Lenders Prevail in Maryland High Court Ruling on Junior Mortgages
Blayne V. Scofield | Bloomberg Law
Recently, Maryland’s highest court, the Court of Appeals, denied an effort by consumers to expand the scope of lender and assignee liability under Maryland law. The dispute centered on lender practices in “secondary mortgages,” i.e., second and other subordinate mortgages, which are regulated by the Maryland Secondary Mortgage Loan Law (SMLL).
Maryland Regulation of Secondary Mortgages
Two provisions of the SMLL were in dispute. Section 12-405 of the SMLL allows a lender to collect “a loan origination fee” (emphasis added) up to limits set forth in the statute and prohibits charging “any other commission, finder’s fee, or point for obtaining, procuring, or placing” a secondary mortgage. Section 12-407.1 requires “each lender” to provide secondary mortgage applicants with a disclosure form that describes their rights when obtaining a commercial mortgage.
Secondary Mortgage Claims Denied
Poleck consolidated five separate cases. In each case, the borrowers obtained secondary mortgages from an originating lender who then assigned the loans to third parties presumably as part of securitizations.
Two borrowers were charged several fees by their lenders at closing. Some of the charges were loan and processing fees. Others were pass-through fees, like appraisal, credit report, and title search charges. The borrowers claimed Section 12-405 only allowed lenders to charge a single fee and that the lenders violated this by itemizing fees.
All of the borrowers claimed that they were not provided with the Section 12-407.1 disclosure. They claimed that the statute required lenders to provide the disclosure regardless of the purpose of the loan.
The borrowers also asserted that the noteholders were liable under Maryland law for the originating lender’s violation.
The trial courts ruled in favor of the lenders. The Court of Appeals granted certiorari before the appeals were heard by Maryland’s intermediate appellate court, the Court of Special Appeals.
The Court of Appeals disagreed with the borrowers on the origination fee statute. The court conceded that the statute was ambiguous—it could be read to support the borrowers’ view or a more expansive approach. After reviewing the legislative history, the court held that the origination fee statute was intended to cap origination fees rather than require lenders to consolidate charges into a single fee. This means that secondary mortgage lenders may itemize charges at closing without running afoul of Maryland law provided that the fees remain under the statutory limit. This is consistent with federal law which, pursuant to the Real Estate Settlement Procedures Act, generally permits and even encourages lenders to itemize loan fees in an effort to increase transparency for consumers. In Poleck, the lenders’ charges were under the cap and the borrowers’ claims were denied.
The Court of Appeals also rejected the borrowers’ literal reading of the disclosure statute. The borrowers asserted that the statute applied to “each lender” regardless of whether the loan was for commercial purposes. The court ruled that lenders only have to provide the disclosure when the loan is intended to be used for commercial purposes. Although it overrides the plain text of the statute, the decision avoids lenders having to provide inapplicable and potentially confusing disclosures to borrowers and reduces potential lender liability.
For both claims, the court did not reach the issue of assignee liability. It ruled that the originating lenders did not violate the SMLL rendering the assignee liability issue moot.
Contract Claims Rejected
Three of the borrowers also accused the noteholders of withholding copies of their loan files after the loans were repaid. The borrowers requested the copies because they did not retain their own copies and sought to evaluate potential claims against the noteholders. The borrowers claimed the noteholders, by withholding the files, were in breach of contract and violated the prohibition against unfair and deceptive acts or practices in Maryland’s Consumer Protection Act (CPA).
The court denied the claims. On the breach issue, the court ruled that there was no contract to enforce. The contracts in question were the loan agreements, which terminated upon repayment. The court reached a similar conclusion on the CPA issue. The CPA protects consumers in certain transactions described in the statute. In this case, the transactions were the loans. These, the court ruled, concluded when the borrowers repaid the loans and thus the loan file requests were beyond the scope of the CPA.
Accordingly, it affirmed the trial courts’ rulings and dismissed the claims.
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