Md. App. Ct. Holds Business Liable as Unlicensed Credit Services Business for Arranging and Purchasing Consumer Loans Through Out-Of-State Banks

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.  

Background

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.

Discussion

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.

Md. App. Ct. Reverses Dismissal of Foreclosure Case; Non-Borrower Spouse’s Post-Sale Challenge to Due-On-Sale Clause was Untimely Post-Sale

In Devan v. Bomar, the Court of Special Appeals reversed the dismissal of a foreclosure case, where such dismissal was premised on a non-borrowing spouse’s claim that the secured party violated federal law prohibiting the exercise of a “due-on-sale” clause, where title to the property was transferred to a surviving spouse upon the death of her husband.  The Court reaffirmed that such pre-sale challenges must be made prior to the foreclosure sale, explaining that “[a]s with statutes of limitations generally, procedural deadlines for raising certain challenges are established and strictly enforced.  An unexcused failure to comply with a clear deadline may doom what might otherwise have been a highly meritorious challenge, has it been timely filed.”  Op. at 1.

A copy of the opinion is available here.

Background

Husband and Wife owned their marital home as tenants by the entireties, however, only Husband was a borrower under the promissory note.  Following his death in 2008, Wife continued making monthly mortgage payments.  After her husband’s estate was closed, the loan servicer refused to accept further monthly payments from her, and demanded payment in full.  Thereafter, foreclosure proceedings were initiated, and nearly one-year later, the property was sold to the lender. 

After the sale, Wife filed exceptions to the sale claiming that she was wrongly prevented from making payments on the promissory note in violation of federal prohibitions on the exercise of a “due-on-sale” clause upon a transfer caused by the death of a spouse.   See 12 C.F.R. § 591.5(b).  The trial court sustained the exception, and set aside the foreclosure sale.  The substitute trustees appealed.

Discussion

As an initial matter, the Court determined that it need not consider the binding effect of the federal regulation.  Rather, the Court noted that the appeal concerned the procedural issue of whether a challenge to the sale based upon a violation of the regulation must be raised before the foreclosure sale, or if it is one that may also be raised as a post-foreclosure exception.

Under Maryland law, a foreclosure proceeding is a two-step process.  “A borrower’s ability to challenge a foreclosure sale is in part determined by whether relief is requested before or after the sale. Prior to the sale, a borrower may file a motion to stay the sale and dismiss the foreclosure action under Maryland Rule 14-211. . . . The situation is different after a foreclosure sale.” Op. at 5 (quoting Thomas v. Nadel, 427 Md. 441, 443-44, 48 A.3d 276 (2012)).

Consequently, the Court reaffirmed that “[a] post-sale exception to a foreclosure sale is not an appropriate vehicle to challenge the broad equities of the entire foreclosure proceeding itself. It is, rather, a narrow challenge to the procedures employed in the execution of the sale process itself.” Op. at 8.

In this case, the Court observed that Wife’s claim was “a sweeping attack on the Bank’s entitlement to initiate the foreclosure proceeding at the very outset,” Op. at 12, that was “fully knowable” to Wife a full year before the sale.   Thus, the Court determined that the subsequent challenge, whatever might have been its merit, simply came too late.  “Bad timing can be as fatal as lack of merit.”  Op. at 12.

The Court rejected attempts to “wriggle out” from prior decisions establishing the timing requirements of a foreclosure challenge.   The Court determined inapplicable its decision in Bierman v. Hunter, 190 Md. App. 250, 988 A.2d 530 (2010), in which the intermediate appellate court upheld a challenge to a foreclosure sale where a spouse proved her signature on the mortgage documents were forged.   The Court noted that part of the rationale in that case had been expressly rejected by subsequent opinions of the Court of Appeals, and noted that “[t]he Bierman opinion, despite its earlier tilt in a different direction, does not help [Wife] in this case.”  Op. at 17.  

Accordingly, finding Wife’s claims untimely, the Court reversed the trial court’s order to set aside the sale, and determined moot the substitute trustee’s evidentiary challenges to the trial court’s ruling.

Md. App. Ct. Rejects Per Se Rule Establishing Debtor's Ownership of Joint Bank Account in Garnishment Proceeding; Non-Debtor Can Rebut Presumption of Ownership

In Morgan Stanley & Co., Inc. v. Andrews, the Court of Special Appeals of Maryland addressed a non-debtor’s defense to a garnishment proceeding against funds in a bank account jointly owned with the judgment debtor, who was not his spouse.   The Court determined that while there is a prima facie presumption of ownership by each named account owner, that presumption can be rebutted by clear and convincing evidence as to which portion of the account funds belong to which owner.  Thus, in this case, the Court agreed that the trial court correctly determined that the funds in an account jointly held by a father and son were not subject to garnishment, where the father successfully proved that he was the sole contributor and owner of all of the funds.

A copy of the opinion is available here.

 Background

In this case, after obtaining a judgment against the judgment debtor (“Son”), Creditor sought to garnish funds held in an account jointly titled in both Son’s name and Father’s name.  Father asserted his claim to the garnished funds under Maryland Rules 2-645(i) and 2-643(e), and after his claim was initially denied on the papers, following an appeal, the case was remanded to the trial court for an evidentiary hearing.  

Thereafter, on remand, the trial court held an evidentiary hearing to determine Father’s claim to the funds in the joint bank account, and determined that Father had established that all of the funds in the joint account belonged solely to him, and that Son had not deposited any of his own funds into the account.  Creditor then filed the present appeal.

Discussion

On appeal, Creditor argued that funds in the joint account were per se subject to garnishment because the judgment debtor was a named owner, regardless of whether co-owners of the account were also judgment debtors.  The appellate court disagreed, determining instead that, while there is a presumption that a bank deposit belongs to a named owner of the account, “a co-owner of a joint account can rebut the presumption of ownership by proving, by clear and convincing evidence, which portion of the account belongs to each co-owner.”  Op. at 14.

Notably, the Court differentiated between legal title to a joint account and equitable title to the funds within the account.  Op. at 11.  The Court adopted the majority rule followed by at least 23 other states, which provides that a judgment creditor of one joint account holder may execute against the joint account only to the extent of the debtor’s equitable interest in the account.  Op. at 11. 

In determining the debtor’s equitable interest, the Court identified two primary factors: (1) control over the funds; and (2) original contribution of the funds.  Op. at 13.  Other relevant factors include whether a party’s social security number appears on the account, which party’s name appears on checks, which party signs checks, which party pays taxes on interest from the account, and which party possesses the passbook and other related documents.  Op. at 13.  The Court cautioned that the titling of the account, and the right to withdraw from the account, do not necessarily indicate equitable ownership.  Op. at 18.

Consequently, the Court agreed with the trial court’s determination that Father was the sole owner of all funds in the account, observing that the most important factor was that it was undisputed that Father was the original contributing source of all the funds.  Op. at 20-21. 

Although the Court described how the prima facie presumption of ownership can be rebutted, it left unanswered what type of prima facie presumption applied.  The Court observed that some jurisdictions use an “equal share” approach, imposing a rebuttable presumption that account holders own equal shares, while others use a “full share” approach, presuming that each co-owner beneficially owns the entire account.  Op. at 13. 

In addition, the Court noted that its opinion did not affect the existing restriction upon garnishment of property owned jointly by spouses.  See Maryland Code, Courts and Judicial Proceedings § 11- 603(a) (“[A] garnishment against property held jointly by [spouses], in a bank, trust company, credit union, savings bank, or savings and loan association or any of their affiliates or subsidiaries is not valid unless both owners of the property are judgment debtors.”).