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Maryland's Court of Appeals hands a victory to consumers and the PJC in Mortgage Fee Case

Maryland's Court of Appeals handed a victory to consumers and the PJC with its ruling on August 9, 2005 in the case of Linda Sweeney v. Savings First Mortgage, LLC.
Maryland has a Finder’s Fee Law that limits the fee a mortgage broker's finder's fee to eight percent of the total loan amount brokered, and limits the fee on subsequent loans on the same property in a twenty-four month period to eight percent of the amount by which the subsequent loan exceeds the initial loan.  The law thus protects consumers from repetitive, excessive fees and removes the financial incentive for brokers to engage in abusive loan flipping, in which a property is refinanced multiple times in a relatively short period without benefiting the consumer.  The Public Justice Center submitted an amicus brief written by Murnaghan Appellate Advocacy Fellow Beth Mellen Harrison and joined by the Maryland Consumer Rights Coalition, the Community Law Center, the National Consumer Law Center, the Center for Responsible Lending, and AARP.  The PJC argued that less protective federal law did not trump Maryland's law in this regard. The brief also described the recent emergence of a subprime mortgage market beset by predatory lending practices, and noted the critical role that mortgage brokers play in the subprime market.  Because of these recent market developments, elimination of the protections provided under the Finder’s Fee Law would have a particularly harsh impact on low- and moderate-income consumers and other vulnerable populations frequently served by the subprime mortgage market.
The impact of this case and PJC's work in it was expressed by Paul Bland, lead counsel at the Trial Lawyers for Public Justice: "This is a great decision!  It will make it hard for brokers anywhere else to introduce this theory. The Public Justice Center's brief really was superb, and I think it was incredibly important.  It was clear that the court had read the brief, and been sobered by it.  I've known how great the PJC's work is since I worked in Baltimore going back to 1990, but this was a particularly terrific brief.  I wish that something like the PJC was in operation in every state."
An article in the Daily Record on the decision follows, with a quote from Murnaghan Fellow Beth Harrison.

Top court: Finders fee law not pre-empted

August 10, 2005
Daily Record Assistant Legal Editor

A Frederick County homeowner whose mortgage broker charged her nearly $20,000 for two refinancings less than a year apart will get another chance to argue that the second fee violated state law.

Case:Sweeney v. Savings First Mortgage LLC, CA No. 148, Sept. Term 2004. Reported. Opinion by Harrell, J. Filed August 9, 2005.
Issue: Is the Maryland Finders Fee Law, restricting a mortgage broker’s ability to charge a fee on subsequent loans on the same property within 24 months, pre-empted by the Federal Depository Institutions Deregulation and Monetary Control Act?
Holding: No; reversed. The Finder’s Fee Law applies to mortgage brokers, while the federal act applies to lenders and creditors.
Counsel: Frank Paul Bland Jr., Washington, D.C., for appellant; John A. McCauley for appellee.
RecordFax: 5-0809-21 (24 pages)

In a case of first impression in Maryland, the Court of Appeals held yesterday that the state Finder’s Fee Law — restricting a mortgage broker’s ability to charge a fee on subsequent loans on the same property within a 24-month period — was not pre-empted by the Federal Depository Institutions Deregulation and Monetary Control Act.

The decision reverses the Circuit Court for Frederick County, which had dismissed Linda R. Sweeney’s case against Owings Mills-based Savings First Mortgage LLC on federal pre-emption grounds last year.

Frank Paul Bland of the Washington, D.C.-based Trial Lawyers for Public Justice called it a great victory for consumers in Maryland.

“If the mortgage brokers had prevailed, there would have been a sea change in consumer protection laws,” he said. “There are some times when Congress intends to wipe away [state] consumer protection laws, but this is not one of them.”

Beth Mellen Harrison of the Public Justice Center, who filed an amicus brief in the matter, was also glad that the Finder’s Fee Law was allowed to remain in place. She said that while there are a number of state statutes regulating lenders, this law is one of the few protecting consumers from mortgage brokers.

“Mortgage brokers can take advantage by encouraging consumers to refinance loans repeatedly in a short period of time,” collecting a fee each time, she said. “The statute takes out the incentive for refinancing where it wouldn’t benefit the consumer.”

Savings First brokered one refinancing for Sweeney on her Frederick County residence in August 2000 and another in July 2001, receiving fees of $8,427 and $10,788, respectively. The lenders were First Union National Bank of Delaware and Texas-based Concorde Acceptance Corporation.

The state law provides that a mortgage broker may charge a finder’s fee of up to 8 percent on any loan and, in the case of a subsequent loan on the same property within two years, may charge a fee only on the amount that the subsequent loan exceeds the initial loan.

Sweeney sued in March 2004, contending that under state law, the maximum fee for the second loan was $1,452, or 8 percent of $18,150 (the first loan was for $140,250; the second, $158,400).

Savings First filed a motion to dismiss, alleging that the statute was pre-empted by federal law, which prohibits a state from limiting the rate or amount of interest, discount points, finance charges or other charges applying to qualifying mortgages. The circuit court agreed.

But in yesterday’s opinion — taking the case before proceedings in the intermediate appellate court — the Court of Appeals reversed.

The court agreed with Sweeney that the federal law, referred to in the opinion as DIDMCA, was intended by Congress to protect lender/creditors, not mortgage brokers, from state regulation. It refused to find that a broker was a lender or creditor within the purview of that law.

DIDMCA, the court noted, was enacted to keep states from restricting interest rates to below-market levels at a time when interest rates were skyrocketing — the late 1970s and early 1980s. Such state restrictions created a lack of available mortgage funds.
“The proper interpretation of the DIDMCA’s preemption provision is to offer immunity from state regulation to lenders in order to promote a national housing policy, not to offer the same protections to any party to a transaction to which a qualified lender is also party,” Judge Glenn T. Harrell Jr. wrote for the court. “Mortgage brokers are outside the reach that Congress intended for the federal statute.”

Counsel for Savings First Mortgage was unavailable for comment yesterday.

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