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trusts, and unless Estate of Brown is reversed by the Maryland Supreme Court and the OFR’s regulation and guidance is withdrawn, it could adversely impact the availability of credit to Maryland consumers.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