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Maryland Laws Update for Financial Services

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Maryland Laws Update 2014

We are pleased to provide our clients and friends this review of 2014 Maryland laws affecting financial service providers.

Please call us if you would like to discuss these new laws and their impact on your business.

Table of Contents

COMMERCIAL LENDING

Secured Transactions – Notice of Financing Statement Filed by Individual about Individual
SB 404 (Chapter 58)
(effective October 1, 2014)

Senate Bill 404 imposes a new notice requirement on the Maryland Department of Assessments and Taxation (SDAT). Beginning October 1, 2014, SDAT must provide a written notice to an individual when that individual is the debtor identified on a financing statement filed by a secured creditor who is an individual. The Act does not apply to a mortgage or deed of trust filed as a financing statement. The form of the written notice will be determined by SDAT but must contain at least: (1) the individual debtor’s name as shown on the financing statement; (2) the individual secured party’s name and address as shown on the financing statement; and (3) the remedies available to the individual debtor if the debtor believes that the financing statement is erroneously or fraudulently filed.

Practice Point: Because the Act only applies when both the secured party and the debtor are individuals, it should have limited impact on commercial lenders.

Economic Development – Equity Participation Investment Program – Small Businesses
HB 583/SB 661 (Chapters 70/71)
(effective July 1, 2014)

House Bill 583 and Senate Bill 661 expand the types of businesses in which the Maryland Small Business Development Financing Authority (MSBDFA) can provide equity financing under the Equity Participation Investment Program (EPIP) found in Subtitle 5 of Maryland’s Economic Development Article. Beginning July 1, 2014, MSBDFA can provide EPIP financing to “small businesses,” adopting the small business size standards under the U.S. Small Business Administration. The Acts change the limit on the equity participation financing under EPIP to $2,000,000 (from the greater of $2,000,000 or 49% of the total investment in the business) and require that all investments in the businesses be recovered within 7 years (from the previous standard that ranged from 7 years to 10 years depending on the type of business). The Acts eliminate the requirement for an independent appraisal at the time of recovery and only require an independent appraisal in the event there is a dispute between the borrower and MSBDFA as to the value of the business entity.

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CORPORATE ISSUES

Maryland Securities Act – Registration and Filing Exemptions
SB 811/HB 1243 (Chapters 557/558)
(effective October 1, 2014)

These Acts were introduced to facilitate crowdfunding, which is permitted by the federal Crowdfund Act. As a general rule, every offer and every sale of a security must be either registered under federal and applicable state securities laws or exempt from such registration requirements. Senate Bill 811 and House Bill 1243 make it easier for startup companies to raise capital by permitting the Maryland Securities Commissioner to exempt, by rule or order, certain types of small investments from Maryland securities registration and filing requirements. Among other requirements applicable to the exemption, (i) a securities offering must be conducted in accordance with Section 3(a)(11) of the Securities Act of 1933 and Rule 147, (ii) offers and sales must be limited to Maryland residents, (iii) each individual investor’s investment must be limited to $100, and (iv) the aggregate investment by the group must be limited to $100,000. The Acts establish a filing fee of $100 for a filing submitted in accordance with a crowdfunding exemption granted by the Commissioner.

Corporations and Real Estate Investment Trusts – Miscellaneous Provisions
SB 713/HB 916 (Chapters 550/551)
(effective October 1, 2014)

Senate Bill 713 and House Bill 916 make several changes to Maryland’s corporation and real estate investment trust (REIT) laws. First, the Acts provide that a corporation or REIT may renounce, in its charter or by board resolution, an interest or expectation of the ability to participate in any business opportunity, including an opportunity that is developed by or presented to a director or officer. The ability to renounce a particular opportunity could afford protection to the board against liability to stockholders in the event it chooses not to pursue a particular transaction or other opportunity. Second, the Acts remove the prohibition against paying certain stock dividends unless the dividend is expressly permitted by the corporation’s charter or approved by stockholders. The third amendment, which is one of the more significant changes, addresses director eligibility requirements. Although Maryland law provides that a corporation’s charter or bylaws may impose director eligibility requirements, it was silent as to the effect of a director’s failure to satisfy those requirements once he or she is elected. The Acts provide that a director’s term will expire if (i) he or she fails to meet any director eligibility requirement that was in effect at the time of his or her election and (ii) the charter or bylaws provide for the expiration of his or her term as a result of such failure. Fourth, the Acts change the manner in which two or more stockholders may agree to vote their securities by recognizing the use of a voting agreement. Under Maryland law in effect prior to these Acts, two or more stockholders who want to enter into a formal voting arrangement must enter into a voting trust agreement and appoint a voting trustee, provide a copy of the agreement to the corporation, and transfer their securities to the voting trustee. The Acts make it simpler and less burdensome for stockholders to enter into arrangements regarding how their securities are to be voted. Fifth, the Acts exempt from the stockholder approval requirement certain mergers involving Maryland corporations and REITs with a class of equity securities registered under the Securities Exchange Act of 1934 if the merger relates to an exchange offer or a tender offer, the acquiring entity gives 30 days’ prior notice to the stockholders of the target corporation or REIT, and certain other conditions are satisfied.

Practice Point: Maryland corporate law applies to Maryland-chartered banks unless the Financial Institution Article of the Annotated Code of Maryland expressly provides otherwise with respect to a particular subject. These institutions and their stockholders can take advantage of the flexibility that the Acts provide, such as by refining director eligibility requirements and the use of voting agreements.

Recordation and Transfer Taxes – Transfer of Property Between Business Entities – Reorganizations – Exemptions
SB 106 (Chapter 129)
(effective July 1, 2014)

Maryland law in effect prior to this Act exempts from recordation and State transfer taxes a transfer of real property between a parent corporation or limited liability company and its subsidiaries, or between multiple subsidiaries that are wholly-owned by the same parent corporation or limited liability company, if, among other transaction types, the transfer is made as part of a tax-free reorganization described in Section 368(a) of the Internal Revenue Code (IRC). By its terms, IRC Section 368(a) contemplates a reorganization involving corporations but the Internal Revenue Service has, since 1997, also applied the section to limited liability companies. However, because the text of IRC Section 368(a) references only corporations, the Maryland Department of Assessments and Taxation has refused to grant the exemption to transfers involving limited liability companies. Senate Bill 106 makes it clear that the exemption applies to transfers involving limited liability companies. Senate Bill 106 applies to instruments of transfer filed on or after July 1, 2014.

DEBT SETTLEMENT SERVICES

Debt Settlement Services Sunset and Reporting Extension
SB 160/HB 704 (Chapters 276/277)
(effective October 1, 2014)

Maryland’s Debt Settlement Services Act (DSSA) authorizes the provision of debt settlement services to consumer debtors by registered providers. The DSSA imposes restrictions on registered providers, including how fees are calculated and how consumer funds are held, and imposes annual reporting requirements. The DSSA was originally enacted with a sunset provision that provided for the DSSA’s expiration on June 30, 2015. This Act extends the sunset date for an additional year, to June 30, 2016, in order to allow further evaluation of the debt settlement industry and its impact on Maryland consumers. The law also provides that a registration or renewal of a registration with an expiration date of December 31, 2015 will be automatically extended (with no additional fee or filing) so that it expires on June 1, 2016.

Practice Point: Among other businesses, banks and credit unions are not subject to the DSSA.

DEPOSIT ACCOUNT ISSUES

Maryland Uniform Commercial Code – Funds (Remittance) Transfers
SB 522 (Chapter 302)
(effective October 1, 2014)

Senate Bill 522 alters applicability of Maryland’s Uniform Commercial Code (UCC) governing certain transfers of funds. A funds transfer is a specialized method of payment, also known in the commercial community as a wholesale wire transfer. The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the federal Electronic Fund Transfer Act (EFTA) to apply to “remittance transfers.” Under federal law, a remittance transfer provider is a business that transfers money electronically for consumers to people and businesses in foreign countries. According to the federal Consumer Financial Protection Bureau (CFPB), the Dodd-Frank Act raised certain issues relating to traditional cash-based remittance transfers sent through money transmitters, which had not been previously covered by the EFTA, as well as international wire transfers, which are not electronic fund transfers. Senate Bill 522 requires the UCC provisions to apply to a transfer of funds that is a “remittance transfer,” unless the remittance transfer is an “electronic fund transfer” as those terms are defined in the EFTA. To the extent the applicable UCC provisions governing fund transfers are inconsistent with the federal EFTA, the federal law governs. Without the changes made by Senate Bill 522, the UCC provisions might not apply to some aspects of remittance transfers, including mistaken addresses or payees, duties of intermediaries, and other issues beyond the initial sending of the transfer.

Practice Point: The Act makes Maryland law consistent with the laws in the vast majority of other states.

Interest on Specific Purpose Savings Accounts
SB 583 (Chapter 306)
(effective June 1, 2014)

In 2012, the General Assembly changed the rate of interest Maryland banks are required to pay on certain specific purpose (e.g., “Christmas Club”) deposit accounts, from a fixed 3% per annum to an adjustable rate based on a national index for six-month certificates of deposit published by the Federal Reserve. As reported in our March 2014 Maryland Legal Alert, the Federal Reserve stopped publishing the six-month certificates of deposit index in December 2013, leaving banks uncertain as to what minimum rate was required on these specific purpose accounts. With this Act, the minimum interest rate on specific purpose savings accounts will be based on the weekly average yield of United States Treasury Securities adjusted to a constant maturity of one year. The Act is effective June 1, 2014, but applies to accounts in existence on or after January 1, 2014.

Practice Point: This section of Maryland law applies only to banking institutions incorporated under Maryland law. The affected accounts are those established for a specific purpose and for a period of 1 year or less. Banks subject to this law may want to review their deposit account agreements to determine if there are any provisions regarding payment of interest that differ from this law.

ENERGY EFFICIENCY LOANS

Clean Energy Loan Programs – Private Lenders – Collection of Loan Payments
SB 186/HB 202 (Chapters 472/473)
(effective October 1, 2014)

Maryland allows counties and municipalities to enact ordinances or resolutions establishing a program to provide loans to commercial property owners in order to finance certain energy efficiency programs and renewable energy projects. The local ordinance or resolution must provide eligibility requirements, including requirements for energy efficiency improvements, renewable energy devices, property owners, property, and loan terms and conditions. Senate Bill 186 and House Bill 202 authorize a private lender to provide capital to a commercial property owner under one of these local clean energy loan programs. In addition, with the express consent of all holders of a mortgage or deed of trust on commercial property that will be improved through a loan under a program, a county or municipality may collect payments owed to the private lender, and costs associated with administration, through a surcharge on the property owner’s tax bill. Such a surcharge may not be greater than necessary to pay for issuing bonds to finance loans and administer the program. This surcharge is treated as a tax lien on the real property until it is paid.

Practice Point: Lenders should be on the lookout for the establishment of these programs in the counties where they do business. Tax liens have priority lien status on real property.

Jane E. Lawton Conservation Loan Program – Energy Efficiency Projects
SB 875/HB 1165 (Chapters 348/349)
(effective July 1, 2014)

The Jane E. Lawton Conservation Loan Program provides financial assistance in the form of low-interest loans to nonprofit organizations, local jurisdictions, and eligible businesses for (1) improvements or modifications that enhance the energy efficiency and reduce the operating expenses of a structure or (2) installation of infrastructure for renewable energy generation by local jurisdictions and nonprofit organizations. Senate Bill 875 and House Bill 1165 repeal provisions relating to renewable energy projects so that this loan program focuses only on energy efficiency projects.

The Maryland Energy Administration (MEA) is authorized to enhance the credit of financing offered by a bank or other financial institution. Such a credit enhancement must (1) carry out the purposes of the program (mentioned above) in a manner MEA considers appropriate, (2) facilitate financing of at least one project of a local jurisdiction, nonprofit organization, or eligible business, and (3) be offered only to a bank or financial institution in good standing that is incorporated or registered to do business in the State. The Acts allow MEA to assess a reasonable fee to a participating bank or financial institution for administrative expenses.

The Acts also amend the definition of “eligible business” to refer to a commercial enterprise or business in good standing with the Maryland Department of Assessments and Taxation and to include businesses registered to do business in the State in addition to those incorporated in the State. The Acts modify the borrower’s requirement to document that the anticipated energy cost savings over a defined period after completion of a project will exceed the cost of the project. The documentation now must be in accordance with a methodology acceptable to MEA and based on the savings and costs of the borrower. The Acts clarify that a portion of the funds do not need to be reserved indefinitely for loans to nonprofit organizations. Rather, MEA must determine a period, not less than 90 days, to reserve the money for nonprofit organizations before making it available to other borrowers. Under the Acts, all projects must be located in Maryland.

Practice Point: MEA has revised its regulations on an emergency basis to bring these regulations into compliance with this new law.

Maryland Clean Energy Center – Green Banks and Clean Bank Financing – Study
SB 985 (Chapter 365)
(effective July 1, 2014)

The Maryland Clean Energy Center’s (MCEC) purpose is to promote and assist development of the clean energy industry in Maryland, promote deployment of clean energy technology in the State, and collect, analyze, and disseminate industry data. In order to further its purpose, MCEC is authorized to make grants to or provide equity investment financing for clean technology-based businesses. This Act requires MCEC, in collaboration with the Maryland Energy Administration (MEA), to conduct an investigation and make recommendations regarding the viability of green banks and clean bank financing initiatives in Maryland. A “green bank” is a public or quasi-public financing institution that provides low-cost, long-term financing support to clean, low-carbon projects by leveraging public funds to attract private investment so that each public dollar supports multiple dollars of private investment. An interim report is due by December 1, 2014, and a final report by December 1, 2015.

Energy Efficient Homes
HB 553 (Chapter 410)
(effective July 1, 2014)

House Bill 553 establishes the Energy-Efficient Homes Construction Loan Program within the State Department of Housing and Community Development (DHCD) to provide low-interest loans for the construction of “low-energy” and “net-zero” homes. A program loan must be secured by a mortgage, which may be subordinate to other mortgages and may include terms that DHCD considers necessary to make the project viable. The Act establishes a special fund within DHCD to pay the expenses of the program, provide credit enhancement under the program, and make or purchase loans under the program. DHCD must adopt regulations to implement the new law, including regulations designed to increase participation of minority business enterprises in the program.

Practice Point: Lenders with an interest in this program may want to reach out to DHCD for further information.

IDENTITY ABUSE

Money Transmission – Fraud Protections
HB 723 (Chapter 421)
(effective October 1, 2014)

Over the last decade, several money transfer scams have tricked elder adults into unknowingly transferring money to a scam artist. House Bill 723 requires Maryland Money Transmission Act licensees to provide, on an annual basis, training materials to agents on how to recognize financial abuse and financial exploitation of elder adults and how to respond appropriately if an agent suspects that a request is for a fraudulent transaction in which an elder adult is the victim. In addition, a licensee must provide the training materials to newly appointed agents within one month after appointment. The Act also requires a licensee to (1) include a fraud warning on all transmittal forms used to send money from one individual to another, (2) allow a customer to voluntarily be disqualified from sending money transmissions from or receiving money transmissions in the State, and (3) retain records relating to training materials provided to the licensee’s agents for at least three years. The Act does not apply to a licensee or an agent that engages in (1) the business of money transmission solely through the Internet or (2) selling or issuing stored value devices, traveler’s checks, or money orders, or providing bill payer services, as long as the licensee or agent does not engage in any other business regulated under the Money Transmission Act.

Practice Point: Banks and credit unions are exempt from licensing under Maryland’s Money Transmission Act

GENDER ISSUES

Prohibition on Discrimination Based on Gender Identity
SB 212 (Chapter 474)
(effective October 1, 2014)

In Maryland, at the beginning of the 2014 legislative session, Hyattsville, Baltimore City, Baltimore County, Howard County, and Montgomery County have laws prohibiting discrimination based on gender identity. Additionally, in August 2007, Maryland’s Governor issued an executive order that included gender identity and expression as a prohibited basis for employment discrimination. Senate Bill 212 prohibits discrimination based on gender identity in public accommodations, labor and employment, and housing by persons licensed or regulated by a unit of the Department of Labor, Licensing, and Regulation (DLLR). The Act further prohibits discrimination based on gender identity and sexual orientation in State personnel actions and in the leasing of property for commercial use. “Gender identity” is defined as the gender-related identity, appearance, expression, or behavior of a person, regardless of the person’s assigned sex at birth, which may be demonstrated by (1) consistent and uniform assertion of the person’s gender identity or (2) any other evidence that the gender identity is sincerely held as part of the person’s core identity. The Act provides exemptions relating to housing discrimination for the rental of rooms or apartments in an owner’s principal residence in a building with no more than five rental units. Additionally, certain religious institutions are exempted from the employment discrimination provisions of the Act with respect to the employment of individuals of a particular gender identity to perform work connected with the activities of the religious entity. It is not unlawful for an employer to establish and require an employee to adhere to certain reasonable workplace appearance, grooming, and dress standards as long as the employee is allowed to appear, groom, and dress consistent with the employee’s gender identity.

Senate Bill 212 does not apply to a private facility in a place of public accommodation if the place of public accommodation makes available, for the use of persons whose gender identity is different from their assigned sex at birth, a space that is functionally equivalent to the space made available to users of the private facility. The Act defines “private facility” as a facility (1) that is designed to accommodate only a particular sex, (2) that is designed to be used simultaneously by more than one user of the same sex, and (3) in which it is customary to disrobe in view of other users of the facility. A petition drive to repeal the Act through a referendum on the November ballot failed.

Practice Point: Banks, credit unions, mortgage lenders, and mortgage brokers, among other financial service providers who are licensed or regulated by DLLR, are subject to this new law. Existing policies and procedures, including personnel policies and hiring practices, should be reviewed in light of this legislation.

LABOR AND INDUSTRY

Maryland Minimum Wage Act
HB 295 (Chapter 262)
(effective July 1, 2014)

This Act makes substantial changes to Maryland’s minimum wage requirements. The Act requires that Maryland employers pay the greater of the federal minimum wage (currently $7.25 per hour) or a State minimum wage of $8.00 per hour (beginning January 1, 2015) subject to the following subsequent increases through July 1, 2018:
• $8.25 per hour on July 1, 2015
• $8.75 per hour on July 1, 2016
• $9.25 per hour on July 1, 2017 and
• $10.10 per hour on July 1, 2018

Base wage for tipped employees is $3.63 provided that the employer makes up any difference if base wage plus tips falls short of the applicable State minimum wage.

For the first six months of employment, employers may pay individuals who are under 20 years of age 85% of the State minimum wage. Under certain circumstances, employers of amusement or recreational establishments (including swimming pools) may pay the greater of 85% of the State minimum wage or $7.25 per hour.

The Act repeals exemptions from minimum wage requirements for individuals age 62 or older who work 25 hours or less per week in a motion picture theatre. It also increases the annual gross income, from $250,000 to $400,000, that allows an exemption for employers owning a café, drive-in, drugstore, restaurant, tavern, or similar establishment selling food and drink for consumption on the premises.

Under existing State law, overtime wages of at least 1.5 times the usual hourly wage must be paid. This Act repeals the overtime exemptions for hotels, motels, restaurants, gas stations, private country clubs, and certain not-for-profit entities engaged primarily in providing temporary at-home care services, such as companionship or delivery of prepared meals to the ill, disabled, elderly, or individuals with a mental disorder. A not-for-profit employer that also is a concert promoter, legitimate theater, music festival, music pavilion, or theatrical show must pay overtime for a craft or trade employee.

Employees claiming they have received less than the wages set forth in the law may recover not only the difference between what they were paid and the required wage but also liquidated damages in the same amount, counsel fees, and other costs. However, if the employer proves it acted in good faith and reasonably believed it was paying the correct wages, the court may reduce or not award the liquidated damages.

ESTATES AND TRUSTS


Maryland Estate Tax – Unified Credit
HB 739 (Chapters 612)
(effective July 1, 2014)

House Bill 739 makes a significant change to Maryland’s estate tax law. Prior to this Act, Maryland imposed an estate tax on estates valued at more than $1,000,000, even though the federal estate tax applicable exclusion amount (commonly referred to as the “estate tax exemption”) is currently $5,340,000 (and is inflation indexed). Maryland “decoupled” from the federal estate tax exemption beginning in 2004. The Act returns Maryland to the federal estate tax exemption amount on a phased in basis, as follows:

Year of DeathEstate Tax Exemption
2014$1,000,000
2015$1,500,000
2016$2,000,000
2017$3,000,000
2018$4,000,000
2019 and laterThe federal amount, indexed for inflation (currently $5,340,000)

Practice Point: There are provisions in some Wills and Revocable Trusts and in other estate planning documents that should be reviewed to address these Maryland tax changes.

Maryland Trust Act
HB 83 (Chapter 585)
(effective January 1, 2015)

There have been efforts for many years to update Maryland’s trust law. These efforts were successful this year and the Maryland Trust Act (nearly 100 pages) was enacted. It is a comprehensive overhaul of Maryland’s trust law. It attempts to codify parts of Maryland’s common (case made) law on trusts, taking into account aspects of Maryland’s previously existing trust statutes and the Uniform Trust Code. The breadth of the new law, dealing with both substantive as well as procedural aspects of trust law, is extensive and needs significant review. Of particular interest to financial service providers, it addresses obligations and liability of trustees, rights of beneficiaries, and rights of certain creditors and assignees. Because it is so massive, the Act is still being studied by our Estates and Trusts Practice Group. Please look for additional information about this Act in coming months.

Practice Point: Financial institutions that exercise trust powers will need to carefully review the new law and determine what, if any, changes are required in operations, policies, and procedures before January 1, 2015.
 

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FORECLOSURE AND MORTGAGE DELINQUENCY

Limitations on Actions to Recover Certain Deficiency Judgments and Shortened Statute of Limitations for Residential Property Promissory Notes and Mortgages
HB 274 (Chapter 592)
(effective July 1, 2014)

This Act focuses on two related but distinct activities: recovery of foreclosure deficiencies and recovery on certain sealed instruments.

Foreclosure Deficiencies. For many years, Maryland law has allowed deficiency judgments resulting from foreclosures to be pursued either through a separate civil action or as part of the foreclosure sale process. House Bill 274 eliminates the choice for residential property foreclosures. It requires that lenders who want to pursue deficiency judgments arising from foreclosures of owner-occupied residential property do so through the foreclosure process (following specified procedures). In addition, this Act significantly shortens the time period (from twelve years to three years) during which recovery of a deficiency judgment may be sought. For residential property that was owner-occupied as a primary residence at the time the foreclosure action was filed, a secured party must file a motion for a deficiency judgment in the foreclosure proceeding within three years after final ratification of the auditor’s report. This mechanism is the only post-ratification remedy available to a secured party. No separate civil action to collect the mortgage loan debt may be brought.

The Act provides that any motion for deficiency judgment arising out of a residential property foreclosure initiated on or after July 1, 2014 must be filed within three years after the final ratification of the auditor’s report, and any motion for a deficiency judgment arising out of a residential property foreclosure for which an auditor’s report has been finally ratified before July 1, 2014 must be filed within three years after final ratification of the auditor’s report or before July 1, 2017, whichever is earlier.

Practice Point: Lenders should examine their foreclosure and deficiency recovery procedures and be prepared to seek deficiency judgments within the new, shorter time period, using only the deficiency judgment motion procedure. Lenders need to be careful to properly apply these new deficiency judgment procedures to all situations in which they apply, especially certain loans that a lender has internally classified as “commercial” (e.g., 1-to-4 multi-family dwellings where an owner lives in one of the units).

Statute of Limitations on Sealed Instruments. Existing Maryland law provides a twelve-year statute of limitations for certain “specialties,” including promissory notes and other instruments “under seal.” Most lenders have Maryland borrowers execute promissory notes, deeds of trust, and mortgages under seal in order to maintain a twelve-year period in which to file suit for breach of the instrument. House Bill 274 dramatically shortens, from twelve years to three years, the statute of limitations for a civil action on a deed of trust, mortgage, or promissory note signed under seal if that deed of trust, mortgage, or promissory note secures or is secured by owner-occupied residential property. The term “residential property” includes real property improved by 1-to-4 single family dwelling units, and “owner-occupied” includes any residential property where at least one of the single family dwelling units is occupied by an individual who has an ownership interest in the property and who uses the dwelling for that individual’s principal residence. As mentioned above, House Bill 274 also provides that if a foreclosure action is brought under a deed of trust or mortgage secured by owner-occupied residential property, no civil action for a deficiency balance may be brought (and recovery of such a deficiency must be pursued as a part of the foreclosure action).

The Act provides that any action to collect the unpaid balance due on an affected sealed instruments that arises before July 1, 2014 must be filed within twelve years after the date the cause of action accrues or before July 1, 2017, whichever is earlier. This has the effect of imposing a shorter statute of limitations on a creditor’s right to file a collection action if the action arose before July 1, 2014.

Practice Point: Lenders should examine their policies and procedures for collecting residential mortgage loan debt and be prepared to file lawsuits within the new, shorter limitations period. Further, lenders must recognize that pursuing a foreclosure action under a deed of trust or mortgage secured by owner-occupied residential property eliminates the right to bring a separate civil action outside the foreclosure process to recover any deficiency balance resulting from the foreclosure.

Real Property – Common Ownership Communities - Foreclosure of Liens
HB 602 (Chapter 603)
(effective October 1, 2014)

This Act states the types of damages for which the governing body of a common interest community may foreclose on for delinquent assessments. The damages may consist of periodic assessments or special assessments (as before), and under this Act interest on those amounts may be included. Reasonable costs and attorneys’ fees directly related to the filing of the lien may be included, but these items may not exceed the amount of delinquent assessments, excluding interest. The Act does not apply to any lien for delinquent assessments filed before October 1, 2014.

Short Sales to Certified Community Development Financial Institutions
HB 595 (Chapter 233)
(effective April 8, 2014)

A certified community development financial institution (CDFI) receives assistance from the United States Department of Treasury’s Community Development Financial Institutions Fund to promote economic revitalization and community development of underserved populations and distressed communities. This Act is intended to facilitate efforts by CDFIs to keep borrowers in their homes. It primarily impacts short sales. Of greatest significance, it prohibits a lender from requiring, as a condition of sale or transfer of owner-occupied residential property to a CDFI, any affidavit, statement, agreement, or addendum that limits ownership or occupancy of the property by the immediately preceding mortgagor or grantor. If such an instrument is given, it will be unenforceable against any person named in the instrument. In addition, the Act exempts from recordation tax the transfer of the residential real property from the CDFI to the immediately preceding owner-occupant.

Practice Point: It is likely that this Act will increase the activity of CDFIs in Maryland. While not directly related to this Act, we note that on May 8, 2014, the FDIC issued a resource guide entitled “Strategies for Community Banks to Develop Partnerships with Community Development Financial Institutions” which discusses how banks can get Community Reinvestment Act credit when working with CDFIs. Perhaps this new Maryland law will lead to CRA opportunities.

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INTELLECTUAL PROPERTY
Patent Troll Claims – Assertions Made in Bad Faith
SB 585 (Chapter 307)
(effective June 1, 2014)

Maryland businesses, including community banks, have become targets of so-called “patent trolls,” alleging that the businesses infringe one or more of the troll’s patents. Similar to laws recently enacted in other states, this Act provides tools to defend against bad faith assertions of patent infringement. It establishes factors for courts to use to determine whether a person has made a patent infringement assertion in bad faith (or in good faith). If a court determines that an assertion of patent infringement was made in bad faith and the target of the assertion suffered damages, the target also may be awarded court costs, reasonable attorneys’ fees, exemplary damages, and any equitable relief that the court determines appropriate. The Act grants the Maryland Attorney General Division of Consumer Protection the same authority it has under the Consumer Protection Act to adopt regulations, conduct investigations, and bring civil and criminal actions for patent infringement assertions made in bad faith. In response to concerns raised by the pharmaceutical industry, the Act exempts certain infringement claims made under the Federal Food, Drug, and Cosmetic Act.

Practice Point: Patent trolls send aggressive letters alleging patent infringement and demand immediate response to pressure the target into quickly paying a license fee to settle the claim. If a letter alleging infringement is received, we recommend asking for an extension of at least 30 days so that you can contact an attorney. Your attorney can investigate the patent troll, evaluate the claims, and determine the status of similar claims made in other jurisdictions.

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LANDLORD-TENANT
Interest on Security Deposits for Residential and Mobile Home Park Leases
SB 345/HB 249 (Chapters 488/489)
(effective January 1, 2015)

Under Maryland law, a landlord in a residential lease generally must return a tenant’s security deposit less amounts for damages that may be rightfully withheld, plus accrued interest at a specified interest rate. This Act changes the required rate of interest from a fixed 3% interest rate to the greater of: (i) an interest rate based on the daily one-year U.S. Treasury Yield Curve Rate (available from the U.S. Department of the Treasury) as of the first business day of each year; or (ii) 1.5%. This interest rate structure applies to security deposits for residential leases as well as security deposits held by mobile home park owners. For security deposits held less than one year, the law requires that interest be calculated based on the proportionate amount of interest that would have been due for the period that the security deposit was held.

Example: If a residential security deposit of $500 was held for six months and the daily one-year U.S. Treasury Yield Curve Rate for the applicable period was 0.10%, the applicable interest rate would be 1.5%. To calculate the interest due in connection with the security deposit: [security deposit amount($) x applicable interest rate(%)] X [number of months security deposit held ÷ 12] or $500 x 1.5% x 6/12 = $3.75.

The Act also requires that the Maryland Department of Housing and Community Development (DHCD) maintain on its website: (i) a list of the interest rates to be used in performing security deposit interest rate calculations; and (ii) a calculator to enable users to input security deposit amounts and dates to determine the appropriate security deposit accrued interest amount. The law provides that a landlord may rely on the rates and calculations provided through DHCD’s website in connection with making security deposit interest determinations. The Act applies prospectively and only impacts new residential and mobile home park leases entered into after January 1, 2015.

Practice Point: Landlords should review residential lease forms to identify any provisions that specify the previous 3% statutory interest rate or that refer to interest calculations that are contrary to the law’s new rate structure. Landlords also should be prepared by January 1, 2015 to calculate security deposit interest amounts using the new rate structure and DHCD’s website.

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MORTGAGE LENDING AND RELATED ISSUES

Interest on Mortgage Escrow Accounts
SB 583 (Chapter 306)
(effective June 1, 2014)

In 2012, the General Assembly changed the rate of interest Maryland banks are required to pay on residential mortgage escrow accounts from a fixed 3% per annum to an adjustable rate based on a national index for six-month certificates of deposit published by the Federal Reserve. As reported in our March 2014 Maryland Legal Alert, the Federal Reserve stopped publishing the six-month certificates of deposit index in December 2013, leaving banks uncertain as to what minimum rate was required. With this Act, the minimum interest rate on mortgage escrow accounts will be based on the weekly average yield of United States Treasury Securities adjusted to a constant maturity of one year. The Act is effective June 1, 2014, but applies to accounts in existence on or after January 1, 2014.

Practice Point: This section of Maryland law applies only to banks doing business in Maryland. Federally-chartered banks may want to discuss with counsel whether federal law preempts application of this Maryland law as to their lending operations. Banks subject to this law should review their first lien residential loan documents to determine if there are contractual provisions regarding payment of interest on escrow accounts that differ from this law.

Prohibition against Acquisition of Mortgages through Condemnation
SB 850 (Chapter 561)
(effective June 1, 2014)

Several cities across the country, most notably the City of Richmond, California, have considered using eminent domain powers to acquire mortgage loans. The concept is that through purchase of mortgage loans, the jurisdiction will help homeowners reduce their debt and will assist the jurisdiction by reducing the risks of foreclosure, blight, and falling property values. Because the legal authority for, and financial consequences of, the acquisition of mortgage loans through condemnation is unclear, Maryland passed Senate Bill 850 to prohibit the State or any of its instrumentalities or political subdivisions from acquiring mortgage loans through condemnation for a certain period of time (from June 1, 2014 to May 30, 2016) and to study the issue. The Maryland Department of Housing and Community Development is directed to conduct a study of methods, including the use of eminent domain by local governments, of restoring equity for underwater homeowners whose mortgage loans are held as private label securities. The results of the study are due to the General Assembly on or before November 1, 2015.

Automatic Subordination for Refinance Mortgages – Amendments
HB 1045 (Chapter 634)
(effective October 1, 2014)

A “refinance mortgage” is a loan that repays an existing mortgage loan with funds from a new loan using the same real property as collateral security. Legislation was enacted in 2013 to assist some refinancings by automatically granting the same lien priority to a qualifying refinance mortgage as the mortgage or deed of trust the refinance mortgage replaced. Under the 2013 legislation, the principal amount secured by the refinance mortgage could not exceed the unpaid outstanding principal balance of the mortgage loan being paid off plus an amount to pay closing costs of up to $5,000. House Bill 1045 clarifies this limitation on the amount that may be refinanced. It allows automatic subordination (i.e., refinancing without permission of junior lien holders) if the principal amount secured does not exceed the unpaid outstanding principal balance, plus closing costs and escrow costs of up to $5,000. The Act defines “escrow costs” as money to pay property taxes, hazard insurance, mortgage insurance, and similar costs that a lender requires to be collected at closing and held in escrow.

Practice Point: This law should help to alleviate some concerns raised by mortgage lenders that the refinancing was not one where automatic subordination applies. As a reminder, in order for automatic subordination to apply, the mortgage or deed of trust must include certain specific information and language.

Mortgage Loan Originator – Expedited Licensing
SB 1091 (Chapter 579)
(effective October 1, 2014)

A “mortgage loan originator” is an individual who, for compensation or gain, or in the expectation of compensation or gain, takes a loan application or offers or negotiates terms of a mortgage loan. Generally, an individual may not engage in the business of a mortgage loan originator unless the individual is licensed. There is an exception to the licensing requirement for an individual who is an employee of a depository financial institution and is registered with the Nationwide Mortgage Licensing System (NMLS). Senate Bill 1091 provides an expedited licensing process for an individual who, within 45 days before the date of application for a mortgage loan originator license, was employed by a depository financial institution as a registered mortgage loan originator. The Act requires the Commissioner of Financial Regulation to waive, as applicable, the Maryland criminal history records check for this applicant. The applicant must fulfill all other prerequisites before obtaining licensure.

Practice Point: This expedited process could make it easier for an employee of a depository institution to become employed as a mortgage loan originator by a non-depository lender.

Real Estate Appraisers – Criminal History Records Checks
SB 1106 (Chapter 79)
(effective January 1, 2015)

Beginning on January 1, 2015, new standards established by the federal Appraiser Qualifications Board require, among other actions, that an applicant for initial licensure or certification as a real estate appraiser undergo a criminal history records check (CHRC). Senate Bill 1106 updates application requirements, qualification standards, and enforcement provisions to conform State law to the new federal requirements. In addition to the requirement that an applicant submit to a national and State CHRC, the Act requires the State Commissioner to (1) receive a complete national and State CHRC before issuing a license or certification and (2) deny a license or certification to an applicant who fails to demonstrate specified traits or who has been the subject of specified judicial or administrative sanctions.

Tax Sales – Reimbursement for Attorneys’ Fees
HB 446 (Chapter 599)
(effective July 1, 2014)

House Bill 446 specifies that a plaintiff or holder of a certificate of tax sale in a foreclosure action may be reimbursed up to $1,200 for reasonable attorneys’ fees and up to $1,200 for expenses and costs incurred for opening an estate for purposes of service of process and notice.

Manufactured Homes – Bankruptcy Issues
HB 1403 (Chapter 109)
(effective October 1, 2014)

In any proceeding under Title 11 of the federal Bankruptcy Code, an individual debtor may exempt up to $5,000 of personal property and the debtor’s aggregate interest, up to the amount allowed under federal bankruptcy law, in (1) owner-occupied residential real property, including a condominium unit or (2) a cooperative housing corporation that owns property that the debtor occupies as a residence. This homestead exemption may be claimed if the individual debtor and specified family members have not successfully claimed the exemption on the property within eight years prior to the filing of the bankruptcy proceeding in which the exemption is claimed. It may not be claimed by both a husband and wife in the same bankruptcy proceeding. House Bill 1403 adds a manufactured home that has been converted to real property to the types of real property for which a debtor may claim the homestead exemption in a bankruptcy proceeding. As of April 1, 2013, the amount of the homestead exemption allowed under the federal bankruptcy law is $22,975. The amount of the exemption is adjusted every three years.

PRE-NEED ACCOUNTS (MORTICIANS AND FUNERAL DIRECTORS)

Changes to Pre-Need Contracts and Accounts
SB 415 (Chapter 497)
(effective July 1, 2014)

Pre-need contracts allow consumers to purchase funeral goods and services in advance of need at market prices prevailing at the time of contracting. Senate Bill 415 requires new disclosures be included in a mortician’s or funeral director’s pre-need contract that clearly state, among other terms, “not all charges that may be required to be paid at the time of need are listed in this contract” and informs a buyer whether the contract is a “guaranteed contract,” a “guaranteed in part contract,” or a “nonguaranteed contract.” Senate Bill 415 also addresses the subject of deposit accounts into which pre-need contract payments must be deposited. It clarifies that a pre-need escrow or trust account is not an asset of the individual licensee or the licensed funeral establishment. It also specifies how such an account must be titled. The account must be established using the name, address, and social security number of the consumer buyer and must be held in trust for the licensed funeral establishment.

Practice Point: Banks that maintain pre-need trust or escrow accounts need to review and, as necessary, modify their procedures for titling the accounts.

Single-Owner Funeral Establishments – Changes
SB 648 (Chapters 332)
(effective October 1, 2014)

Senate Bill 648 establishes procedures for funeral establishments owned by a single owner and sole licensee in the event of the owner’s death, which include public notification of the death, options for pre-need contract holders, and the disposition of unclaimed remains. A pre-need trustee license is established to ensure management of pre-need accounts held by a funeral establishment until its closing or sale. In addition, the qualifications, term, and application procedures for an executor license are altered.

Practice Point: This Act should facilitate transition of pre-need trust or escrow accounts when a single owner and sole licensee of a funeral home dies.

STATE AND FINANCE PROCUREMENT

Debarment from Procurement Process
SB 669 (Chapter 189)
(effective October 1, 2014)

This Act expands the bases for debarring a person (or entity) from entering into a contract with the State if convicted of violating a variety of laws of Maryland, another state, or the United States. Examples of laws, if violated, that will be the basis for debarment include fraud, embezzlement, forgery, theft, receiving stolen property, falsification or destruction of records, tax evasion or fraud, racketeering, mail fraud, failure to pay prevailing living or minimum wages under State law, violating State workplace safety laws, failing to pay equal wages for equal work under State law, deliberately failing to perform in accordance with contract specifications or time limits set forth in the contract, or any other cause that is determined to be so serious as to affect the integrity of the procurement process.

TAXES – REAL PROPERTY

Homestead Tax Credit – Eligibility and Definition of Legal Interest
SB 572/HB 227 (Chapters 526/527)
(effective June 1, 2014)

The Homestead Property Tax Credit Program provides tax credits against State, county, and municipal real property taxes for owner-occupied residential properties resulting from certain increases in annual assessments. Senate Bill 572 and House Bill 227 extend the Homestead Property Tax Credit to persons having an interest in a dwelling as a settlor, grantor, or beneficiary of a trust if the settlor, grantor, or beneficiary does not pay rent or other remuneration to reside in the dwelling and legal title to the dwelling is held in the name of the trust or in the names of the trustees for the trust. As always, application for the Homestead Property Tax Credit must be made by these settlors, grantors, and beneficiaries of trusts in order to obtain the credit.

Baltimore City Residential Retention Act
HB 920 (Chapter 623)
(effective June 1, 2014)

House Bill 920 requires Baltimore City to grant a $4,000 property tax credit to homeowners who had received the Homestead Property Tax Credit for a home in Baltimore City for the previous five years and who move into another dwelling in Baltimore City. The tax credit is applied to the homeowner’s property tax bill over a five-year period based on a specified schedule. The total amount of the tax credit may be increased by up to an additional $1,000 for a homeowner who purchases a dwelling located within a low- or moderate-income census tract and in which at least a majority of the persons living in the tract are in households earning 80% or less of the area median income.

Recordation and Transfer Taxes – Transfer of Property Between Business Entities – Reorganizations – Exemption
SB 106 (Chapter 129)
(effective July 1, 2014)
See description under Corporate Issues.

TITLE INSURANCE ISSUES

Title Insurance Commitment and Binders
SB 624/HB 679 (Chapters 318/319)
(effective October 1, 2014)

These Acts are intended to reverse the decision by the Court of Appeals in 100 Investment LimitedPartnership v. Columbia Town Center Title Co., 430 Md. 197, 60 A.3d 1 (2013), in which a title insurance company was found liable under a negligence theory for issuing a title insurance commitment even though it never issued a policy. The Acts provide that in connection with a real estate transaction that involves a purchase money mortgage or deed of trust, a title insurer must disclose that a title commitment constitutes the terms and conditions on which the title insurer is willing to issue a policy, but that the title commitment is not a representation as to the status of title and does not constitute an abstract of title.

Statutory or Unearned Premiums Reserves for Title Insurers
SB 881/HB 1082 (Chapters 350/351)
(effective June 1, 2014, with retroactive effect)

Senate Bill 881 and House Bill 1082 require a title insurance company domiciled in Maryland to maintain a statutory or unearned premium reserve of an amount computed in a specified manner using the retained liability for title insurance contracts. The initial reserve, which remains unchanged, is 8% of the total amount of the risk premiums (which include commissions) written in the calendar year for the insurer’s retained liability. During each of the twenty years following the year in which an insurance contract is issued, the reserve applicable to that contract must be reduced in equal twelve-month installments in accordance with a specified formula. The Acts also require each title insurer to file, with its required annual statement, a certification by a member in good standing of the Casualty Actuarial Society, or by a member in good standing of the American Academy of Actuaries who has been approved by the Casualty Practice Council of the American Academy of Actuaries, as to the adequacy of the title insurer’s reserves. The Acts take effect June 1, 2014 but apply retroactively to affect all title insurance contracts in effect on that date.

Date

June 24, 2014

Type

Publications

Author

Bulgin, Andrew D.
Enten, D. Robert
Levin, Edward J.
Rahl, Christopher R.
Rosenwald, II, Peter B.

Teams

Financial Services
Private Client Services
Real Estate
Technology & Intellectual Property
Trusts & Estates