The U.S. Court of Appeals for the Fourth Circuit recently held that the Maryland Finder’s Fee Act is only actionable against mortgage brokers, and that an entity named as the lender in the operative loan documents is categorically excluded from the definition of “mortgage broker,” and therefore cannot be held liable for the borrowers’ alleged violation of the Finder’s Fee Act.
A copy of the opinion is available at: http://www.ca4.uscourts.gov/Opinions/Published/131869.P.pdf
The plaintiffs (“Borrowers”) obtained a mortgage loan in connection with the purchase of a house in Baltimore, Maryland. For its services, their lender (“Lender”) charged typical lending fees in the amount of $1,290 at closing. This amount included an application fee of $410 (most of which for the cost of an appraisal and a credit report), a processing fee of $490, and an underwriting fee of $390.
Borrowers had been introduced to the Lender by an employee of a national real estate agency (“Real Estate Agency”). To fund the loan, Lender opened a line of credit with a bank (“Bank”). Four days after closing, Lender sold the loan to Bank. Lender was owned in equal shares by two companies affiliated with Real Estate Agency and Bank, respectively. As part of its business plan, Lender would operate as a residential mortgage lending business principally with customers of Real Estate Agency, and would use funds obtained through a line of credit from Bank. Within days of closing a loan, Lender would sell most (but not all) of its loans to Bank.
In their class action lawsuit, Borrowers claimed that the fees imposed by Lender at closing were “finder’s fees” and violated the Maryland Finder’s Fee Act.
Specifically, the alleged violations included (1) charging finder’s fees in transactions in which Lender was both the mortgage broker and the lender; and (2) charging finder’s fees without a separate written agreement providing for them. Also, Borrowers named Real Estate Agency and Bank in the lawsuit as supposed aiders and abettors, and as supposed coconspirators.
Dismissing the claims against Real Estate Agency and Bank, the district court denied Defendants’ motion to dismiss Borrowers’ core claim that Lender was a mortgage broker that illegally collected a finder’s fee while also acting as the lender. Shortly before trial, the district court sent a letter to the parties indicating that the fees charged for work actually performed by Lender in providing processing, underwriting, and application services were not finder’s fees.
The trial court indicated that the scheme could only make sense if Borrowers had paid “some excessive or redundant fee” to Bank (in the guise of Lender) for finding Bank as lender. Slip. Op. at p. 5. When Borrowers admitted that they could not meet that burden, the trial court entered final judgment in Defendants’ favor. This appeal followed.
As you may recall, the Maryland Finder’s Fee Act, Md. Code, Comm. Law (“CL”) § 12-801, et seq., prohibits a “mortgage broker” from charging a “finder’s fee in a transaction in which the mortgage broker…is the lender…” Md. Code, CL § 12-804(e). “Finder’s fees” are defined as those fees “imposed by a broker . . . for the broker’s services in procuring, arranging, or otherwise assisting a borrower in obtaining a loan or advance of money,” Md. Code, CL § 12-801(d). Thus, the Maryland Finder’s Fee Act “applies only to mortgage brokers and the fees they charge borrowers.” Sweeney v. Sav. First Mortg., LLC, 879 A.2d 1037, 1048-49 (Md. 2005).
On appeal, the U.S. Circuit Court for the Fourth Circuit affirmed the trial court’s judgment but under a different rationale.
According to the Fourth Circuit, because Lender was the “lender named in the loan documents,” it was not a mortgage broker under the Maryland Finder’s Fee Act. See Md. Code, CL § 12-801(f). Indeed, Maryland law defines a “mortgage broker” as “a person who: (1) [f]or a fee or other valuable consideration, whether received directly or indirectly, aids or assists a borrower in obtaining a mortgage loan; and (2) [i]s not named as a lender in the agreement, note, deed of trust, or other evidence of the indebtedness.” Md. Code, Fin. Inst. § 11-501(i) (emphasis added).
Therefore, the Court held that “an entity that is named as the lender in the operative loan documents is categorically excluded from the definition of ‘mortgage broker,’ as that term is used in the Finder’s Fee Act.” Slip. Op. at p. 15.
Borrowers’ primary argument arose from their challenge to the rationality of the statutory definition. Specifically, they argued that the exclusion of the named lender from the definition of “mortgage broker” is “irreconcilable” with § 12-804(e), a provision of the Finder’s Fee Act that states that “[a] mortgage broker may not charge a finder’s fee in any transaction in which the mortgage broker . . . is the lender.” Md. Code Ann., Com. Law § 12-804(e).
However, the Fourth Circuit disagreed, holding that these provisions are not irreconcilable. Rather, “such a situation could occur if a broker were to accept a finder’s fee to help a borrower obtain a loan from an entity that merely put its name on the loan documents while the broker secretly ‘table funded’ the loan…” Slip. Op. at p. 17. According to the Fourth Circuit, in such a scenario, the broker would be charging a finder’s fee in a transaction where it was both broker and lender but not named as the lender on the loan documents. Therefore, “[Section] 12-804(e) comfortably coexists with the statute’s definition of ‘mortgage broker.’” Id. These circumstances were not at issue in this case.
Accordingly, the Fourth Circuit affirmed the judgment of the district court, denied the Borrowers’ motion to certify certain questions to the Maryland Court of Appeals, and denied as moot Borrowers’ motion to dismiss Defendants’ cross-appeal.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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