Maryland Laws Update for Financial Services

Bank Robbery

Increased Penalties
HB 663 - Chapter 567 (effective June 1, 2005)

Bank robbery has become an increasing problem in Maryland. Under current law, a person who commits a robbery may be imprisoned for up to 15 years, but a person who commits a robbery with a dangerous weapon may be imprisoned for up to 20 years. Most bank robberies are committed by persons passing a note claiming they have a dangerous weapon and, under current law, those persons face a maximum sentence of 15 years. Chapter 567 exposes a person displaying a written instrument claiming that the person has possession of a dangerous weapon to a 20 year prison sentence.

Privacy

Identity Theft
HB 818/SB 43 - Chapters 241, 242 (effective July 1, 2005)

Identity theft was a hot issue this year, but most bills addressing this issue did not pass. This law creates a Task Force to Study Identity Theft. The Task Force will report its findings and recommendations by December 31, 2006.

Social Security Numbers
HB 56 - Chapter 521 (effective January 1, 2006) (for health insurance policies and contracts in effect before January 1, 2006, compliance is required by January 1, 2006)

When this law goes into effect, businesses that have customers' Social Security numbers will have to be even more careful. The new law prohibits publicly displaying an SSN, printing an SSN on a card required to access products or services, requiring an individual to transmit the individual's SSN over the Internet or initiating the transmission of an SSN over the Internet, or requiring an individual to use his or her SSN to access an Internet website unless a password is required. Unless otherwise legally required, the new law prohibits printing an SSN on material mailed to an individual and including an individual's SSN in material that is transmitted electronically or by facsimile to the individual unless the connection is secure or the SSN is encrypted. The prohibitions do not apply to the inclusion of an SSN in a document mailed or electronically transmitted under specified circumstances, the use of an SSN for internal verification or administrative purposes, or an interactive computer service or telecommunications provider's transmission, routing or temporary storage of an SSN. A business that used an SSN before January 1, 2006, in a manner prohibited by the new law may continue to use it until January 1, 2009, if the use is continuous and the business provides an annual disclosure form stating the individual's right to stop the use. A request to stop using an SSN must be honored within 30 days.

Action Item: Any business that maintains Social Security numbers must review how SSN's are used and ensure compliance with this new law.

Electronic Commerce

Payment of Wages to a Debit or Card Account
HB 751 - Chapter 573 (effective June 1, 2005)

Maryland employers must pay wages in cash or check. Wages may be direct deposited to a bank account only if authorized by the employee. The Maryland Department of Labor believes that former law did not permit employers to pay wages by crediting them to a stored value card, making Maryland one of 4 states nationwide where employers and employees could not take advantage of this convenient method of wage payment. Chapter 573 permits employers to credit an employee's wages to a stored value payroll card, which allows employees to access the funds through withdrawal, purchase, or transfer. The employee must authorize payment to a debit card or card account and any card or account fees must be disclosed to the employee in at least 12 point font.

Opportunity: This law presents an opportunity to both Maryland employers and financial institutions.

Electronic Payment Fee
HB 282 - Chapter 529 (effective October 1, 2005)

This law authorizes a homeowners association to charge a reasonable electronic payment fee if a member of the association elects to pay a fee by credit card or debit card. The fee may not exceed the amount charged to the homeowners association in connection with the use of the credit card or debit card. The homeowners association must include a notice that a fee will be charged with each bill for which electronic payment is authorized.

Electronic Postmarks

HB 487 - Chapter 381 (effective October 1, 2005)

Chapter 381 amends the Maryland Uniform Electronic Transactions Act to provide that a legal requirement to send, communicate, or transmit a record by registered or certified mail may be satisfied by an electronic record that is (1) addressed properly to an information processing system designated by the recipient; (2) either enters an information processing system outside the sender's control or a region of an information processing system under the recipient's control; (3) postmarked with a postal authority's electronic postmark; and (4) authenticated by an electronic postmark. An electronic postmark may not be used for serving legal process. The U.S. Postal Service, through its partner Authentidate, Inc., offers an electronic postmark service that verifies the times and dates when electronic mail is sent and received and the contents of the electronic mail.

Opportunity: Because electronic mail is much less costly than certified or registered mail, businesses required to send communications by certified or registered mail should consider using electronic mail and an electronic postmark instead.

Gift Certificates

SB 8 - Chapter 456 (effective July 1, 2006)

For the first time in Maryland, this law establishes rules for gift certificates and gift cards. A gift certificate is a device that can be used to purchase goods or services or is issued as a store credit for returned goods. Certain items are excluded, including prepaid calling cards, coupons for discounts, free gift certificates, and gift cards (defined below). No gift certificate may expire or be subject to any fee within 4 years after it is purchased. If the gift certificate will expire or be subject to a fee after 4 years, these terms and conditions must be printed in at least 10 point type in a visible place on the gift certificate, on a sticker affixed to the gift certificate, or on an envelope containing the gift certificate. If a gift certificate is issued in violation of the law, it will not expire or be subject to any fee.

Gift cards that are processed through a national credit or debit card service and that may be used to purchase goods or services from multiple unaffiliated merchants are not gift certificates. A gift card may be subject to expiration or post-sale fees, but only if the expiration date and information about the fees are printed on the front or back of the gift card in at least 10 point type. If the disclosures are hidden by the gift card's packaging, a written statement of the disclosures must be given to the purchaser. Special disclosure requirements apply to gift cards issued by electronic or telephonic means.

The law prohibits any change in a term or condition of a gift certificate or gift card disclosed at the time of issuance or sale, unless the change benefits the consumer. The law does not apply to any gift certificate or gift card issued before July 1, 2006.

Mortgage Lending

Licensing for Mortgage Loan Servicers
SB 159 - Chapter 132 (effective October 1, 2005)

Under current law, a person may not act as a mortgage lender or broker in Maryland unless the person is licensed by the Commissioner of Financial Regulation, is exempt from licensing, or is a federally approved seller-servicer and is registered with the Commissioner. A federally approved seller-servicer is a mortgage lender that has been approved to service loans by Freddie Mac, Fannie Mae, Ginnie Mae, VA or HUD.

This law repeals the exemption from Mortgage Lender licensing for federally approved seller-servicers. The law allows seller-servicers exempt from licensing immediately prior to October 1, 2005, to continue to service mortgage loans without a license until the Commissioner approves or disapproves the seller-servicer's license application, but only if the seller-servicer applies for a license no later than 30 days after October 1, 2005.

Action Item: Federally approved seller-servicers who currently rely on an exemption from licensing must submit a Mortgage Lender license application to the Commissioner not later than October 31, 2005, or divest their servicing portfolios of Maryland residential mortgage loans.

Licensing for Mortgage Originators

HB 1040 - Chapter 590 (effective October 1, 2005, with new licensing requirements effective January 1, 2007)

The law establishes a new licensing regime by the Commissioner of Financial Regulation for mortgage originators who work for some Maryland-licensed mortgage brokers and lenders. With limited exceptions, the law defines a mortgage originator who must become licensed as an individual who: is an employee of a Maryland Mortgage Lender licensee that either acts as a mortgage broker or has a net branch out of which the individual works; directly contacts prospective borrowers for the purpose of negotiating with or advising the prospective borrowers regarding mortgage loan terms and availability; is compensated as described in the law (basically, on commission or as a percentage of business the individual produces); and is authorized to accept loan applications on behalf of the Maryland-licensed employer. If an individual is a mortgage originator, he or she must quickly become familiar with the licensing requirements that include, among others, an education component. Perhaps more important, Maryland-licensed mortgage lenders and brokers whose employees are subject to this law must become familiar with the new licensing regime. Action item: Mortgage originators must be licensed by January 1, 2007. Mortgage originator license applications should be submitted to the Commissioner long before October 1, 2006, to ensure timely licensing.

Foreclosure Consultants and Protection of Homeowners

SB 761 - Chapter 509 (emergency bill effective May 26, 2005)

This law contains new disclosures, requirements, and prohibitions to stop foreclosure "rescue" scams perpetrated against homeowners in recent years. It primarily regulates activities of "foreclosure consultants" and "foreclosure consulting services." Many businesses are exempt if they are performing regular or normal business activities, including: banks, trust companies, savings and loan associations, credit unions, and insurance companies and their subsidiaries, affiliates, and agents; authorized title insurers; licensed title insurance producers; licensed mortgage brokers and lenders; licensed real estate brokers, associate real estate brokers, and real estate salespersons; and Maryland lawyers. Nonprofit organizations that offer counseling advice to homeowners in foreclosure or loan default, persons who hold or are owed an obligation secured by a lien on a residence in foreclosure while providing services in connection with the obligation or lien, and judgment creditors of a homeowner also are exempt. While most of the law does not apply to exempt persons, a new notice applies to all foreclosure actions. The notice must contain specific language printed in not less than 14 point bold-face type that must be sent by a person who is authorized to make a foreclosure sale to the homeowner no more than 2 days after the action to foreclose is docketed.

Action Item: Even those businesses that are exempt from the law must be sure that whoever is handling the foreclosure sale makes this new disclosure.

Releases

HB 1421 - Chapter 271 (effective June 1, 2005)

This law repeals the requirement that the clerk of a circuit court retain an original mortgage or deed of trust for 25 years after a release endorsed on the instrument is filed for the purpose of recording the release. The current practice of clerks is to record releases by making a photocopy, photograph, or digital copy, all of which are then converted to microfilm for storage at the State Archives. The original release is returned to the person submitting the release for filing and is no longer stored by the clerk.

Prerequisites to Recording

HB 204 - Chapter 35 (effective July 1, 2005)

Chapter 35 provides an alternative to the requirement that an instrument changing ownership in real property on the assessment records be accompanied by a complete intake sheet at the time of recordation. The law allows the clerk of the court to record an instrument that effects a change of ownership in real property if the instrument either is accompanied by a completed intake sheet or, and this is new, endorsed by the local assessment office. The law also prohibits a clerk from refusing to record an instrument that does not effect the change of ownership on the assessment books solely because it is not accompanied by a complete intake sheet. When property is transferred on the assessment books in this new fashion, the person offering the instrument must provide the assessment office the information required on the intake sheet. Also, the transfer must be made to the grantee or assignee, and the person recording the transfer must evidence the transfer on the deed or other instrument.

Maryland Uniform Environmental Covenants Act (UECA)

HB 679 - Chapter 229 (effective October 1, 2005)

This law establishes rules regarding the creation, applicability, maintenance, and enforcement of environmental covenants, and defines the rights and duties arising from such covenants. As a result of this law, environmental covenants will "run with the land," and will not be eliminated as an unintended consequence of the operation of traditional real property law. The law is premised on ensuring the long-term reliability of institutional controls (e.g., a concrete cap, a monitoring requirement, or a prohibition on the use of wells), and expanding the entities (including state agencies and private parties) entitled to insist on the continuing enforcement of institutional controls. UECA does not determine what the controls should be, what cleanup level is appropriate, or what liability attaches to a responsible party.

UECA is significant for financial institutions in two ways. First, it encourages the clean up of real property, thus returning it to productive use and maintaining or increasing market value. Second, although it would rarely be in an institution's interest to do so, UECA does not affect the right of a mortgage holder to extinguish an environmental covenant created subsequent to the mortgage by foreclosing on the property.

Deposits

Deposits of Surplus Local Government Money

SB 774 - Chapter 173 (effective June 1, 2005)

Under this law, local governments are authorized to participate in a banking service called the Certificate of Deposit Account Registry Service (CDARS), allowing deposit of unexpended or surplus public funds in any participating federally insured bank or savings and loan in excess of the $100,000 FDIC limit without the financial institution pledging collateral to secure the deposits. CDARS breaks up a customer's large deposit balances into smaller amounts of less than $100,000 and places those deposits at other banks within the CDARS network. The CDARS network can insure up to $10 million of a single customer's deposit. Customers benefit by maintaining one banking relationship, getting one interest rate at the certificate of deposit level that can be higher than other investment alternatives, and receiving one consolidated bank statement.

Mobile Homes - Interest on Security Deposits

SB 480 - Chapter 23 (effective October 1, 2005)

This law reduces from 4% to 3% the interest rate that must be paid by specified mobile home park owners on security deposits to specified residents at the end of a tenancy.

Escheat

Notice to Owner

HB 190 - Chapter 34 (effective July 1, 2005)

Since 2003, all holders of property presumed abandoned under Maryland's escheat laws have been required to send a notice about possible escheatment to the property owners between 30 and 120 days before the time for filing an abandoned property report with the Maryland Comptroller. This new law establishes $100 as the minimum value of abandoned property for which a notice must be sent and eliminates the need for some property owners to receive notice.

Practice Pointer: This $100 minimum does not apply to the notice that must be given by banks and other depositories that want to cease paying interest or impose inactivity charges on dormant accounts. Financial institutions subject to Maryland law still must provide notice before ceasing benefits or imposing fees on dormant accounts, regardless of the amount in the accounts.

General Business

Maryland Small Business Development Financing Authority

HB 674 - Chapter 228 (effective June 1, 2005)

The Maryland Small Business Development Financing Authority provides financing, as well as guaranty assistance, to lenders in Maryland that extend financing to qualified applicants engaged in specified businesses. This law increases assistance levels for existing MSBDFA programs and alters the types of assistance that MSBDFA can offer. The law increases the maximum loan amount from the Small Business Contract Financing Fund to $1,000,000 from $500,000; the maximum bond and surety guaranty amounts under the Small Business Surety Bond Program; and the maximum equity participation accounts in franchises, technology-based business, and acquired existing businesses under the Equity Participation Investment Program. The law expands MSBDFA's authority to fund businesses under EPIP, which formerly was limited to franchises and technology-based businesses, as long as the investment is recoverable within 7 years.

Insurance
HB 788 - Chapter 239 (effective October 1, 2005)

This Maryland Antitrust Act currently prohibits engaging in activities intended to restrain trade or competition in commerce. It exempts the activities of persons engaged in the insurance business (insurers, producers, adjusters, advisors, and rating organizations), so long as the persons are regulated by the Maryland Insurance Administration or the activity is authorized by State law. Chapter 239 narrows the Act's current exemption for the insurance industry so that it tracks federal law and, on and after October 1, 2005, bid rigging, boycotting, coercion, intimidation, and customer or territorial allocation will not be exempted activities.

Corporations and Real Estate Investment Trusts

HB 958 - Chapter 586 (effective June 1, 2005)

This law makes 3 important changes to the Maryland corporation law. First, it creates a Certificate of Notice, a new type of document that a corporation may file with the Maryland State Department of Assessments and Taxation. A Certificate of Notice may be used to disclose any action by a corporation,its board of directors or its stockholders, the expiration of the period of existence of the corporation, or any other information. A Certificate of Notice is not a charter document and may not affect the charter in any way or any rights or liabilities of stock-holders. Second, a director now may seek reimbursement of expenses incurred in success-fully defending any claim in a proceeding involving his or her service to the corporation. Current law permits directors to seek reimbursement of expenses only if successful on the entire proceeding. Third, the law authorizes a corporation's charter to limit the ability of the board of directors to change the name of the corporation or change the name, other designation, or par value of its stock, without stockholder approval. The law also amends the Maryland real estate investment trust law by removing the limitation on the number of persons (currently 100) to whom a real estate investment trust may issue beneficial interests for the purpose of qualifying the REIT under the Internal Revenue Code.

Action Item: Lenders and others that propose to engage in a transaction with a corporation should review any Certificate of Notice that may be on file with SDAT as part of their due diligence efforts.

Trusts and Estates

Personal Representatives

SB 45 - Chapter 106 (effective October 1, 2005)

Maryland law establishes an order of priority for appointment as a personal representative of an estate. A personal representative named in a will admitted to probate is first priority. This law provides that a personal representative nominated in accordance with a power conferred in a will admitted to probate is second priority. As a result, the surviving spouse (not otherwise designated pursuant to the first two levels of priority) has been moved to third priority for a person who has a will.

Qualified Minor's Trust

SB 3 - Chapter 455 (effective October 1, 2005, applied only prospectively and may not have any effect on or application to any custodial property created before the effective date)

This law permits a custodian serving under the Maryland Uniform Transfer to Minors Act to transfer all or part of the custodial property to a qualified minor's trust without a court order. A qualified minor's trust is a trust for the use and benefit of a minor of which a minor, presumably the same minor for whom the custodial account has been held, is the sole beneficiary during the minor's lifetime and that meets the requirements of Internal Revenue Code _ 2503(c). The custodianship terminates when the assets are transferred. The transfer of custodial property to a qualified minor's trust created under a will must be authorized expressly in the will.

For an inter vivos transfer under the new law to be valid, the instrument that created the custodial property must contain in conspicuous type a statement that the transferor of the property elects to grant the custodian the authority to transfer all or part of the custodial property to a qualified minor's trust without a court order.

Practice Pointer: Custodial property must be distributed to the minor upon the minor reaching 21 years of age. For a trust created under IRC _ 2503(c), upon reaching 21 years of age, the minor must be given the right for a limited period of time to withdraw the trust assets. If that right is not exercised, the assets can remain in trust. Thus, while enabling the use of a qualified minor's trust offers planning opportunities by allowing custodial assets to be transferred to a trust structure, it will not cure the problem faced by a grantor who creates a custodial account and later regrets that the minor will have access to the funds at age 21. Before converting a custodial account to a qualified minor's trust, the planner should take into account the other differences between the use of a custodial account and a qualified minor's trust, such as disposition of the property upon the death of the minor.

Taxes

Budget Reconciliation and Financing Act of 2005

HB 147 - Chapter 444 (various effective dates)

Chapter 444 includes several tax provisions to increase State revenues.

Medicaid Recovery. Chapter 444 authorizes the State Department of Health and Mental Hygiene to seek recovery from the estate of the spouse of a deceased Medicaid recipient for the cost of furnishing Medicaid services to individuals who applied for Medicaid on or after July 1, 2005 and extends the time frame for the Department to file a claim against any estate of a deceased medicaid recipient. Under current law, the claim may be filed by the Department within the earlier of 6 months after the appointment of a personal representative or 2 months after the personal representative notifies the Department that the claim would be barred unless the Department presents its claim within 2 months from the receipt of the notice. Under Chapter 444, the 6-month bar now occurs after publication of notice of the first appointment of a personal representative.

Pass-through Entity Tax. Maryland currently imposes a 4.75% tax on the income of a partnership, limited liability corporation, or S corporation that is passed through to a nonresident. The tax is paid on behalf of the nonresident by the partnership, LLC, or S corporation. A nonresident that receives pass-through income and files a Maryland tax return can claim a credit in the amount of pass-through entity (PTE) tax paid on its behalf. Effective for tax years beginning after December 31, 2004, Chapter 444 increases the PTE tax from 4.75 to 6 %, to reflect the imposition of the additional State tax on nonresidents equal to the lowest county income tax imposed. In addition, the PTE tax is expanded to include income of a partnership, LLC, or S corporation that is passed through to a nonresident entity. Income that is passed through to a real estate investment trust, whether directly or indirectly, is not subject to the PTE tax.

Withholding Tax Rates. The Budget Reconciliation and Financing Act of 2004 imposed a Maryland income tax equal to the lowest county income tax rate in Maryland (currently 1.25%) on individuals who are subject to the State income tax, but are not subject to the county income tax. Effective June 1, 2005, Chapter 444 increases withholding rates for nonresident income derived from real estate sales and gambling winnings from 4.75 to 6%, to reflect the imposition of this additional State tax on nonresidents.

Heritage Structure Rehabilitation Tax Credit. In each of the past 3 Sessions of the General Assembly, legislation has been adopted to place limits on the Heritage Structure Rehabilitation Tax Credit to control Maryland's fiscal exposure under the credit. Chapter 76 in 2004 reestablished the Heritage Structure Rehabilitation Tax Credit Program with several major changes. Chapter 444 of 2005 contains 2 changes to the credit. The changes take effect on October 1, 2005.

First, the Maryland Historical Trust is required to adopt regulations to charge a reasonable fee to certify heritage structures and rehabilitations. Charging a fee will eliminate reliance on Maryland general funds to administer the program. Second, the law allows a taxpayer to claim the heritage tax credit based on the taxpayer's actual rehabilitation expenditures, even if actual expenditures exceed the estimated amount stated on an initial credit application, for projects for which an application was received by the Trust before July 1, 2002. The maximum additional credit that may be allowed under this provision is $250,000.

Miscellaneous

Enforcement Authority of Consumer Protection Division

HB 507 - Chapter 216 (effective October 1, 2005)

The law clarifies and enhances the enforcement authority of the Consumer Protection Division of the Maryland Attorney General's office.

Hurricane Isabel Disaster Relief Act

HB 1281 - Chapter 599 (emergency bill, effective May 26, 2005)

Last year we reported about a law enacted to provide financial assistance to homeowners who suffered losses due to Hurricane Isabel. The financial assistance programs under last year's law were to terminate at the end of May 2005. This law extends the availability of financial assistance through May 31, 2006. All applications for financial assistance must be received by the Maryland Department of Housing and Community Development by September 30, 2005.

Abandoned or Distressed Property

SB 322 - Chapter 18 (effective June 1, 2005)

Last year we reported about a new law authorizing the Mayor and City Council of Baltimore to extinguish an irredeemable ground rent under certain circumstances. This new law authorizes Baltimore City to redeem a ground rent on abandoned or distressed property that has been condemned by following the same process provided for extinguishing an irredeemable ground rent.

Maryland Withholding Tax on Qualified Retirement Plan Distributions

Chapter 444, HB 147, requires payors of eligible rollover distributions from qualified retirement plans (pension, profit sharing, 401(k), 403(b), and 457(b) plans) to withhold Maryland tax whenever federal tax is required to be withheld. Under Internal Revenue Code Section 3405(c), whenever an "eligible rollover distribution" is made from a qualified retirement plan, a mandatory 20% federal withholding tax applies, unless the distribution is directly rolled over to an Individual Retirement Account or to another qualified retirement plan. An eligible rollover distribution is generally any lump sum distribution to a participant or surviving spouse. Annuities, most installment payments and death benefits to non-spouses are not eligible rollover distributions.

Chapter 444 provides that a mandatory 7.75% Maryland withholding tax now also applies to eligible rollover distributions. The state withholding tax applies to the same distributions and to the same payors as does the federal withholding tax. The withholding requirement takes effect for distributions made on and after July 1, 2005.

Please call D. Robert Enten, Esq. at 410-576-4114 if you would like to discuss this law and its effect on your business. Copies of these laws may be obtained from the Maryland General Assembly website at www.mlis.state.md.us.

If you have any questions about these laws, or need help implementing them, please call our attorneys in the Financial Services Group.

Disclaimer: This Bulletin is to inform you of current legal developments and does not constitute legal advice or opinion concerning specific factual situations.