Maryland Laws Update for Financial Services

The 2006 session of the Maryland General Assembly adjourned on April 10 and the Governor held his last bill signing session May 26, but declined to sign many bills and instead permitted them to become law without his signature.  During this session, Article 9 of the Uniform Commercial Code was clarified in an effort to avoid litigation and uncertainty at the end of the "transition period" on June 30.  Establishing branches in commercial affiliates was prohibited for banks, including out of state industrial loan companies.  The premium finance company law was comprehensively changed.  New laws on lending equity and non-discrimination, privacy, certificates of deposit and trusts present opportunities and challenges for financial institutions.  Some new laws are effective now, and others effective later.  Some of these new laws may require changes to your forms.

As you review these laws, remember that many new business opportunities are created because the law is changed to remove impediments.  The 2007 session of the Maryland General Assembly begins January 10, 2007.  If your business would benefit by changing existing law, please call Bob Enten and get started.

Please call any member of our Financial Services and Government Relations Group if you would like to discuss these new laws and their effect on your business.

Branching

Branching Restrictions

HB 1735 - Chapter 636 (effective April 7, 2006)

In an effort to preserve competitive equality for Maryland's community banks, this law prohibits state banking institutions and out-of-state banks from establishing or maintaining a branch in Maryland on the premises or property of an affiliate if the affiliate engages in activities that are not permitted for a bank or financial holding company, a national bank or its financial subsidiary. Commercial enterprises that wish to house banking facilities on their premises must contract with unaffiliated financial institutions. This emergency law was intended specifically to prevent industrial loan companies owned by commercial firms from establishing branches in their parent company's stores.

Deposits
Statute of Limitations for Certificates of Deposit

SB747 - Chapter 535 (effective June 1, 2006 and applies to all CDs in existence on or after that date)

This bill establishes a time (statute of limitations) after which a claim for payment of a certificate of deposit cannot be made. It addresses the problem of old paper certificates of deposit being presented where the bank believes the CD may have been redeemed long ago by use of an indemnification and affidavit of lost certificate without presenting the original paper CD. Banks frequently do not keep records longer than 6 or 7 years after an account has been closed. Bank acquisitions often exacerbate the absence of older records. This law establishes time periods (generally 6 years after specified reference points) after which an action for payment of a CD may not be brought.

Action item: Financial institutions should update their document retention/destruction policies to comply with the new statute of limitations.

Maryland Uniform Transfers to Minors Act ("MUTMA")

Joint Custodians

SB 550 - Chapter 435 (effective June 1, 2006)

Formerly, MUTMA permitted only one custodian to serve at a time on a MUTMA account. The new law permits two custodians to serve with respect to a single custodianship. Unless specified otherwise in the document creating the custodianship, each joint custodian has the power to act alone. If either custodian ceases to serve, the remaining custodian may serve alone without needing to appoint a successor joint custodian.

Action Item: Deposit forms most likely will need to be revised.

Lending

Mortgage Loans - Property Insurance Limits

HB 1288 - Chapter 615 (effective October 1, 2006)

This law clarifies existing law that a residential mortgage lender may not require a consumer borrower to purchase property insurance coverage exceeding the replacement cost of the improvements on the real property. "Replacement cost" is defined as the amount needed to repair damage or rebuild improvements on real property to restore the improvements to their pre-loss condition. It does not include the value of the land.

Action Item: Lenders that require borrowers to provide property insurance in an amount equal to the amount of the loan, or the appraised value of the property including land, need to change their procedures. We expect active enforcement of this law.

Mechanic's Liens - Professional Services

HB 1060 - Chapter 198 (effective October 1, 2006)

Current law provides for the establishment of a mechanic's lien to secure the payment of debt contracted for work done and materials furnished in the construction or repair of buildings. This law adds building or landscape architectural services, engineering services and land surveying services to the types of work for which a mechanic's lien may be established.

Property Disposition in Annulment or Divorce

SB 353 - Chapter 431 (applies to cases filed on or after October 1, 2006)

Under current Maryland law, courts in divorce and annulment actions cannot transfer real property interests from one spouse to another, although courts may transfer ownership of a pension, retirement or other deferred compensation plan from one spouse to either or both spouses and, subject to the consent of any lien holder, family use personal property. This law allows courts to make similar transfers of real property interests. A court, subject to the terms of any lien, may transfer ownership of an interest in real property jointly owned by the parties and used as the principal residence of the parties when they lived together by ordering the transfer of ownership of the real property or any interest in the real property from one party to the other party under certain conditions, authorizing one party to purchase the interest of the other party, or both.

Action Item: Lenders and other lien holders will want to revise loan servicing policies and procedures to account for potential transfers and releases.

Secured Transactions

SB 354 - Chapter 521 (effective March 30, 2006)

All UCC financing statements filed in Maryland before July 1, 2001 that expire June 30, 2006, or later must be continued before June 30, 2006 or they will lapse. Revised Article 9 as adopted in Maryland provides that financing statements filed before July 1, 2001 expire at the earlier of their normal expiration date or June 30, 2006. Unlike some states where there is confusion about whether financing statements filed before July 1, 2001, expire on June 30, Maryland law is clear. This law was enacted as an emergency measure to confirm that continuation statements filed before June 30 are effective.

Privacy
Social Security Numbers

HB 388 - Chapter 458 (effective January 1, 2007)

According to the latest Federal Trade Commission data, Maryland ranks 13th in the number of identity theft victims per 100,000 people. Continuing concerns over the high incidence of identity theft in Maryland prompted this law, which restricts employers' use of Social Security numbers. Chapter 458 prohibits printing SSNs on an employee's wage payment check, an attachment to it, a notice of direct deposit or a notice of credit to a debit or credit card account.

Action Item: Employers need to ensure that any necessary changes to employee payroll systems (both internal and third party) are made.

Identity Theft Passports

HB 1201 - Chapter 607 (effective October 1, 2006)

A victim of identity theft who has filed a report with law enforcement may apply for an identity theft passport. After completing a background investigation, the Maryland Attorney General may issue the passport to verify the victim's identity. The passport may be used to help prevent the arrest or detention of the victim for an offense committed by the identity thief or may be used by a creditor to aid in the investigation of a fraudulent account or charge. The law is contingent on availability of sufficient funds in the state budget for the Attorney General to enforce the law.

Use of Affidavit by Credit Cardholder in Criminal Case or Juvenile Proceeding

HB 1217 - Chapter 388 (effective October 1, 2006)

To make prosecution of identity thieves easier, the State is authorized to introduce an affidavit of the lawful credit cardholder, rather than the actual cardholder's testimony, in a prosecution, unless the defendant requires the presence of the affiant.

Lending Equity

Commercial Nondiscrimination Policy

SB 897 - Chapter 897 (effective October 1, 2006)

This law establishes a Commercial Nondiscrimination Policy under the Maryland Procurement Law. The State may not enter into a contract with a party who has been found to have violated the Commercial Nondiscrimination Policy with respect to a public or private contract by discriminating in the solicitation, selection, hiring or commercial treatment of vendors, suppliers, subcontractors or commercial customers on the basis of race, color, religion, ancestry or national origin, sex, age, marital status, sexual orientation or disability. Any alleged victim of discrimination can bring a charge with the Maryland Commission on Human Relations against state contractors. Disgruntled competitors, customers, and former employees may file charges that will expose companies to significant defense costs.

A nondiscrimination clause and certification must be included in State contracts, bids and subcontracts. Although the State will insert appropriate language into prime contracts, contractors must be sure to include the language in their subcontracts and bid proposals.

Action Item: An ounce of prevention is worth pounds of cure. State contractors should act now to update anti-discrimination policies, provide appropriate employee training and set up or review procedures for documentation. While no amount of diligence can guarantee that charges will not be filed, time spent up front attempting to avoid problems can both significantly reduce the number of claims, and increase the chances of successfully defending against claims that are filed.

State Investments

HB 257 - Chapter 565 (effective October 1, 2006)

The Treasurer of Maryland oversees the State's investment portfolio. Among other investments, the State invests in "commercial paper," which includes drafts, promissory notes, bank checks, and other negotiable instruments for the payment of money. This law authorizes the Treasurer to increase the amount invested in commercial paper from 5 to 10 percent. The law also expands the type of mutual funds in which the Treasurer may invest, provided those funds have received the highest rating from nationally recognized rating organizations. This law may create new opportunities for firms interested in providing investment services to the State.

Lending Equity

HB 300 - Chapter 309 (effective October 1, 2006)

To encourage banks to support the development of small and minority owned businesses through loans, technical assistance and investments in their communities, the General Assembly in 2004 established a Task Force on Lending Equity within Financial Institutions Providing State Depository Services. Chapter 309 implements Task Force recommendations by requiring that the State Treasurer consider several new factors before deciding whether to deposit State funds into a bank or otherwise use the financial services of a bank. In assessing whether to use a bank, the Treasurer must assign 15 percent of the weight of the decision to an assessment of the bank's record of lending to or otherwise fostering the growth of small and minority owned businesses, adhering to antidiscrimination statutes and regulations and investing in its community.

Action Item: Financial institutions interested in doing business with the State and its agencies will need to review this new law carefully.

Linked Deposit Program

HB 1431 - Chapter 396 (effective October 1, 2006)

In an effort to support minority business enterprises (MBEs) in the State, this law authorizes the purchase of up to $50 million in certificates of deposit by the Department of Housing and Community Development from financial institutions that, in turn, provide below-market interest rate loans to MBEs. The law requires DHCD to establish procedures for obtaining up-to-date listings of State certified MBEs, notifying lending institutions when MBEs lose their certification and processing loan applications from MBEs. The law provides that the State is not liable to any bank for unpaid loan payments made under the linked deposit program, and a loan under the linked deposit program is not a debt of the State.

This law is modeled on a very successful program in the State of Washington that has been beneficial to both lenders and the minority business community.

Trusts and Estates

Maryland Estate Tax

SB 2 - Chapter 225 (effective July 1, 2006, applicable to decedents dying after December 31, 2005)

In 2004, Maryland "decoupled" the computation of its estate tax from the federal estate tax by limiting its estate tax exemption to $1 million, instead of what is currently a federal estate tax exemption of $2 million. In the 2006 session, the Maryland General Assembly considered a variety of proposals that would have significantly reduced or eliminated the differential between the Maryland and federal estate tax exemptions. Ultimately, the General Assembly retained the limit of a $1 million exemption in calculating the State estate tax. However, the new law will allow the taxpayer to defer (not avoid) the Maryland estate tax on the differential between the State and federal exemption amounts until the surviving spouse's death as long as that differential is held by a trust for the surviving spouse's benefit that would qualify as a QTIP trust for federal estate tax purposes even though a marital deduction is not claimed for federal estate tax purposes with respect to that trust. Through the use of such a "State-only QTIP trust," the taxpayer will be able to maximize use of the federal exemption while deferring Maryland estate tax on the differential. The new law includes modest relief in the tax computation and provides extensive procedural, technical and penalty provisions regarding the imposition of the Maryland estate tax, including the filing of the Maryland estate tax return, a return that may be required when a federal return is not.

Action Item: Married couples with estates valued at more than $1 million may want to consider whether the new State-only QTIP trust is appropriate for them. While the desire to defer tax is an important factor in tax planning (time value of money, larger pool of funds for the survivor, possibility that an increased exemption may eliminate or reduce tax in the future), the answer is not clear-cut in this case. For example, apparently, the trust holding the differential between the federal and Maryland exemption amounts would be limited to use for the spouse, instead of being available to the descendants during the survivor's life, which may defeat the taxpayer's non-tax wishes.

Insurable Interests

SB 300 - Chapter 516 (effective June 1, 2006, applicable to all trusts existing before, on or after June 1, 2006, but only as to life insurance policies in force and for which the insured is alive on or after June 1, 2006)

In Chawla v. Transamerica Occidental Life Insurance Co., the U. S. District Court for the Eastern District of Virginia, applying Maryland law, determined that an irrevocable life insurance trust created by the insured did not have an insurable interest in the insured's life. Although the U.S. Court of Appeals for the Fourth Circuit eventually vacated this aspect of the Chawla decision, some practitioners remained uneasy with the implications of Chawla should Maryland's insurable interest law be subjected to judicial interpretation again. The new law provides that the trustee of a trust has an insurable interest in the life of an individual insured under a life insurance policy owned by the trust or trustee if, on the date on which the policy is issued, the insured is the grantor of the trust, an individual closely related by blood or law to the grantor or an individual in whom the grantor otherwise has an insurable interest, and the life insurance proceeds are primarily for the benefit of the trust beneficiaries having an insurable interest in the life of the insured. Additionally, a partnership, limited partnership or LLC has an insurable interest in the life of an individual insured under a life insurance policy owned by that entity if, on the date on which the policy is issued, substantially all of the owners of the entity are the insured, individuals closely related by blood or law to the insured, or persons having an insurable interest in the life of the insured.

Maryland Inheritance Tax - Exemption for Property Passing to Family Partnership or LLC

SB 545 - Chapter 30 (effective July 1, 2006, applicable to all decedents dying after June 30, 2006)

Chapter 30 creates inheritance tax exemptions for property passing from a decedent to a partnership or LLC if all of the partners or members are individuals (all of whom are family members of the decedent) who are exempt from inheritance tax in their individual capacities. This law extends to partnerships and LLCs an exemption that already was available to family-owned corporations.

Limited Liability Companies - Environmental Inspection Authority of Fiduciaries

SB 678 - Chapter 531 (effective July 1, 2006) Maryland law currently authorizes personal representatives, trustees and fiduciaries to inspect, for environmental law compliance reasons, assets held by sole proprietorships, partnerships and corporations. The new law adds LLCs.

Insurance

Homeowner's Insurance

HB 1261 - Chapter 388 (effective for policies issued, delivered or renewed on or after January 1, 2007)

Under this new law, insurers must provide homeowner's insurance policyholders with an annual statement that contains specific information and summarizes the coverages and exclusions under the policy, including whether the coverage provides for replacement cost, actual cash value or other method of loss payment. In addition, the new law requires an insurer or insurance producer to provide a notice at the time a homeowner's policy is initially purchased that states that a standard homeowner's insurance policy does not cover losses from flood, and gives specific information about the need for and how to obtain flood insurance. Finally, an insurer or insurance producer that sells homeowner's insurance must provide an applicant, at the time of application, with a separate written statement that lists all additional optional coverages available from the insurer. The statement must meet specific type size and language requirements.

Action Item: New disclosures are required beginning January 1, 2007.

Title Insurers and Title Insurance Producers

HB 1460 - Chapter 620 (effective October 1, 2006)

Many title insurance producers outsource escrow, closing and other settlement services by hiring independent contractors to perform these services. Under current law, any independent contractor that provides escrow, closing, or "settlement services that may result in the issuance of a title insurance contract" must hold a valid title insurance producer's license. This law defines these persons as "title insurance producer independent contractors" and regulates them by imposing two new requirements. First, no title insurance producer may use a title insurance producer independent contractor unless the contractor is appointed by the title insurer issuing the insurance policy. Second, a title insurance producer who employs a title insurance producer independent contractor must ensure that its blanket fidelity bond covers the independent contractor. This law now requires a title insurance producer to notify its appointing title insurer whenever it hires or associates with a licensed title insurance producer, including a title insurance producer independent contractor. Importantly, the law establishes a carve-out from the notices required to be given to a borrower by the person who first accepts the title insurance premium when the policy relates to real estate securing a commercial loan.

Action Item: Title insurance producers who use independent contractors for escrow, closing or other covered settlement services should review their fidelity coverage to ensure that it covers the independent contractors, provide their title insurers with a list of contractors that will be used and ensure that these contractors hold valid appointments with the insurers.

Premium Finance Companies

HB 861 - Chapter 194 (effective October 1, 2006)

Chapter 194 comprehensively changes the premium finance company law. It alters the filing requirements and registration fee for initial premium finance company registration. It also alters the requirements for renewal. A premium finance company will be required to report changes to the form of the premium finance agreement or fees, as well as changes to officers, directors, business address and telephone numbers, to the Insurance Commissioner within 30 days after a change occurs. The penalties for violating the premium finance law are increased. Finally, the premium finance contract must include specified additional information.

Action Item: Premium finance companies must revise forms and procedures before October 1, 2006.

Licensed Lenders

Examination of Consumer Credit Licensees

HB 247 - Chapter 84 (effective October 1, 2006)

Current law permits a business licensed by the Commissioner of Financial Regulation (such as mortgage lenders, installment loan or sales finance licensees) whose place of business is outside Maryland to produce documents for examination in Maryland, in lieu of being examined at its out-of-state location. This law, which was requested by the Commissioner, eliminates the discretion currently permitted to out-of-state licensees and gives the Commissioner the authority to decide whether to examine the documents through production in Maryland or at the licensee's out-of-state location.

Miscellaneous

Merchant Contact Information for Certain Internet Sales

HB 1016 - Chapter 371 (effective October 1, 2006)

Chapter 371 requires a merchant who sells consumer goods and services over the Internet under a contract that calls for periodic payments directly from a consumer's bank account, credit card account or debit card account to include on the merchant's website a toll-free phone number that the consumer can call or an address to which the consumer can write to cancel his or her contract. Many merchants currently allow a consumer to alter or cancel his or her contract only through a secure website, using the consumer's username and password. When a consumer forgets or loses his or her log-in information, it can be difficult for the consumer to cancel the contract without intervention by the consumer's credit card company or other financial institution. When this law goes into effect on October 1, 2006, consumers may cancel their contracts regardless of whether they remember their secure log-in information. Any covered merchant who fails to comply with the law engages in an unfair or deceptive trade practice, which could subject the merchant to fines and penalties.

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