Financial institutions that purchase mortgage loans in Maryland, including securitization trusts and other secondary market purchasers, face a new requirement to obtain a state license.
The Maryland Office of Financial Regulation has issued guidance clarifying the licensing requirements in response to an appellate court’s decision. The office also has:
- Issued emergency regulations to streamline the licensing process for passive trusts under the Maryland Mortgage Lending Law.
- Suspended enforcement actions until April 10, 2025.
Although the Office of Financial Regulation is not enforcing these edicts until presumably April 10th, impacted businesses should consider the licensing implications to their operations and the downstream effects this will have from a collections and enforceability perspective. We and many interested stakeholders are collectively working to identify commercially viable solutions to these issues, but there is no guarantee that the most optimal solution will be reached in the near term. As such, contingency planning will be key from a risk and business continuity perspective.
In More Detail: A Key Court Ruling
In Estate of Brown v. Ward, an appeals court held that a license is required to purchase HELOCs originated as part of a state law addressing credit grantor revolving credit provisions. That section of the law says:
The court reasoned that any purchaser of a loan made under Subtitle 9 of Maryland state law must be licensed because the term “credit grantor” includes assignees.
Although the Court’s holding did not explicitly apply to closed-end mortgage loans, the definition of “credit grantor” is the same under a similar section of state law involving credit grantor closed end credit provisions.
The Maryland Office of Financial Regulation now says purchasers of all mortgage loans must be licensed. (A license already has been required to purchase loans originated under the Consumer Loan Law).
In Ward, the Court implies that failure to be licensed while seeking judicial intervention to foreclose on a mortgage loan is a curable defect (i.e., obtain a license and the foreclosure can proceed).
However, the Office of Financial Regulation’s guidance implies that without the license, the assignee could be prohibited from taking any actions to enforce the rights under the obligation prior to licensure, including merely collecting payments on the debt.
Open Issues
The guidance raises several questions.
1. It is not clear whether one who steps into the shoes of the assignor requires a Mortgage Lender License when acquiring residential mortgage loans post origination.
- One can originate loans under the credit grantor provisions using either a Mortgage Lender License or an Installment Loan License,
- Although one likely needs a Mortgage Lender License (or an exemption) to originate residential mortgage loans, the new interpretation under the credit grantor provision is not clear as to whether one needs a Mortgage Lender License to purchase residential mortgage loans or whether an Installment Loan License would suffice.
- A person holding a Consumer Loan License is exempt from the Installment Loan License and presumably could rely on that license for compliance with Installment Loan License obligations.
2. Does the rationale that an assignee steps into the shoes of the assignor extend to all types of consumer loans? If a license is generally required to originate a loan, is a license also required to purchase the loan?
- Although the guidance is limited to mortgages, the rationale can be extended with broad implications for auto finance, credit cards, student loans and other consumer lending.
- In a bank partnership model, persons arranging or facilitating loans are licensed as Credit Services Businesses (essentially a loan broker license). This rationale, if extended, could require a loan facilitator purchasing loans after origination to maintain a lending license in addition to the CSB license.
3. Is an Installment Loan License required to purchase commercial loans secured by residential property or other types of real-estate secured loans?
- Given the guidance, it is clear that the Office of Financial Regulation will require a Mortgage Lender License (or possibly an Installment Loan License) to purchase loans secured by residential property, and an Installment Loan License to purchase other types of mortgage loans.
- A license is required to originate (and now, presumably, to purchase) an “installment loan.”
- Certain commercial loans secured by real property (including residential real property), however, are arguably not “installment loans” for licensure purposes under a different section of the interest and usury provision of Maryland law, and, as such, no license is presumably required to originate those loans and should not be required to purchase those loans.
- Specifically, Maryland law allows those lenders to charge any rate of interest on:
- A loan made to a corporation.
- A commercial loan in excess of $15,000 not secured by residential real property.
- A commercial loan in excess of $75,000 secured by residential real property.
- A mortgage loan originated under § 12-103(e) is arguably not an “installment loan” and therefore a license is not required. Thus, even under the Ward case, a license should not be required to purchase such loans.
- The guidance does not recognize this distinction and instead concludes that a license is required to purchase any type of mortgage loan. Nonetheless, given the plain text of the statute, there are strong arguments that a license is not required to purchase mortgage loans originated under § 12-103(e).
Licensing Trusts
The guidance issues emergency regulations to streamline the licensing process under the Maryland Mortgage Lender Law for “passive trusts,” defined as a trust that:
- Acquires mortgage loans which are serviced by others.
- Does not make mortgage loans.
- Is not a mortgage broker or mortgage servicer.
- Receives all periodic mortgage loan payments through a mortgage servicer.
- Is not engaged in the day-to-day servicing of mortgage loans.
The regulations allow a passive trust to designate the trustee as the “qualifying individual” subject to background checks and vetting. That designation will likely raise operational concerns, especially for trustees who are employees of national banks.
- The trust can meet the net worth requirements by providing evidence that the assets (i.e., the mortgage loans) will be held within 90 days of licensure.
- Because the regulations do not define trust, both statutory trusts and common law trusts should register.
- The trust must satisfy the net worth requirements within 90 days of licensure. Depending on the nature and timing of the transaction, this could require equity funding of the net worth requirements.
- These regulations do not apply to investors in mortgage servicing rights since MSR holders are considered mortgage servicers. Only purchasers of whole loans, or loans without the servicing rights, may benefit from this streamlined licensing process for passive trusts.
Want to know more? Ask one of the authors: Jedd Bellman, Katy Ryan, Clint Rockwell, Daniel Bellovin, Orion Mountainspring.