The Maryland Court of Appeals – the state’s highest court – recently reversed a trial court’s dismissal of a putative class action alleging that a mortgage servicer and loan owner violated the Maryland Usury Law and Maryland Consumer Debt Collection Act by charging property inspection fees in connection with residential mortgage loans.
In so ruling, the Court held that:
- The Maryland Usury Law, specifically at CL §12-121, limits the authority of a person who makes a mortgage loan, as well as servicers and assignees of the loan, to charge property inspection fees in connection with that loan.
- In order “to adequately allege the requisite knowledge for purposes of [Maryland Consumer Debt Collection Act, CL §14-202(8)], a plaintiff must allege that the defendant either actually knew that it did not possess a right it claimed as part of its debt collection efforts, or recklessly disregarded the falsity of that claim.”
A copy of the opinion in Nationstar Mortgage v. Kemp is available at: Link to Opinion.
The plaintiff borrower obtained a loan secured by a deed of trust on her home. The loan was later sold and assigned, and the borrower later defaulted on the loan. The servicer began assessing fees for “drive-by inspections” of the collateral property.
The borrower objected to the fees, and eventually filed a putative class action lawsuit among other things under the Maryland Usury Law and under the Maryland Consumer Debt Collection Act (MCDCA) against the loan owner and servicer for supposedly charging illegal “drive-by inspection” fees.
The trial court dismissed the claim, and the borrower appealed. The Court of Special Appeals (Maryland’s intermediate appellate court) reversed, and the Maryland Court of Appeals granted the parties’ petition and cross-petition for writ of certiorari.
The Maryland Court of Appeals noted that the first question to be resolved was “whether the addition of a definition of ‘lender’ to the Maryland Usury Law during [1975] code revision effected a significant change in that law – and the Maryland common law – that lay latent for more than four decades before this case arose.”
The second issue was whether the borrower’s complaint adequately alleged that the servicer “attempted to collect an alleged debt by asserting a right to collect inspection fees with knowledge that the right did not exist, in violation of the MCDCA.”
On the first issue, the Court noted that Maryland has regulated interest rates and fees on loans since colonial times. The statute at issue here was codified in 1957, and now appears as the Maryland Usury Law in the state’s Commercial Law Article.
The specific provision at issue here — CL §12-121, added in 1986 – restricts the charging of an inspection fee in connection with residential real property financing as follows:
- In this section, the term “lender’s inspection fee” means a fee imposed by a lender to pay for a visual inspection of real property.
- Except as provided in subsection (c) of this section, a lender may not impose a lender’s inspection fee in connection with a loan secured by residential real property.
- A lender’s inspection fee may be charged if the inspection is needed to ascertain completion of: (1) Construction of a new home; or (2) Repairs, alterations, or other work required by the lender.
- This section does not apply to an appraisal of the value of real property by a lender or to fees imposed in connection with an appraisal.
The defendant loan servicer and assignee took the position that they were not covered by the term “lender” in the statute.
The defendants argued that, since 1975, CL §12-101(f) “defined ‘lender’ as ‘a person who makes a loan under this subtitle,” and that the “’subtitle’ referenced in that definition is the Maryland Usury Law.”
The defendants also pointed to “the reference to making a loan and the absence of the word ‘assignee’ in CL §12-101(f).” In addition, the defendants argued that “the text of CL §12-109.2(a)(3) includes a reference to an ‘assignee of a lender,’” and therefore that “the definition of ‘lender’ generally applicable in the Usury Law in CL §12-101(f) must not encompass an assignee of a loan originator.”
The Maryland Court of Appeals disagreed.
In so ruling, the Court noted that “[u]nder the common law, an assignee generally has the same rights and responsibilities as its assignor – no more, no less.” Therefore, “[t]he rights and responsibilities of an assignee of a mortgage are no different,” and “[a]s a general rule, an assignee of a mortgage acquires no power with respect to the mortgage that the assignor did not have.”
Here, the Court recited that “it is a standard canon of statutory construction that statutes are not construed to repeal the common law by implication.” The Court continued that “[g]iven the ease and frequency with which loans are assigned – and have long been assigned in Maryland – it is very unlikely that the Legislature intended to change the common law so substantially without making such a purpose clear,” and that “[s]imilarly lacking is any indication that the Legislature intended to narrow the scope of the Usury Law by inserting a gaping loophole in those provisions that use the term ‘lender’ in the context of post-origination conduct.”
In addition, the Court pointed out that “[o]ther parts of the Usury Law, however, clearly regulate conduct that occurs later in the life of the loan,” and that “[t]hese provisions, which appear to apply over the life of a loan, suggest that the term ‘lender’ includes not only an originator of a loan but also an assignee.”
The Maryland Court of Appeals also referenced its ruling in Taylor v. Friedman, 344 Md. 572 (1997), in which the Court stated that it held that “the prohibition in CL §12-121 was not confined to the origination of the loan.” Although the Taylor v. Friedman “case concerned whether the prohibition in CL §12-121 applied to post-default inspection fees,” the Court noted that “the status of the respondent bank as an assignee of the mortgage loan was obvious from the facts.”
In addition, the Court also referenced its ruling in Thompkins v. Mountaineer Investments, LLC, 439 Md. 118 (2014), in which it held that “an assignee was not liable for a violation of the [Maryland Secondary Mortgage Loan Law (SMLL)] committed by the original lender when the loan was originated, but that the assignee was subject to the requirements of the SMLL and would be liable for its own violations of the statute,” and “observed that the [Maryland] Usury Law in particular contemplated that an assignee could be liable for violations of that law.”
Moreover, the Court also noted that “[s]ince at least January 2014, the Maryland Commissioner of Financial Regulation has taken the position that mortgage servicers … are subject to the prohibition on inspection fees in CL §12-121 during the life of a mortgage loan. Advisory Notice (January 7, 2014), available at https://perma.cc/2WYR-S22S”.
Accordingly, the Maryland Court of Appeals held that the 1975 “code revision did not change Maryland law applicable to assignees of mortgage loans and that the prohibition on property inspection fees applies to” both the loan servicer and the loan owner.
On the second issue, the Maryland Court of Appeals noted that the MCDCA prohibits anyone collecting or attempting to collect an alleged debt from, among other things, making any “[c]laim, attempt, or threat[] to enforce a right with knowledge that the right does not exist.” CL §14-202(8).
The Court first recited its ruling from Chavis v. Blibaum & Associates, P.A., ___ Md. ___, ___ (2021), issued on the same day as this one, that a plaintiff may invoke subsection (8) “when the amount claimed by the debt collector includes sums that the debt collector, to its knowledge, did not have the right to collect.” The Maryland Court of Appeals held that the complaint met this requirement.
In addition, again referencing its contemporaneous ruling in Chavis v. Blibaum & Associates, P.A., the Maryland Court of Appeals held that “the knowledge element is met when the law is settled, because the debt collector’s recklessness in failing to discover that law is the equivalent of knowledge,” and rejected the notion that “the existence of a ‘potentially meritorious’ argument as to the existence of the right necessarily negates knowledge.” Instead, the Court held, “the question whether a debt collector acted recklessly is a question of fact, to be determined in light of the particular circumstances.”
The Maryland Court of Appeals summarized that, “to adequately allege the requisite knowledge for purposes of [CL §14-202(8)], a plaintiff must allege that the defendant either actually knew that it did not possess a right it claimed as part of its debt collection efforts, or recklessly disregarded the falsity of that claim.”
Here, the Court referenced its rulings and reasoning under the Maryland Usury Law, especially the 2014 advisory notice of the Maryland Commissioner of Financial Regulation. The Court held this was sufficient to state a claim that the servicer “had knowledge that it did not have the right to impose such a fee.”
Accordingly, the Maryland Court of Appeals reversed the trial court’s ruling and remanded the case for further proceedings consistent with its opinion.
