Maryland Collection Agency License Not Required for Foreign Statutory Trusts

The Court of Appeals of Maryland recently held, in an appeal involving four consolidated cases, that foreign statutory trusts that own delinquent mortgage loans are not required to obtain a collection agency license under the Maryland Collection Agency Licensing Act (MCALA) before substitute trustees can institute foreclosure actions against defaulting borrowers.

In each case on appeal, the borrowers had defaulted on their mortgage loan and the lender had transferred the loan and all beneficial interest in the deed of trust as part of a securitized pool of mortgage loans to one of two foreign statutory trusts.  These trusts, acting through trustees (which in these cases were other banks), ultimately appointed, and conveyed all rights and duties under the deeds of trust including the power of sale to, substitute trustees who initiated foreclosure actions against the defaulting borrowers.    The borrowers filed counter complaints arguing that the trusts improperly acted as collection agencies, as defined under MCALA, by obtaining defaulted mortgage loans and collecting payments through foreclosure actions without being licensed as required by MCALA.  The lower court in each case sided with the borrowers and dismissed the foreclosures.

The question presented on appeal was whether a foreign statutory trust, as owner of a delinquent mortgage loan, must obtain a collection agency license under MCALA before substitute trustees can institute a foreclosure action against a defaulting borrower.  To answer this question, the court analyzed whether MCALA, as revised in 2007, remained constrained to its original scope of third-party debt collectors (i.e., entities collecting consumer debts for others) or whether the revisions, which changed the “collection agencies” definition to include persons engaging directly or indirectly in the business of “collecting a consumer claim the person owes, if the claim was in default when the person acquired it,” expanded the scope to require “principal actors of Maryland’s mortgage market to obtain a collection agency license.”

The court determined that MCALA’s plain language is ambiguous in this context and, therefore, reviewed the legislative history, subsequent legislation, and related statutes to discern the Maryland General Assembly’s intent.  Based on this review, the court determined that the General Assembly did not intend to expand MCALA’s scope to include entities outside the collection agency industry and, instead, intended to address abuses within the industry.  Based on this determination, the court concluded that: (i) foreign statutory trusts are outside the scope of the collection agency industry regulated and licensed under MCLA, and therefore do not require a collection license under MCALA before substitute trustees can institute a foreclosure action against a defaulting borrower; and (ii) the lower courts erred in dismissing the foreclosures.