Last year, the Maryland real estate industry was rocked by a trial court decision that found that the state’s debt collector statutes also applied to investors and statutory trusts that held mortgages. On Thursday, a Maryland Court of Appeals finally issued their decision, overruling the lower court and providing new guidance into the application of the Maryland Collection Agency Licensing Act (MCALA).
The Maryland Court of Appeals issued a 64-page decision with two dissents in the consolidated cases of Blackstone v. Sharma, Shanahan v. Marvastian, O’Sullivan v. Altenburg, and Goldberg v. Neviaser. A statement from Legal League 100 member firm Stern & Eisenberg explained that the Court of Appeals’ decision “held that the legislative intent and history of the statute did not intend to force registration on foreign statutory trusts.”
Prior to the lower court’s decision, servicers operating in Maryland were licensed, as it was clear that the law applied to them, but investors and trusts had not been.
“By analogy, it was like saying, ‘You’re engaged in the unlawful practice of law because you filed a lawsuit,’ even though you used a lawyer,” said Kevin Hildebeidel, Regional Managing Attorney, Stern & Eisenberg.
Moreover, there were questions as to whether they feasibly could acquire a license. While the online registration process only requires a $750 fee, it calls for information that might not actually exist for a foreign statutory trust, such as a direct physical address or residence.
“The way mortgage origination works today, with loans bought and sold on the open market, means that having to have a debt collection license to foreclose would have been a large hindrance on the state’s mortgage industry,” said Diane Rosenberg, Managing Partner, Rosenberg & Associates, LLC.
“The shock that went through the industry was, ‘My God, we’ve been doing this for ten years, and there’s at least a three-year statute of limitations in Maryland. Are we looking at three years of foreclosures statewide in Maryland possibly being challenged?’ That could be catastrophic.”
While waiting for the Court of Appeals’ decision, “a lot of the industry ground to a halt in Maryland,” Hildebeidel said.
Now, that wait is over. “The majority decision held that the legislative intent was never to apply to the mortgage industry or to the statutory trusts,” Hildebeidel told DS News. Instead, the legislation was specifically targeted at “about 40 debt collection agencies whose primary business was buying defaulted consumer debt and being compensated on a percentage of the recovery,” according to Stern & Eisenberg’s statement.
The Court of Appeals decision reads, in part: “The legislative history persuades this Court that the General Assembly did not intend to regulate or license the mortgage industry actors, including foreign statutory trusts serving as a repository for mortgage loans, as collection agencies due to the specific exemptions and the limited scope of MCALA.”
“It’s a big win for the lenders at this point,” Hildebeidel said.
Nor is there any immediate appellate path for the decision.
“The court found that the Debt Collection Licensing Act was not meant to apply to the mortgage industry," said Mark Meyer, Partner, Rosenberg & Associates. "That reasoning would seem to me to apply to any other entity, whether it’s an LLC, a securitized trust, or any other kind of entity servicing, holding, or foreclosing a mortgage. There are certainly ways to argue that the court didn’t specifically rule on those other entities, but the argument against it is the underlying reasoning of the opinion that it doesn’t apply to the mortgage industry at all.”
“Pending cases should now be reviewed to determine whether they should resume or be reinstated in compliance with the statute,” Stern & Eisenberg's statement explains. “As a reminder, the statute still contains a number of exceptions to the licensing requirement which may include non-resident borrowers, debt which was not in default at the time of acquisition, property for which relief from stay was obtained in a bankruptcy proceeding, certain deceased borrowers, and vacant or abandoned properties. Such situations should be reviewed by a licensed Maryland attorney familiar with both real property and debt collection requirements before proceeding.”