Saturday, July 16, 2016

More on Maryland HB 439

Maryland home improvement contractors got some new law last June 1. It’s Maryland Commercial Law Code § 14-302.1, usually referred to as HB 439. The new law revises Maryland’s Door-to-Door Sales Act and the three-day right to cancel. Most owners now get five days to cancel. Any owner 65 or over gets an extra two days to cancel. And every owner has to acknowledge in writing receipt of the right to cancel form. To help answer questions about HB 439, the Maryland Home Improvement Commission sent an explanation of the new law to Maryland contractors on June 3.

All this is routine. It’s the next step that gets sticky.

As pointed out in my May 22, 2016 blog post, there’s something very peculiar about this new law, it almost never applies to any job. That’s because Maryland Commercial Law Code § 14-302(d)(ii) makes it clear: The door-to-door disclosures in HB 439 aren’t required if an owner has the three-day right to cancel under federal Regulation Z. Re-read the May 22 blog post if you don’t recall the details.

But I was curious. So I sent a query to the Maryland Attorney General. If an owner lives in the house being improved, we know that Reg Z applies, not HB 439. If an owner rents out the place, HB 439 doesn’t apply under terms of Maryland law. HB 439 almost never applies.

I got a prompt response from the office of Maryland’s AG:

“[Reg Z] applies when there is ‘a credit plan in which a security interest is or will be retained or acquired in a consumer’s principal dwelling.’  Then the federal act would give a right of rescission.  Not every home improvement contract in which an individual is doing work on a primary residence meets these qualifications, however, and in fact, most, do not.”

The AG’s opinion rests on the definition of “security interest.” If the contractor has a security interest when work starts, then Reg Z applies, the federal three-day notice is required and the HB 439 notice is surplus. The AG says that’s not usually the case, almost certainly because of a quirk in Maryland mechanics lien law.

In most states, contractors, subs and suppliers have an “inchoate” lien (a security interest) from the day work starts. Not so in Maryland. Contractors have to petition the court (file suit) to have a lien in Maryland. So they don’t have a security interest from day one. According to the AG, Reg Z doesn’t apply and the HB 439 notice will be needed on most jobs.

I Don’t Agree, For Three Reasons.
  1. True, Maryland prime contractors don’t have lien rights (a security interest) until they petition a court. But Maryland law gives subcontractors and suppliers a lien without filing anything in court. Subs and suppliers have a lien from the day they give written notice to the owner. That sounds like a security interest to me and should trigger a Reg Z three-day notice before work starts.
  2. Fortunately, Federal courts settled this issue many years ago. “The possibility of a mechanic's lien is a ‘security interest’ which must be disclosed under TILA and Regulation Z even though a mechanic's lien may never actually be taken.” Rudisell v. Fifth Third Bank, 622 F.2d 243, 251 (6th Cir.1980). 
  3. The Federal Reserve Board (the people behind Reg Z) has removed any doubt: The possibility of a lien arising is a “security interest” for purposes of a customer's right to rescission.
My May 22 blog post included a guess that HB 439 was simply a mistake. The explanation from the Maryland AG confirms my opinion. If the AG were correct about no security interest during construction, delivery of the Reg Z three-day cancellation notice would never be required until a contractor filed for an interlocutory lien -- weeks or months after the job was finished. That would both sabotage the purpose of Reg Z and lead to unintended consequences -- giving owners the right to cancel a job and get a refund weeks or months after completion. That’s plain nonsense.

The Maryland AG office goes on to cite Crystal v. West and Callahan, Inc., 328 Md. 318 (1992) for the proposition that “home improvement transactions are not excluded from the Maryland Door-to-Door Sales Act.” I agree. But only if Reg Z doesn’t apply, such as if you’re working on an owner’s second home, not the primary residence of the owner. For work on a second home, HB 439’s door-to-door disclosures are required. For all other home improvement work, give the Reg Z three-day notice. HB 439 disclosures would be surplus.

And there’s another, broader, issue here. In my experience, most contractors prefer to obey the law – especially if the law is clear and makes sense. Writing laws like that is an obligation of every legislature. In my opinion, Maryland’s General Assembly didn’t think very hard before passing HB 439. The June 3 message from the Home Improvement Commission only made it worse – omitting any mention of when the HB 439 notice was required. So home improvement contractors in Maryland are left to guess about what the new law requires. Every home improvement crew shouldn’t need a carpenter, an electrician and two lawyers. Construction contractors perform a valuable service. Maryland could support that effort with clear, sensible laws and regulations. HB 439 falls short of that standard,