Maryland Legal Alert for Financial Services
Pending Legislation Targets Bank Partnership Models
As the Maryland legislative session begins to heat up, we have been tracking several bills that would impact financial services providers. One bill of interest is House Bill 254, titled: Commercial Law – Credit Regulation – Predatory Loan Prevention (True Lender Act). The bill would add a new Subtitle 15 to Maryland’s credit law statutory framework, and it targets bank partnership models where fintech providers work with out of state financial institutions (banks or credit unions) to originate credit with the resulting interest rate in excess of what Maryland law otherwise permits. Among other things, the bill prohibits “making or offering, or assisting or arranging for a debtor to obtain, a loan or extension of credit with a greater rate of interest, consideration, or charge than is authorized by [Subtitle 15] through any method.” Loans made in violation of the new Subtitle 15 would be void and unenforceable as to any principal, fee, interest, or charge.
The bill includes a predominant economic interest test and totality of the circumstances test to determine who is the “true lender” in a transaction. The tests aim to address whether a “person directly or indirectly holds, acquires, or maintains the predominant economic interest in the loan or extension of credit” and whether “the totality of the circumstances show that the person is the lender, and the transaction is structured to evade the requirements of [Subtitle 15].” Factors in the bill that are to be evaluated under the totality of circumstances test include whether a person (1) indemnifies, insures, or protects a covered lender from any costs or risks related to the loan, (2) predominantly designs, controls, or operates the loan or credit program; (3) holds the trademark or intellectual property rights in the brand, underwriting system, or other core aspects of the loan program; or (4) purports to act as an agent, service provider, or in another capacity for a covered entity while acting directly as a lender in other states. The bill also extends the definition of a true lender to a person that both markets, brokers, arranges, or facilitates the loan or extension of credit and holds the first right of refusal, receivables, or other interest in the loan or credit extension.
Those who partner with out of state financial institutions to originate loans to Maryland residents will be impacted by this bill if it is enacted. We will continue to provide updates concerning this bill and others of interest to financial service providers as the legislative session continues.
Contact Christopher R. Rahl | 410-576-4222
Contact Tamia J. Morris | 410-576-4021