Maryland Legal Alert for Financial Services

In This Issue:

OCFR REVISES MARYLAND’S REGULATIONS FOR LICENSED MORTGAGE LENDERS AND SERVICERS

CFPB CONFIRMS PROHIBITION AGAINST COLLECTION OF “CONVENIENCE FEES” UNDER THE FDCPA

FOURTH CIRCUIT CLARIFIES EXCEPTIONS TO DISCHARGE FOR SMALL BUSINESS DEBTORS

OCFR Revises Maryland’s Regulations for Licensed Mortgage Lenders and Servicers 

Recently, the Office of the Commissioner of Financial Regulation (Commissioner) issued revisions to its regulations concerning licensed mortgage lenders and servicers. The amendments include revisions to certain defined terms in the regulations, as well as new regulations setting prudential standards for non-depository mortgage lenders and servicers.

The revisions expand the definition of “mortgage servicer” to include persons: (i) performing the routine administration of mortgage loans as agent of a servicer or mortgage servicing rights investor under a subservicing contract; and (ii) persons investing in or owning mortgage servicing rights who rely on subservicers to administer mortgage loans.

The Commissioner also issued new regulations for licensed mortgage lenders and servicers to set standards for safety and soundness, financial responsibility, and corporate governance. These new regulations largely track model standards such as those issued by the Conference of State Bank Supervisors.  The new regulations direct covered institutions to maintain a board of directors responsible for (i) oversight of the company, (ii) establishing corporate governance controls, and (iii) establishing internal and external audit processes. The prudential standards further direct covered institutions to establish documented risk management programs to identity, measure, monitor, and control risk sufficient for the institution’s characteristics.

For questions concerning this topic, please contact Bryan M. Mull.

CONTACT BRYAN M. MULL | 410-576-4227

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CFPB Confirms Prohibition Against Collection Of “Convenience Fees” Under The FDCPA

On June 29, 2022, the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion addressing debt collectors’ recovery of so-called “pay-to-pay” or “convenience” fees. These fees include those that are imposed by the debt collector when a debtor seeks to use an alternative payment channel, such as via an online portal or by phone.

The Fair Debt Collection Practices Act (FDCPA) and Regulation F, which implements the FDCPA, provide that a debt collector may not use unfair or unconscionable means to collect a debt, including any amount (e.g., interest, fees, charges, or expenses) “incidental to the principal obligation,” unless such amount is expressly authorized under the debt agreement or applicable law.

The CFPB’s advisory opinion clarifies that any fee is prohibited unless the fee is stated in the contract creating the debt or the fee is affirmatively permitted by law. The CFPB further notes that even if no law expressly prohibits the fee, this silence cannot be construed as an authorization under law to collect the fee. Debt collectors cannot avoid this prohibition by obtaining the consumer’s consent to a convenience fee in a separate agreement outside of the underlying contract that created the debt. The CFPB further cautioned that debt collectors should monitor their payment processors, since debt collectors may violate the unauthorized convenience fee prohibition if the payment processors who charge unauthorized fees remit any amount to the debt collector in connection with that unauthorized fee. 

Practice Point: This advisory opinion is yet another sign that convenience fees are a ripe area for scrutiny by regulators, courts, and the plaintiffs’ bar. As we’ve previously reported, the Maryland Consumer Debt Collection Act has been held to prohibit creditors and servicers (as opposed to the more narrowly-defined “debt collectors” subject to the FDCPA) from collecting unauthorized convenience fees. Debt collectors (and all persons collecting Maryland debts) should carefully scrutinize their payment collection processes to ensure compliance with state and federal requirements.

For more information concerning convenience fees, please contact Christopher R. Rahl or Bryan M. Mull.

CONTACT CHRISTOPHER R. RAHL | 410-576-4222

CONTACT BRYAN M. MULL | 410-576-4227

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Fourth Circuit Clarifies Exceptions to Discharge for Small Business Debtors

Generally, one of the primary goals for a debtor in a bankruptcy proceeding is to obtain a discharge of its debts. A recent decision from the U.S. Court of Appeals for the Fourth Circuit clarified an ambiguity as to what types of debts may be excepted from discharge for a debtor proceeding under Subchapter V of Chapter 11 as a “small business debtor.”

For individuals, Section 523 of the Bankruptcy Code provides that certain types of debts are excepted from discharge, including debts for willful and malicious injury by the debtor to another or another’s property. In a normal Chapter 11 bankruptcy for a non-individual (such as a corporation or LLC), the Section 523 exceptions to discharge would not apply. However, for small business debtors proceeding under Subchapter V of the Chapter 11, the language concerning exceptions to discharge is less clear.

Specifically, under Section 1192 of the Bankruptcy Code, if the court confirms the small business debtor’s plan, “the court shall grant the debtor a discharge of all debts … except any debt … of the kind specified in section 523(a) of this title.”

In this case, the small business debtor (an LLC) was subject to a $4.7 million judgment for intentional interference with contracts and tortious interference with business relations. The judgment creditor filed an adversary proceeding to except the judgment from discharge, as a judgment for willful and malicious injury under Section 523(a), but the bankruptcy court dismissed this action. The bankruptcy court dismissed the action on the basis that the Section 523(a) exceptions to discharge only apply to individual debtors, so the court held that they could not be applied to a non-individual debtor.

On appeal, the Fourth Circuit reversed. The court emphasized that Section 1192 (which applies equally to individual and non-individual debtors) excepted from discharge for a small business debtor any debts “of the kind specified” in Section 523(a). The Court held that this wording made it clear that the focus was on the types of debts covered by Section 523(a), not on the type of debtor. Moreover, the court recognized that equitable considerations weighed in favor of this interpretation. The court recognized that this reading of Section 1192 was a necessary counterweight to the debtor-friendly provisions under Subchapter V, such as the ability to confirm a cram-down plan without following the absolute priority rule. The court reasoned that it would be inequitable (and may create unsavory incentives) to enable a small business debtor to discharge debts for fraud or willful injury when the debtor is already receiving such favorable treatment under the code.

Practice Point: This ruling brings some balance to the largely debtor-friendly Subchapter V process. Creditors with claims arising from fraud or willful injury by a non-individual debtor should pay careful attention to the type of bankruptcy case that their debtor has filed to evaluate whether they have the option to pursue exceptions to discharge.

For questions concerning this topic, please contact Bryan M. Mull.

CONTACT BRYAN M. MULL | 410-576-4227

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