Maryland regulations governing “shared appreciation agreements” become effective November 25, 2024.  After the Maryland Commissioner of Financial Regulation proposed regulations governing required disclosures for shared appreciation agreements in July 2024, the regulations were finalized on October 30, 2024, with no substantive revisions.

As a reminder, a “shared appreciation agreement” is defined for purposes of Maryland’s Credit Grantor mortgage laws as “a writing evidencing a transaction or any option, future, or any other derivative between a person and a consumer where the consumer receives money or any other item of value in exchange for an interest or future interest in a dwelling or residential real estate, or a future obligation to repay a sum on the occurrence of an event such as: (1) the transfer of ownership; (2) a repayment maturity date; (3) the death of the consumer; or (4) any other event contemplated by the writing.”

Below is a summary of the final regulations governing shared appreciation agreements. 

Financing Agreement

In addition to defining terms applicable to shared appreciation agreements, the regulations identify the disclosure requirements that allow a lender to satisfy Maryland’s statutory requirements for financing agreements and commitments in the Credit Grantor provisions in Maryland Commercial Law 12-922 and 12-1022.  Notably, any lender that receives an application for a shared appreciation agreement must provide the consumer with a financing agreement.  The financing agreement requirement can be satisfied by:

1. Providing the consumer a disclosure in the form, or in a substantially similar form, to Appendix A of the final regulations within ten business days after the date of an application; and
2. Calculating the annualized cost of the shared appreciation agreement for each scenario shown on the Appendix A form by using Appendix J of federal Regulation Z for calculating an annual percentage rate.

If the terms described in the disclosure are subject to change, the lender is required to provide the consumer with a commitment.  The commitment requirement is satisfied by including a statement on the financing agreement form that the terms therein are not subject to change and providing that form to the consumer at least 72 hours before the settlement time of the agreement.

Appendix A is a six-page disclosure titled “Important Information Regarding Your Shared Appreciation or Shared Equity Transaction.” It includes a summary of the key terms of the shared appreciation agreement, as well as scenarios of a consumer’s final payment amount depending on the length of time before termination of the option, as well as change in the property’s value.  If a lender chooses to not use the exact Appendix A form to satisfy the financing agreement requirement, the regulations treat a disclosure as substantially similar to Appendix A if it includes all information provided in Appendix A. 

Disclosing and Calculating Property Value

Lenders also are required to disclose the following information regarding the estimated fair market value of the property used in the financing agreement disclosure:

1. The method used to calculate the estimated fair market value;
2. The amount, if any, by which the lender is discounting the estimated fair market value in establishing the property’s initial value;
3. The estimated fair market value of the property and any discount applied to that value in determining the starting value; and
4. The potential impact of that discount on the repayment amount.

“Estimated fair market value” and “starting value” are defined terms in the regulation.

Except where a shared appreciation agreement is terminated with the sale of the property, the regulations require the lender to use the same method for calculating the estimated fair market value in connection with determining the starting value and the final value of the property.  A lender may use an appraisal, broker price opinion, or automated valuation model in calculating property value.  Those valuation products may be obtained only from unaffiliated third parties.

Where a sale of the property occurs, the final value must not exceed the sales price if:

1. The sale was an arms-length sale (defined term);
2. The property was not sold as part of a foreclosure; and
3. The borrower did not retain an interest in the property.

Calculating Appreciation and Final Payment Amounts

The regulations require that actual appreciation/change in value must be calculated using the “All-Transactions House Price Index” published by the Federal Reserve Bank of St. Louis.  If this index becomes unavailable, the Maryland Commissioner of Financial Regulation may designate an alternative index. 

In addition, the final payment amount must be calculated as the lender’s share of appreciation, plus (if applicable) any other amounts payable by the consumer at termination, less any amount over any repayment limit to which the parties have agreed.

Ability to Repay

Maryland’s Credit Grantor laws prohibit a lender from originating a mortgage loan (which includes a shared appreciation agreement) without giving due regard to a consumer’s ability to repay the loan in accordance with the loan’s terms. Based on the final regulations, a lender offering a shared appreciation agreement is considered to have given due regard to a consumer’s ability to repay if the lender provides the required disclosures in Appendix A, the shared appreciation agreement does not require periodic payments prior to termination, and the term of the shared appreciation agreement is no less than five years.