Last week, we watched a presentation from a top business management company. The theme was about the challenges that mortgage lenders face these days.
As a large mortgage lender, we found the presentation interesting. However, it occurred to us that they gave this big presentation and did not define the word “lender” in their slides.
So, we looked at the mortgage regulations and found that the definition varied, depending on the regulation. After talking about it, we decided to ask you for a general, working definition that we could use.
What is a generic definition of a “lender?”
ANSWER
This is a good question. You did not mention if the regulations you looked at were state or federal. And that is important. In any event, I think the essence of your question is meant to pertain to both state and federal banking laws. Our firm is always using definitions as they are defined in a specific statute. We deal with consumer credit compliance all the time and know the importance of statutory and regulatory definitions.
My guess is that you had the federal mortgage regulations in mind. So, I will give you a bird’s eye view based on the federal regulations and how they may extend to state law. Sometimes we can determine what a mortgage lender is by describing what it is not. That may seem counterintuitive, but it really isn’t. You’d be surprised how much litigation pivots on a judicial interpretation of what is or is not meant by a single word!
A recent case shows the importance of the term “lender” as it is used in state and federal law. The case is Kemp v. Nationstar Mortgage Association, which was litigated in Maryland’s Court of Special Appeals.[i] First, I will provide a brief outline of the case. Then, I’ll offer a few observations.
Kemp obtained a mortgage loan from Countrywide, which assigned the loan to Fannie Mae. Unfortunately, in 2017 Kemp fell behind on her payments, and her loan servicer, Seterus, declared the loan in default. Kemp had learned that Seterus charged her $180 for twelve property inspections it ordered after she defaulted. In November 2017, Seterus offered, and Kemp accepted, a loan modification, which rolled several of the property inspection fees into the loan balance.
In December 2017, Kemp sued Seterus and Fannie Mae on behalf of herself and a class, alleging that Seterus had violated § 12-121 of Maryland’s Commercial Law, which prohibits a “lender” from imposing a property inspection fee “in connection with a loan secured by residential property.”
The trial court dismissed the complaint, holding that Seterus and Fannie Mae were not “lenders” and that § 12-121 did not prohibit them from charging inspection fees.
The Court of Special Appeals reversed. The view here was that the trial court’s interpretive construction would defeat the broader statutory purpose and lead to absurd results. This is because § 12-121 applied to assignees. Maryland’s General Assembly, the court held, did not intend for the section’s broad prohibition against property inspection fees to apply only to the originator of the loan and, even more to the point, to allow assignees of the loan or their agents to charge the very fees the originators could not.
Now for some observations.
Both lenders and borrowers should be careful when considering the reach of a decision, such as in the case I’ve cited above. As I inferred, the meaning of a term such as “lender” may change from one statutory provision or framework to another. For instance, in the case of Bishop v. Carrington Mortgage Services, LLC,[ii] a federal district court considered a claim by borrowers that their mortgage loan servicer, which handled servicing for an assignee of the borrowers’ loan, had improperly charged them a $5 fee to make their payments online, in violation of several state statutes and the Federal Debt Collection Practices Act (FDCPA). In Bishop, the federal court apparently chose to discount Kemp, which was a state court decision.
Let’s drill down a bit.
In November 2005, Alexander took out a residential mortgage loan from America’s Wholesale Lender to buy a home. She entered into a deed of trust that included this language:
“In regard to any other fees, the absence of express authority in this Security Instrument to charge a specific fee to Borrower shall not be construed as a prohibition on the charging of such fee. Lender may not charge fees that are expressly prohibited by this Security Instrument or Applicable Law.”
Alexander’s Note required her “to make all payments under this Note in the form of cash, check or money order” and to make those payments at a specified post office box or “at a different place if required by the Note Holder.”
Seven years later, in 2012, Alexander’s Note was assigned to The Bank of New York Mellon, as trustee for the certificate holders of the CWABS, Inc., Asset-Backed Certificates, Series 2005-13, which I’ll call “CWABS.” In August 2013, CWABS retained Carrington Mortgage Services to service Alexander’s loan.
When Alexander made her monthly payments, Carrington Mortgage offered her options with respect to the payment method. She chose to make her payments online to Carrington Mortgage, each time incurring a $5 processing fee, rather than to send a check or money order and not incur a processing fee. Alexander sued Carrington Mortgage on behalf of herself and a purported class, alleging that the practice of charging a $5 “convenience fee” violated various Maryland statutes, most notably for our purposes Maryland Commercial Law § 12-105(d).
According to the court, § 12-105 limits the fees a “lender” may charge. Under Maryland law, a “lender” means “a licensee or person who makes a loan subject to this subtitle.” A “lender” does not include a subsequent assignee of the loan or the loan servicer. The court cited Flournoy v. Rushmore Loan Management Services, LLC,[iii] a federal court decision that Kemp had disavowed.
In Bishop, the court mentioned Kemp this way:
“While Plaintiffs argue that the recent Maryland Court of Special Appeals’ decision in Kemp v. Nationstar Mortgage Association supports finding that Carrington was a lender, that decision specifically applied to Section 12-121 of Maryland's Commercial Law Code, finding that ‘§ 12-121 is not limited to the originators of loans.’…. This holding does not extend to Section 12-105(d), which still requires that the lender be the originator of the loan.”
I know it seems convoluted, but, according to the court, this left no question that Carrington was not the originator of the loan, so Alexander’s claim under § 12-105(d) failed. The court discounted Kemp simply because Kemp dealt with a different provision, to wit, § 12-121, without addressing the “broader statutory purpose” cited by Kemp.
How another court will consider the question is anyone’s guess. A decision might depend on whether the action is filed in a state court or a federal district court. But, I hope you can see how the word “lender” is determined as defined by a statute.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
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[i] 248 Md. 1, 239 A.3d 798, Md. App. (Ct. Spec. App. 2020)
[ii] Bishop v. Carrington Mortgage Services, LLC, 2020 U.S. Dist. (D. Md. Dec. 11, 2020)
[iii] Flournoy v. Rushmore Loan Management Services, LLC, 2020 U.S. Dist. (D. Md. Mar. 17, 2020)
[i] 248 Md. 1, 239 A.3d 798, Md. App. (Ct. Spec. App. 2020)
[ii] Bishop v. Carrington Mortgage Services, LLC, 2020 U.S. Dist. (D. Md. Dec. 11, 2020)
[iii] Flournoy v. Rushmore Loan Management Services, LLC, 2020 U.S. Dist. (D. Md. Mar. 17, 2020)
