In Askew v. HRFC, LLC, the U.S. Court of Appeals for the Fourth Circuit affirmed the grant of summary judgment in favor an automobile finance company on claims of breach of contract and violation of the Maryland Credit Grantor Closed End Credit Provisions (“CLEC”), Md. Code, Comm. Law § 12-1001, et seq., where the Finance Company self-corrected an otherwise usurious interest rate within the 60-day statutory safe harbor period following “discovery of the error.”
The Court rejected Borrower’s claim that the “discovery rule” required the Finance Company to correct the error within 60 days of its acquisition of the loan. Although Borrower argued that Finance Company should have known upon acquisition that the interest rate exceeded the 24% maximum, the Court held that “discovery of the error means when the Defendant actually knew about” a mistake—in this case, charging an excessive interest rate. Op. at 12. To that end, the Court observed that the safe harbor under CLEC was intended to encourage credit grantors to self-correct, who would otherwise “have little incentive to correct their mistakes and make debtors whole” particularly given that the borrower is unlikely to discover on his own that the interest rate charged on a loan exceeds CLEC’s maximum. Op. at 13.
However, the Court vacated dismissal of the claims under the Maryland Consumer Debt Collection Act (“MCDCA”), Md. Code., Com. Law § 14-201 et seq., which were premised upon alleged misconduct in collection of amounts owed. A copy of the opinion can be found here.
Borrower obtained financing of a vehicle under a retail installment contract from a dealership that subsequently assigned the contract to Finance Company. The contract, which was subject to CLEC, charged a 26.99% interest rate, exceeding CLEC’s maximum allowable rate of 24%. When Finance Company discovered the discrepancy, it sent Borrower a letter informing him that “the interest rate applied to [his] contract was not correct,” that it would compute interest at the new rate of 23.99%, that it was crediting Borrower’s account the difference, and that he would repay his loan earlier if he continued the same monthly payments, but that Finance Company would adjust his monthly payments so that the contract will be repaid on the date originally scheduled if he so requested. Op. at 3.
Thereafter, Borrower fell behind on his payments, whereupon Finance Company contacted Borrower by letter and by telephone. Borrower claimed that over the course of those contacts Finance Company allegedly made false and threatening statements to induce him to repay his debt, including alleged statements regarding a preparation of a lawsuit against him.
Borrower filed suit alleging violations of CLEC and the MCDCA, as well as asserting that Finance Company breached its contract with him by failing to comply with CLEC. The District Court dismissed Borrower’s lawsuit, noting that Finance Company was protected under CLEC’s safe harbor allowing for correction of an error, that the contract claim could not survive absent a CLEC violation, and that Borrower’s allegations did not rise to the level of abuse or harassment to constitute an MCDCA violation. Borrower appealed.
In Maryland, a credit grantor may opt upon written election to make certain loans covered by CLEC. If the statute applies, CLEC sets a maximum interest rate of 24% and mandates that “[t]he rate of interest chargeable on a loan must be expressed in the agreement as a simple interest rate or rates.” Op. a 5 (citing CLEC § 12-1003(a). Generally, if a credit grantor violates this provision, it may collect only the loan principal rather than “any interest, costs, fees, or other charges.” § 12-1018(a)(2). If a credit grantor “knowingly violates [CLEC],” it “shall forfeit to the borrower 3 times the amount of interest, fees, and charges collected in excess of that authorized by [the statute].” § 12-1018(b).
The statute also provides two safe harbors, one of which was applicable to this case. “Section 12- 1020 affords credit grantors the opportunity to avoid liability through self-correction.” Op. at 7. That section provides:
A credit grantor is not liable for any failure to comply with [CLEC] if, within 60 days after discovering an error and prior to institution of an action under [CLEC] or the receipt of written notice from the borrower, the credit grantor notifies the borrower of the error and makes whatever adjustments are necessary to correct the error.
CLEC, Section 12-1020.
Borrower claimed that Finance Company violated CLEC by failing to disclose an interest rate below the statutory maximum, which he claimed was not curable. Additionally, Borrower claimed that the “discovery rule” required the Finance Company to correct the error within 60 days of its acquisition of the loan, because it should have known at that time that the interest rate exceeded the 24% maximum. Borrower also claimed that the Finance Company failed to notify him of the error and make necessary judgments.
The Fourth Circuit rejected these claims. Interpreting the statute, the Court determined that “the first sentence of section 12-1003(a) bars credit grantors from collecting or charging interest above 24%, while the second sentence, quoted above, requires credit grantors to express the rate as a simple interest rate.” Op. at 9. Otherwise, the Court determined that the statute would impose a “meaningless technical requirement while doing little to help consumers. . . . Instead, read as a whole and in context, the provision targets far more immediate dangers to consumers: being charged excessive interest and being duped into accepting a deceptively high rate.” Op. at 9.
The Court also rejected Borrower’s claim that Finance Company should have discovered the that the interest rate exceeded 24% maximum interest rate when the contract was assigned to it. The Court declined to adopt Borrower’s interpretation of “discovering” in Section 12-1020, noting that such interpretation was typically used in cases involving the running of statutes of limitation, rather than “a safe-harbor provision placing a deadline on a defendant.” Op. at 12. Instead, the Court determined that “interpreting the term ‘discovering an error’ in section 12-1020 as actually uncovering a mistake constituting a violation of the statute better comports with CLEC’s text, public policy, and the statute’s purpose.” Op. at 12. Accordingly, “discovery of the error means when the Defendant actually knew about” a mistake—in this case, charging an excessive interest rate. Op. at 12.
The Court also determined that the Finance Company’s cure letter provided Borrower notice of the error, “albeit somewhat cryptically.” Op. at 15. It identified a “problem” with Borrower’s interest rate and then told him that he was due a credit of $845.40. “Taken together, this information implies that [Borrower]’s interest rate was too high—the ‘error’ that [Finance Company] cured under section 12-1020. We think this was enough to comply with the statute’s notice requirement.” Op. at 15. The Court distinguished the notice requirements from cases involving disclosure errors, explaining that “[d]isclosure errors are rooted in some defect in conveying information. . . . An anti-usury provision, on the other hand, exists to stop the collection of excessive interest. Requiring more specificity strikes us as a far more useful remedy in the former case than in the latter.” Op. at 15-16.
Addressing Borrower’s Breach of Contract claim, which was premised upon a CLEC violation, the Court determined that the “contract incorporates all of CLEC—including its safe harbors.” Op. at 19. “[J]ust as liability under CLEC begets a breach of the contract, a defense under CLEC precludes contract liability. A contrary outcome would nullify the effect of CLEC’s safe harbors because credit grantors that properly cure mistakes—as CLEC encourages—would still face contract liability. We decline to accept such an anomalous result.” Op. at 19.
The Court determined, however, that the Finance Company was not entitled to summary judgment on the MCDCA claim. The Court noted that a jury could find that attempting to collect a debt by falsely claiming that legal actions have been taken against a debtor violates section 14-202(6), which prohibits a debt collector from “[communicating] with the debtor or a person related to him with the frequency, at the unusual hours, or in any other manner as reasonably can be expected to abuse or harass the debtor.” Op. at 20. The Court also observed that “[t]here is a line between truthful or future threats of appropriate legal action, which would not give rise to liability, and false representations that legal action has already been taken against a debtor, as HRFC allegedly made here.” Op. at 21-22. Because Finance Company allegedly told Borrower on at least three occasions that it had taken legal action against him when it had not, the Court determined that a jury could find that such conduct, “at least in the aggregate, could reasonably be expected to abuse or harass [Borrower].” Op. at 22. The Court therefore reversed the grant of summary judgment on the MCDCA claim, while affirming judgment in favor of the Finance Company on the CLEC and breach of contract claims.