FYI: Maryland High Court Holds Property Inspection Fees Limited for Mortgage Lenders, Servicers, and Assignees

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 is available at:  Link to Opinion

 

The plaintiff borrower obtain 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:

 

(a) 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.

(b) 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.

(c) 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.

(d) 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 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 "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 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 a consider debt from, among other things, making any "[c]laim, attempt, or threaten 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.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 8th Cir Affirms Denial of Class Cert in UDAP Case

The U.S. Court of Appeals for the Eighth Circuit recently affirmed a trial court's denial of class certification, concluding that:

 

(1) the plaintiffs' nationwide class action complaint alleged violations of the Minnesota Consumer Fraud Act, and thus rebuttal evidence was permitted;

(2) the defendant company had evidence challenging the extent to which each plaintiff allegedly relied on the alleged omissions; and

(3) individualized findings on reliance were therefore required, which would likely lead to multiple mini-trials within the class action.

 

The Eighth Circuit also explained that, because the class had not been defined in such a way that anyone within it would have standing, the class could not be certified.

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiffs filed a putative class action alleging that the defendant company failed to disclose heat defects in the all-terrain vehicles ("ATVs") sold by the company and that this artificially inflated the price of their ATVs.

 

Six plaintiffs in six states sought to certify a nationwide class under the Minnesota Consumer Fraud Act ("MCFA"). Alternatively, they asked the trial court to certify six statewide classes for ATV owners in California, Florida, Minnesota, Missouri, New York, and North Carolina, under the laws of each state.

 

The trial court denied class certification because it determined that individualized questions predominated, a class action was not a superior method for litigating, and the putative classes included members who lacked standing. The plaintiffs timely appealed.

 

In In re St. Jude Medical, Inc., the Eighth Circuit held that a trial court abused its discretion by certifying a class of plaintiffs that alleged material misrepresentations concerning heart valve replacements in violation of the MCFA. 522 F.3d 836, 841 (8th Cir. 2008). In that cases, the Court noted that fraud cases are ill-suited for class actions because they require individualized findings on whether the plaintiffs actually relied on the alleged misrepresentation. Id. at 838. The defendants there put on evidence showing that the plaintiffs did not remember whether their doctors mentioned the unique qualities of the valve. Id. at 839. Considering this rebuttal evidence, the Court held that individual issues predominated over common questions. Id. at 841.

 

The Eighth Circuit found the same reasoning applied in this case.

 

The nationwide class action complaint at issue here alleged violations of the MCFA, and the Court held that rebuttal evidence was permitted. See St. Jude, 522 F.3d at 840. The defendant company in turn had evidence challenging how much each plaintiff relied on the alleged omissions, which the Eighth Circuit concluded would require individualized findings on reliance and was likely to make for multiple mini-trials within the class action.

 

Because these individual fact issues would predominate, the Eighth Circuit held that the trial court was within its discretion to deny the plaintiffs' motion for class certification on this basis.

 

The plaintiffs also argued that the trial court should have certified six state-wide classes for the states of California, Florida, Minnesota, Missouri, New York, and North Carolina. However, the Eighth Circuit determined that at least two of these proposed classes — Minnesota and North Carolina — required individualized fact findings on the issue of reliance. See St. Jude, 522 F.3d at 838–39; see also Arnesen v. Rivers Edge Golf Club & Plantation, Inc., 781 S.E.2d 1, 7 (N.C. 2015). Therefore, the Eighth Circuit agreed with the trial court that those two putative statewide classes had individual questions that predominated.

 

The plaintiffs next argued that even if classes could not be certified for Minnesota and North Carolina, the trial court could have certified class actions for the remaining four states.

 

Under Rule 23(b)(3), even if common questions predominate, a class can only be certified if the trial court finds "that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy."

 

The Eighth Circuit ruled that the trial court did not abuse its discretion by denying class certification for superiority reasons.

 

The trial court had found that the class action was not superior because the underlying issues in the case "would present a significant risk of jury confusion and would create enormous challenges to trial management." This was based on the observation that the proposed classes would require application of the laws of four different states to forty-three different vehicle configurations, including at least four different engines, with changing exhaust standards through the years, and various attempts by the company to remedy the problems.

 

In the Eighth Circuit's view, this scenario presented monumental manageability concerns, a certification factor under Rule 23(b)(3). The putative classes simply sought to consolidate too many claims with too many variables. Accordingly, the Court concluded that the record supported the trial court's superseding concern that the litigation would be unmanageable. See Windham v. Am. Brands, Inc., 565 F.2d 59, 70–72 (4th Cir. 1977).

 

Furthermore, the Eighth Circuit noted that "[a]lthough federal courts do not require that each member of a class submit evidence of personal standing, a class cannot be certified if it contains members who lack standing." Avritt v. Reliastar Life Ins. Co., 615 F.3d 1023, 1034 (8th Cir. 2010).

 

To satisfy Article III standing, a plaintiff must show (1) an injury in fact; (2) a causal connection between the injury and conduct complained of; and (3) the likelihood that the injury will be redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992) (citation omitted). "It is well established that purchasers of an allegedly defective product have no legally recognizable claim where the alleged defect has not manifested itself in the product they own." Briehl v. Gen. Motors Corp., 172 F.3d 623, 628 (8th Cir. 1999) (citation omitted).

 

The Eighth Circuit concluded that the plaintiffs did not define their classes to make sure all proposed members had standing. Although the plaintiffs sought to certify classes for everyone who bought the ATV models in question, evidence at the class certification stage showed that not all of the ATVs manifested the alleged heat defect.

 

Indeed, the plaintiffs' own briefing before the trial court acknowledged only that "the high [exhaust gas temperatures] and low clearance create melt risks to the ATV and burn risks to the rider." "It is not enough to allege that a product line contains a defect or that a product is at risk for manifesting this defect; rather, the plaintiffs must allege that their product actually exhibited the alleged defect." O'Neil v. Simplicity, Inc., 574 F.3d 501, 503 (8th Cir. 2009).

 

Thus, because the classes had not been "defined in such a way that anyone within [them] would have standing," the Eighth Circuit held that the classes could not be certified. Avritt, 615 F.3d at 1034.

 

Accordingly, the Eighth Circuit affirmed the trial court's denial of the plaintiffs' motion for class certification.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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and

 

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