Alston & Bird Consumer Finance Blog

Mortgage Loans

Update on New Maryland Law Clarifying Exemptions for Certain Mortgage Trusts

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What Happened?

As we previously advised you, in 2024, the Maryland Appellate Court in Estate of H. Gregory Brown v. Carrie M. Ward, et al., No. 1009, (App. Ct. Sept. Term 2023), ruled that a statutory trust that held a defaulted home equity line of credit (a “HELOC”) must be licensed as both an installment lender and a mortgage lender under Maryland law prior to proceeding to foreclosure on the HELOC.  The relevant parties did not appeal the decision.  Following this ruling, on January 10, 2025, the Maryland Office of Financial Regulation (the “OFR”) issued formal guidance on licensing requirements for mortgage trusts and a notice of emergency regulations to conform to the Brown decision. The guidance mandated that absent an exemption, all assignees of Maryland residential mortgage loans, including trusts, must be licensed as Maryland Installment Lenders or Maryland Mortgage Lenders.  While the formal guidance and emergency regulations took effect upon promulgation by the OFR on January 10, 2025, the OFR suspended enforcement of the emergency regulations until April 10, 2025 — later extended to July 6, 2025.

Why Does it Matter?

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 expressly excludes passive trusts from Maryland’s mortgage licensing requirements and 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.

On May 29, 2025, in response to the enactment of the Maryland Secondary Market Stability Act of 2025, OFR rescinded its prior guidance issued on January 10, 2025, and all related advisories (issued on January 31, 2025, and February 18, 2025) and enforcement deadlines concerning licensing requirements for trusts holding mortgage loans. The OFR also formally withdrew the previous emergency and proposed regulations relating to the licensing of mortgage trusts.

The OFR also clarified that commercial lenders making loans exclusively for business purposes under Maryland’s installment loan statutes, as defined by Md. Code Ann., Fin. Inst. § 11-301, are not subject to OFR’s licensing requirements under mortgage lending and installment licensing provisions.

What to Do Now

Please be advised that the Maryland Secondary Market Stability Act of 2025 and the OFR’s rescission of its prior guidance and previous emergency and proposed regulations applies only to residential mortgage loans, and does not address other loan categories such as consumer loans not secured by real estate.  

Secondary market purchasers of loans that do not use passive trusts to acquire or take assignment of residential mortgage loans in Maryland must become licensed as Maryland mortgage lenders by July 6, 2025. However, there can be no assurance that other states will not pass laws or issue regulations, or courts of law will require licensing, even retrospectively, which may adversely affect the 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.