In Commissioner of Financial Regulation v. Cashcall, Inc., the Court of Special Appeals of Maryland reversed the trial court, and instead upheld the Maryland Commissioner of Financial Regulation’s determination that Appellee constituted an unlicensed credit services business under the Maryland Credit Services Business Act, Md. Code, Com. Law § 14-1901, et seq. (“MCSBA”), and was therefore liable for arranging loans to an out-of-state bank at interest rates that exceeded the state law maximum.
The Court determined that the Act was industry specific, and targeted third-party businesses, such as payday lenders, that were partnering with federal banks in order to import prohibited interest rates into Maryland. The Court distinguished cases holding the Act inapplicable to businesses that offered goods or services, who then arranged credit as an ancillary service without receiving a direct payment from the consumer for arranging the loan. Rather, the Court noted that the sole purpose of Appellee was to arrange loans for Maryland consumers, and therefore, determined that indirect payment of an origination fee through the out-of-state bank did not exclude applicability of the Act. Further, the Court determined that Appellee’s arrangement, in which the origination fee was rolled into the loan, and then purchased by Appellee after closing, satisfied the Act’s applicability. As a result, the Court upheld the Commissioner’s order that Appellee cease and desist engaging in a credit services business and imposed a civil penalty of $1000 per loan transaction, amounting to $5,651,000.
A copy of the opinion is available here.
Following an investigation, the Commissioner determined that Appellee arranged more than 5,000 loans for Maryland consumers from 2006 through 2010. Each loan was made by one of two out-of-state banks, at interest rates significantly higher than permitted by Maryland law. Pursuant to an agreement between Appellee and the banks, Appellee would purchase the loan at face value three days after issuance, together with any accrued interest. Thereafter, Appellee would collect all payments, interest, and fees due on the loan, including repayment of the origination fee, which was added into the loan amount before the loan was sold. The bank also paid Appellee a “royalty fee” per each loan sold.
The Commissioner determined that Appellee had violated the MCSBA by operating as a “credit services business” without a license. The Commissioner issued a final order that Appellee cease and desist from all credit services business activities in Maryland and pay a civil penalty of $5,651,000.
Upon judicial review, the trial court reversed the Commissioner’s final order, declaring that, under the Maryland Court of Appeals’ decision in Gomez v. Jackson Hewitt, Inc., 427 Md. 128 (2012), Appellee was not a “credit services business” under the MCSBA. The Commissioner thereafter noted the present appeal.
The MCSBA requires a “credit services business” to, among other things, obtain a license from the Commissioner and inform consumers that they may cancel a contract before the end of the third business day after the transaction. Op. at 11. The Act also prohibits “credit services businesses” from assisting consumers in obtaining loans at an interest rate prohibited by Maryland law. Op. at 11-12. Interpreting the Act, the Gomez court excluded from the definition of a “credit services business” those businesses that did not provide credit services “in return from the payment of money or other valuable consideration,” with the requirement that such payment “must come directly from the consumer.” Op. at 14.
Although Appellee argued that it should be excluded from the Act because it did not receive payment directly from the consumer, the Court disagreed, holding that Appellee was a “credit services business.” Op. at 22. Accepting the Commissioner’s arguments, the Court determined that the direct payment requirement was not intended by the Legislature to apply to companies, like Appellee, whose sole purpose is to arrange loans for Maryland consumers at interest rates that would be considered usurious in Maryland. Op. at 18. Reviewing the legislative history, the Court determined that a goal of the “industry specific” statute was to protect Maryland consumers from companies marketing high-interest small loans who partnered with out-of-state banks to charge otherwise usurious interest rates. Op. at 20. The Court noted that, because “the nature of the commercial relationship between [Appellee] and Maryland consumers was clear,” it was not necessary to make the Act’s applicability contingent on a direct payment requirement. Op. at 19-20.
The Court further determined that, even if the direct payment requirement applied, that it was met in Appellee’s case. Op. at 21. Given the nature of Appellee’s business arrangement with the out-of-state banks, the Court concluded that while the origination fee was charged by the bank, it was ultimately paid to Appellee as part of repayment of the loan. Op. at 22. Any other determination, the Court explained, would permit a “credit services business” to “redirect the path of a consumer payment through a myriad of creative business structures and transactions and avoid the Act.” Op. at 22.
Accordingly, the Court remanded the case to the trial court for entry of a judgment affirming the Commissioner’s final order. Op. at 23.