Maryland Legal Alert for Financial Services

In this issue:

• DISAPPOINTING STATUTE OF LIMITATIONS DECISION UNDER CLEC
• UPDATE ON MARYLAND’S HOUSING COUNSELING DISCLOSURE
• INTEREST ON MORTGAGE ESCROW ACCOUNTS
• FANNIE MAE AND FREDDIE MAC ARE EXEMPT FROM MARYLAND TRANSFER TAX

DISAPPOINTING STATUTE OF LIMITATIONS DECISION UNDER CLEC

On February 24, 2014, Maryland’s Court of Appeals held that claims based on the Maryland Credit Grantor Closed End Credit Provisions (CLEC) are subject to a statute of limitations that ends 6 months after the credit is satisfied. The Court also found that when a loan contract adequately incorporates CLEC as a part of the contract obligations, a breach of contract claim may be asserted not only against the original creditor but also against the assignee of the loan contract. The plaintiff in this case claimed CLEC’s repossession requirements were violated. She filed suit more than 2 years after the creditor advised her of the repossession sale and the deficiency she owed on the loan contract. The assignee of the loan contract made a very unique argument that the 1-year statute of limitations in Maryland’s ECOA applied (because the ECOA statute of limitations provision states it applies to an action under “this title” and CLEC is in the same “title” as the ECOA). Based on a review of legislative history, the Court found no support for this novel argument. Unfortunately, as an alternative, the Court held that a provision in CLEC, which more resembles a statute of repose, is a statute of limitations and decided that claims for violation of CLEC may be brought until 6 months after the loan is satisfied. In addition, the Court held that because the loan contract incorporated CLEC into the agreement, a claim for breach of contract also exists. This decision requires careful consideration by all creditors extending credit to Maryland consumers. Particularly, creditors should establish how to show that a loan contract has been satisfied to ensure they know when the statute of limitations has ended. Please contact Margie Corwin if you would like to discuss the ramifications of this decision on your business.

UPDATE ON MARYLAND’S HOUSING COUNSELING DISCLOSURE

In our December 2013 Maryland Legal Alert, we reminded readers about the overlap of Maryland’s law that obligates certain residential mortgage lenders to provide a housing counseling programs notice and a list of housing counselors with the CFPB’s new RESPA regulation that obligates most of the same lenders to provide a list of homeownership counseling organizations. On February 19, 2014, the Maryland Department of Housing and Community Development (DHCD) posted an advisory on its website describing an alternative that results in one disclosure complying with both Maryland and federal requirements. DHCD advises that by adding a sentence to the CFPB’s RESPA-required list of homeownership counseling organizations, a lender can simultaneously comply with both Maryland and federal law. How does a lender add this unique Maryland-required sentence to the RESPA notice? We believe there are choices. Perhaps the lender will add a page that accompanies the RESPA notice. Perhaps the lender will add the Maryland-required sentence directly onto the RESPA notice. There should be many alternatives for complying with DHCD’s advisory. We thank DHCD for being proactive and practical in addressing this matter. Please contact Margie Corwin if you have any questions or comments.

INTEREST ON MORTGAGE ESCROW ACCOUNTS

Maryland law requires banks that maintain an escrow account for a loan secured by a first lien on residential real property to pay interest on that escrow account. Since June 2012, the minimum interest rate that banks must pay has been based on an index: the 6-month CD rate published in the FRB’s Statistical Release H.15 on the first business day of the calendar year. (Before June 2012, the minimum interest rate was 3% per year or more.) In December 2013, the FRB ceased publishing the 6-month CD rate, leaving banks in Maryland uncertain about the minimum interest rate required on escrow accounts. Legislation has been introduced (House Bill 735/Senate Bill 583) to replace the discontinued index with the weekly average yield on US Treasury Securities adjusted to a constant maturity of 1 year. In the meantime, on February 10, 2014, the Commissioner of Financial Regulation issued an Advisory explaining that until a new index replaces the discontinued index, banks should pay interest on mortgage loan escrow accounts at a rate not less than the 6-month CD rate published on January 2, 2013. Please contact Margie Corwin if you have any questions.

FANNIE MAE AND FREDDIE MAC ARE EXEMPT FROM MARYLAND TRANSFER TAX
Federal law generally exempts Fannie Mae and Freddie Mac from state and local taxes. However, this exemption from tax is not absolute because “any real property of [either Fannie Mae or Freddie Mac] shall be subject to State, territorial, county, municipal, or local taxation to the same extent as other real property is taxed.” 12 USC §1723a(c)(2) and 12 USC §1452(e). On January 27, 2014, the United States Court of Appeals for the Fourth Circuit, in Montgomery County, Maryland v. Federal National Mortgage Association, recognized the distinction between “property taxes” imposed annually based on real property ownership, which the Court determined Fannie Mae and Freddie Mac must pay, and “transfer taxes” imposed for a specific act or use of real property, which the Court determined Fannie Mae and Freddie Mac were exempt from paying. In upholding the lower court’s decision, the Court held that Fannie Mae and Freddie Mac are exempt from paying Maryland’s transfer and recordation taxes on “instruments of writing,” including deeds and mortgages. In addition to concluding that the exception in the tax exemption statute did not apply to transfer or recordation taxes, the Court found that Congress acted within its power to regulate commerce in granting the tax exemption. The issue of exemption from state transfer and recordation tax for Fannie Mae and Freddie Mac has become significant in light of the numerous properties these entities now own due to foreclosures. Please contact John Morton if you would like to discuss this case in greater detail.