Drew v. FIRST GUARANTY

Decision Date12 November 2003
Docket NumberNo. 1,1
Citation379 Md. 318,842 A.2d 1
PartiesAlton E. DREW v. FIRST GUARANTY MORTGAGE CORPORATION, et al.
CourtMaryland Court of Appeals

Scott C. Borison (Douglas B. Bowman, Legg Law Firm, LLC, Frederick, on brief), for appellant.

Jacob Geesing (Bierman, Geesing & Ward, LLC, Bethesda, on brief), for appellees. Argued before BELL, C.J., and ELDRIDGE, RAKER, WILNER, CATHELL, HARRELL, BATTAGLIA, JJ.

BATTAGLIA, J.

This case comes to us by a Certified Question from the United States District Court, District of Maryland, pursuant to the Maryland Uniform Certification of Questions of Law Act, Maryland Code, §§ 12-601 through 12-613 of the Courts and Judicial Proceedings Article (1974, 2002 Repl.Vol.), and Maryland Rule 8-305. The question of Maryland law set forth in the Certification Order is as follows:

Whether Md.Code Ann. Com. Law II, Section 12-404(c)(2) (2002) mandates that a lender or a seller who takes a mortgage or a deed of trust to secure all or a portion of the purchase price of a residence and who creates a balloon payment must state in writing on the loan documents that the lender or seller must postpone the maturity of the balloon payment one time at the borrower's request, for a period not to exceed six (6) months, provided that the borrower continues to make the monthly installments provided for in the original loan agreement; and if the answer to the certified question of law is in the affirmative, whether Section 12-413 is then applicable to the loan.1

The borrowers, the Drews, argue that Maryland's Secondary Mortgage Loan Law (Secondary Mortgage Law) requires the lender to disclose to the borrower that a lender is required to postpone a balloon payment2 at maturity without charge at the borrower's request. When a lender does not do so, the Drews maintain that the Secondary Mortgage Law is violated and its penalty provisions apply. Wilshire Credit Corporation, the current holder of the Drews' secondary mortgage, argues that the Secondary Mortgage Law does not require the lender to disclose to the borrower the one-time postponement right. Wilshire also argues that the Drews were not harmed by the loan provision at issue because the balloon payment provision was not triggered and that the Secondary Mortgage Law's penalty provisions could apply in this case only if they had denied the Drews their right to postponement when the balloon payment matured.

We hold that Section 12-404(c)(2) does not require a seller or lender, who takes a secondary mortgage or a deed of trust securing all or a portion of a residence's purchase price and creating a balloon payment, to state in writing that the statutory postponement period of six months is available to borrowers. Because we so hold, we do not reach the question as to whether the penalty provisions found in Section 12-413 apply.

I. Facts

Alton and Verne Drew purchased a new residence in Frederick, Maryland, from Ryan Homes. Part of the purchase price was issued in the form of a loan, signed on December 15, 2000, secured by a secondary mortgage, now held by Wilshire Credit Corporation,3 with a balloon payment of an amount that approximates 92% of the principal of the secondary mortgage after payments for 15 years. The promissory note provided for principal and interest payments of $763.98 monthly, commencing February 1, 2001, with the last payment due January 1, 2016. Under the balloon payment disclosure, the amount due at maturity is estimated to be $54,063.30. The balloon payment provision was disclosed to the Drews in writing, and they inscribed their agreement to the provision. The loan documents did not reflect the fact, however, that Section 12-404(c)(2) of the Commercial Law Article requires lenders, in this case, Wilshire, to postpone the maturity date of the loan one time for six months at the borrower's request. Rather, the loan provisions stated in part:

Unless otherwise expressly disclosed in the Note, or in an Addendum or a Rider to the Note, THE LENDER IN THIS TRANSACTION IS UNDER NO OBLIGATION TO REFINANCE THE OUTSTANDING PRINCIPAL BALANCE OF THIS LOAN DUE ON MATURITY DATE. You may be required to payoff the entire principal balance, plus any unpaid interest due thereon, on the maturity date using personal assets. If this Lender, or any other Lender, agrees to refinance the outstanding balance due on the maturity date, you may be required to pay the then prevailing interest rate, which may be higher or lower than the interest rate specified in the Note, plus loan origination costs and fees as are typically incurred when creating a new loan. (Emphasis in original.)

The balloon payment is not due until 2016, and the Drews have not requested an extension.

II. Discussion

We will examine Section 12-404(c)(2) of the Secondary Mortgage Law to resolve whether the provision requires the lender to disclose in writing to the borrower that a one-time six-month postponement period is available to the borrower at the time the entire principal payment or balloon payment matures. To do so, we will explore the statute's plain language and legislative history.

A. The Secondary Mortgage Law

Balloon payments have long been identified as loan transactions that are particularly problematic for consumer borrowers. See, e.g., HUD Task Force at 97 (explaining how balloon terms can be "onerous" and result in higher payments for the borrower); William N. Eskridge, Jr., One Hundred Years of Ineptitude: The Need for Mortgage Rules Consonant With Economic and Psychological Dynamics of the Home Sale and Loan Transaction, 70 VA. L.REV. 1083, 1158 (1984) (describing balloon payments as a "high-stakes gamble by the home purchaser that he can refinance the principal with a new loan, or that he can sell the house for a price close to or higher than the balloon"). While some states forbid them altogether, see, e.g., N.C. GEN.STAT. § 24-1.1E(b) (2001), other states, like Maryland, allow balloon payments in certain circumstances. The Uniform Consumer Credit Code, for example, which influenced many state statutes in this area, provides that, with respect to balloon payments, a "contract evidencing the consumer credit transaction gives the consumer the right to refinance the amount of the final payment." See § 3-308 of the Uniform Consumer Credit Code. In Iowa, the state requires lenders to offer to refinance the balloon payment twenty days prior to the balloon payment date. IOWA CODE § 534.205(6)(2001). Likewise, California requires the lender to offer or arrange for refinancing upon the balloon payment's maturity. CAL. HEALTH & SAF.CODE § 52513.5(a) (2003). In Maine, balloon payment provisions are allowed only if the contract gives the consumer the right to refinance. ME.REV.STAT. ANN. tit.9-A, § 3-308 (2002). In Kansas, the borrower has the right to refinance the amount of a balloon payment at maturity without penalty. KAN. STAT. ANN. § 16a-3-308 (1995). Although their approaches differ, the goal of all of these statutes is to provide borrowers with the knowledge and ability to refinance their balloon payment without penalty if they are unable to pay it off at maturity.

The General Assembly of Maryland enacted the Secondary Mortgage Loan Law in 1967.4 1967 Md. Laws, Ch. 390. When the Secondary Mortgage Law first was enacted, balloon payments were prohibited in secondary mortgages.5 In addition, providing that "[n]o lender shall make or offer to make any secondary mortgage loan except within the terms and conditions authorized by this subtitle," 1967 Md. Laws, Ch. 390, Section 60, the Secondary Mortgage Law included a civil penalty provision6 and a criminal penalty provision.7 The Secondary Mortgage Law was recodified without modification as part of the Commercial Law Article in 1975. 1975 Md. Laws, Ch. 49, § 3.

From 1975 to 1985, the General Assembly modified the Secondary Mortgage Law several times. In 1975, the General Assembly changed the statute to allow balloon payments in commercial loans and residential secondary loans designed to help a borrower sell his residence. 1975 Md. Laws, Ch. 574. It also added two express disclosure provisions, requiring that the balloon payment be:

I. Expressly disclosed to the borrower, and
II. Agreed to by both the borrower and the lender/seller in writing.

Md. Laws 1975, Ch. 574.

In 1982, during a savings and loan crisis, the General Assembly modified the Secondary Mortgage Law as part of a comprehensive effort to make mortgages more available to prospective homeowners during a period of heightened interest rates. See Bill file for House Bill 305, testimony of Delegate John W. Quade, 1982. House Bill 305, which amended the provision at issue here, was passed as part of this effort. Its primary intent was the expansion of the availability of balloon payment provisions and the establishment of the maximum rate of interest lenders could charge on secondary mortgage loans.8 Extracts from House Bill 305's bill file, however, indicate that the legislation as introduced was perceived as weakening the consumer protection provisions in its companion legislation, House Bill 1853. Summary of Testimony of Delegate Stephen V. Sklar on House Bill 305 (1982); Letter from Stephen Sachs, Attorney General, to Senator Harry J. McQuirk, Chairman of the Senate Economic Affairs Committee (April 7, 1982). Three days after the Attorney General expressed his concerns about the bill, the Senate Economic Affairs Committee adopted an amendment to the bill adding a postponement provision to the statute. Substitute Committee Amendment No. 4 to House Bill No. 305 (April 10, 1982). Consequently, after the amendment, Section 12-404(c)(2) required that a balloon payment must be:

I. Expressly disclosed to the borrower;
II. Agreed to by both the borrower and the lender/seller in writing; and
III. Required to be postponed one time, upon becoming due, at the borrower's request, for a period not
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