On January 10, 2025, the Maryland Office of Financial Regulation (“OFR”) issued formal guidance asserting that assignees of residential mortgage loans—including certain “passive trusts” that acquire or obtain assignments of residential mortgage loans in Maryland—must become licensed in Maryland prior to April 10, 2025 unless the assignee is expressly exempt under Maryland law. The guidance, which expands on an April 2024 court ruling that an existing assignee of a home equity line of credit was required to obtain a license as a prerequisite to having legal authority to bring a foreclosure action in Maryland court, raises significant questions regarding how the OFR will apply this new licensing requirement, how assignees of residential mortgage loans will respond to the new guidance, and whether and to what extent this guidance will impact the secondary market for Maryland residential mortgage loans.
Maryland’s existing licensing laws do not expressly require a license to purchase closed and funded residential mortgage loans. In April 2024, a decision by the Appellate Court of Maryland, Maryland’s intermediate appeals court, held that the licensing requirement under Maryland’s Credit Grantor provisions that applies to persons who “make” certain open-end home equity lines of credit loans with interest rates and charges exceeding Maryland’s statutory usury limit must be read in a manner that applies to subsequent assignees of such a loan. The Appellate Court held in Estate of Brown v. Ward that those provisions require assignees of home equity lines of credit made pursuant to the Credit Grantor provisions to hold (1) a Maryland mortgage lender license, and (2) a Maryland Installment Loan license in order to have the legal right to initiate a foreclosure action on the loan, unless the assignee is exempt from licensing. Even though the express statutory language in the Credit Grantor provisions limits the scope of the licensing requirement to a person “making” loans, which arguably is limited to the originating lender that closes and funds the loan, the Appellate Court concluded that because Maryland case law observes “the principle that an assignee ‘succeeds to the same rights and obligations under the loan agreement as its assignor[,]’” an assignee of a loan made subject to the Credit Grantor provisions is subject to any licensing requirements that applied to the originating lender. Thus, the court held that an assignee (including the statutory trust at issue) was required to obtain both an Installment Loan license and a Mortgage Lender license in order to have legal authority to bring a foreclosure action on a loan made subject to the Credit Grantor provisions.
The Ward decision was limited to home equity lines of credit that were specifically made pursuant to the Credit Grantor provisions and did not address whether a statutory trust, or any other assignee, would be required to obtain a license to acquire a loan that was not made pursuant to the Credit Grantor provisions (although the court did express skepticism about the reasoning of certain federal court decisions that held that out-of-state statutory trusts were not subject to licensing requirements under Maryland’s Mortgage Lender Law). Since the parties did not appear to raise that argument, the Ward decision also did not address whether the court’s conclusion would have been different if the national bank that acted as trustee for the trust in Ward—and which, as a national bank, is exempt from licensing under Maryland law—was the party that acquired and held the loans in its capacity as trustee for the trust.
On January 10, the OFR issued guidance to “clarify” its position on the application of Maryland’s licensing laws to assignees of residential mortgage loans in light of Ward. Despite previously taking the position that a license was not required to purchase closed and funded residential mortgage loans (and issuing regulations consistent with that position), the OFR’s new guidance adopts the court’s reasoning in Ward that an assignee “succeeds to the same rights and obligations as the assignor,” including licensing requirements that applied to the originating lender. The guidance expands the holding in Ward and asserts that any assignee of residential mortgage loans, including “mortgage trusts,” are required to obtain a license under the Maryland Mortgage Lender Law to “acquire or obtain assignments of any mortgage loans,” regardless of lien position. The Mortgage Lender Law exempts, among other entities, federally-chartered banks, Maryland state banks, and insurance companies that are authorized to do business in Maryland, although state banks that are chartered by a state other than Maryland are only exempt if the bank maintains a branch in Maryland.
The OFR also asserts that an Installment Loan license is required if the mortgage loans are that are made subject to the Credit Grantor provisions, regardless of whether the loans are open- or closed-end extensions of credit, although the guidance also clarifies that an entity licensed under the Maryland Mortgage Lender Law that engages solely in mortgage lending business is not required to also obtain an Installment Loan license. The exemptions from the Installment Loan Law are more narrow, and include national banks (if they are qualified to do business in Maryland), Maryland-chartered banks, and, consistent with the OFR guidance, Mortgage Lender licensees that are engaged solely in mortgage lending business. Similar to the Ward decision, the guidance does not specifically address whether a trust would be required to obtain a license if the trust is structured so that a national bank, which is exempt from licensing under Maryland law, is the party that “acquires” or obtains all residential mortgage loans in its capacity as trustee for a trust, and whether existing trusts structured in this manner must obtain a license.
The OFR’s guidance does not distinguish between first- or subordinate-lien loans, whether the loans are open- or closed-end extensions of credit, or whether the acquired loans were made by a lender that is exempt from licensing or that enjoys federal preemption of Maryland licensing and/or usury laws. However, because Maryland exempts commercial loans in amounts exceeding $15,000 from its usury law (unless the loans are secured by an owner-occupied 1-to-4 family residential property, in which case the loan must be in excess of $75,000 to be exempt from the usury law), and because the Maryland Mortgage Lender Law applies only to residential mortgage loans made for personal, family, or household purpose, the application of the guidance to commercial-purpose mortgage lending should be limited.
The OFR guidance asserts that the requirement for an assignee to become licensed in order to acquire residential mortgage loans applies to “[m]ortgage trusts,” including “passive trusts,” and that these trusts “must comply with OFR’s licensing requirements[.]” The OFR simultaneously issued emergency regulations designed to create a way for “passive trusts” to satisfy net worth and qualified individual requirements under the Maryland Mortgage Lender Law and provide a “feasible avenue” for “passive trusts” to obtain a Maryland Mortgage Lender license. The regulations define a “passive trust” as a trust that (i) acquires mortgage loans that are serviced by others; (ii) does not make mortgage loans; (iii) does not act as a mortgage broker or mortgage servicer under the Maryland Mortgage Lender Law; (iv) receives all periodic payments through a mortgage servicer, and (v) is not engaged in the day-to-day servicing of mortgage loans.
The OFR guidance indicates that the OFR intends to suspend enforcement of the licensing obligations until April 10, 2025. The guidance recommends that parties subject to the OFR guidance audit their existing portfolios to determine whether they hold the proper licenses for any assigned mortgage loan agreements, and submit applications for license(s) in Maryland.
Although Maryland law does not provide a method to “appeal” the OFR’s guidance, it does provide potential avenues to challenge the guidance in court, including under Maryland’s declaratory judgment statute. In addition, interested parties may wish to request the OFR to re-consider the guidance and its conclusions or petition the Maryland General Assembly to amend the underlying laws.