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Maryland Court of Appeals says law firm collecting HOA debt is not engaged in the business of making loans
On August 11, a split Maryland Court of Appeals held that “a law firm that engages in debt collection activities on behalf of a client, including the preparation of a promissory note containing a confessed judgment clause and the filing of a confessed judgment complaint to collect a consumer debt, is not subject to the Maryland Consumer Loan Law [(MCLL)].” A putative class action challenging the law firm’s debt collection practices was filed in Maryland state court in 2018. According to the opinion, several homeowners associations and condominium regimes (collectively, “HOAs”) retained the law firm to help them draft and negotiate promissory notes memorializing repayment terms of delinquent assessments. These promissory notes, the opinion said, included confessed judgment clauses that were later used against homeowners who defaulted on their obligations. The suit was removed to federal court and was later stayed while the Maryland Court of Appeals weighed in on whether the law firm was subject to the MCLL. Loans made under the MCLL by an unlicensed entity render the loans void and unenforceable, the opinion said.
Class members claimed that the law firm is in the business of making loans and that the promissory notes are subject to the MCLL and “constitute ‘loans’ because they are an extension of credit enabling the homeowners to pay delinquent debt to the HOAs.” Because neither the law firm nor the HOAs are licensed to make loans the promissory notes are void and unenforceable, class members argued. The law firm countered that it (and the HOAs) are not obligated to be licensed because they are not lenders that “engage in the business of making loans” as provided in the MCLL.
On appeal, the majority concluded that there is no evidence that the state legislature intended to require HOAs to be licensed “in order to exercise their statutory right to collect delinquent assessments or charges, including entering into payment plans for the repayment of past-due assessments.” Moreover, in order to qualify for a license, an applicant “must demonstrate, among other things, that its ‘business will promote the convenience and advantage of the community in which the place of business will be located[]’”—criteria that does not apply to an HOA or a law firm, the opinion stated. Additionally, applying class members’ interpretation would lead to “illogical and unreasonable results that are inconsistent with common sense,” the opinion read, adding that “[t]o hold that the MCLL covers all transactions involving any small loan or extension of credit—without regard to whether the lender is ‘in the business of making loans’—would cast a broad net over businesses that are not currently licensed under the MCLL.”
The dissenting judge countered that the law firm should be subject to the MCC because to determine otherwise would allow law firms to engage in the business of making loans in the form of new extensions of credit with confessed judgment clauses and would “create a gap in the Maryland Consumer Loan Law that the General Assembly did not intend.”
Maryland amends security procedures standards
On May 29, Maryland HB 962 was enacted under Article II, Section 17(c) of the Maryland Constitution - Chapter 502, which amends the Maryland Personal Information Protection Act. The bill, among other things, expands the types of businesses that are required to implement and maintain reasonable security procedures and practices to protect personal information from unauthorized use. The bill also decreases the period within which certain businesses must provide required notifications to consumers after a data breach. Violation of the bill’s provisions are considered to be an unfair, abusive, or deceptive trade practice under the Maryland Consumer Protection Act (MCPA), subject to MCPA’s civil and criminal penalty provisions. The law is effective October 1.
Special Alert: Federal court says state bank, fintech partner must face Maryland’s allegation of unlicensed lending before state ALJ
A federal court late last month told a state-chartered bank and its fintech partner that they must return to a state administrative law proceeding to fight a Maryland enforcement action alleging that their failure to obtain a license to lend and collect on loans violated state law — potentially rendering the terms of certain loans unenforceable.
The Missouri-chartered bank and its partners attempted to remove an action brought by the Office of the Maryland Commissioner of Financial Regulation to the U.S. District Court for the District of Maryland, but the district court determined that removal was not proper and that Maryland’s Office of Administrative Hearings was the appropriate venue.
OCFR initially filed charges in January 2021 in Maryland’s Office of Administrative Hearings against the bank and its partner asserting the bank made installment and consumer loans and extended open-ended or revolving credit in the state without being licensed or qualifying for an exception to licensure. As a result, OCFR said they “‘may not receive or retain any principal, interest, or other compensation with respect to any loan that is unenforceable under this subsection.’” It said that not only are the bank’s loans to all Maryland consumers possibly unenforceable, but also that the bank, or its agents or assigns, could in the alternative be “prohibited from collecting the principal amount of those loans from any of these consumers or from collecting any other money related to those loans.”
The OCFR’s charge letter also said the fintech company that provided services to the bank violated the Maryland Credit Services Business Act by providing advice and/or assistance to consumers in the state “with regard to obtaining an extension of credit for the consumer when accepting and/or processing credit applications on behalf of the Bank without a credit services business license.” Additionally, the OCFR alleged violations of the Maryland Collection Agency Licensing Act related to whether the fintech company engaged in unlicensed collection activities, thus subjecting it to the imposition of fines, restitutions, and other non-monetary remedial action.
The defendants filed a notice of removal to federal court last year while the enforcement action was still pending before the OAH; OCFR moved to remand the case back to the agency.
In granting the OCFR’s motion to remand, the court concluded that the OCFR persuasively argued that the defendants have not properly removed this case from the OAH for several reasons, including that the OAH does not function as a state court. “Pursuant to 28 U.S.C. § 1441, a defendant may remove to federal court ‘any civil action brought in a State court of which the district courts of the United States have original jurisdiction.’” However, the court determined that, while defendants correctly observed that the OAH possesses certain “court-like” attributes, its limitations clearly showed that it does not function as a state court.
In reaching this conclusion, the court considered several undisputed facts, including that the OCFR is a unit of the Maryland Department of Labor “responsible for, among other things, issuing licenses to entities wishing to issue loans to consumers in Maryland and investigating violations of Maryland’s consumer loan laws.” The court also said that, while OCFR has authority under Maryland law to investigate potential violations of law or regulation and has the ability to issue cease and desist orders, revoke an individual’s license, or issue fines, it cannot enforce its own subpoenas or orders — and that its decisions are not final and may be appealed to a state circuit court.
The defendants had argued that the case involved a federal question as a result of the complete preemption of state usury laws by Section 27 of the FDI Act. The court said licensure, not state usury law claims, was the issue at hand.
During a status conference held last month to discuss OCFR’s motion to remand, defendants requested an opportunity to file a motion certifying the case for appeal. The court will hold in abeyance its remand order pending resolution of that motion. Parties’ briefings are due by the end of May.
If you have any questions regarding the ruling or its ramifications, please contact a Buckley attorney with whom you have worked in the past.
4th Circuit affirms district court’s decision in lone class member's appeal
On February 10, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s approval of a $3 million class action settlement between a class of consumers (plaintiffs) and a national mortgage lender (defendant), resolving allegations arising from a foreclosure suit. In 2014, the lead plaintiffs alleged that the defendants violated federal and Maryland state law by failing to; (i) timely acknowledge receipt of class members’ loss mitigation applications; (ii) respond to the applications; and (iii) obtain proper documentation. After the case was litigated for six years, a settlement was reached that required the defendant to pay $3 million towards a relief fund. The district court approved the settlement and class counsel’s request for $1.3 million in attorneys’ fees and costs, but an absent class member objected to the settlement, arguing that “the class notice was insufficient; the settlement was unfair, unreasonable, and inadequate; the release was unconstitutionally overbroad; and the attorneys’ fee award was improper.” A magistrate judge overruled the plaintiff’s objections, finding that “both the distribution and content of the notice were sufficient because over 97% of the nearly 350,000 class members received notice,” and that “class members ‘had information to make the necessary decisions and . . . the ability to even get more information if they so desired.’”
On the appeal, the 4th Circuit rejected the class member’s argument that the magistrate judge lacked jurisdiction to approve the settlement where she had not consented to have the magistrate hear the case. The 4th Circuit noted that only “parties” are required to consent to have a magistrate hear a case and held that absent class members are not “parties,” noting that “every other circuit to address the issue has concluded that absent class members aren’t parties.” The appellate court also upheld the adequacy of the class notice, and held that the magistrate judge did not abuse his discretion in finding that the settlement agreement was fair, reasonable, and adequate.
States settle with company on fraudulent MLO certifications
On February 10, the Conference of State Bank Supervisors announced that the California Department of Financial Protection and Innovation, Maryland’s Office of the Commissioner of Financial Regulation, and the Oregon Division of Financial Regulation have reached a settlement agreement with the owner of a California-based company for providing false certificates claiming that mortgage loan originators (MLOs) took mandatory eight-hour continuing education courses as required for licensure under state and federal law. The three state financial regulators brought separate enforcement actions alleging violations of the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) against the individual and his family (collectively, “respondents”) for their role in the “multi-state fraud scheme that involved hundreds of mortgage loan originators.” According to the announcement, the respondents have “agreed to fully cooperate and provide testimony against implicated mortgage loan originators,” and have “agreed to a lifetime restriction from direct and indirect involvement in businesses that provide mortgage lending-related education.” In addition to a $75,000 monetary penalty (which will be divided between the three states), the respondents have agreed to a non-compliance penalty of $15 million should they fail to fully comply with the terms of the settlement agreement.
The action follows a multistate $1.2 million settlement reached last month with 441 MLOs. As previously covered by InfoBytes, the enforcement action included the participation of 44 state agencies from 42 states, and required the settling MLOs to surrender their licenses for three months, pay a $1,000 fine to each state that is a signatory to the consent order in which the MLO holds a license, and take pre-licensing and continuing-education courses before petitioning or reapplying for an MLO endorsement or license.
District Court grants preliminary approval of class action settlement against national bank
On January 10, the U.S. District Court for the District of Maryland granted preliminary approval of a settlement in a class action against a national bank (defendant) for allegedly participating in a kickback scheme with a title company (company). According to the memorandum in support of plaintiffs’ unopposed motion for preliminary approval of the settlement, the class action complaint alleged that over a six year period the company paid the defendant for the referral of residential mortgage loans, refinances, and reverse mortgages for title and settlement services in violation of RESPA. Further, the plaintiffs alleged that the company and defendant falsified borrowers’ HUD-1 settlement statements and other documents, and misrepresented the defendant’s efforts to “choose a qualified attorney, title agent or title insurance company to search title and conduct [the borrower's] closing.” While agreeing to the class action settlement, the defendant disputes plaintiffs’ allegations and denies that it is liable for any of the claims in the complaint. Under the terms of the preliminarily approved settlement agreement, the defendant will pay approximately $1.2 million in settlement benefits to class members, a $1,500 service award to both lead plaintiffs, and up to $325,000 in attorneys’ fees and $17,500 in expenses to class counsel.
Maryland appoints officials to oversee cybersecurity and data privacy
On November 10, the Maryland governor announced the appointments of a new chief privacy officer and chief data officer, both of which are newly-created roles, as part of the state’s commitment to cybersecurity and data privacy. The chief privacy officer will lead state initiatives with respect to data privacy and will assume responsibility for “monitoring program compliance, investigation and tracking of incidents and potential breaches, and ensuring citizens’ rights.” The chief data officer will spearhead Maryland’s data governance program and will promote the use of technology and data analytics. “Public officials have no higher responsibility than keeping the American people safe, and there is no greater threat to their safety than the cyber vulnerabilities of the systems that support our daily lives,” Governor Hogan said in the statement.
Maryland affirms penalties of over $3 million against auto lender
On August 11, the Maryland attorney general announced that a circuit court in Maryland affirmed that an auto-lending company’s transactions were illegal loans, not pawn transactions, and upheld the Consumer Protection Division’s imposition of $2.2 million in restitution and a $1.2 million penalty. In its press release, the AG alleged that the company “made predatory loans at outrageous interest rates, illegally repossessed cars, and preyed on Maryland consumers,” in violation of the Maryland Consumer Loan Law, the Maryland Interest and Usury Law, and the Installment Loan-Licensing Provision. According to the memorandum of the court, the loans issued by the company were not considered to be title pawn transactions, but were instead illegal consumer loans which “violated the consumer protection statutes as respondents were not licensed to make loans in Maryland, failed to make the required disclosures to the consumer, engaged in unfair trade practices, exceeded the statutory interest rate caps, took unpermitted security interests for loans of less than $700.00 and engaged in illegal repossession activities.”
Maryland regulator again extends foreclosure restrictions
On April 28, the Maryland commissioner of financial regulation issued guidance that extends the “re-start date” for the ability to initiate residential foreclosures to July 1, 2021 (prior guidance has been discussed here and here.) The guidance is issued pursuant to the Maryland governor’s executive order 20-12-17-02, which amended and restated previous executive orders covered here and here.
Maryland regulator amends guidance regarding foreclosures
On March 29, the Maryland commissioner of financial regulation issued amended regulatory guidance extending the prohibition of the initiation of foreclosures through May 3, 2021. The “re-start date” for the initiation of residential foreclosures will be May 4, 2021. The guidance is issued pursuant to the Maryland governor’s executive order 20-12-17-02, which amended and restated previous executive orders covered here, here, and here.