DOES IT MATTER IF A LENDER IS LICENSED WHEN IT COMES TO MORTGAGE LOANS? DOES A FRIEND OR REALTOR MAKE THE CUT? WHAT ARE THE RISKS AND WHO MAY BE HELD LIABLE?
If you rob a bank and are not caught, is it still a crime? You bet it is. Maryland explicitly prohibits a person from acting as a “mortgage lender” unless they are licensed or fall under one of the exemptions to licensing. In fact, a violation of the Maryland Mortgage Lender Law is a felony and upon conviction, violators are subject to a fine up to fifty thousand dollars ($50,000.00) or imprisonment up to ten (10) years, or both.
How does the State define a “mortgage lender”? Who may qualify as a defendant? Moreover, what are the exemptions to the licensing requirement? The answers are not as simple as one may think. Test your knowledge of the Maryland Mortgage Lender Law below, and more importantly, ensure your compliance with it.
Let’s Set The Scene:
The Maryland Mortgage Lender Law applies to mortgage loans that are primarily for personal or family use and secured by property that will be owner-occupied. In other words, loans made for commercial purposes are not subject to this Law.
Let’s say you want to use a private lender to buy a home that will be your principal residence.Perhaps a friend, or even your realtor, has offered to loan you the money for the purchase price. Soon, you find yourself ata title company or law office requesting assistance with the transaction and preparation of loan paperwork.
What Is The Licensing Requirement? What Exemptions Exist?
A person may not act as a mortgage lender, broker, or servicer unless: 1) the person is licensed with the State Office of the Commissioner of Financial Regulation, of the State Department of Labor, Licensing and Regulation (See https://www.dllr.state.md.us/finance/industry/mortlend.shtml), or 2) the circumstances of the loan qualify for an exemption under the Law. Moreover, the State requires that mortgage loan instruments presented for recording contain: the mortgage originator license number and the mortgage lender license number, or affidavits demonstrating that the originator or lender is exempt from the licensing requirement.
Common exemptions to the licensing requirement include:
- Banks, savings and loan institutions, and credit unions that operate under State laws;
- A person who takes back a deferred purchase money mortgage related to the sale of a dwelling or residential real estate owned by and titled in the name of the person or a new residential dwelling that the Seller built (For example, a builder who buys a lot, builds a residential home on the lot, and sells it to a Buyer, in which the builder takes back a purchase money mortgage deed of trust);
- An employer who makes a mortgage loan to an employee;
- A person making a mortgage loan to a borrower who is the person’s spouse, child, child’s spouse, parent, sibling, grandparent,grandchild, or grandchild’s spouse;
- A real estate broker that is licensed in the State and makes a mortgage loan with a repayment schedule of two (2) years or less to assist in the purchase or sale of a dwelling or residential real estate through the broker.
The full list of exemptions to the licensing requirement can be found in Section 11-502 of the Financial Institutions Article of the State Code, available at http://www.lawlib.state.md.us/researchtools/sourcesmdlaw.html
What Are The Possible Consequences Of Violating The State Mortgage Lender Law?
A. Fine And Imprisonment
In general: Upon conviction, violators of the Mortgage Lender Law are subject to a fine up to fifty thousand dollars ($50,000.00) or imprisonment up to ten (10) years, or both.
B. Liability Extends Beyond The Lender
An unlicensed person who makes or assists a borrower in obtaining a mortgage loan in violation of this Law is subject to its penalties. This broad statutory language suggests liability to not only the lender but all those who “assist” the borrower, such as the Buyer’s realtor and the individual who prepared the loan documents, to name a few.
C. Unlicensed Lenders, Who Do Not Qualify For An Exemption, May Only Enforce Unpaid Principal, If Anything.
The Law provides that the unlicensed lender may collect only the principal amount of the loan, and not any interest, costs, finder’s fees, broker fees, or other charges. However, the licensing requirement raises the issue of whether the unlicensed person may enforce the mortgage at all. A borrower could certainly choose to challenge the validity of the mortgage, and therefore their responsibility to make any payments, based on the lender’s failure to comply with the legal requirements of a valid mortgage loan instrument. Moreover, by doing so, the borrower opens the door to implicating all those who assisted them in obtaining the loan.
Maryland does not consider mortgage loans to be casual transactions. The State Mortgage Lender Law specifically prohibits the giving of a mortgage loan by an unlicensed person who does not otherwise qualify for an exemption under the Law. If the loan is secured by owner-occupied residential real estate, it is subject to the Law. A person who gives a mortgage loan in violation of the Law, as well as anyone who assists with the transaction, is asking for trouble. Penalties can range up to fines in the thousands as well as imprisonment, not to mention the question of whether the mortgage is enforceable and to what extent a court would rule.
With what may be the biggest investment in a person’s life, the mortgage on a home, it makes good sense to value legality over convenience and ensure that all aspects of the mortgage transaction comply with the current State law. In doing so, the lender may also protect their interest and be confident that they have a legally enforceable mortgage.
– Brianne Paugh
Readers with questions about this or any real estate legal matter can reach Brianne at 301-698-9300.
*Brianne Paugh is an Attorney with Village Settlements, Inc. and The Law Offices of Parker, Simon, Hahn & DeLisi, LLC, in Frederick, Maryland.