by Marjorie A. Corwin
Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC
Consumer credit is an everyday occurrence. Every time an individual gets a loan, finances a sale, or makes a simple credit card purchase, one or more credit laws govern the transaction. Even so, many lawyers have no idea what law governs a particular credit transaction. This is true, in part, because the laws applicable to credit extensions in Maryland are confusing. This article presents a basic road map through credit laws as they apply to transactions by Maryland consumers. A better understanding of applicable credit laws should lead to greater control over consumer credit transactions.
This article is merely the beginning of the journey. It is intended to afford readers the ability to identify more quickly the credit laws that might govern a particular transaction which, in turn, can lead to a more efficient review of applicable credit terms or, at least, to better questions for the creditor.
This credit laws road map is based on a few simple rules. First, except for very limited types of credit sales, all credit extended in Maryland is subject to one – and perhaps more than one – credit law. Second, in most circumstances, the creditor is in the driver’s seat and decides which credit law governs the transaction. Third, to determine which law governs a specific consumer credit transaction, look to the details and circumstances of the credit.
As with any map, key definitions help to guide the way. Maryland Credit Laws” refers to seven different Subtitles of Title 12 of Maryland’s Commercial Law Article (“CL”) that set permissible rates of interest, charges, and fees, as well as impose restrictions on credit and obligations on creditors. “Consumers” refer to individuals who live in Maryland and who are obtaining credit for personal, family, or household purposes. “Open-end” (also known as “revolving”) credit results when the creditor agrees to extend credit from time to time up to a maximum amount and the consumer has a right to repay the debt and obtain credit again under the terms of a written agreement, often called a “plan.” Credit card debt is a common example of open-end credit. “Closed-end” credit is a more traditional form of credit and arises when the creditor extends the full amount of the credit at one time without any intention for repeat credit extensions and the consumer repays the credit as provided in the promissory note or other evidence of the debt. Personal installment loans or automobile financing are examples of closed-end credit.
Rule #1: All credit extended in Maryland is subject to one – and perhaps more than one – credit law
Maryland’s Credit Laws. A guide through Maryland’s laws governing consumer credit begins with Title 12 of the Commercial Law Article. Maryland’s Credit Laws, in numerical order, are identified as follows:
Interest and Usury, CL §§ 12-101 et seq.(“I&U”): I&U dates back to 1845 when the Maryland legislature enacted a penalty provision for usury, which is defined as a rate of interest that exceeds legal limits. I&U covers both open-end and closed-end credit. I&U governs credit extensions that are not clearly subject to other Maryland credit laws. I&U has various permissible interest rates – from 6% per year to unlimited interest – depending upon the type of collateral and certain terms of the credit transaction.
Consumer Loans-Credit Provisions, CL §§ 12-301 et seq. (“Consumer Loan Law”): The Consumer Loan Law applies to certain loans of $6,000 or less. It is modeled on a traditional small loan law that allows high interest rates, but imposes many restrictions on other loan terms. The Consumer Loan Law is most frequently used by traditional consumer finance companies that make loans in very small amounts and want to charge the highest interest rate – 2.75% per month – permitted by Maryland law.
Secondary Mortgage Loans-Credit Provisions, CL §§ 12-401 et seq. (“SMLL”): SMLL governs loans secured in whole or in part by second or more junior liens on 1-to-4 family residential real property. SMLL also governs deferred purchase price financing if the financed purchase price is secured by a secondary lien on residential real property. It allows interest up to 24% per year. Because this law contains significant ambiguities and does not accommodate recent innovations in mortgage lending, it should be used infrequently. However, SMLL will govern secondary lien loans on residential real property unless clearly subject to another credit law.
Retail Credit Accounts, CL §§ 12-501 et seq. (“RCAL”): RCAL governs the retail sale of goods or services except for those that are financed under RISA (as defined below) or another credit law. RCAL is intended primarily to cover open-end credit, but also applies to closed-end credit. It allows finance charge of up to 24% per year. Because it does not include recent innovations in open-end financing, RCAL should be and is used infrequently.
Retail Installment Sales, CL §§ 12-601 et seq. (“RISA”): RISA governs closed-end financing of the retail sale of consumer goods valued at $25,000 or less (or any value if the goods are motor vehicles) if the seller takes a security interest in the goods or takes other collateral as security. It imposes some unique disclosure obligations and restrictions on creditors and, for these reasons, has become less favored in recent years except by sellers of used motor vehicles who want to charge the highest finance charge – 27% per year – permitted by Maryland law.
Credit Grantor Revolving Credit Provisions, CL §§ 12-901 et seq. (“Subtitle 9”): Enacted in 1983 to modernize Maryland’s Credit Laws, Subtitle 9 covers open-end direct loans and credit sales. It is the most flexible Maryland law available for open end consumer credit and allows interest up to 24% per year.
Credit Grantor Closed End Credit Provisions, CL §§ 12-1001 et seq. (“Subtitle 10”): Enacted in 1983 to modernize Maryland’s Credit Laws, Subtitle 10 covers closed-end direct loans and credit sales. It is a flexible Maryland law and is purposely selected by creditors for many types of closed-end credit. It allows interest up to 24% per year.
Other Maryland Laws. There are a few unique situations when a credit transaction will not be governed by any one of Maryland’s seven Credit Laws even though Maryland law governs the transaction. Maryland recognizes the common law time-price sale doctrine. See Rothman v. Silver, 245 Md. 292, 226 A.2d 308 (1967). Thus, credit sales not covered by RCAL, RISA, or Subtitle 9 or 10 may be made as unregulated time-price sales. Installment sales of real property may be governed by the Land Installment Contracts Law. Md. Code Ann., Real Prop. §§ 10-101 et seq. Credit for insurance premium financing is governed by Maryland’s insurance law. Md Code Ann., Ins. §§ 23-101 et seq. True leasing is not subject to Maryland’s Credit Laws. See, e.g., Keeling v. Ford Motor Credit Corp., 314 Md. 311, 550 A.2d 932 (1988). But see CL §§ 14-2001 et seq. (Consumer Motor Vehicle Leasing Contracts). Rent to own arrangements that comply with a specific statute also are not subject to Maryland’s Credit Laws. See CL §§ 12-1101 et seq. (Rental- Purchase Agreement Act).
Other States’ Credit Laws. Even when a Maryland consumer is involved, it may be that Maryland Credit Laws will not govern the credit transaction. Maryland courts rely on a standard conflicts of law analysis. See Kronovet v. Lipchin, 288 Md. 30, 415 A.2d 1096 (1980). If the contract for credit identifies another state’s law as governing and there is a substantial relationship with that other state regarding the credit transaction, then unless there is a fundamental public policy requiring Maryland law to govern the transaction, the selection of another state’s law is likely to be upheld. I&U expresses a public policy that loans made to Maryland residents secured by property located in Maryland will be governed by Maryland law. See CL § 12-114(c). The Consumer Loan Law makes its penalty provisions applicable to loans covered by that law if made to residents of Maryland and if the application for the loan originated in Maryland. See CL § 12-314(c). SMLL defines “secondary mortgage loan” to mean a loan secured by real property in Maryland and imposes restrictions on those loans, which implies a public policy that credit secured by a junior lien on residential real property located in Maryland will be governed by Maryland law. See CL § 12-401(i). The other Maryland Credit Laws express no public policy that they should control a Maryland consumer credit transaction.
Federal Law. Finally, whether Maryland or another state’s law governs a credit transaction may not end the inquiry of which law governs a consumer credit transaction. Various federal laws, some specific to the type of creditor and others specific to the type of credit, preempt state laws as they relate to consumer credit. For example, depository institutions located outside of Maryland may, under federal law, choose to have the law of the place where the institution is located govern the credit transaction. See 12 U.S.C. § 85 (national bank authority for exporting interest rates); 12 U.S.C. § 1831d (state bank authority for exportation); 12 U.S.C. § 1463 (federal thrift authority for exportation); 12 U.S.C. § 1757(5) (federal credit unions). In the mortgage lending arena, depository and non-depository creditors alike may rely on assorted federal laws that preempt interest rates, fees, and similar restrictions imposed by otherwise applicable state law. See, e.g., 12 U.S.C. § 1735f-7a (interest rates and points on first mortgage loans preempted under the Depository Institutions Deregulation and Monetary Control Act (“DIDMCA”)); 12 U.S.C. §§ 3801 et seq. (preemption for alternative mortgage transactions under the Alternative Mortgage Transactions Parity Act); 12 U.S.C. § 1701j-3 (preemption of due on sale restrictions). Maryland has not overridden any federal law applicable to mortgage lending. See 82 Opin. Att’y Gen. 77 (August 19, 1997) (concerning federal Alternative Mortgage Transactions Parity Act); 75 Opin. Att’y Gen. 218 (1990) (concerning interest on mortgage loan escrow accounts by federal thrifts); 73 Opin. Att’y Gen. 144 (1988) (concerning interest on first mortgage loans subject to DIDMCA).
Rule #2: The creditor decides which credit law governs a credit transaction
For many types of credit, alternative credit laws are available and, with very few exceptions, creditors have the ability to select the credit law that will govern a consumer credit transaction. This is particularly true in Maryland since the enactment of Subtitles 9 and 10 in 1983. For example, assuming Maryland Credit Laws will govern the terms for financing automobile sales, that financing may be governed by either RISA or Subtitle 10. First mortgage financing may be governed by either I&U or Subtitle 9 or 10, and second mortgage financing may be governed by either SMLL or Subtitle 9 or 10.
Many different factors drive a creditor’s decision as to which law should govern certain types of consumer credit. Some factors are so influential and universal that there is little choice for creditors; other factors are more subjective and creditors reasonably may choose different credit laws to govern similar transactions based on business objectives. For example, at this time lenders who make secondary mortgage loans secured by Maryland residential real property should expressly select Subtitle 9 or 10 as the governing credit law. SMLL, which will apply to consumer secondary mortgage loans unless there is an express selection of another governing credit law, does not contain any provisions that would be more beneficial for the creditor than the provisions in Subtitle 9 or 10. Instead, SMLL is fraught with ambiguities and limitations that are difficult for creditors to address. See, e.g., CL § 12-406 (restricts payment of commissions, finder’s fees, and points). Unlike secondary mortgage lenders, lenders who make first mortgage loans can make a reasoned business decision among alternative Maryland Credit Laws. For example, I&U allows an unlimited interest rate on first lien residential mortgage loans and, for most first mortgage lenders, flexible fees. See CL §§ 12-103(b), -105; B.F. Saul Co. v. West End Park N., Inc., 250 Md. 707, 246 A.2d 591 (1968). I&U also, for the most part, only imposes a penalty for collecting interest and fees greater than authorized by that statute and the penalty amounts only to three times the overcharges. See CL § 12-114. However, for those mortgage lenders who cannot take advantage of the DIDMCA federal preemption mentioned in Rule #1, I&U prohibits the collection of points. See CL § 12-108. In contrast, Subtitles 9 and 10 allow first mortgage lenders to charge interest at 24% per year, which is less than the unlimited rate permitted by I&U. See CL § 12-1003. However, unlike I&U, Subtitles 9 and 10 allow all first mortgage lenders to charge any amount in points. See CL § 12-1005. The greater concern under Subtitles 9 and 10 are potential penalties, which apply to a violation of any applicable provision and could result in a forfeiture of all interest, costs, fees, or other charges imposed in connection with the credit along with treble damages for overcharges. See CL § 12-1018.
In addition to choosing among Maryland’s Credit Laws, some creditors for some types of credit may consider selecting another state’s law. As described in Rule #1, the potential of another state’s law governing a Maryland resident’s credit arises both based on a conflicts of law analysis and on federal law preemptions available to out-of-state depository institutions.
Some factors that creditors should consider when selecting applicable credit law include: convenience of administration (e.g., the flexibility of Subtitle 10’s provisions allow all types of closed-end credit offered by a lender to be subject to the same credit law); permissible interest rates (e.g., while most of Maryland’s Credit Laws allow interest up to 24% per year, the Consumer Loan Law allows interest up to 2.75% per month on small loan amounts, RISA allows finance charge up to 27% per year on some used motor vehicle financing, and I&U allows unlimited interest on first lien residential mortgage loans); flexibility of fees and charges (Compare I&U which, as interpreted by common law, allows most creditor fees as long as they are treated as interest on the loan with Subtitle 10 which limits many charges to actual and verifiable third party fees for specified activities); lesser potential penalties for compliance errors (Compare I&U which, for the most part, imposes a penalty only for usury with Subtitles 9 and 10, RISA, RCAL, and SMLL which impose penalties for any violation of the law and Consumer Loan Law which, under certain circumstances, has a penalty that makes the loan unenforceable). Because creditors have different business objectives and constituencies, there is no one overriding factor, and each creditor needs to make its own determination as to which credit law is best for the circumstances.
Rule #3: To determine which law governs a specific consumer credit transaction, look to the details and circumstances of the credit
Even though creditors have the ability to select which credit law governs a particular transaction, there still are times when it is unclear what law governs the transaction. If the creditor has stated expressly in the credit documents which credit law governs the transaction, the only issue is whether the selected credit law can govern the transaction. If there is no express election of governing credit law, then the details and circumstances of the credit itself must reveal what law governs the credit.
Express Election. Except as discussed in the immediately following paragraph, no Maryland Credit Law nor any applicable federal law requires an express election of governing law in order for a particular law to govern. That being said, creditors should consider expressly describing the credit law that governs the transaction. With an express election, there should be no questions as to which credit law applies.
The exception concerning express election of governing law arises for Subtitles 9 and 10. For extensions of credit made on or after October 1, 1993, Subtitles 9 and 10 govern credit only if the creditor makes a written election of Subtitle 9 or 10 in the credit agreement. See CL §§ 12-913.1, -1013.1. If either Subtitle 9 or 10 is selected in writing, no other Maryland Credit Laws apply to that credit. For extensions of credit made on or after October 1, 1993, if the parties have not selected in writing in the credit agreement to have either Subtitle 9 or 10 as the governing law, neither Subtitle 9 nor 10 will apply, and the details of the credit agreement will establish which other credit law applies. Id.
The selection of either Subtitle 9 or 10 as governing law was not required to be in writing prior to October 1, 1993, and for credit extended prior to that date (but after July 1, 1983, when the law took effect) with no express election of governing law, the details and circumstances of the credit may well reveal that Subtitle 9 or 10 governs the credit. See CL § 12-1013. However, if an open-end credit plan was established before October 1, 1993, advances under the plan made on or after that date are not governed by Subtitle 9 unless the parties have made a written election in the plan agreement.
Financed Sale v. Direct Loan. One detail of the transaction that will help determine the governing credit law is whether the transaction is a financed sale (i.e., the seller is the original creditor) or is a direct loan (i.e., a lender is the original creditor). If the transaction is a financed sale and Maryland Credit Laws apply, then the credit may be governed by Subtitles 9 or 10, RISA, RCAL, or SMLL, or will be an unregulated time-price sale. If the credit is a direct loan, the Maryland Credit Laws that may apply are Subtitles 9 or 10, the Consumer Loan Law, SMLL, or I&U. As discussed in Rule #2, Subtitles 9 or 10 will apply only if there is an express written election of one of those laws in the credit agreement. I&U controls if, based on details of a credit transaction, no other more specific Maryland Credit Law clearly governs.
Type of Collateral. Identifying the collateral for the credit can make the path to determining governing credit law a much easier road. For example, if residential real property will secure the credit, then RISA and RCAL can be eliminated from consideration, even if the transaction is a financed sale.
If the lien being created in connection with the credit will be junior to existing liens on the residential real property, then the possible Maryland Credit Laws are limited to Subtitles 9 or 10, the Consumer Loan Law, or SMLL. Because the Consumer Loan Law will only apply if the credit is $6,000 or less, it frequently is not available in connection with real property lending (where the credit is normally greater than $6,000). If the credit is open-end, then a loan secured by a junior lien on residential real property will be governed by Subtitle 9 if there is an express election of that law. Otherwise, it will be governed by SMLL. Alternatively, if the credit is closed-end, then a loan secured by a junior lien on residential real property will be governed by Subtitle 10 if there is an express election of that law. Otherwise, it will be governed by SMLL.
As another example, if a motor vehicle will be collateral for a financed sale to a consumer, Subtitle 9, Subtitle 10, or RISA could apply. Because RISA applies to financed sales of motor vehicles to consumers regardless of the original cash price, the transaction cannot be an unregulated time-price sale. Assuming the credit is not open-end, we can eliminate Subtitle 9 from consideration. Thus, this financed sale will be governed by Subtitle 10 if there is an express election of that law in the installment sale contract. Otherwise, it will be governed by RISA.
Type of Creditor. Identifying the type of lender and where the lender is located also can help focus the determination of which credit law applies. On the one hand, if the lender is a depository institution not located in Maryland, there is a likelihood that the law of a state where the lender has at least one branch governs the transaction. A governing law provision in the credit documents should reveal which state’s law has been selected. On the other hand, if the lender is a non-depository institution and is unaffiliated with a depository institution, there is a likelihood that Maryland Credit Law will control. Again, a governing law provision may be helpful in making this determination.
After reviewing this road map through consumer credit laws, consumers and lawyers should be on the right track for determining which credit law governs a particular transaction in Maryland. Granted, there is substantially more information about credit terms, conditions, restrictions, limitations, disclosures, and other regulatory issues that goes into determining compliance with applicable law. However, this brief map provides a head start into a confusing but ultimately decipherable area of law that affects consumer credit.