Md. App. Ct. Holds Business Liable as Unlicensed Credit Services Business for Arranging and Purchasing Consumer Loans Through Out-Of-State Banks

In Commissioner of Financial Regulation v. Cashcall, Inc., the Court of Special Appeals of Maryland reversed the trial court, and instead upheld the Maryland Commissioner of Financial Regulation’s determination that Appellee constituted an unlicensed credit services business under the Maryland Credit Services Business Act, Md. Code, Com. Law § 14-1901, et seq. (“MCSBA”), and was therefore liable for arranging loans to an out-of-state bank at interest rates that exceeded the state law maximum.

The Court determined that the Act was industry specific, and targeted third-party businesses, such as payday lenders, that were partnering with federal banks in order to import prohibited interest rates into Maryland.  The Court distinguished cases holding the Act inapplicable to businesses that offered goods or services, who then arranged credit as an ancillary service without receiving a direct payment from the consumer for arranging the loan.   Rather, the Court noted that the sole purpose of Appellee was to arrange loans for Maryland consumers, and therefore, determined that indirect payment of an origination fee through the out-of-state bank did not exclude applicability of the Act.   Further, the Court determined that Appellee’s arrangement, in which the origination fee was rolled into the loan, and then purchased by Appellee after closing, satisfied the Act’s applicability.  As a result, the Court upheld the Commissioner’s order that Appellee cease and desist engaging in a credit services business and imposed a civil penalty of $1000 per loan transaction, amounting to $5,651,000.

A copy of the opinion is available here.  

Background

Following an investigation, the Commissioner determined that Appellee arranged more than 5,000 loans for Maryland consumers from 2006 through 2010.  Each loan was made by one of two out-of-state banks, at interest rates significantly higher than permitted by Maryland law.  Pursuant to an agreement between Appellee and the banks, Appellee would purchase the loan at face value three days after issuance, together with any accrued interest.  Thereafter, Appellee would collect all payments, interest, and fees due on the loan, including repayment of the origination fee, which was added into the loan amount before the loan was sold.  The bank also paid Appellee a “royalty fee” per each loan sold.

The Commissioner determined that Appellee had violated the MCSBA by operating as a “credit services business” without a license.  The Commissioner issued a final order that Appellee cease and desist from all credit services business activities in Maryland and pay a civil penalty of $5,651,000.

Upon judicial review, the trial court reversed the Commissioner’s final order, declaring that, under the Maryland Court of Appeals’ decision in Gomez v. Jackson Hewitt, Inc., 427 Md. 128 (2012), Appellee was not a “credit services business” under the MCSBA.  The Commissioner thereafter noted the present appeal.

Discussion

The MCSBA requires a “credit services business” to, among other things, obtain a license from the Commissioner and inform consumers that they may cancel a contract before the end of the third business day after the transaction.  Op. at 11.  The Act also prohibits “credit services businesses” from assisting consumers in obtaining loans at an interest rate prohibited by Maryland law.  Op. at 11-12.  Interpreting the Act, the Gomez court excluded from the definition of a “credit services business” those businesses that did not provide credit services “in return from the payment of money or other valuable consideration,” with the requirement that such payment “must come directly from the consumer.” Op. at 14.

Although Appellee argued that it should be excluded from the Act because it did not receive payment directly from the consumer, the Court disagreed, holding that Appellee was a “credit services business.”  Op. at 22.  Accepting the Commissioner’s arguments, the Court determined that the direct payment requirement was not intended by the Legislature to apply to companies, like Appellee, whose sole purpose is to arrange loans for Maryland consumers at interest rates that would be considered usurious in Maryland.  Op. at 18.  Reviewing the legislative history, the Court determined that a goal of the “industry specific” statute was to protect Maryland consumers from companies marketing high-interest small loans who partnered with out-of-state banks to charge otherwise usurious interest rates.  Op. at 20.  The Court noted that, because “the nature of the commercial relationship between [Appellee] and Maryland consumers was clear,” it was not necessary to make the Act’s applicability contingent on a direct payment requirement.  Op. at 19-20.  

The Court further determined that, even if the direct payment requirement applied, that it was met in Appellee’s case.  Op. at 21.  Given the nature of Appellee’s business arrangement with the out-of-state banks, the Court concluded that while the origination fee was charged by the bank, it was ultimately paid to Appellee as part of repayment of the loan.  Op. at 22.  Any other determination, the Court explained, would permit a “credit services business” to “redirect the path of a consumer payment through a myriad of creative business structures and transactions and avoid the Act.”  Op. at 22. 

Accordingly, the Court remanded the case to the trial court for entry of a judgment affirming the Commissioner’s final order.  Op. at 23.

D.C. Court of Appeals Holds Seller is Estopped From Unwinding Real Estate Transaction Due to Failure to Read Settlement Documents

In Moore v. Deutsche Bank Nat'l Trust Co., the District of Columbia Court of Appeals rejected a Seller’s title challenge to a post-foreclosure eviction, where she claimed that she had been defrauded into selling the property.  Although Seller claimed that the Purchaser misled her to believe that she was refinancing her prior mortgage loan, the Court of Appeals rejected her claim, determining that she failed to prove her fraud and forgery allegations by clear and convincing evidence.  Rather, the evidence suggested that her alleged misunderstanding was due to her own negligence in failing to read the documents before signing them.  Accordingly, the Court determined she has no interest in the property.

A copy of this opinion is available here.

Background

Seller claimed that she sought to refinance her mortgage to obtain $300,000 to make improvements to the property.  She contacted a loan officer, who informed her that she would need a co-signer, and introduced her to Purchaser who would be willing to co-sign the loan for a $100,000 fee.   During her first meeting with Purchaser, Seller signed several documents handed to her by a notary, including many that she did not read completely, and others without reading them at all.  Op. at 3.

Following the meeting, Seller received $78,435.45.  Because this was far less than the $300,000 she expected, she contacting the loan officer, who informed her that there was no record of her loan.  Seller contacted Purchaser, who told her that she had sold him the property and that he had a sales contract bearing her signature.  Appellant sued Purchaser for fraud, which was settled between the parties, whereby Seller agreed to assist Purchaser in paying the mortgage until 2008, when he would transfer the property back to Seller provided she pay-off the balance of the loan.

Despite such agreement, Purchaser defaulted on his own mortgage on the property.  At the foreclosure sale, Bank credit bid its debt, and purchased the property.  Bank thereafter filed a complaint for possession in the Superior Court, to which Seller filed a plea of title and counterclaim asserting that Purchaser and Bank had no interest in the property because she was defrauded into selling it.

Following a trial, the Superior Court ruled in favor of Bank, determining that Seller had not met her evidentiary burden to prove by clear and convincing evidence that the deed was forged or that the transaction was fraudulent.   Seller thereafter filed the present appeal.

Discussion

On appeal, Seller argued that the deed recorded in the land records was an altered forgery; that the transaction conveying the property to Purchaser was fraudulent and void ab initio; and that Bank’s interest in the property was therefore invalid.  Op. at 7.  She also claimed Bank was not a bona-fide lender for value without notice.

Rejecting her challenge, the Court of Appeals affirmed the trial court’s findings that “[t]he evidence indicating [that Seller] knew that the transaction was a sale of her property is overwhelming.”  Op. at 13.  The Court observed that the documents signed by the Seller included an a HUD-1 settlement statement, a “Correction Agreement, Limited Power of Attorney,” and two disbursement authorizations, all of which referred to sale of the property and which Seller signed over lines marked “seller.”  Op. at 4-5.  Seller also admitted that the signature on the recorded deed “looks like my signature,” but claimed that she didn’t remember signing it.  Op. at 6.

The Court also rejected Seller’s claim that the recorded deed was forged, explaining that “[t]here is a presumption that a deed is what it purports to be on its face, and one who seeks to establish the contrary has the burden of doing so by clear and convincing evidence.”  Op. at 8.  The Court held that Seller’s possession of an unsigned deed with different terms was insufficient because it could not compel an inference that she was given that version to sign.  Op. at 8.  Nor did a mistake in the notary block referencing the Purchaser instead of the Seller suggest that the deed was forged.  Op. at 8.  Rather, the trial court deemed such irregularity a “clerical error.”  Op. at 8.

Seller also claimed that she proved fraud in the factum, i.e., fraud which “procures a party’s signature to an instrument without knowledge of its true nature or contents.”  Op. at 9.   However, the Court noted that such a claim must be proved by clear and convincing evidence, and that the claimant would be estopped from making such claim if as a “literate and reasonably intelligent” person they fail to read the instrument.   Op. at 9.

Here, the Court agreed with the trial court that “the weight of the evidence did not support [Seller]’s claim that she signed the closing documents believing that they were refinancing documents.” Op. at 10. 

Moreover, the Court observed that Seller was a college graduate, had experience in property transactions, and had the opportunity to read the documents before signing.  Op. at 10.  Even assuming that Seller did not understand them, such a misunderstanding was due to her own negligence, negating any fraud-in-the-factum defense.   Op. at 10-11.

Finally, the Court rejected Seller’s fraudulent inducement claim, noting that “the evidence indicating that [Seller] knew that the transaction was a sale of her property is overwhelming.”  Op. at 12.  In addition to signing the documents, Seller could not give information she would be expected to know if she intended a mortgage refinancing, such as the amount of her new monthly payments.  Op. at 12.

The Court echoed the trial court’s suspicions as to whether the transaction as a whole was legitimate, but nevertheless agreed with the findings of the trial court, which was unable to accept as true Seller’s claim that she believed the transaction was a refinancing.  Accordingly, as Seller failed to meet her evidentiary burden, the Court affirmed the trial court’s judgment in favor of Bank.   Op. at 11-12.    In doing so, the Court determined that it need not address Seller’s challenge to the Bank’s status as a bona-fide purchaser for value.  Op. at 2, n.1.

Md. App. Ct. Reverses Dismissal of Foreclosure Case; Non-Borrower Spouse’s Post-Sale Challenge to Due-On-Sale Clause was Untimely Post-Sale

In Devan v. Bomar, the Court of Special Appeals reversed the dismissal of a foreclosure case, where such dismissal was premised on a non-borrowing spouse’s claim that the secured party violated federal law prohibiting the exercise of a “due-on-sale” clause, where title to the property was transferred to a surviving spouse upon the death of her husband.  The Court reaffirmed that such pre-sale challenges must be made prior to the foreclosure sale, explaining that “[a]s with statutes of limitations generally, procedural deadlines for raising certain challenges are established and strictly enforced.  An unexcused failure to comply with a clear deadline may doom what might otherwise have been a highly meritorious challenge, has it been timely filed.”  Op. at 1.

A copy of the opinion is available here.

Background

Husband and Wife owned their marital home as tenants by the entireties, however, only Husband was a borrower under the promissory note.  Following his death in 2008, Wife continued making monthly mortgage payments.  After her husband’s estate was closed, the loan servicer refused to accept further monthly payments from her, and demanded payment in full.  Thereafter, foreclosure proceedings were initiated, and nearly one-year later, the property was sold to the lender. 

After the sale, Wife filed exceptions to the sale claiming that she was wrongly prevented from making payments on the promissory note in violation of federal prohibitions on the exercise of a “due-on-sale” clause upon a transfer caused by the death of a spouse.   See 12 C.F.R. § 591.5(b).  The trial court sustained the exception, and set aside the foreclosure sale.  The substitute trustees appealed.

Discussion

As an initial matter, the Court determined that it need not consider the binding effect of the federal regulation.  Rather, the Court noted that the appeal concerned the procedural issue of whether a challenge to the sale based upon a violation of the regulation must be raised before the foreclosure sale, or if it is one that may also be raised as a post-foreclosure exception.

Under Maryland law, a foreclosure proceeding is a two-step process.  “A borrower’s ability to challenge a foreclosure sale is in part determined by whether relief is requested before or after the sale. Prior to the sale, a borrower may file a motion to stay the sale and dismiss the foreclosure action under Maryland Rule 14-211. . . . The situation is different after a foreclosure sale.” Op. at 5 (quoting Thomas v. Nadel, 427 Md. 441, 443-44, 48 A.3d 276 (2012)).

Consequently, the Court reaffirmed that “[a] post-sale exception to a foreclosure sale is not an appropriate vehicle to challenge the broad equities of the entire foreclosure proceeding itself. It is, rather, a narrow challenge to the procedures employed in the execution of the sale process itself.” Op. at 8.

In this case, the Court observed that Wife’s claim was “a sweeping attack on the Bank’s entitlement to initiate the foreclosure proceeding at the very outset,” Op. at 12, that was “fully knowable” to Wife a full year before the sale.   Thus, the Court determined that the subsequent challenge, whatever might have been its merit, simply came too late.  “Bad timing can be as fatal as lack of merit.”  Op. at 12.

The Court rejected attempts to “wriggle out” from prior decisions establishing the timing requirements of a foreclosure challenge.   The Court determined inapplicable its decision in Bierman v. Hunter, 190 Md. App. 250, 988 A.2d 530 (2010), in which the intermediate appellate court upheld a challenge to a foreclosure sale where a spouse proved her signature on the mortgage documents were forged.   The Court noted that part of the rationale in that case had been expressly rejected by subsequent opinions of the Court of Appeals, and noted that “[t]he Bierman opinion, despite its earlier tilt in a different direction, does not help [Wife] in this case.”  Op. at 17.  

Accordingly, finding Wife’s claims untimely, the Court reversed the trial court’s order to set aside the sale, and determined moot the substitute trustee’s evidentiary challenges to the trial court’s ruling.