’s outstanding principal amount as of January 1 of the year the policy will be in effect. As amended, that section makes the maximum permitted amount of coverage the lesser of the outstanding principal amount or the residential property’s replacement. Additionally, AB2056 slightly alters the printed notice about flood insurance that a mortgagee must deliver to mortgagors, removing language referring to the fact that required coverage would only protect the interest of the lender or creditor in the property.
  • Effective March 21, New York Senate Bill 804 amends data breach notification requirements. Section 899-aa of the General Business Law requires a person or business to notify New York residents whose data is part of a breach, as well as to provide notice to certain governmental entities (including the Department of Financial Services). As amended, that section will require notification to the Department of Financial Services (in the form mandated by N.Y. Comp. Code R. & Regs. tit. 23, § 500.17) only by “covered entities.” A “covered entity” is any person who requires any type of authorization to operate under the Banking Law, Insurance Law, or Financial Services Law, and thus includes a mortgage banker or mortgage servicer.

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.