| Of Interest

A&B ABstract:

In the wake of the recent earthquakes in Puerto Rico, the Puerto Rico Office of the Commissioner of Financial Institutions (“OCFI”) released Circular Letter No. CFI-2020-01 (the “Circular Letter”). The Circular Letter imposes weekly and monthly reporting requirements on all Puerto Rico licensed mortgage lenders, mortgage servicers, Home Equity Conversion Mortgage servicers, reverse mortgage servicers, and all financial institutions acting as mortgage servicers (collectively “Mortgage Servicers”) for specific zip codes and “persons affected by the earthquake” in Puerto Rico. Significantly, the Circular Letter does not include a deadline for Mortgage Servicers to submit the first monthly report, but it provides that the first weekly report is due by 4:30 P.M. on February 5, 2020, for the week ending January 31, 2020.

Purpose of the Circular Letter

The Circular Letter requires that all Mortgage Servicers report to OCFI on their on-going activities to assist all persons affected by the earthquakes that took place in southern Puerto Rico commencing on December 28, 2019, and which continue as of the date of the Circular Letter, January 31, 2020. Specifically, the OCFI is interested in the efforts undertaken by Mortgage Servicers to help the affected persons to file insurance claims to recover their property losses caused by the earthquakes.

Covered Persons for Reporting

For purposes of the reporting requirement, “persons affected by the earthquake” include “persons who suffered a physical damage to their residence or buildings (whether or not covered by hazard or homeowner’s insurance and/or other type of property insurance), persons who have suffered economic injury or loss attributable to the earthquakes (including, but not limited to, loss of income from employment or business), and persons who have been harmed or suffered injuries from the earthquakes or circumstances or events directly related to the earthquakes, which persons’ principal residence or place of employment or business is located in [the following 17 zip codes in Puerto Rico]”:

Adjuntas, 00601
Maricao, 00606
Arecibo, 00612
Peñuelas, 00624
Sabana Grande, 00637
Ciales, 00638
Utuado, 00641
Guánica, 00653
Guayanilla, 00656
Hatillo, 00659
Jayuya, 00664
Lajas, 00667
Lares, 00669
Yauco, 00698
Ponce, 00730
Ponce, 00731
Juana Díaz, 00795

Reporting Requirements

Monthly Reporting Requirement: For all persons affected by the earthquake, Mortgage Servicers must provide a monthly report, for each of the 17 zip-codes listed above, on the OCFI’s “Report of Moratorium Granted Due to Earthquake PR” Form. This form does not appear to be publicly-available on the OCFI’s website. The Circular Letter did not specify when Mortgage Servicers must submit the monthly reports or any associated timing requirement. A conservative reading of the Circular Letter would suggest that the end of the first monthly reporting period would be February 29, 2020, one month after the OCFI released the Circular Letter.

Weekly Reporting Requirement: For all consumer mortgages on properties located in the 17 listed zip-codes, or for persons affected by the earthquake, Mortgage Servicers must provide weekly individual reports by zip-code using the OCFI’s “Mortgage Delinquency Report” Form for the entirety of their portfolio. This form also does not appear to be publicly-available on the OCFI’s website. The Circular Letter states that the first weekly report is due to the OCFI by 4:30 p.m. on Wednesday, February 5, 2020, and all subsequent weekly reports must be submitted the Wednesday after the proceeding week, by 4:30 p.m. Each weekly report must cover all activity Monday-Friday from the previous week.

The Circular Letter specifies that Mortgage Servicers are required to transmit the weekly and monthly reports to the OCFI in electronic form using the corresponding excel forms in the appendix of the Circular Letter. However, the Circular Letter does not provide an email or portal where licensed Mortgage Servicers are supposed to submit their reports.

Takeaways:

Licensed Mortgage Servicers in Puerto Rico are now required to submit a monthly report for mortgage servicing activity taken to help borrowers affected by the recent earthquakes and are required to submit weekly reports for all consumer mortgages located in the 17 zip-codes and for all persons affected by the earthquake. The first weekly report, which shall cover activities undertaken in the week commencing on January 27, 2020, is due tomorrow, February 5, 2019, in electronic format to the OCFI by 4:30 P.M. EST. Going forward, weekly reports are due every Wednesday at 4:30P.M. EST, which must include any relevant activity from the previous week.

Mortgage Servicers that fail to provide their reports to the OCFI in a timely manner may be subject to penalties: the OCFI may impose fines of up to $10,000 for each violation of any rules and regulations under title 7 chapter 143 of the Laws of Puerto Rico, and the OCFI may also impose fines of up to $5,000 for each day that a Mortgage Servicer fails to comply with any orders issued by the Commissioner.

A&B Abstract:

Maryland’s inspection fee statute has been interpreted by the Maryland Court of Appeals and the Maryland Office of the Commissioner of Financial Regulation (“OCFR”) to apply both at the time of origination and throughout the servicing of a residential mortgage loan. More recently, a lower federal district court decision came to a different interpretation.

Maryland’s Inspection Fee Restriction

Maryland Commercial Law Section 12-121 provides that, subject to limited exceptions, a lender may not impose a “lender’s inspection fee” in connection with a loan secured by residential real property. A “lender’s inspection fee” means a fee imposed by a lender to pay for a visual inspection of real property. A lender’s inspection fee may be charged only if the inspection is needed to ascertain the completion of (i) the construction of a new home; or (ii) repairs, alternations, or other work required by the lender. A “lender” is defined as a licensee or a person who makes a loan subject to Maryland’s Interest and Usury subtitle. In turn, a “licensee” is defined as a person that is required to be licensed to make loans subject to Maryland’s Interest and Usury subtitle, regardless of whether the person is actually licensed.

Prior Guidance

Previously, the Court of Appeals of Maryland held, in Taylor v. Friedman, 689 A.2d 59 (Md. Ct. App. 1997), that, unless permitted by Section 12-121(c), the prohibition on inspection fees was not limited to inspections for closings, but extended to any inspections throughout the life of the loan. In 2014, the OCFR released an advisory opinion stating that Taylor remains good law in Maryland and applies to circumstances where a servicer orders a visual inspection of property following default on the terms of the mortgage.

Roos vs. Seterus

More recently, the U.S. District Court for the District of Maryland in Roos v. Seterus held, despite previous decisions indicating otherwise, that non-lenders may charge inspection fees to mortgagors. The defendants in Roos argued that they did not charge illegal inspection fees because (1) the deed of trust specifically authorized inspection fees; (2) Section 12-121 is inapplicable to the defendants; and (3) Section 12-121 does not have a blanket prohibition on the imposition of inspection fees. The defendants believed that since they were a servicer, and the plain language of the statute only prohibited lenders from charging inspection fees, the statute did not prohibit them from charging inspection fees. The court agreed with defendants that the plain meaning of the statute only prohibits a “lender” from imposing or collecting inspection fees. Although the court in Roos did not itself provide a definition of “lender,” the court pointed to a Montgomery Circuit Court case, Kemp v. Seterus, Inc., No. 441428-V, 2018 Md. Cir. Ct. LEXIS 9 (Md. Cir. Ct. Oct. 19, 2018), which addressed the issue. In that case, the court stated that “the meaning of the statute [wa]s plain; only ‘persons’ which make loans to ‘borrowers’ are lenders and thus covered by the statute.” The court in Roos adopted the Kemp court’s definition of lender, finding it well reasoned and applicable since it involved the same issue and defendant.

Takeaway

It is unclear if this decision will convince the OCFR to change its long-standing position or if plaintiffs will appeal this decision. Moreover, we note that this decision was issued by a federal district court interpreting Maryland state law and, as such, will not have precedential value in Maryland state courts. While defendants may have prevailed in this federal district court case, servicers should still remain cautious in charging inspection fees when servicing a loan secured by residential real estate in Maryland.

* We would like to thank Associate, David McGee, for his contributions to this blog post.

Mortgage Servicing