In two recent opinions, the U.S. Court of Appeals for the Fourth Circuit substantially limited the potential scope of liability under the Maryland Finder’s Fee Act. Applying the plain language of the statute, the Fourth Circuit concluded that the Finder’s Fee Act applies only to mortgage brokers, which necessarily means that an entity functioning as a mortgage lender, rather than as a mortgage broker, cannot be liable for a statutory violation. These decisions are significant because they follow several years of hard-fought litigation in which borrowers at some times appeared to be making headway toward expanding the scope of liability under the Finder’s Fee Act.
The first case, Petry, et al. v. Prosperity Mortgage Co., et al., involved a purported Finder’s Fee Act claim asserted on behalf of a class against Prosperity Mortgage Company, an entity that had functioned as plaintiff’s purchase-money mortgage lender. Prosperity was owned in part by Wells Fargo, which provided a warehouse line of credit to Prosperity to fund mortgage loans. Even though the loan instruments identified Prosperity as the mortgage lender, the plaintiff alleged that Prosperity was in effect a mortgage broker, because it had procured a loan that in reality was originated by Wells Fargo.
The district court did not outright reject this theory of liability, but held that Prosperity could only be liable if it had charged excessive “lending fees so as to disguise a hidden finder’s fee.” Because the plaintiffs could not prove that Prosperity had padded its fees, the district court awarded judgment on the eve of trial.
The Fourth Circuit reached the same conclusion, but upon a basis with broader ramifications for future cases involving the Finder’s Fee Act. Because of the important statutory issues and because the district court actually certified a class before entering a defense judgment, the Mortgage Bankers Association (MBA) took sufficient interest in Petry to obtain permission to file an amicus brief.
In its brief, authored by Gary C. Tepper and Daniel J. Tobin of Ballard Spahr, the MBA argued that the plain language of the statute precludes any possibility that Prosperity might be liable under the circumstances presented. This is because the statutory definition of “mortgage broker” excludes any entity whose name appears as a lender in the loan agreement, note, or deed of trust. Because the plaintiff’s loan instruments identified Prosperity as the lender, Prosperity necessarily could not be liable for charging improper fees as a mortgage broker. The Fourth Circuit agreed with the reasoning advocated by the MBA, and on this basis affirmed the judgment entered in favor of Prosperity.
The second case, Marshall v. James B. Nutter & Co., involved a purported Finder’s Fee Act claim asserted against an entity that had provided table funding for the plaintiff’s mortgage loan. The plaintiff acknowledged that the table funding lender had not functioned as a mortgage broker, but could nevertheless be held liable for the statutory remedy, including treble damages, for having conspired with a broker to violate the statute.
Again recognizing that the Finder’s Fee Act applies only to mortgage brokers, the Fourth Circuit also rejected this theory of liability. The Fourth Circuit reasoned that a table funding lender is legally incapable of violating the statute, because the Finder’s Fee Act applies only to mortgage brokers. Accordingly, under Maryland law, a table funding lender may not be derivatively liable for a statutory violation under a purported conspiracy theory.
The Fourth Circuit’s decisions in Petry and Marshall clarify that the statute applies to mortgage brokers, but not to entities functioning as a mortgage lender, whether directly under the statute or through a theory of derivative or vicarious liability. Most significantly, the decisions confirm the propriety of table funding as a legitimate funding mechanism, although Petry specifically acknowledges that a mortgage broker might be liable under the statute if it disguises its dual role as a table funding lender, and thereby charges excessive and improper fees.