Maryland Legal Alert for Financial Services

PROPOSED REGULATIONS: A 'MUST READ' FOR MORTGAGE LENDERS AND BROKERS

On August 29, 2008, the Commissioner of Financial Regulation published in the Maryland Register three sets of proposed regulations that, when made final, will impose significant new obligations on Maryland residential mortgage lenders, brokers, servicers, and originators and also on other persons regulated by the Commissioner. The proposed changes, too numerous to describe in this newsletter, include: reporting, recordkeeping, and documenting requirements for mortgage lender and broker licensees; a unique disclosure requirement for all persons regulated by the Commissioner who make or broker residential mortgage loans; and a requirement – applicable to nearly all persons regulated by the Commissioner – to report actual or suspected fraud, theft, or forgery. Of great significance, the proposed regulations impose on licensed mortgage lenders, brokers, and originators a new “duty of care and fair dealing" toward borrowers, which expressly includes an obligation to consider the "net tangible benefit" for borrowers refinancing their mortgage loans. In addition, the proposed regulations establish marketing and risk management obligations for licensees offering non-traditional or higher-priced mortgage loans. Click herefor a copy of the proposed regulations. For more information, please contact Chris Rahl.

COMMISSIONER ISSUES ADVISORY ON ABILITY TO REPAY

The Commissioner of Financial Regulation issued an advisory on Maryland's new “ability to repay” underwriting requirement for residential mortgage loans (previously reported in MD Legal Alert April 7, 2008 Edition and 2008 Maryland Laws Update). The August 11, 2008 Advisory Notice expresses the view that there is “significant flexibility” in what documents lenders may consider when giving due regard to the borrower's ability to repay. (The Advisory Notice mentions similar flexibility in the FRB's new TILA “higher priced loan” regulations, published in the July 30, 2008 Federal Register, but the FRB's regulation requires verification of income or assets while Maryland's law requires verification of income and assets.) The Commissioner believes that no lender should be inhibited from extending loans to self-employed applicants based on this new underwriting requirement. For more information, please contact Chris Rahl.

MORTGAGE LOAN SERVICER REPORTING REGULATIONS ARE STILL IN EFFECT

There was confusion in August about the effectiveness of Maryland's new reporting requirements for servicers of residential mortgage loans. The effectiveness of the emergency regulations, which were adopted February 19, 2008 (previously reported in MD Legal Alert March 2008), was extended through August 24, 2008 and the proposed regulations, intended to replace the emergency regulations, became final and effective August 25, 2008. There was no lapse in these reporting requirements. For more information, please contact Chris Rahl.

WORD TO THE WISE: BUSINESSES REQUIRED TO REGISTER WITH THE COMMISSIONER

On August 1, 2008, the Commissioner of Financial Regulation issued an Advisory Notice reminding certain businesses which do not need to be licensed in Maryland that they still need to register. Mortgage Lending: While certain banks, thrifts, and credit unions along with their subsidiaries and affiliates are exempt from Mortgage Lender licensing, these subsidiaries and affiliates must file certain information with the Commissioner to maintain exempt status. Consumer Reporting Agencies: Regulations require registration by credit bureaus that report on Maryland residents, with updates required if the information previously provided changes. Collection Agencies: If a collector is exempt from licensing based on common ownership between the collector and the debt owner, then the collector must file certain information with the Commissioner to maintain exempt status. Click here for the Commissioner's new registration form. For more information, please contact Chris Rahl.

COMMERCIAL LENDING: GUARANTOR LIABLE NOTWITHSTANDING LENDER'S AGREEMENT TO CHANGE LOAN TERMS

On July 28, 2008 the United States Court of Appeals for the Fourth Circuit upheld the lower court's decision finding a commercial loan guarantor liable for the borrower's debt. In Nourison Rug Corporation v. Parvizian, 2008 U.S. App. LEXIS 15960 (4th Cir. Md. 2008), the guarantor attempted to argue equitable discharge or release of its obligations because the lender modified the borrower's payment schedule before pursuing the guarantor. While Nourison Rug primarily was decided on procedural grounds, the Court of Appeals supported the District Court's finding that there was no “agreement modifying the terms of the Promissory Note for separate consideration, but rather a temporary forbearance or indulgence of [the borrower's] default under the Promissory Note.” The Court of Appeals stated: “Forbearance should be encouraged as a matter of policy as it is a creditor's compromise between accepting no payment and entering into costly litigation.” Because the guarantor admitted that he guaranteed the debt, the debt was in default, and he was on notice of the default, the Court of Appeals upheld the District Court's grant of summary judgment. For more information, please contact Chris Rahl.

Pursuant to U.S. Treasury Department Regulations, we are advising you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. No written opinion of a Gordon Feinblatt attorney on a federal tax issue should be understood to suggest a more likely than not favorable outcome unless the words “more likely than not” are actually used in the opinion.