Maryland Laws Update for Financial Services

The 2003 session of the Maryland General Assembly adjourned at midnight on April 7 after passing 629 bills. Many of these new laws affect financial service providers. Some of these new laws may affect procedures or forms and may require action to be taken. Please call any member of our Financial Services and Government Relations Group if you would like to discuss these laws and their effect on your business.

D. Robert Enten, 410-576-4114
Peter B. Rosenwald, III, 410-576-4193
Elliott Cowan, 410-576-4108
Michael C. Powell, 410-576-4175
Andy Bulgin, 410-576-4280

Taxes (and more)

Revenue Enhancement and Tax Compliance
HB 935 - Chapter 203 (various effective dates)

Maryland's fiscal crises has spawned a number of revenue enhancing measures. Chapter 203 is the most significant and wide ranging. This law increases various revenues, provides for transfers to the State's general fund, and includes a number of provisions to mitigate the fiscal condition of the State. To provide revenue to balance the Maryland budget, the law increases filing fees for corporations and other business entities, makes tax compliance and administration changes, and eliminates graduated income tax withholding. Of particular interest to financial institutions are provisions dealing with sales of real property by non-residents and a streamlined bank account attachment process for tax liens. Different provisions have different effective dates, as shown below:

• Sales of Property by Non-Residents Effective October 1, 2003, deeds transferring real property and associated tangible personal property owned by a non-resident may not be recorded with the Clerk of the Circuit Court for a county or the State Department of Assessments and Taxation unless payment is made to the Clerk or the SDAT of 4.75% of the net proceeds of sale payable to an individual non-resident or 7% of the amount payable from the sale to a non-resident entity. A "non-resident entity" is an entity that is not formed under the laws of Maryland and is not qualified or registered with the SDAT to do business in Maryland. There are 5 exceptions to this tax payment:

  (1) If the deed contains a certification under penalties of perjury that the transferor is a resident of Maryland or is a resident entity (as defined in the law).

  (2) If the transferor presents a certificate issued by the Maryland Comptroller stating that no tax is due in connection with the sale or exchange of property, a reduced amount is due, or the transferor has satisfied the transferor's tax liability or has provided adequate security to cover the liability.

  (3) If the property is transferred pursuant to foreclosure of a mortgage, deed of trust or other lien instrument, or a deed in lieu of foreclosure.

  (4) If the property is transferred by the United States, the State of Maryland, or a unit or political subdivision of the State of Maryland.

  (5) If there is a certification under penalties of perjury that the property being transferred is the transferor's principal residence.

  The tax must be collected by the Clerk or SDAT prior to the recording of the instrument transferring title. The transferee, title insurance producer, title insurer, settlement agent, closing attorney, lending institution, and real estate agent or broker are not liable for the tax. The Comptroller must adopt regulations to implement this new tax collection requirement.

  Action Alert: All persons involved in real estate and lending must be familiar with this new law and the regulations that will follow. Non-resident sellers of real property should be made aware of the requirements of this law well in advance of closing.

• Streamlined Bank Account Attachment Process Effective October 1, 2003, the Maryland Comptroller will be able to enforce Maryland tax liens like the Comptroller enforces obligations for child support. Like child support, the Comptroller may notify financial institutions of the identity of persons whose property is subject to a tax lien and the financial institution must perform a "data match" and report any matches to the Comptroller. The Comptroller then may notify the financial institution to freeze the account of the obligor and, subject to the due process requirements of the law, eventually pay the amount frozen to the Comptroller.

  Action Alert: Depository institutions must become familiar with the data match and non-judicial attachment procedures provided for in this law.

• Expanded and Increased Filing Fees are required to be paid with all annual reports for business entities filed after December 31, 2003. Increased filing fees for corporate documents are effective on July 1, 2003. Effective June 1, 2003, the $5.00 surcharge for recordation of instruments in the land records and the financing statement records of the circuit courts will increase to $20.

  This law also limits the amount of expenditures for commercial rehabilitations that may be approved by the Maryland Historic Trust between February 1, 2003 and December, 2003, to expenditures that in the aggregate will result in no more than $23 million in tax credits. In calendar year 2004, the Trust may approve expenditures for commercial rehabilitations in the aggregate that will not exceed $15 million in tax credits.

  Other parts of Chapter 203 deal with:

  * Withholding taxes to be remitted on a more frequent schedule - effective January 1, 2004.

  * Expansion of requirements for license clearance and requirements for agency verification of tax clearance - July 1, 2003.

  * Expanded direct salary attachment for taxes - July 1, 2003.

  * Withholding from non-resident contractors - effective for contracts entered into on or after July 1, 2003 (should be looked at closely, in particular regarding construction draws).

  * Change "safe harbor" for estimated tax payments from 100% of last year's liability to 110% - effective for tax years beginning after December 31, 2003.

  * Limited withholding exemptions for tax delinquents - January 1, 2004.

  * Advance sales tax due date by one day - July 1, 2003.

  * Reduce required electronic fund transfer threshold from $20,000 to $10,000 - July 1, 2003.

  * Elimination of graduated withholding - January 1, 2004.

  Action Alert: This 89 page law, with effective dates as early as June 1, 2003, must be carefully examined by all Maryland businesses. This law affects a multitude of business practices for financial institutions and their customers.

Mortgage Lending

Releases of Mortgages or Deeds of Trust
HB 1054 - Chapter 348 (effective October 1, 2003)

Current law requires the holder of a mortgage or deed of trust given by an individual to secure consumer debt (or given by an individual to secure commercial debt of $75,000 or less when the lien attaches to the individual's principal dwelling) to release the lien within a "reasonable time" after the loan has been paid in full. Beginning October 1, 2003, the holder must record the release, or provide it to a responsible person for recordation, within 45 days after a loan has been paid in full. If a holder does not provide the required release and the borrower brings an action, the holder will be liable for delivery of the release and for all costs and expenses of the borrower in connection with bringing the action, including attorney fees. Persons licensed under Maryland's Mortgage Lender Law, depository institutions chartered under Maryland or federal law, depository institutions with a branch in Maryland, and most subsidiaries and affiliates of these institutions are immune from the borrower's right to recover costs and expenses.

Prerequisites to Transferring Property
HB 992 - Chapter 189 (effective October 1, 2003)

Under current law, a deed or other instrument that changes ownership in real property may not be recorded until the property is transferred on the assessment books of the county where the property is located. This is to assure, to the extent possible, that taxes are paid before ownership in the property transfers. This new law clarifies that public taxes that must be paid before the property is transferred on the assessment books are those taxes which are "currently due and owed." This new law also joins Baltimore City with 5 other counties and allows the transfer of property to the City itself, even if taxes have not been paid, when the City Comptroller certifies that the conveyance does not impair the security for public taxes, assessments, and charges due on the remaining property of the grantor.

Real Estate Appraisers - Baltimore City - Reports
HB 521 - Chapter 435 (effective October 1, 2003)

This law requires licensed and certified real estate appraisers to file with the State Commission of Real Estate Appraisers and Home Inspectors (or a designee) at the end of each calendar quarter, a report listing the address and appraised value of all residential real estate in Baltimore City upon which the appraiser performed an appraisal during the calendar quarter. The report is open for inspection only to representatives of government agencies for investigation of fraudulent practices.

Action Alert: Financial institutions employing in-house licensed and certified appraisers will have to adopt procedures to ensure compliance.
Financial institutions employing in-house licensed and certified appraisers will have to adopt procedures to ensure compliance.

Condemnation of Distressed Property
(Baltimore City)
HB 424 - Chapter 429 (effective October 1, 2003)

This new law adds "distressed" property to the types of properties for which the Mayor and City Council of Baltimore City may bring action for condemnation and immediate taking. It also grants exclusive original civil jurisdiction to the District Court for those proceedings where the estimated value of the distressed property does not exceed $25,000. "Distressed" property includes property that is subject to a tax lien with a lien-to-value ratio of 15% or more and that contains a deteriorated dwelling unit which is a serious and growing menace to the public health, safety, and welfare. It also includes property that is subject to a tax lien with a lien-to-value ratio of 15% or more and that is also subject to a lien greater than $1,000 for work performed on the property by Baltimore City. If an owner of distressed property satisfies the tax and City liens on the property, the court action must be dismissed.

Tax Sales of Abandoned Property (Baltimore City)
SB 346 - Chapter 238 (effective July 1, 2003)

In general, property sold at tax sale may not be sold for less than the total amount of all taxes and charges due. However, in Baltimore City, abandoned property may be sold at tax sale for less than the taxes owed. This new law makes two changes to the law regarding tax sales of abandoned property in Baltimore City. First, it gives the City discretion (rather than imposing a requirement) to seek a monetary judgment against persons whose property was sold at a tax sale for less than the full amount of the City's tax lien. Second, it clarifies the rights of defendants and other interested persons to recover damages on the grounds of inadequate notice of a tax sale.

Recordation Tax
HB 164 - Chapter 411 (effective immediately)

Chapter 411 exempts from recordation tax the refinancing of real property that is being refinanced by the original mortgagor and the spouse of the original mortgagor. Under current law, the refinancing of real property is only exempt from recordation tax if it is refinanced by the original mortgagor and is used as a principal residence by the original mortgagor.

Baltimore City Foreclosures
HB 1049 - Chapter 465 (effective October 1, 2003)

When property is sold at foreclosure sale under a mortgage or a deed of trust, the court issues an order of ratification. Persons making foreclosure sales in Baltimore City must record a copy of the final order of ratification in the land records within 90 days if the vendor and purchaser are the same and a deed is not recorded.

Motor Vehicle Finance

Vehicle Laws - Dealer Processing Charges
SB 438 - Chapter 249 (various effective dates; most provisions effective July 1, 2003)

Both motor vehicle dealers and financial institutions that purchase motor vehicle sales contracts should review this law. The dealer processing charge is increased from $25 to $100 and may cover record retention expenses and the expenses of complying with federal and state privacy laws, but the total must be reasonable and reflect the dealer's actual expenses. A dealer must now give the purchaser, upon request, a written disclosure about the amount and components of the processing charge. Any freight charge imposed must be disclosed in 12 point type in the contract of sale (but no longer must it be pre-printed) and in 10 point type in any advertisement in which the price of the vehicle is disclosed. Finally, the law amends the definition of "total purchase price" for purposes of the Maryland vehicle excise tax to include the dealer processing charge.

Action Alert: Financial institutions that purchase motor vehicle sales contracts from dealers should review the form of contract used by dealers and the related documentation to ensure compliance with the notice and type size requirements of the law.

Revolving Credit

Revolving Credit
SB 179 - Chapter 364 (effective October 1, 2003)

Creditors wishing to unilaterally amend revolving credit plans governed by Subtitle 9 of the Maryland Credit Laws have been subject to a cumbersome 2-notice procedure, with the notice form required to be approved by the Maryland Commissioner of Financial Regulation. This new law eliminates the second notice and prior Commissioner approval, and also reduces the circumstances where a notice and opt out are required. This law is very good news for Maryland creditors.

Secured Lending

Uniform Commercial Code, Revised Article 9
SB 286 - Chapter 372 (effective June 1, 2003)
Revised Article 9 of the Uniform Commercial Code became effective July 1, 2001, and was a comprehensive revision to the law governing the creation and enforcement of security interests in personal property. Chapter 372 reflects the latest changes to Revised Article 9 adopted by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. The law also clarifies the rules for continuation of financing statements. The clarifications are needed because Maryland law, before adoption of Revised Article 9, had a 12-year effective period for financing statements, while nearly every other state had a 5-year period. Without these clarifications, there was some confusion about when a financing statement filed in Maryland before July 1, 2001 (the effective date of Revised Article 9) must be continued. Some practitioners thought it must be continued before June 30, 2006, the nationwide uniform date, and some believed it only must be continued when the 12-year effectiveness under old Article 9 expires. Now, Maryland's Revised Article 9 clearly provides that continuation must occur before June 30, 2006.

Corporate Governance

Corporations - Miscellaneous Provisions
HB 471 - Chapter 301 (effective June 1, 2003)

Maryland corporations have more flexibility when classifying shares and issuing dividends. After June 1, 2003, boards of directors may delegate to a committee or corporate officer the power to fix the amount and terms of a distribution on the company's shares of stock, but only if they first establish a procedure for fixing the maximum amount of the distribution. In addition, shares issued after a classification are voidable only until Articles Supplementary are filed. Rights or liabilities resulting from such issuance will terminate when the Articles Supplementary are filed, except to the extent that the person having that right or liability has detrimentally relied on the existence of that right or liability.

Action Alert: Corporations with boards that meet infrequently, and may need more frequent dividend distributions, should consider delegating dividend declaration to a committee or corporate officer after establishing a procedure for fixing the maximum amount of the distribution.

Corporations - Investment Companies
HB 473 - Chapter 302 (effective June 1, 2003)

This law insulates the assets of an investment company that are associated with a specific class or series of stock against the liabilities of the investment company associated with other classes or series, provided certain formalities are followed.

Corporations - Director and Stockholder Affairs
SB 495 - Chapter 387 (effective June 1, 2003)

Maryland corporations have more flexibility with respect to the manner in which board of directors and stockholder meetings are conducted. Board and stockholder action may be taken by unanimous consent via any type of electronic means of communication, including e-mail. Directors and stockholders may use any means of remote communication fixed by the board to conduct meetings, so long as the board ensures that all participants can hear each other and participate at the same time. The board must establish guidelines and procedures to verify the identities of participants, ensure that stockholders can hear or read the proceedings, and record any votes. Notices of meetings and waivers of such notices may be provided electronically. The law includes a number of conditions to using electronic methods. Finally, long-awaited householding provisions are added to the Maryland General Corporation Law, and corporations are no longer required to provide stockholders who reside at the same residence with separate notice and proxy materials.

Action Item: Corporate charters and bylaws must be reviewed to ensure that they do not limit or prohibit these new practices.

Premium Finance

Insurance - Premium Finance Agreements
SB 167 - Chapter 69 (effective October 31, 2003)

Under this law, premium finance agreements entered into for the purpose of financing premiums for surplus lines insurance may additionally provide for the financing of the required 3% premium receipts tax and the actual cost of a property inspection required by a surplus lines broker, to the extent the broker documents the cost of the inspection.

Action Item: Premium finance companies that finance surplus lines should review their finance agreements to ensure that these taxes and costs may be financed.

Deposit Accounts

Truncated Checking Accounts
SB 160 - Chapter 363 (effective January 1, 2004)

Under current Maryland law, a bank that offers truncated checking accounts also must offer checking accounts that return cancelled checks. This new law permits a bank only to offer truncated checking accounts. However, it also requires original checks (or full size check facsimiles of the front and back of the check) to be returned to consumers, at no cost, for various reasons, including tax audits, litigation, and campaign financing.

Action Alert: Maryland banks may now offer truncated accounts without also offering accounts where checks are returned, all in accordance with the requirements of this new law. Banks should confirm that they are able to produce full size facsimiles of the front and back of checks as required under the circumstances required by the law.
Maryland banks may now offer truncated accounts without also offering accounts where checks are returned, all in accordance with the requirements of this new law. Banks should confirm that they are able to produce full size facsimiles of the front and back of checks as required under the circumstances required by the law.

Child Support Enforcement - Definition of Financial Institution
HB 313 - Chapter 138 Emergency Bill (effective immediately upon signing)

This new law expands the definition of "financial institution" to include certain individuals who, in addition to the depository institution itself, may be asked by the Child Support Enforcement Administration to provide information about property of a parent liable for child support. The definition of "financial institution" now includes an "institution-affiliated party," which means any director, officer, employee, or controlling stockholder (excluding a bank holding company) of, or agent for, an insured depository institution. The new law makes it clear, however, that an "institution-affiliated party" will not be required to provide information or assistance if the financial institution with which the party is affiliated has otherwise provided the required information.

Escheat

Abandoned Property (Escheat)
HB 201 - Chapter 36 (effective July 1, 2003)

Under current law, financial organizations that hold deposits or property for others must send a notice by first-class mail to the property owner, at the owner's last known address, stating that the property presumed abandoned will be escheated to the State if there is no response within 30 days after the notification. This new law extends the notice requirement to holders of other types of abandoned property. For example, this new law applies to insurance companies holding unclaimed funds under matured policies and to businesses holding unclaimed dividends or other distributions owed to owners. It also requires, for the first time, the notice to be sent between 30 and 120 days before the holder of the abandoned property files its required abandoned property report with the Maryland Comptroller. Reports are due to the Comptroller no later than October 31 each year. For example, under this new law, if a holder of abandoned property plans to file its abandoned property report on the last possible date, its notices may not be sent out before July 3 and must be sent out by October 1. As a reminder, under 2002 legislation, the dormancy period by which property is presumed abandoned was reduced from 4 to 3 years effective June 30, 2003. Thus, like last year (when the dormancy period was reduced from 5 to 4 years), holders of abandoned property may have an increased number of abandoned property notices to send out this year and these notices will be subject to the new timing requirements.

Action Alert: Holders of abandoned property must be sure notices are sent to property owners in a timely fashion.

Brownfields

Brownfields
HB1051 - Chapter 466 (effective June 1, 2003)

There are three parts to this law. The first part adopts recent federal reforms that shield property owners from liability for pollution that originates on contiguous or other nearby properties. The second part adopts modest improvements to the state Voluntary Cleanup Program. Most significantly, the law allows the Maryland Department of the Environment to charge a lower fee for co-applicants (such as lending institutions). Finally, the law forms a large task force to study further reforms to the Brownfields Program and report back to the legislature in time for consideration next session.

Action Alert: This law should make it significantly easier to make loans secured by land that is contaminated solely from off-site sources.

State Finance Programs

State Finance and Procurement
SB 715 - Chapter 402 (effective October 1, 2003)

This law requires several agencies currently exempt from State procurement law to comply with the State's Minority Business Enterprise requirements. In particular, the following agencies (or in some cases only certain programs operated by the agencies) will become subject to the MBE law, including procurement goals, established under Title 14, Subtitle 3 of the State Finance and Procurement Article: Maryland State Arts Council, Maryland Health and Higher Educational Facilities Authority, the Maryland Higher Education Supplemental Loan Authority, Department of Business and Economic Development, the Maryland Food Center Authority, the Maryland Public Broadcasting Commission, public institutions of higher education, the Maryland State Planning Council on Developmental Disabilities, the Maryland Automobile Insurance Fund, the Maryland Historical Trust, the St. Mary's College of Maryland, the Forum for Rural Maryland, the Maryland State Lottery Agency and the Maryland Health Insurance Plan. The law also requires the State Board of Public Works to keep a record of, and report to the General Assembly, the number of waivers from the MBE requirements that are requested and the number that are granted.

Action Alert: This law may create additional business opportunities for MBE certified businesses.

Maryland Small Business Development Financing Authority - Guaranty Fund
HB 103 - Chapter 408 (effective July 1, 2003)

This law permits the Maryland Small Business Development Financing Authority to guaranty loans made for the purpose of refinancing existing debt of qualified applicants.

Trusts

Estates and Trusts - Investment in Closed-End Funds
SB 262 - Chapter 226 (effective June 1, 2003)

This law specifically authorizes corporate fiduciaries to invest in closed-end mutual funds, subject to the same requirements that currently exist regarding investments by corporate fiduciaries in open-end mutual funds. As is the case with open-end mutual funds, the investment may be made even if the corporate fiduciary or an affiliate of the corporate fiduciary provides services as investment advisor or manager, sponsor, distributor, custodian, transfer agent, registrar, or similar related services to the investment company or investment trust and receives reasonable compensation for those services, subject to certain requirements.

Action Alert:
This law opens up new opportunities for investment of fiduciary funds,including funds for which the fiduciary acts in the capacity of investment advisor or otherwise provides similar services to the fund.

Recovery by Minor in Tort
HB 1008 - Chapter 52 (effective October 1, 2003)

It is the State's public policy that a substantial sum of money paid to a minor from a tort claim or judgment must be preserved for the benefit of the minor. This law increases the amount of a net tort recovery for which the person responsible for the payment must issue a check made payable to the order of a trustee or guardian for the minor from $2,000 to $5,000 or more. Such payment constitutes the payer a trustee.

Ground Rents

Real Property - Costs Associated with Collection of Ground Rents
SB 321 - Chapter 80 (effective October 1, 2003)

This new law requires owners of ground rents to give notice of unpaid ground rent to the title agent or attorney listed on the deed or the intake sheet, in addition to the tenant, prior to bringing an action for possession of the property. Notice must be given at least 45 days (rather than 30 days) prior to the date the landlord brings the action. The law also caps the maximum amount of actual expenses for which the landlord may seek reimbursement to $500, and only if the landlord has notified the tenant at least 30 days prior to bringing any action. The notice must be in 14-point bold type, list the amount of past due ground rent, and include a statement that, unless such rent is paid within 30 days, an ejectment action will be brought and the tenant will be liable for the landlord's expenses.

Ground Rents - Missing Ground Rent OwnerHB 1030 - Chapter 464 (effective January 1, 2004)

Chapter 464 authorizes a tenant who has given notice to the last known address of the landlord to apply to the SDAT to redeem a ground rent if the ground rent owner cannot be found. Upon receipt of required documentation, fees, redemption amount, and up to 3 years' back rent, SDAT must issue a ground rent redemption certificate to the tenant. When recorded in the county land records, the redemption transfers title to the tenant. The landlord, any creditor of the landlord, or any other person claiming through the landlord may collect the redemption amount, without interest, by providing SDAT with proof of the claimant's interest and payment of a $20 fee, along with any fee for expedited processing.

Litigation
District Court - Civil Jurisdiction - Dishonored Checks and Other Instruments
HB 97 - Chapter 275 (effective October 1, 2003)

This law clarifies that the District Court of Maryland has exclusive original civil jurisdiction in an action for damages for a dishonored check or other instrument, regardless of the amount in controversy. If the amount in controversy in such an action exceeds $25,000, a defendant may demand a transfer of the action from the District Court to a Circuit Court.

Small Claim Actions
SB 4 - Chapter 54 (effective October 1, 2003)

This law increases the maximum amount of a small claim over which the District Court of Maryland has exclusive jurisdiction from $2,500 to $5,000. The law also increases, from $2,500 to $5,000, the amount in controversy above which the district court and circuit courts have concurrent jurisdiction in civil cases and for which a civil appeal from the district court must be based on the record. The law also increases from $1,000 to $2,500 the amount in controversy in a civil action in which there are no formal pleadings. The law applies only to cases filed on or after October 1, 2003.

Action Alert: Even if not admitted to practice law, an officer or employee of a corporation or other business entity may appear on behalf of the entity in a small claim action. This increase in the amount for small claim actions includes garnishment proceedings. The result is that the need to retain a lawyer for cases involving small amounts, including garnishments, will dramatically decrease when this law goes into effect.

Identity Fraud

Criminal Law - Identity Fraud - Penalties
SB 135 - Chapter 67 (effective October 1, 2003)

Identity theft is one of the fastest growing crimes in the United States. Maryland has one of the highest number of identity theft complaints per capita. As part of Maryland's continuing effort to deter identity theft, this law increases from $5,000 to $25,000 the maximum fine for a person knowingly, willfully, and with fraudulent intent possessing, obtaining, or helping another person to possess or obtain any personal identifying information of an individual without consent in order to use, sell, or transfer the information to get a benefit, credit, good, service, or other thing valued at $500 or more in the name of the individual. The law similarly increases the maximum fine for the felony of intentionally manufacturing or distributing personal identifying information without consent.

Debt Management

Debt Management Services
HB640/SB339 - Chapters 374 and 375 (effective October 1, 2003)

Current law prohibits debt adjustment, but exempts a number of practices, including non-profit organizations providing debt counseling without charge. This law repeals current law and enacts a comprehensive law concerning debt management services that requires providers to be licensed by the Commissioner of Financial Regulation, establishes contract and surety bond requirements, and caps permissible fees and charges. "Debt management services" is defined as "receiving funds periodically from a consumer under an agreement with the consumer for the purpose of distributing the funds among the consumer's creditors in full or partial payment of the consumer's debts." Only non-profit organizations under § 501(c) of the Internal Revenue Code qualify for a license. Many businesses are exempt from all requirements, including depository institutions and licensed mortgage lenders.