In a decision that narrows the scope of potential liability for assignees of second mortgage loans secured by Maryland properties, the state’s intermediate appellate court recently rejected an attempt by borrowers to hold an assignee liable for violations of Maryland's Secondary Mortgage Loan Law (SMLL) allegedly committed by the original lender.

In a case before the Court of Special Appeals of Maryland, the borrowers had obtained a second mortgage loan on their home in 1998. They alleged that certain fees charged by the originating lender were in excess of those permitted by the SMLL, and that the originating lender failed to comply with certain SMLL disclosure requirements. The original lender assigned the loan shortly after the closing, and the borrowers brought suit against the subsequent assignee (the Assignee). The suit was filed after the borrowers had paid the loan in full and the Assignee had released the deed of trust securing the loan. The borrowers alleged that the Assignee was liable for the originating lender's alleged violations of the SMLL, even though the Assignee was not involved in the loan's origination and did not receive any of the related fees that were charged.

Relying on Maryland's implementation of the Uniform Commercial Code (UCC), the court rejected the borrowers' argument that the Assignee was liable under UCC Section 3-306 because it could not establish a holder-in-due-course defense. The court ruled that Section 3-306 applies to situations where a party is seeking to enforce, invalidate, or reform the instrument itself.

The court pointed out that appellants had not made a claim on the loan instrument or its proceeds, but instead sought damages associated with the loan's origination. Because their claims did not involve questions of “who has the right to possess a note or to receive the note's proceeds,” the court held that Section 3-306 did not apply and did not provide a basis to hold the Assignee liable.

The court also rejected the borrowers’ contention that their claims were claims in recoupment under UCC Section 3-305. The court found the provision inapplicable because it only applied to actions to enforce an instrument, and the borrowers’ loan had been paid in full before the suit was filed.

Finally, the court rebuffed the borrowers’ argument that Maryland common law provided a basis for imposing liability on the Assignee for the originating lender's alleged SMLL violations. The court pointed out that the bulk of the case law cited by appellants addressed an assignee's right to enforce a mortgage instrument, and consequently did not apply to the facts at issue. It also found that the borrowers had pled no facts indicating that the Assignee had expressly assumed liability for any of the originating lender's alleged violations relating to the borrowers' loan.