Md. Holds Borrower Law Firm That Regularly Offered to Negotiate Loan Modifications Subject to Regulation Under Maryland Credit Services Business Act

The Court of Appeals of Maryland recently determined that a law firm engaged in the business of assisting homeowners to modify their mortgage loans constituted a “credit services business” under the Maryland Credit Services Business Act, Md. Code, Comm. Law (“CL”) § 14-1901 et seq. (“MCSBA”), and was subject to regulation and licensure.  The Court also determined that, because the law firm had engaged in the credit services business on a “regular and continuing basis,” it was not subject to the Act’s exemption for attorneys.

A copy of this opinion is available here.

Background

Several homeowners facing foreclosure hired a Virginia law firm, which promised to help renegotiate their mortgage loans in exchange for payment.  After receiving a complaint from one such homeowner, the Maryland Commissioner of Financial Regulation (“Commissioner”) instituted administrative proceedings against Law Firm and its managing partner (collectively, “Law Firm”).  Following an evidentiary hearing, Commissioner found that Law Firm committed multiple violations of the MCSBA, which regulates “credit service businesses” purporting to assist consumers in obtaining credit.  Specifically, neither Law Firm nor any of its attorneys held a license under the MCSBA.  The Commissioner also found that Law Firm violated the MCSBA’s bonding and disclosure requirements.   After settlement efforts failed, the Commissioner entered a cease and desist order prohibiting law firm from engaging in any credit services business activities with Maryland residents, imposed a civil monetary penalty of $114,000 and, determining that its violations were willful, directed law firm and its principal to pay 57 Maryland consumers treble damages totaling $720,600.

Reversing the Commissioner’s order, both the trial court and the intermediate appellate court held that that Law Firm was not a “credit services business” under the MCSBA because its attempts to obtain loan modifications for its clients were “ancillary” to its provision of legal services.  The Commissioner thereafter obtained certiorari in the Court of Appeals.

Discussion

The Court of Appeals agreed with the Commissioner that Law Firm constituted a “credit services business,” which is defined to include “any person [or entity] who, with respect to the extension of credit by others, sells, provides, or performs, or represents that such person can or will sell, provide or perform” any of certain enumerated services “in return for the payment of money or other valuable consideration.”  Md. Code, CL § 14-1901(e)(1).  Such services include “obtaining an extension of credit for a consumer,” or providing advice or assistance to a consumer in connection with obtaining an extension of credit.

Notably, the Court determined that, in undertaking to renegotiate the terms of homeowners’ mortgage loans in exchange for payment, Law Firm was offering to assist the homeowners in “obtaining an extension of credit,” thus falling within the MCSBA’s definition of a “credit services business.”  Op. at 15-16.  The Court also examined the MCSBA’s legislative history and concluded that the statute was not limited to regulating only “ordinary credit repair services” or payday lenders.  Op. at 18.  “Rather, it is intended to provide broad protection to consumers of credit services.”  Op. at 18.   Moreover, the Act’s exemption for “mortgage assistance relief providers” who were separately regulated confirmed that “the General Assembly believed that those who offer to obtain loan modifications for homeowners would be otherwise covered by the MCSBA.”  Op. at 19.

The Court then evaluated whether Law Firm met its burden to show that its activities were exempt from regulation under a statutory provision exempting attorneys.  See Md. Code, CL § 14-1901(e)(3)(vi).  For the “attorney exemption” to apply, three requirements must be met:  “(1) the individual must be admitted to the Bar of the Court of Appeals of Maryland, (2) the individual must render the services within the course and scope of practice by the individual as a lawyer, and (3) the individual must not engage in the credit services business ‘on a regular and continuing basis.’”  Op. at 22.  The Court determined that Law Firm could not satisfy the third prong because, over the relevant time period, Law Firm entered into 57 agreements with Maryland homeowners, and consulted with hundreds of others.  Further, such agreements constituted a “very significant part of the firm’s business” and “accounted for most of the work of its Maryland-licensed attorney . . . .”  Op. at 23. 

The Court noted that “[a] Maryland attorney who counsels an individual client facing foreclosure and attempts to negotiate a mortgage loan modification would . . . ordinarily be exempt from the MCSBA.”  Op. at 23.  However, “there may be cases where there is a significant question at what point an attorney who frequently provides such services has crossed the line into providing ‘regular and continuing’ credit services.  That, however, is not this case.”  Op. at 23.  To that end, the Court observed that “[t]he consultations and agreements with Maryland homeowners seeking loan modifications were not only a very significant part of the firm’s business during the month’s in question, but also accounted for most of the work of its Maryland-licensed attorney by the time he left the firm.”  Op. at 23.  Consequently, the Court determined that there was substantial evidence to support the Commissioner’s finding that the law firm engaged in a credit services business on a regular basis.  Op. at 23.

Accordingly, the Court held that Law Firm was subject to the MCSBA as a “credit services business,” but remanded the case to the trial court to determine whether Law Firm’s violations were willful.  Op. at 28.

Va. Sup. Ct. Holds General District Court Must Dismiss Unlawful Detainer Case Where Borrower Raises Bona Fide Dispute of Title from Foreclosure Sale

In Parrish v. Federal National Mortgage Association, the Supreme Court of Virginia reversed the judgment of the Circuit Court (in an appeal from the General District Court), which granted possession in favor of Fannie Mae in an unlawful detainer case (i.e. an eviction case).  Specifically, the Supreme Court held that, where a borrower raises a bona fide question as to the validity of title in a case originally filed in the General District Court (or subsequently appealed to the Circuit Court from the General District Court), the case must be dismissed without prejudice because the General District Court lacks original subject matter jurisdiction to adjudicate the validity of title.

The Court explained that in order to raise a bona fide dispute to title, a borrower is required to raise sufficient facts that would otherwise survive a Demurrer (Motion to Dismiss).  The Court noted that the jurisdictional limitations at issue did not apply to unlawful detainer actions originally brought in the Circuit Court pursuant to Virginia Code § 8.01-124, nor does such holding impact prior cases where the homeowner failed to raise such issues.

A copy of the opinion can be found here.  

Background

Borrowers owned certain property secured by a deed of trust.  Following a foreclosure sale of the property, the trustee conveyed the property to Fannie Mae.  Fannie Mae sent the Borrowers a notice to vacate, and later filed a summons for unlawful detainer in the General District Court.

Borrowers filed a response to the Unlawful Detainer Action, which argued that the foreclosure was invalid because the deed of trust incorporated 12 C.F.R. § 1024.41(g), which prohibits foreclosure if a borrower submitted a completed loss mitigation application more than 37 days before the foreclosure sale.  Borrowers claimed to have submitted a complete application within such timeframe.  Because Fannie Mae (who, according to the Borrowers’ allegations, was also their lender) instigated the foreclosure despite their allegedly timely filed loss mitigation application, Borrowers alleged that Fannie Mae breached their deed of trust.

The General District Court awarded Fannie Mae possession, and the Borrowers filed a de novo appeal to the Circuit Court.  In the Circuit Court (which was sitting as an appellate court), Fannie Mae filed a motion for summary judgment, arguing that its trustee’s deed was prima facia evidence of its right of possession.   Fannie Mae also moved to exclude evidence of any defense contesting the validity of the trustee’s deed, arguing that  the General District Court (and the circuit court sitting as an appellate court) lacked subject matter jurisdiction to adjudicate title in an unlawful detainer proceeding.   The Circuit Court agreed, granted Fannie Mae’s motions, and awarded it possession.  Borrowers thereafter filed this appeal to the Supreme Court of Virginia.

Discussion

At the outset, the Supreme Court agreed that the General District Court (or in this case the Circuit Court which was hearing an appeal from the General District Court), lacked subject matter jurisdiction to adjudicate title.

In the context of an unlawful detainer case, “[t]he validity of the plaintiff’s right of possession is an issue that, when disputed, must be determined in the adjudication of the of the unlawful detainer action.”  Op. at 4.  Where a plaintiff (such as a foreclosure purchaser) claims a right of possession acquired after the defendant’s original, lawful entry, the plaintiff must show the validity of its right of possession.   See Op. at 4.  Consequently, “[w]hen the plaintiff’s after-acquired right of possession is based on a claim of title, the plaintiff may be required to establish the validity of that title.” Op. at 5.

According to the Court, “[i]n most foreclosure cases, a trustee’s deed will satisfy the foreclosure purchaser’s burden to establish that it acquired a right of possession after the homeowner’s original, lawful entry, and the homeowner will have no good-faith basis to contest it. However, in limited circumstances, the homeowner could allege facts sufficient to place the validity of the trustee’s deed in doubt. In such cases, the General District Court’s lack of subject matter jurisdiction to try title supersedes its subject matter jurisdiction to try unlawful detainer and the court must dismiss the case without prejudice.”  Op. at 6.

The Court emphasized that “[t]he question of title raised by the homeowner’s allegations must be legitimate. . . .  Because a court always has jurisdiction to determine whether it has subject matter jurisdiction, the court has the authority to explore the allegations to determine whether, if proven, they are sufficient to state a bona fide claim that the foreclosure sale and trustee’s deed could be set aside in equity. Stated differently, the allegations must be sufficient to survive a demurrer had the homeowner filed a complaint in circuit court seeking such relief.”  Op. at 6 (citations and quotations omitted).

However, the Court noted that “[a] general allegation that the trustee breached the deed of trust is not sufficient. The homeowner’s allegations must (1) identify with specificity the precise requirements in the deed of trust that he or she asserts constitute conditions precedent to foreclosure, (2) allege facts indicating that the trustee failed to substantially comply with them so that the power to foreclose did not accrue, and (3) allege that the foreclosure purchaser knew or should have known of the defect.”  Op. at 7, n. 5.  

In this case, the Court determined that the Borrowers raised a bona fide question of title in the underlying unlawful detainer proceeding.  The Court observed that the Borrowers alleged that 12 C.F.R. § 1024.41(g) was incorporated in their deed of trust as a condition precedent, that they submitted a complete loss mitigation application, and that none of the exceptions applied.  Op. at 8-9.  The Court also inferred that Fannie Mae, as foreclosure purchaser, was aware of the alleged violation of the deed of trust “because it was the lender that allegedly committed the violation.”  Op. at 9.  Consequently, the Supreme Court concluded that these allegations were sufficient, and if proved, could satisfy a court of equity to set aside the foreclosure.”  The Court therefore vacated the judgment in favor of Fannie Mae, and dismissed the summons for unlawful retainer. 

Md. App. Holds Collection Agency License Not Required for Insurance Company Pursuing Subrogation Rights Against Consumer

In Old Republic Insurance Company v. Gordon, the Court of Special Appeals of Maryland determined that an insurance company under a credit insurance policy was not required to hold a collection agency license when it sued a consumer to enforce its subrogation rights under the policy.   At issue was the interpretation of the Maryland Collection Agency Licensing Act, Md. Code, Bus Reg. § 7-101, et seq. (“MCALA”), which defined “collection agency” to include any person engaged directly or indirectly “in the business of” collecting a consumer claim if the claim was in default when the person acquired it.  See Md. Code, Bus. Reg. § 7-101(c).  The Court concluded that the term “in the business of” was ambiguous, and, relying upon the legislative history of MCALA, determined that an insurance company pursuing subrogation rights under its credit insurance policy did not fall under the definition of “collection agency.” 

A copy of the opinion is located here. 

Background

Insurance Company issued a credit insurance policy to Lender to insure payments due under a mortgage loan made to Borrower.  Following Borrower’s default, Insurance Company paid Lender pursuant to the policy.  Insurance Company then sought repayment from Borrower under subrogation rights provided in the policy.  After Borrower’s failure to pay, Insurance Company ultimately sued Borrower. 

Borrower challenged the lawsuit, claiming that Insurance Company could not obtain a judgment against her because it had acted as an unlicensed collection agency under § 7-101(c) of MCALA, rendering any possible judgment against her void pursuant to the Court of Special Appeals’ ruling in Finch v. LVNV Funding LLC, 212 Md. App. 748 (2013).  Borrower claimed that, because Insurance Company obtained the right to collect the debt after her default, it constituted a “collection agency,” which under Section 7-101(c).

The trial court agreed with Borrower, holding that under MCALA’s plain language, Insurance Company was acting as a collection agency because it was asserting a consumer claim related to a debt that it acquired while the debt was in default.  The trial court found immaterial that Insurance Company acquired the debt through a subrogation agreement rather than a debt purchase.  Consequently, the trial court granted summary judgment to Borrower and dismissed Insurance Company’s lawsuit with prejudice.  This appeal followed. 

Discussion

Noting its prior holding in Finch that “a judgment entered in favor of an unlicensed debt collector constitutes a void judgment,” the Court determined that resolution of the appeal hinged on whether Insurance Company, in pursuing its subrogation rights against borrower, was a ‘collection agency’ under MCALA and required to hold a license.  Op. at 13.  Notably, the exclusions under Section 7-102, were not applicable.  Op. at 13, n. 4 (“[MCALA” specifically excludes certain persons, such as a bank and a mortgage lender.  BR § 7-102. . . . “[A]n insurance company pursuing subrogation rights is not included in this list.”).

The Court considered the language of § 7-101(c), which defined “collection agency” to include persons engaging “in the business of” collecting a consumer claims if the claim was in default when the person acquired it.  Op. at 18.  The Court determined that § 7-101(c)’s phrase “in the business of” had been interpreted differently by courts:  some considered the nature and extent of the activity, while others interpreted the phrase more broadly.   Consequently, the appellate court concluded that the phrase was ambiguous.  Op. at 18-20. 

The Court then examined MCALA’s legislative history and determined that the Legislature did not intend § 7-101(c) to target insurance companies pursuing subrogation rights.  Op. at 22.  Specifically, the expansive definition of collection agency was the result of an amendment in 2007.  The Court observed that the 2007 amendments of MCALA were specifically intended to regulate debt purchasers, who purchase debts at a discount or are otherwise compensated on a contingent basis.  Op. at 20-21.  

Given that Insurance Company was not a “debt purchaser” that purchased Borrower’s debt at a discount, the Court determined that it did not constitute a “collection agency” under the purview of MCALA.  Moreover, the Court noted that “[b]ecause an insurance company pursuing subrogation claims does not qualify as a collection agency, there wasneed to include an insurance company in the list of exclusions [from the definition of ‘collection agency’] found in BR § 7-102.”  Op. at 22, n. 9.   Accordingly, the appellate court reversed the judgment of the trial court.