If an insurance company sells a Maryland mortgage to a bank, does the bank suddenly have to start paying interest on the escrow account?

Plain-English summary

The Bank Commissioner asked the Attorney General to reconsider a 1975 AG opinion holding that when a residential mortgage originated by a lender exempt from Maryland's escrow-interest law, such as an insurance company, was sold along with its escrow account to a bank or other "lending institution," the bank automatically had to start paying interest on that escrow account. The 1982 opinion concluded the 1975 opinion had been wrong. Reading the escrow-interest statute's requirements as conjunctive, both lending money and creating or taking assignment of an escrow account in connection with that loan, the opinion found that a bank that merely takes an assignment of an existing mortgage and its escrow account from an exempt lender, without itself extending any new credit, is not thereby required to begin paying interest on the account, as long as the transaction is a genuine sale and not a device to dodge the interest requirement.

Currency note

This opinion was issued in 1982. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The opinion interpreted §12-109 of the Commercial Law Article, Maryland's escrow-account interest statute, as it existed in 1982, including a 1977 exception for certain out-of-state loan purchases through federal mortgage programs. Maryland's escrow-interest law and mortgage-servicing practices have had decades to change since then. Anyone researching whether interest must be paid on a Maryland mortgage escrow account today should verify the current version of §12-109 and any later case law rather than relying on this opinion's 1982 analysis.

Common questions

If a bank buys a mortgage and its escrow account from an insurance company, does the bank have to start paying escrow interest?
No, according to this 1982 opinion, which reversed a 1975 AG opinion that had said yes. The opinion concluded that simply taking an assignment of an existing escrow account from an exempt lender, without the bank itself having lent the money, does not trigger the interest requirement.

Did this mean a borrower who already had a right to escrow interest could lose it through an assignment?
No. The opinion was careful to say it was not disturbing the separate, well-established rule that once a borrower has acquired a right to escrow interest (because the original lender was itself a covered lending institution), that right survives an assignment and cannot be taken away by a later sale of the loan.

Could a bank use this rule to dodge the escrow-interest requirement by routing loans through an exempt lender?
The opinion explicitly warned against that. It cautioned that its conclusion presupposed a genuine, bona fide transaction, not a subterfuge where a lending institution refers a mortgage applicant to an exempt lender and then arranges to take an assignment of the resulting mortgage specifically to avoid paying escrow interest.

Is there any situation where an assignee would have to pay escrow interest even after taking a loan from an exempt out-of-state lender?
Yes. The opinion identified an exception: if an out-of-state lender bought a loan through certain federal mortgage programs and was therefore itself exempt from the interest requirement, that exemption would be lost, obligating the ultimate assignee to pay escrow interest, if the out-of-state lender later sold the loan to a Maryland lender or placed it with a Maryland lender for servicing.

Background and statutory framework

The Bank Commissioner's request asked the Attorney General to revisit 60 Opinions of the Attorney General 403 (1975), which had construed former Article 49, §13(b) (since recodified without substantive change as §12-109 of the Commercial Law Article) to mean that a lending institution that became the assignee of an escrow account tied to a mortgage created after May 31, 1974, had to begin paying interest on that account, regardless of who originally made the loan. The 1982 opinion concluded this reading was wrong, based on the statute's actual structure: CL §12-109(b) requires interest payment only when a lending institution both lends money secured by a first mortgage or deed of trust on residential real property and creates or is the assignee of the related escrow account. Because these two requirements are conjunctive, a lending institution that merely receives an assignment of an escrow account from an exempt lender, without extending any new credit itself, does not satisfy both conditions and so is not obligated to pay interest, a reading the opinion found consistent with an earlier 1974 AG opinion construing the same conjunctive language.

The opinion took care to distinguish this conclusion from a separate, well-settled principle it was not disturbing: once a borrower has acquired a right to escrow interest because the original lender was itself a covered lending institution, an assignment of the loan does not extinguish that right, and the obligation to pay interest survives the assignment regardless of the assignee's status or location. The 1982 opinion's holding applied only to the different situation where the original lender was exempt from §12-109 in the first place, so no interest obligation had ever attached to the escrow account before the assignment.

The opinion also flagged an exception to its general rule, arising from CL §12-109(d), added in 1977, which exempts a loan from the interest requirement if an out-of-state lender purchased it through the Federal National Mortgage Association, the Government National Mortgage Association, or the Federal Home Loan Mortgage Corporation and elected to service it as a condition of purchase. That exemption is lost, however, if the out-of-state lender later sells the loan to a Maryland lender or places it with one for servicing, at which point the Maryland lender must begin paying escrow interest. The opinion closed with a caution against using its ruling as a subterfuge, warning that its conclusion assumed a bona fide sale transaction and not an arrangement designed merely to route a loan through an exempt lender to avoid the interest requirement.

Citations

Statutes:

• §12-109 of the Commercial Law Article
• CL §12-109(a)(2)
• CL §12-109(a)(3)
• CL §12-109(b)
• CL §12-109(d)
• Former Article 49, §13(b)
• Chapter 106, Laws of Maryland 1977
• CL §12-101(f)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1982/Volume67_1982.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

Credit Regulation—Residential Mortgages—Escrow Accounts—Right to Interest—Assignment by Exempt Lender to Nonexempt Lending Institution Does Not Create Obligation to Pay Interest

November 22, 1982

Mr. Joseph R. Crouse
Bank Commissioner

You have asked us to reconsider a prior Opinion of the Attorney General, 60 Opinions of the Attorney General 403 (1975), which involved the application of the interest-on-escrow-account law, now codified at §12-109 of the Commercial Law Article ("CL" Article). Specifically, you have asked us to reconsider that portion of the 1975 Opinion which concluded that the assignment of an escrow account in connection with the sale of a residential mortgage by an "exempt lender" to a nonexempt "lending institution" would obligate that lending institution to pay interest on funds maintained in the escrow account.1

For the reasons given below, it is our opinion that the 1975 Opinion was wrong in its conclusion that the lending institution must pay interest on the assigned escrow account. Generally speaking, if the lender assigning the escrow account is itself beyond the purview of CL §12-109, the assignment of that escrow account in conjunction with a sale of a mortgage does not obligate the assignee to begin paying interest on that account.2

1 CL §12-109(a)(2) defines "lending institution" to mean "a bank, savings bank, or savings and loan association doing business in Maryland". In this Opinion, the term "exempt lender" is used to describe a lender that is not also a "lending institution" subject to §12-109, e.g., an insurance company.

CL §12-109(a)(3) defines "escrow account" to mean "an expense or escrow account which tends to protect the security of a loan by the accumulation of funds for the payment of taxes, insurance premiums, or other expenses".

2 We should emphasize that we are not here addressing the well-established principle that, subject only to the exception discussed in Part III of this Opinion, a borrower who is entitled to interest on his or her escrow account cannot be divested of his or her right to that interest by a subsequent assignment.

In 63 Opinions of the Attorney General 438, 439 (1978), this principle was stated as follows:

"[A]s to any mortgage loan made after May 31, 1974, the creation of an escrow account in connection with the loan also creates a duty to pay interest if the lender is a lending institution as defined in the statute. The right of the borrower to interest on the escrow funds is not extinguished by an assignment of the loan. On the contrary, the right to interest is a continuing right and survives the assignment of the loan, whether or not the assignee is a lending institution. Nor does the residence of the assignee, whether Maryland or out of state, affect the borrower's right to escrow account interest once he has acquired it."

See also 59 Opinions of the Attorney General 458, 464 (1974). The 1975 Opinion itself referred to this principle and elaborated:

"Once the mortgagor has acquired the right to payment of interest on his escrow funds[,] he ought not be divested of that right without his consent. ... [On assignment of the mortgage to a third party,] the primary obligation remains with the original lender for the duration of the escrow account." 60 Opinions of the Attorney General 403, 406 (1975).

We do not here at all question this oft-repeated conclusion. Rather, our inquiry here is limited solely to issues involving a borrower's right, in the first instance, to receive interest on an escrow account.

I
The 1975 Opinion

The 1975 Opinion addressed the following inquiry:

"If a mortgage created after [May 31, 1974] by [an exempt lender] is sold to a [lending institution] in Maryland and the [lending institution] services the loan[,] would the [lending institution] then be required to commence the payment of interest on an escrow account?" 60 Opinions of the Attorney General 403, 403 (1975).3

3 In the 1975 Opinion, the phrase "services the loan" was assumed to mean that the lending institution had become the assignee of the escrow account and subsequent holder of the escrow deposits. Id. at 403-04.

Then Article 49, §13(b) provided, in relevant part:

"[A]ny . . . lending institution . . . which lends money to a borrower secured by real property and which lending institution creates or is the assignee of an expense or escrow account . . . shall pay the borrower interest on the funds accumulated in the expense or escrow account in accordance with the procedure provided below."4

4 Former Article 49, §13(b) (1972 Repl. Vol., 1974 Cum. Supp.) has since been recodified without substantive change as §12-109 of the Commercial Law Article. As recodified, CL §12-109 clarifies the scope of this law as being limited to loans "secured by a first mortgage or first deed of trust on any interest in residential real property". See Revisor's Note to §12-109.

According to the 1975 Opinion, the mere assignment of the escrow account, in and of itself, required the lending institution to commence interest payments on the account:

"[U]nder the terms of [the statute], if a 'lending institution' such as a bank doing business in Maryland, becomes the 'assignee of an expense or escrow account' relating to a loan created after [May 31, 1974], it must commence the payment of interest on the escrow account." Id. at 404.

We believe that this conclusion was wrong.

II
Statutory Construction of CL §12-109

According to CL §12-109(b), a lending institution is required to pay interest on an escrow account only if, after May 31, 1974, that lending institution "lends money secured by a first mortgage or first deed of trust on any interest in residential real property and creates or is the assignee of [the] escrow account" in question. The prerequisites of §12-109(b), "lends money . . . and creates or is the assignee of [the] escrow account", are clearly conjunctive in nature. Two events must occur in order for a borrower to be entitled to interest on his or her escrow account: (1) a lending institution must lend money; and (2) that lending institution must create or be the assignee of an escrow account in connection with that loan.

This reading of the statute is consistent with prior Opinions of this Office. For example, in 59 Opinions of the Attorney General 458, 463 (1974), the Attorney General concluded:

"The [s]ection refers to a qualified lending institution which lends money to a borrower 'and' is the creator or assignee of an escrow or expense account in connection therewith .... Both acts have to occur ... to bring into play the operative provisions of [the section]."

Applying this construction to the inquiry addressed in the 1975 Opinion, it seems evident that a lending institution, on taking an assignment of an escrow account from an exempt lender, is not thereby required to commence interest payments on that account. This is so because, according to the facts presented in that Opinion, the lending institution did not itself extend any new credit or make any new loan secured by the underlying mortgage to which the escrow account relates.

As a general rule, then, when an exempt lender assigns both a mortgage and the related escrow account to a lending institution, the lending institution is not subject to the interest payment requirements of CL §12-109.5

5 We caution, however, that our conclusion presupposes a bona fide transaction and not a subterfuge where, for example, in order to avoid the requirements of §12-109, a lending institution refers a mortgage applicant to an exempt lender and then arranges to take an assignment of the resulting mortgage.

III
Exception to General Rule

An exception to this general rule might arise, however, if the original mortgage were made by a lending institution otherwise subject to CL §12-109, but the transaction itself is nevertheless exempt from the interest payment requirement by virtue of CL §12-109(d).

Section 12-109(d), which was added to the law by Chapter 106, Laws of Maryland 1977, provides:

"This section does not apply if the loan is purchased by an out-of-state lender through the Federal National Mortgage Association, the Government National Mortgage Association, or the Federal Home Loan Mortgage Corporation and the out-of-state lender as a condition of purchase elects to service the loan. However, this section shall apply if the out-of-state lender sells the loan to a Maryland lender or places the loan with a Maryland lender for servicing."

Thus, a lending institution is statutorily exempt from the interest payment requirement if the loan is purchased and serviced by an out-of-state lender through one of certain specified government programs.

However, even this exemption is lost if "the out-of-state lender [later] sells the loan to a Maryland lender or places the loan with a Maryland lender for servicing". Under these circumstances, the mere assignment of the loan would obligate the ultimate assignee, the "Maryland lender", to comply with CL §12-109(b) and commence payment of interest on the escrow account.6

6 In passing, we note that the use in subsection (d) of the term "lender" instead of "lending institution" is ambiguous. The term "lender" is broader than the term "lending institution": As defined in CL §12-101(f), "lender" refers to "a person who makes a loan under this subtitle", i.e., one who makes a loan under Title 12, Subtitle 1, of the Commercial Law Article. Thus, under the loan purchases described in CL §12-109(d), the referenced assignees are not "lenders" because they were not themselves persons who lent money under the subtitle.

On the other hand, the title of Chapter 106, Laws of Maryland 1977, which enacted this subsection, indicates the purpose of CL §12-109(d) to be that of "exempting certain persons lending institutions from paying interest in [sic] escrow accounts under certain conditions".

For purposes of this Opinion, we need not resolve this ambiguity.

IV
Conclusion

In summary, it is our opinion that 60 Opinions of the Attorney General 403 (1975) was wrong in its conclusion that a lending institution must pay interest on an escrow account assigned to it by any lender, even if that lender was itself exempt from paying that interest.

As a general rule, if an escrow account has been created in connection with a mortgage made by an exempt lender, the subsequent assignment of that mortgage and escrow account to a non-exempt lending institution does not obligate the lending institution to pay interest on that escrow account.

Stephen H. Sachs, Attorney General
Robert deV. Frierson, Assistant Attorney General
Avery Aisenstark
Chief Counsel,
Opinions and Advice