Maryland Legal Alert for Financial Services

In This Issue

DC "Debt Collector" Provisions

Updated Guidance for Mortgage Servicers on the Maryland Homeowner Assistance Fund

Court Rules Bank Arbitration Provision Unenforceable

Maryland Minimum Interest Rate for Escrow and Special Purpose Accounts Increases

DC "Debt Collector" Provisions

Since the early 1970s, the District of Columbia (DC) has had a debt collection provision on the books.  The DC law was typical of many state provisions that either tracked or slightly supplemented the core requirements of the federal Fair Debt Collection Practices Act (FDCPA).  DC made changes to the law in August of this year and the changes went into effect on January 1, 2023.

Unlike the federal FDCPA, the DC changes expand the definition of “debt collector” to include original creditors collecting their own debts.  The updated provisions have been causing headaches for creditors that collect on consumer accounts in DC.  The updated provisions apply to debt collectors collecting obligations arising from any “consumer debt” (other than real estate-secured loans and “direct” motor vehicle installment loans).  This means loans to DC residents that are unsecured and/or originated through indirect channels with collateral other than real-estate are loans that are subject to the new law.  The new law defines covered “consumer debt” to include any advance of money for personal, family, medical, or household purposes which is or is alleged to be more than 30 days past due and owing (unless a different grace period has been agreed to by the consumer).

Two provisions of the new law have been proving problematic for original creditors who collect on DC consumer debt because they impose limitations on contact methods and frequency.  The new law prohibits making more than four phone calls per account (inclusive of all phone numbers a creditor has for the consumer) in any 7-day period.  In addition, after a completed call between a debt collector and consumer, the debt collector cannot call the consumer again for seven days (unless otherwise directed by the consumer) and the consumer can opt-out of receiving phone calls from the debt collector “in writing at any time.”  

There are also limitations on communicating with a consumer via email, text message, or through private messaging on social media platforms.  The new law first requires that a debt collector have a consumer’s express consent to communicate via email/text/private message (a debt collector can send one email/text/private message in any 7-day period for purposes of seeking consent to communicate by one of these methods).  Once a consumer has provided consent, a debt collector may not send more than five emails/texts/private messages to the consumer per account in any 7-day period (unless otherwise agreed to by the consumer).  Debt collectors must also include opt-out language in any email/text/private message that permits consumers to opt-out of these forms of communication by notifying the debt collector via email/text/private message.

Practice Pointer: Financial institutions that collect consumer debt in DC should examine their internal policies concerning past due notifications and similar collection notices to ensure compliance with the contact method/frequency limitations imposed by the new law.  This review should include determining how a financial institution obtains contact consent from consumers and updating front-end loan documents and account agreements where necessary.

For questions concerning this topic, please contact Christopher R. Rahl.

CONTACT CHRISTOPHER R. RAHL | 410-576-4222

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Updated Guidance for Mortgage Servicers on the Maryland Homeowner Assistance Fund

The Maryland Homeowner Assistance Fund (HAF) is a 2021 program launched by the Maryland Department of Housing and Community Development (DHCD) to assist homeowners experiencing financial difficulty.  The Office of the Commissioner of Financial Regulation (OCFR) has now issued updated guidance concerning servicers’ duties with respect to the HAF.  

First, servicers should now inform borrowers about the HAF as early as possible following the default instead of treating it as a final option for loss mitigation.  Borrowers may consider the HAF early and in conjunction with other loss mitigation options.  Once a borrower has submitted a HAF application, servicers should not submit a Final Loss Mitigation Affidavit until the borrower has either received a denial of their HAF application or the servicer has received the HAF Funds.

Second, the updated guidance rescinds the 14-day reasonable time frame for HAF application processing, and instead encourages servicers to regularly communicate with DHCD about actual processing times.  The updated guidance also clarifies that a servicer that offers a borrower a modification is in compliance with HAF requirements for safe harbor purposes if the borrower is afforded an opportunity to receive a HAF determination before accepting or rejecting the modification offer.

Third, servicers are required to respond promptly to HAF program staff regarding borrowers who have applied for HAF. The OCFR cautioned that an unjustifiable delay in responding to HAF program staff may potentially be deemed an unfair practice on the part of the servicer. Servicers must communicate with the borrower and HAF staff regarding the appropriate method for DHCD to deliver funds for an approved borrower.

Finally, the updated guidance reiterates that servicers are required to adequately train their employees on HAF and adequately staff customer service centers to respond to borrowers and DHCD.  Communications with HAF staff should be treated by servicers as communication with borrowers, and a failure on training or staffing which results in a borrower being unable to bring their mortgage current using HAF funds may be deemed a violation of applicable laws and regulations.

Practice Pointer: Mortgage servicers should ensure that all customer service staff are trained on the Maryland Homeowner Assistance Fund and update their policies to include information about the HAF to borrowers early in the loss mitigation process.  Servicers should also confirm that personnel are regularly communicating with DHCD in a timely manner regarding borrowers who have applied for HAF.

For questions about this topic, please contact Bryan M. Mull or Tonya R. Foley.

CONTACT BRYAN M. MULL| 410-576-4227

CONTACT TONYA R. FOLEY | 410-576-4238

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Court Rules Bank Arbitration Provision Unenforceable

The enforceability of consumer arbitration agreements remains a hotly contested issue. In a recent decision, a court evaluated whether an arbitration agreement is unconscionable due to consumers’ inability to meaningfully opt out of the agreement.

In this case, the U.S. District Court for the Southern District of New York found that a bank’s addition of an arbitration provision in amended deposit account agreements was unconscionable and therefore unenforceable.  The customer filed a putative class action alleging that the bank’s overdraft fees were unfair and unconscionable.  The bank then filed a motion to compel arbitration.  

The customer had opened a deposit account with the bank in 2002, and the account agreement in effect at that time did not contain an arbitration provision.  The account agreement did contain a change of terms provision, which authorized the bank to change the agreement at any time as allowed by law and without notice, and the customer agreed to be bound by those changes.

In 2008, the bank amended the account agreement to add an arbitration provision and new customers were able to opt out of the arbitration agreement by sending notice within 45 days after the opening the account.  The amended account agreement did not contain an option for existing account holders to opt out of the arbitration agreement and the bank did not notify existing account holders of these amendments.  

In 2014, the bank amended its account agreement again, but this time the bank sent notice of the amendments to customers. The bank also offered customers the option to opt out of all changes by closing their account and to opt out of the arbitration provision by entering into a new deposit agreement and sending an arbitration rejection notice to the bank within 45 days of receipt of the notice. The customer in this case neither closed the account nor mailed in a rejection.  The court, however, ruled that the arbitration provision was unenforceable.  

The court reasoned that for the 2014 amended agreement to have been a “new” agreement as required for a customer to opt out, the offer and the customer’s acceptance would have had to be express and unmistakable. The court found that an express and unmistakable offer and acceptance did not occur in connection with the 2014 agreement and, thus, the 2008 amended agreement was the agreement contained the controlling the arbitration provision.  The court held that because the bank did not give the customer notice of the 2008 amended account agreement and the 2008 agreement did not contain a meaningful and reasonable opportunity for the customer to opt out of the arbitration provision, the arbitration provision was unconscionable and therefore unenforceable. Once the customer was unable to opt out in 2008, the court stated that no contract to arbitrate was formed, and the customer was not required to opt out again when the bank amended its account agreement in 2014.  The court also found that the 2008 arbitration agreement was unconscionable because it contained a “loser pays” fee-shifting provision, which the court ruled unreasonably favored the bank.

Practice Pointer: Financial institutions should review arbitration agreements carefully, paying particular attention to whether customers have been given notice of any changes and a meaningful and reasonable opportunity to opt out. The analysis regarding the enforceability of arbitration agreements is heavily fact-specific, and institutions should consider directing any questions to legal counsel.

For questions about this topic, please contact Bryan M. Mull or Tonya R. Foley.

CONTACT BRYAN M. MULL| 410-576-4227

CONTACT TONYA R. FOLEY | 410-576-4238

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Maryland Minimum Interest Rate for Escrow and Special Purpose Accounts Increases

Maryland law requires depository institutions doing business in Maryland that make first lien residential real property loans and maintain escrow accounts for those loans to pay a minimum rate of interest on those escrow accounts.

Maryland law also requires Maryland-chartered banks that offer certain short-term “special purpose” deposit accounts (for example, Christmas Club accounts) to pay a minimum rate of interest on those deposit accounts.

The minimum rate of interest on these accounts is based on the weekly average yield of U.S. Treasury Securities adjusted to a constant maturity of one year as of the first business day of the calendar year as published in the Federal Reserve Board’s “Selected Interest Rates” table H.15.

Because the Federal Reserve Board’s H.15 table no longer includes a “weekly average yield” for the selected one-year securities, many institutions look to the weekly average yield interest rate data posted by the Federal Reserve Bank of St. Louis (using the H.15 daily rate information).

The Federal Reserve Bank of St. Louis displays a 4.73% weekly average yield for U.S. Treasury Securities adjusted to a constant maturity of one year (reflecting the weekly average yield for the weekly period ending on December 30, 2022, as posted on January 3, 2023). The 2022 weekly average yield was 0.37%.

For questions concerning this topic, please contact Christopher R. Rahl.

CONTACT CHRISTOPHER R. RAHL | 410-576-4222

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