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Office of the Commissioner of Financial Regulation


Mortgage Lender Licensees 02-03 - Advisory Notices


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September 3, 2002

Chapter 532 of the Laws of Maryland 2002 (HB 649)

Effective October 1, 2002, Chapter 532 of the Laws of Maryland 2002 will establish new requirements for certain residential mortgage loans that are referred to as "covered loans."  Specifically, mortgage lenders will be: 1) prohibited from financing single premium insurance in connection with covered loans; 2) required to provide upon completion of applications for covered loans, a written recommendation that the borrower seek home buyer education or housing counseling, and provide a list of agencies and organizations approved by the county where the property is located; and 3) prohibited from making covered loans without due regard for the borrower's ability to repay. These requirements will apply to covered loans made under Md. Comm. Law Article (CL), Title 12, Subtitles 1, 3, 4 and 10.

In the new law, "covered loan" means a mortgage loan made under CL, Title 12, Subtitle 1, 3, 4, or 10, Annotated Code of Maryland that meets the criteria for a loan subject to the Federal Home Ownership Equity Protection Act (15 U.S.C. Section 1602(AA)), as modified from time to time by Regulation Z, 12 C.F.R. Part 226, except that the comparison percentages for the mortgage loan are 1 percentage point less than those specified in 15 U.S.C.  Section 1602(AA), as modified by Regulation Z, 12 C.F.R. Part 226.

As general awareness of the new law has grown, the Office of the Commissioner has begun to receive a number of questions from lenders and others about the requirements of the law. Some of these frequently asked questions and their answers are presented below for your information.

These questions and answers are provided only for general information, and should not be regarded as declaratory rulings of the Commissioner nor as legal advice. It is strongly recommended that all mortgage lenders that will make covered loans on or after October 1, 2002 consult with their counsel to assure complete understanding of and compliance with the requirements of the law.

1. Does the new law apply to covered loans that were applied for, but not closed before October 1, 2002?

The requirements of Chapter 532 are not retroactive. If a loan application was complete before October 1, 2002, the home buyer education/housing counseling recommendation is not required. However, the prohibitions against financing single premium insurance and making a loan without due regard for ability to repay apply to any covered loan that is closed on or after October 1, 2002.

2. How can a Lender know the median family income for a metropolitan statistical area that applies to a loan?

This information is published by the U.S. Department of Housing and Urban Development (HUD). Information on the median family income statistical data can be found on HUD’s website (PDF document, download Adobe Acrobat for free). A list of median statistical areas can be found at: Hud's website (PDF document, download Adobe Acrobat for free).

3. Do mortgage brokers have additional obligations under the new law?

The plain language of Chapter 532 indicates that it applies to "lenders" under CL, Title 12, Subtitles 1, 3 and 4; and to "credit grantors" under Subtitle 10. Except for covered loans made under the Maryland Secondary Mortgage Loan Law (Subtitle 4) mortgage brokers do not meet the definition of "lenders"; and, therefore, have no responsibilities under the new law. However, under Subtitle 4, the term "lender' also includes all mortgage lender licensees (which includes brokers). thus, the requirement to provide a written recommendation for home buyer education or housing counseling, and a list of approved agencies and organizations under CL,  12-409.1(c) applies to brokers as well as to the lenders who make the covered loans. Since brokers, by definition, do not make the loans, the provisions prohibiting financing single premium insurance and requiring due regard for ability to repay do not apply to brokers.

4. What is due regard for a borrower's ability to repay?

In its most basic terms, due regard for borrower's ability to repay requires that the lender reasonably believes that the borrower will be able to make scheduled monthly payments considering current and expected income, current obligations, employment status and other financial resources at the borrowers disposal. The new law does not give any guidance as to how income and obligations are to be determined and verified. With this in mind, it would be prudent for a lender to be diligent in the verification process and to apply generally accepted underwriting standards. Sources of information might include information provided by the borrower and verified by a consumer reporting agency. It is important to remember that except for the explicit "safe harbor" provided in the new law, the burden is on the lender to show that due regard was given to borrower's ability to repay. A conservative approach is advisable.

5. What information must a lender provide to a borrower if there are no approved home buyer education or housing counseling programs in the county where the property securing the loan is located?

At the time a borrower completes an application for a covered loan, the lender (which includes a broker if the loan is made under the Maryland Secondary Mortgage Loan Law) must provide a written recommendation that the borrower seek home buyer education or housing counseling. This written recommendation must be given even if there are no approved programs in the county. Additionally, if there are approved programs in the county a list of those agencies must also be provided. If there are none, a written statement to that effect should be provided. This is the minimum information the new law requires. Chapter 532 does not prohibit a lender from providing additional information about the availability of appropriate counseling or educational programs. For example, it might be helpful to borrowers to also be given a list of HUD approved programs.