Opinion ID: 2680957
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Heading: The Secondary Mortgage Loan Law

Text: The SMLL is a consumer protection measure that was designed to incorporate, complement, and prevent circumvention of the usury laws by limiting the interest, fees, and other charges that a lender could collect from a borrower as part of a second mortgage loan on a residential property. It was “designed to curb predatory practices that had caused many people, often minorities and older people who were in debt and ignorant of the intricacies of the law, to lose their homes and become subject to crushing deficiency judgments for hugely inflated interest, costs, and fees.” Drew v. First Guaranty Mortgage Corp., 379 Md. 318, 333, 842 A.2d 1 (2003) (Wilner, J., dissenting). It is “a law intended to guard the foolish or unsophisticated borrower, who may be under severe financial pressure, from his own improvidence. The law achieves this beneficent purpose by penalizing even the unwitting violator, to the extent of limiting him to recovery of the principal amount of the loan. This is consistent with the strong Maryland policy against usury.” Duckworth v. Bernstein, 55 Md. App. 710, 724, 466 A.2d 517 (1983). The SMLL is codified at Maryland Code, Commercial Law Article (“CL”), §12-401 et seq. It sets forth certain requirements that must be followed when a lender3 extends a 3 The statute defines “lender” as a licensee under the Maryland Mortgage Lender Law or a person who makes a secondary mortgage loan and is exempted from licensing under that law. CL §12-401(b). The Maryland Mortgage Lender Law is codified at Maryland Code, Financial Institutions Article (“FI”), §11-501 et seq., and requires that a person obtain a (continued...) 3 secondary mortgage loan to a borrower and also restricts in certain respects the terms of the loan. The statute defines “secondary mortgage loan” as “a loan or deferred purchase price secured in whole or in part by a mortgage, deed of trust, security agreement, or other lien on real property located in the State, which property: (i) is subject to the lien of one or more prior encumbrances, except a ground rent or other leasehold interest; and (ii) has a dwelling on it designed principally as a residence with accommodations for not more than four families.” CL §12-401(i)(1).4 As a general rule, the term does not include a loan to a corporation or commercial loans in excess of $75,000. CL §12-401(i)(2). 3 (...continued) license from the Commissioner of Financial Regulation to act as a mortgage lender. That law excepts from its requirements various entities, such as banks, insurance companies, and government corporations, as well as individuals in defined circumstances (e.g., a licensed real estate broker for certain loans to facilitate a sale by the broker, or an individual making a mortgage loan to certain relatives). See FI §11-502. 4 A brief note on terminology is in order. Although the statute has been known as the “Secondary Mortgage Loan Law” since it was first enacted nearly 50 years ago (Chapter 390, Laws of Maryland 1967), it governs a category of loans that might be more accurately called “second mortgages.” A “second mortgage “ is generally defined as “a mortgage that is junior to a first mortgage on the same property ...” Black’s Law Dictionary (9th ed. 2009) at 1103. In popular usage, the term “secondary” appears more frequently with the term “mortgage,” in discussions of the “secondary mortgage market” – which denotes a market in which mortgages are bought and sold, often in pools. Id. at 1105. The secondary mortgage market has exploded in size in recent years. See Plank, Regulation and Reform of the Mortgage Market and the Nature of Mortgage Loans: Lessons from Fannie Mae and Freddie Mac, 60 S.C. L. Rev. 779, 794-98 (2009). At the time the SMLL was passed, however, it appears that the term “secondary mortgage” was used as a synonym for “second mortgage” (At that time, Black’s Law Dictionary defined only “second mortgage” but had no entry for “secondary mortgage “ or “secondary mortgage market.” See Black’s Law Dictionary (1968) at 1163). Thus, we use the phrase “secondary mortgage” in this opinion simply to denote a loan subject to the SMLL and not to suggest any necessary connection to the contemporary secondary mortgage market. 4 The SMLL regulates in certain respects the terms of repayment of the loan. Among other things, the SMLL sets a maximum rate of interest that may be charged for a secondary mortgage loan. CL §12-404. Under the statute, a borrower may prepay the loan at any time without penalty. CL §12-407(d). The statute also limits the frequency with which a lender may refinance a loan. CL §12-408. The statute regulates, in some detail, the origination of such a loan. In particular, one who makes such a loan must be licensed to do so or come within an exemption to the licensing requirement. CL §12-402. The lender must consider the borrower’s ability to repay the loan at the time the loan is made. CL §12-409.1(b). The SMLL also sets limits on origination fees, finder’s fees, and other charges related to the placement of the loan. CL §§ 12-404.1, 12-405, 12-406. A broker’s or finder’s fee may be paid by the lender only to certain categories of professionals and only pursuant to a written agreement signed by the lender. CL §12-406. The statute also imposes certain disclosure requirements on the lender, most of which are to be made on forms developed by the Commissioner of Financial Regulation. CL §§12-407, 12-407.1. The statute includes various other consumer protection provisions, including prohibitions against false advertising regarding the availability of secondary mortgage loans, against age discrimination in the granting of such loans, and against loan provisions that require the debtor to waive the protections of the SMLL. CL §§12-403, 12-403.1, 12-409. The statute generally prohibits a lender from offering or making a secondary mortgage loan 5 that is not in compliance with the SMLL and, more specifically, from “directly or indirectly” charging or receiving fees forbidden by the statute. CL §§12-411, 12-412. Finally, the SMLL provides for both civil and criminal enforcement. CL §§12-413, 12-414. The civil remedy provision reads as follows: Except for a bona fide error of computation, if a lender violates any provision of [the SMLL] he may collect only the principal amount of the loan and may not collect any interest, costs, or other charges with respect to the loan. In addition, a lender who knowingly violates any provision of [the SMLL] also shall forfeit to the borrower three times the amount of interest and charges collected in excess of that authorized by law. CL §12-413. Thus, a lender who violates the SMLL is limited to collecting the principal amount of the loan and is not entitled to collect any interest or other charges. If the violation is “knowing,” the borrower can recover a form of treble damages from the lender.