Assignees Not Liable for Lender Violations of Maryland Secondary Mortgage Loan Law, Appeals Court Holds

In a decision that narrows the scope of potential liability for assignees of second mortgage loans secured by Maryland properties, the state’s intermediate appellate court recently rejected an attempt by borrowers to hold an assignee liable for violations of Maryland's Secondary Mortgage Loan Law (SMLL) allegedly committed by the original lender.

In a case before the Court of Special Appeals of Maryland, the borrowers had obtained a second mortgage loan on their home in 1998. They alleged that certain fees charged by the originating lender were in excess of those permitted by the SMLL, and that the originating lender failed to comply with certain SMLL disclosure requirements. The original lender assigned the loan shortly after the closing, and the borrowers brought suit against the subsequent assignee (the Assignee). The suit was filed after the borrowers had paid the loan in full and the Assignee had released the deed of trust securing the loan. The borrowers alleged that the Assignee was liable for the originating lender's alleged violations of the SMLL, even though the Assignee was not involved in the loan's origination and did not receive any of the related fees that were charged. 

Relying on Maryland's implementation of the Uniform Commercial Code (UCC), the court rejected the borrowers' argument that the Assignee was liable under UCC Section 3-306 because it could not establish a holder-in-due-course defense. The court ruled that Section 3-306 applies to situations where a party is seeking to enforce, invalidate, or reform the instrument itself.

The court pointed out that appellants had not made a claim on the loan instrument or its proceeds, but instead sought damages associated with the loan's origination. Because their claims did not involve questions of “who has the right to possess a note or to receive the note's proceeds,” the court held that Section 3-306 did not apply and did not provide a basis to hold the Assignee liable.

The court also rejected the borrowers’ contention that their claims were claims in recoupment under UCC Section 3-305. The court found the provision inapplicable because it only applied to actions to enforce an instrument, and the borrowers’ loan had been paid in full before the suit was filed.

Finally, the court rebuffed the borrowers’ argument that Maryland common law provided a basis for imposing liability on the Assignee for the originating lender's alleged SMLL violations. The court pointed out that the bulk of the case law cited by appellants addressed an assignee's right to enforce a mortgage instrument, and consequently did not apply to the facts at issue. It also found that the borrowers had pled no facts indicating that the Assignee had expressly assumed liability for any of the originating lender's alleged violations relating to the borrowers' loan.

- Robert A. Scott, Steven D. Burt, and Sarah T. Reise

No Opposition Expected to SG’s Certiorari Petition in Noel Canning

As we reported earlier, the Solicitor General of the United States (SG) has filed in the U.S. Supreme Court a petition for a writ of certiorari to the U.S. Court of Appeals for the District of Columbia Circuit in Noel Canning v. NLRB. As the Court considers whether to take up the case, the Justices apparently will face no pressure to decline hearing it; according to a Reuters report, Noel Canning’s counsel says they will support a Court hearing. 

The Noel Canning decision invalidated the recess appointments of three National Labor Relations Board (NLRB) members as incompatible with the Recess Appointments Clause (RAC) of the Constitution. In addition, the decision cast a cloud over the validity of Richard Cordray’s simultaneous recess appointment as CFPB Director.

A backup to the default process of Senate “advice and consent” for presidential appointments, the RAC authorizes the President to fill vacancies “that may happen during the Recess of the Senate,” through appointments that expire at the end of the next session. In Noel Canning, the D.C. Circuit held that “the Recess” referred only to an intersession recess of Congress, and not to an intrasession recess. The court also held that to qualify for a recess appointment under the RAC, the vacancy must “happen” during the intersession recess. The petition invokes a split in the circuits (most notably with 11th Circuit’s 2004 ruling in  Evans v. Stephens, the rationale of which the D.C. Circuit expressly rejected) and attacks both holdings in Noel Canning head-on. 

After pointing out that the decision would dramatically curtail the scope of presidential authority under the RAC and calls into question every NLRB order issued since January 4, 2012, the petition argues that neither the text nor the historical implementation of the RAC supports confining it to intersession recesses. The use of “the” is not dispositive, since the word can equally refer to an individual item or a class of items (compare “the pen is on the desk” with “the pen is mightier than the sword”), and prior practice (mostly in the 20th century) has accorded a “functional” approach to the word “recess” that would encompass both the intersession and intrasession varieties. 

The petition next argues that executive branch practice—comprising the actions of former Presidents and several Attorney General opinions—has construed the phrase “that may happen” as referring to vacancies that exist during a recess, regardless of whether they came into existence then or occurred before the recess. That construction, the SG asserts, is supported by the Evans case and two other circuit court opinions: United States v. Woodley, issued by the Ninth Circuit in 1985, and United States v. Allocco, issued by the Second Circuit in 1962. The petition also argues that something can be said to “happen” throughout a period and not merely at one point in time (e.g., World War II “happened” during the 1940s, even though it began in 1939). 

More persuasively, the petition argues that the consequences of denying review are severe. They include hamstringing the NLRB, calling into question dozens of recess appointments of prior administrations (and the validity of acts performed by those appointees), and other collateral consequences. There are also collateral consequences for the CFPB and the validity of actions taken under Mr. Cordray if certiorari is denied. 

Although it is premature to weigh in on the merits of the SG’s arguments about the proper interpretation of the RAC, the split in the circuits and the obvious importance of the case to the functioning of our form of government cannot be denied. This significantly raises the odds of obtaining the writ. It is perhaps for that reason—and the absence of compelling arguments to the contrary—that the Respondent has indicated that it will not oppose the petition. 

While I do not believe that the Court will duck the case on “political question” grounds, the case certainly has an overtly political aspect. It only arose as a result of the use of “pro forma sessions” in the Senate at three-day intervals. Though such sessions contemplated the conduct of no senatorial business, they were intended to preclude the President from making any recess appointments by negating the existence of a recess or adjournment of any sort. (Article I, Section 5 of the Constitution says, in part, “Neither House, during the Session of the Congress, shall, without the Consent of the other, adjourn for more than three days, nor to any other Place than that in which the two Houses shall be sitting.”) 

These “pro forma sessions” were an innovation adopted by the Democratically controlled Senate during the administration of George W. Bush, a Republican, to keep him from using the RAC to appoint federal judges whose nominations otherwise would not likely receive Senate confirmation. Those same pro forma sessions were invoked even under a Democratic administration from December 2011 through January 2012. Interestingly, the December sessions turned out not to be “pro forma” after all; some Senate business was conducted during this period. In-depth analysis of these facts was, however, conspicuously absent from the petition for certiorari.

At issue is the tension between two potential abuses of power. One is that the Senate could prevent the President from making recess appointments even when the Senate is unavailable to give its advice and consent. This is possible under the D.C. Circuit’s interpretation of the RAC. The SG’s interpretation, in contrast, would allow the President to use the RAC to evade the advice and consent process altogether, even though the Constitution makes the latter the default mechanism and the former merely an emergency backup.  

If the Supreme Court agrees to hear the case, its Rules call for a period of more than three months after that in which both sides have opportunities to file briefs on the merits. This means that even if the Supreme Court were to grant certiorari tomorrow, the briefing process could not be completed before the Court adjourns in June for its summer recess. The earliest that oral arguments could be heard, and a decision rendered, would be during the October 2013 Term. 

- Keith R. Fisher

TILA Ban on Mandatory Arbitration in Mortgage Loans Takes Effect June 1

Lenders should be aware that the Truth in Lending Act (TILA) ban on mandatory arbitration provisions in certain mortgage loans becomes effective on June 1, 2013. Lenders now using mortgage loan documentation containing such provisions should take steps to ensure that they (and references to them) are removed from documentation to be used for any loans that will be subject to the ban.

The prohibition was one of the amendments to Regulation Z made by the Consumer Financial Protection Bureau’s final rule on loan originator compensation issued in January 2013. Intended to implement new TILA Section 129C(e), which was  added by the Dodd-Frank Act, it bans “terms that require arbitration or any other non-judicial procedure to resolve any controversy or settle any claims arising out of the transaction” in any agreement for a closed-end loan secured by a dwelling or an open-end loan secured by the consumer’s principal dwelling. “Dwellings” include mobile homes and trailers used as residences.

The prohibition applies to loans for which an application is received on or after June 1, 2013. It does not apply to loans for which the application was received before then, even if the loan is consummated on or after June 1. The prohibition does not affect arbitration provisions in existing documents for closed loans. (The prohibition was not of great importance since very few mortgage lenders were using arbitration provisions. This is because Fannie Mae and Freddie Mac would not allow the inclusion of such provisions in loans they purchased.)

While arbitration provisions in documents used for non-mortgage consumer financial products and services are also unaffected, the Dodd-Frank Act left open the possibility of broader regulation of mandatory arbitration agreements. Under Section 1028 of the Act, the CFPB is required to conduct a study of the use of mandatory arbitration agreements in connection with the offering of consumer financial products and services generally.

Section 1028 also authorizes the CFPB to “prohibit or impose conditions or limitations on the use of” such agreements based on the study results. In April 2012, the CFPB took what it  described as “a preliminary step in undertaking the study” by publishing a request for information about the scope, methodology, and data sources for the study. (For more information on the CFPB’s request, see our prior legal alert.) The study is now proceeding.

For consumer loans other than mortgage loans subject to the TILA prohibition, we believe the use of mandatory arbitration provisions remains the most effective method for expediting the resolution of disputes and minimizing litigation costs. For mortgage loans subject to the TILA prohibition or other consumer loans for which lenders elect not to use arbitration provisions, lenders should consult with counsel about other documentation language that can be used to achieve these same objectives.

- Richard J. Andreano, Jr.

Florida Federal Court Rejects FCC Ruling on Autodialed Collection Calls to Cell Phones

A Florida federal court has rejected the Federal Communication Commission's 2008 ruling that by providing a wireless number to a creditor on a credit application, a consumer has given “prior express consent” as required by the Telephone Consumer Protection Act (TCPA) for autodialed or prerecorded collection calls to that number.

The TCPA generally prohibits autodialed or prerecorded, non-emergency calls to wireless numbers unless they fall within certain exceptions, which include an exception for calls made with “the prior express consent of the called party.” In 2008, the FCC issued a declaratory ruling in which it concluded that “the provision of a cell phone number to a creditor, e.g., as part of a credit application, reasonably evidences prior express consent by the cell phone subscriber to be contacted at that number regarding the debt.” 

Because it viewed the FCC's ruling as having created a new exception for collection calls made with “implied consent,” the court in Mais v. Gulf Coast Collection Bureau, Inc. found the ruling to be inconsistent with the TCPA's plain language and therefore not entitled to deference. According to the court, for an individual to give “express consent,” he must “directly, clearly, and unmistakably [state] that the creditor may call him” at the telephone number provided on an application. (The court rejected the defendant debt collector's argument that it could not review the FCC's TCPA interpretation because under the Hobbs Act, the federal courts of appeals have exclusive jurisdiction to rule on the validity of FCC final orders.)

The plaintiff in Mais had filed a putative class action alleging that the debt collector had violated the TCPA by making autodialed calls to his cell phone without his consent. The calls were made to collect a debt owed by the plaintiff to a hospital-based provider of medical services. The collector argued that the plaintiff had provided "prior express consent" for the calls because, when he was admitted to the hospital, his wife had provided the plaintiff's cell phone number to the hospital's admissions representative.

The court found the plaintiff had not given express consent because none of the admission-related forms signed by or given to the plaintiff's wife expressly stated that the plaintiff agreed to the calls. Alternatively, the court found that the FCC's ruling did not apply “to the medical care setting.” In contrast to a debtor in a consumer credit transaction who, according to the court, “might reasonably expect” a creditor to use a cell phone number provided on an application for debt collection purposes, the court observed that “[t]o receive automated debt collection calls is not necessarily or obviously one of the reasons” someone might give his phone number to a doctor or hospital.

In the court's view, such reasons would “likely relate to treatment, care, and insurance.” In addition, the court found that because the FCC's ruling required consent to be given to the creditor, and the plaintiff's wife had given his phone number to the hospital instead of the provider that was the creditor, there was no consent under the FCC ruling.

The court did, however, reject the plaintiff's attempt to impose TCPA liability on the health care provider and the provider's parent company, finding that the FCC's ruling also was not entitled to deference on the issue of vicarious liability. In its ruling, the FCC had stated that, for purposes of TCPA liability, calls made by a third party “are treated as if the creditor had made the call.” According to the court, the ruling was inconsistent with the language of the TCPA, which only imposes liability on those who “make” prohibited autodialed or prerecorded calls. It also found that neither of the two defendants exercised, or had the right to exercise, the kind of control over the debt collector necessary to create vicarious liability. 

Mais illustrates the potential impact of the TCPA's draconian penalties. Violations can yield damages equal to the greater of $500 or actual damages per violation, triple damages for willful or knowing violations, and unlimited class action liability. The debt collector in Mais had attempted 30 calls to the plaintiff's cell phone, with 15 actually dialed and 15 others failed. While unwilling to count the failed calls as TCPA violations, the court found that the plaintiff was entitled to $500 for each of the 15 actually dialed calls. In addition, leaving open the possibility of class-wide TCPA liability, the court directed the parties to brief the question of whether the case could proceed as a class action.

- Barbara S. Mishkin

D.C. Circuit Vacates NLRB Poster Rule

The U.S. Court of Appeals for the District of Columbia Circuit has vacated a controversial rule issued by the National Labor Relations Board (NLRB) that would have required most private sector employers covered by the National Labor Relations Act (NLRA) to post a notice advising employees of their rights under the Act. That rule would have made it an unfair labor practice for an employer to fail to post the notice, and would have allowed the NLRB to toll the six-month statute of limitations for filing charges and to use an employer's refusal to post the notice as evidence of anti-union animus under the NLRA.

The court's decision is a significant victory for employers at a time when the NLRB has made clear its goal of employee outreach. The NLRB has announced that it will continue to delay enforcement of the rule pending the outcome of litigation over its validity.

Basing its decision on the free speech rights of employers, the court found that the NLRB's poster rule was squarely at odds with Section 8(c) of the Act. This section provides that the expression or dissemination of any views or opinions—whether in written, printed, graphic, or visual form—cannot constitute evidence of an unfair labor practice where no threats of reprisal or promise of benefit is made.

The court drew upon fundamental First Amendment principles, finding that an employer has a right to choose whether or not to disseminate a particular view and noting that the U.S. Supreme Court has held that “freedom of speech prohibits the government from telling people what they must say.” Because an employer has a right to speak and not to speak, the court held that the rule violated Section 8(c) of the Act by making an employer's failure to post the notice both an unfair labor practice and evidence of anti-union animus.

Turning to the rule's tolling provision, the court also found that the NLRB exceeded its authority under the Act, which sets forth a six-month statute of limitations for filing unfair labor practice charges. Under the doctrine of equitable tolling, the rule would have allowed the Board to toll that limitations period concerning employers who fail to post the notice. The court rejected the Board's tolling arguments, finding that Congress did not intend for that doctrine to apply to the Act's limitations period.

In light of its holding that the three enforcement mechanisms of the NLRB's rule were invalid, the court struck down the entire rule. The court declined to consider whether the NLRB had the authority under the Act to promulgate the rule in the first instance. 

The court's decision follows closely on the heels of its decision in Noel Canning v. NLRB (also see Keith R. Fisher's article above), in which the court invalidated President Barack Obama's recess appointments to the NLRB. Referencing that previous decision, the court briefly reviewed whether the NLRB had the requisite quorum necessary to enact the rule, and found that it did. The court also noted that a federal district court in South Carolina had invalidated the poster rule, and that the issue also is pending before the Fourth Circuit.

- Daniel V. Johns and Kelly T. Kindig

Welcome to Karen Morgan

We are pleased to welcome Karen M. Morgan, an experienced consumer financial services attorney, as the newest member of our Mortgage Banking Group. An associate in the firm’s Washington, D.C., office, Karen counsels national mortgage servicers and financial institutions on compliance issues and legal risks under state and federal financial services laws and regulations.


Karen holds a B.A. in political science from Case Western Reserve University and a J.D. from The George Washington University Law School.

Another Agency Adopts the Uniform State Test

Another state agency has announced that it will be adopting the new national MLO test with the Uniform State Content. The Alabama Banking Department will adopt the test effective July 1, 2013. With this announcement, a total of 31 state agencies have adopted the new test and will, therefore, no longer require a separate state-specific test component as a prerequisite for MLO licensure.

Washington Expands the Scope of its Collection Agency Licensing Law

Washington State recently amended its collection agency licensing law. Under the amendment, a collection agency license will be required of any entity that is engaged in the business of buying delinquent or charged-off claims for collection purposes. Licensure will be required regardless of whether the entity collects the claims itself or hires a third party for collection (or an attorney for litigation) in order to collect the debt. Accordingly, such debt buyers will be subject to the licensing and substantive requirements of the Washington Fair Debt Collection Practices Act. This amendment is effective October 1, 2013.

Georgia Amends Mortgage Licensing Exemption

Georgia recently amended its mortgage licensing statute to exempt Georgia-licensed real estate salespersons who provide information to a lender or its agent related to an existing or potential short sale transaction in which a separate fee is not received by the salesperson. Such salespersons will be exempt from licensure as a mortgage loan originator, mortgage lender, and/or mortgage broker. This amendment is effective July 1, 2013.

NMLS System Upgrade To Allow for Advance Change Notice

Upcoming NMLS system enhancements include a new feature that will allow state-licensed companies and branches to submit advance notice to state regulators on certain amendments to their record. The change will allow companies to provide a future effective date for certain changes to their record. An amendment filing can be submitted prior to the effective date and the entity's record will be updated the day after the effective date. The system enhancement is scheduled to be released on June 24, 2013.

Copyright © 2013 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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