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Maryland

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trusts, and unless Estate of Brown is reversed by the Maryland Supreme Court and the OFR’s regulation and guidance is withdrawn, it could adversely impact the availability of credit to Maryland consumers.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.

Federal Court Inspects Maryland’s Restrictions on Inspection Fees

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A&B Abstract:

Maryland’s inspection fee statute has been interpreted by the Maryland Court of Appeals and the Maryland Office of the Commissioner of Financial Regulation (“OCFR”) to apply both at the time of origination and throughout the servicing of a residential mortgage loan.  More recently, a lower federal district court decision came to a different interpretation.

Maryland’s Inspection Fee Restriction

Maryland Commercial Law Section 12-121 provides that, subject to limited exceptions, a lender may not impose a “lender’s inspection fee” in connection with a loan secured by residential real property.   A “lender’s inspection fee” means a fee imposed by a lender to pay for a visual inspection of real property. A lender’s inspection fee may be charged only if the inspection is needed to ascertain the completion of (i) the construction of a new home; or (ii) repairs, alternations, or other work required by the lender.  A “lender” is defined as a licensee or a person who makes a loan subject to Maryland’s Interest and Usury subtitle. In turn, a “licensee” is defined as a person that is required to be licensed to make loans subject to Maryland’s Interest and Usury subtitle, regardless of whether the person is actually licensed.

Prior Guidance

Previously, the Court of Appeals of Maryland held, in Taylor v. Friedman, 689 A.2d 59 (Md. Ct. App. 1997), that, unless permitted by Section 12-121(c), the prohibition on inspection fees was not limited to inspections for closings, but extended to any inspections throughout the life of the loan. In 2014, the OCFR released an advisory opinion stating that Taylor remains good law in Maryland and applies to circumstances where a servicer orders a visual inspection of property following default on the terms of the mortgage.

Roos vs. Seterus

More recently, the U.S. District Court for the District of Maryland in Roos v. Seterus held, despite previous decisions indicating otherwise, that non-lenders may charge inspection fees to mortgagors.  The defendants in Roos argued that they did not charge illegal inspection fees because (1) the deed of trust specifically authorized inspection fees; (2) Section 12-121 is inapplicable to the defendants; and (3) Section 12-121 does not have a blanket prohibition on the imposition of inspection fees. The defendants believed that since they were a servicer, and the plain language of the statute only prohibited lenders from charging inspection fees, the statute did not prohibit them from charging inspection fees.  The court agreed with defendants that the plain meaning of the statute only prohibits a “lender” from imposing or collecting inspection fees. Although the court in Roos did not itself provide a definition of “lender,” the court pointed to a Montgomery Circuit Court case, Kemp v. Seterus, Inc., No. 441428-V, 2018 Md. Cir. Ct. LEXIS 9 (Md. Cir. Ct. Oct. 19, 2018), which addressed the issue. In that case, the court stated that “the meaning of the statute [wa]s plain; only ‘persons’ which make loans to ‘borrowers’ are lenders and thus covered by the statute.” The court in Roos adopted the Kemp court’s definition of lender, finding it well reasoned and applicable since it involved the same issue and defendant.

Takeaway

It is unclear if this decision will convince the OCFR to change its long-standing position or if plaintiffs will appeal this decision.  Moreover, we note that this decision was issued by a federal district court interpreting Maryland state law and, as such, will not have precedential value in Maryland state courts. While defendants may have prevailed in this federal district court case, servicers should still remain cautious in charging inspection fees when servicing a loan secured by residential real estate in Maryland.

* We would like to thank Associate, David McGee, for his contributions to this blog post.

Maryland Clarifies New Net Worth Requirements for Mortgage Servicers

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A&B Abstract:

Effective October 1, 2019, the Maryland Commissioner of Financial Regulation will impose new net worth requirements on licensees. Importantly, Maryland servicing licensees without GSE approvals may not use a line of credit to satisfy the net worth requirements. However, mortgage servicers may include mortgage servicing rights in the calculation of tangible net worth.  The minimum net worth requirements for mortgage lender and broker licensees remain unchanged, but must be met with tangible net worth (excluding intangible assets such as copyright, trademark or goodwill).

Background

Since the financial crisis, the rapid growth of nonbank mortgage servicers has led regulators to call for enhanced oversight of such entities.  The Financial Stability Oversight Council (charged under the Dodd-Frank Act with identifying risks to the stability of the U.S. market) recommended in its 2014 annual report that state regulators work collaboratively to develop prudential and corporate governance standards.

In 2015, state regulators through CSBS and AARMR, proposed baseline and enhanced prudential regulatory standards (including capital and net worth requirements) for nonbank mortgage servicers. Although those standards were not finalized, several states – including Oregon and Washington – have imposed new net worth requirements on nonbank servicers.  Maryland is the latest state to update its law.

Maryland House Bill 61 and Advisory Notice

Maryland House Bill 61 takes effect October 1, 2019, and, among other changes adds net worth requirements for licensed mortgage servicers.  This means that current licensees must meet the revised requirements during the 2020 renewal cycle of November 1  to December 31, 2019.  Licensed servicers that meet the capital requirements of and are approved by a government sponsored entity (such as Fannie Mae or Freddie Mac) satisfy Maryland’s net worth requirements.

Maryland licensees without GSE approval must maintain a minimum tangible net worth that varies according to portfolio volume.  Specifically, the minimum net worth requirements are:

  • $100,000 if the unpaid principal balance of the entire servicing portfolio is less than or equal to $50,000,000;
  • $250,000 if the unpaid principal of the entire servicing portfolio is greater than $50,000,000  but less than or equal to $100,000,000
  • $500,000 if the unpaid principal balance of the entire servicing portfolio is greater than $100,000,000 but less than or equal to $250,000,000, or
  • $1,000,000 if the unpaid principal balance of the entire servicing portfolio is great than $250,000,000.

Limitations on Net Worth

Importantly, a servicer may not use a line of credit to satisfy the net worth requirements of a licensed mortgage servicer.  This is an important distinction from the requirements for mortgage lenders and broker net worth requirements, where a working line of credit (but not a warehouse line of credit) can be used to satisfy a portion of the net worth requirements.  It is also important to recognize that the new law requires tangible net worth for licensees.  The calculation of tangible net worth excludes intangible assets, such as copyrights, trademarks or goodwill.

Takeaway

The regulators have clarifies that mortgage servicing rights may be included in the calculation of tangible net worth. With the continued focus on nonbank mortgage servicers, capital and net worth requirements are worthy of attention.