Cashcall, Inc. v. Md. Comm'r of Fin. Regulation

• Decision Date: 23 June 2016
• Docket Number: No. 80, Sept. Term, 2015.,80, Sept. Term, 2015.
• Citation: 448 Md. 412,139 A.3d 990
• Parties: CASHCALL, INC., and J. Paul Reddam v. MARYLAND COMMISSIONER OF FINANCIAL REGULATION.
• Court: Court of Special Appeals of Maryland

448 Md. 412

139 A.3d 990

CASHCALL, INC., and J. Paul Reddam

v.MARYLAND COMMISSIONER OF FINANCIAL REGULATION.

No. 80, Sept. Term, 2015.

Court of Appeals of Maryland.

June 23, 2016.

Clifford M. Sloan (Joseph L. Barloon, Michael A. McIntosh, Skadden, Arps, Slate, Meagher & Flom, LLP, Washington, DC, Richard M. Kremen, Jodie E. Buchman, Kristy N. Grace, DLA Piper, LLP (US), Baltimore, MD), on brief, for petitioners.

Christopher B. Lord, Asst. Atty. Gen. (W. Thomas Lawrie, Asst. Atty. Gen., Brian E. Frosh, Atty. Gen. of Maryland, Baltimore, MD), on brief, for respondent.

Tassity Johnson, Esq., Murnaghan Appellate Advocacy Fellow, Public Justice Center, Baltimore, MD, for Amici Curiae brief of the Civil Justice, Public Justice Center, Maryland Consumer Rights Coalition, and Maryland Cash Campaign in support of respondent.

Argued before BARBERA, C.J., BATTAGLIA^* , GREENE, ADKINS, McDONALD, WATTS, and ALAN M. WILNER (Retired, Specially Assigned), JJ.

GREENE

, J.

In the instant case, we address whether the definition of a “ credit services business” under the Maryland Credit Services Business Act (“the MCSBA”)¹ requires there to be a direct payment from a consumer to a company whose primary business is to assist consumers in obtaining loans that would be usurious under Maryland law. The Commissioner of Financial Regulation of the Department of Labor, Licensing, and Regulation (“the Commissioner”)² brought an administrative enforcement action against Petitioners, CashCall, Inc. (“CashCall”), a California corporation, and John Paul Reddam (“Reddam”), the corporation's president and owner, for violating various Maryland consumer protection laws, including the MCSBA. Petitioners disagreed that their business activities fell within the purview of the MCSBA, claiming that our holding in Gomez v. Jackson Hewitt, Inc., 427 Md. 128, 46 A.3d 443 (2012)

established a broad “direct payment” requirement within the MCSBA's definition of a credit services business. We shall clarify the holding in Gomez v. Jackson Hewitt, Inc., 427 Md. at 128, 46 A.3d at 443 by limiting its discussion of a “direct payment” requirement to the circumstances of that case. For the reasons explained below, we hold that the definition of a credit services business does not contain a broad direct payment requirement.

FACTUAL AND PROCEDURAL BACKGROUND

A person or entity engaged in providing credit services business is subject to regulation under Maryland law. Under CL § 14–1901(e)

,

(1) “Credit services business” means any person who, with respect to the extension of credit by others, sells, provides, or performs, or represents that such person can or will sell, provide, or perform, any of the following services in return for the payment of money or other valuable consideration:

(i) Improving a consumer's credit record, history, or rating or establishing a new credit file or record;

(ii) Obtaining an extension of credit³ for a consumer; or

(iii) Providing advice or assistance to a consumer with regard to either subparagraph (i) or (ii) of this paragraph.

(2) “Credit services business” includes a person who sells or attempts to sell written materials containing information that the person represents will enable a consumer to establish a new credit file or record.⁴

Under CL and FI, a credit services business must comply with various requirements imposed by statute. Most relevant to this case is the requirement that a credit services business is prohibited from assisting “a consumer to obtain an extension of credit at a rate of interest which, except for federal preemption of State law” would exceed the maximum annual percentage rates under Maryland Law.⁵

CL § 14–1902(9)

. See CL § 12–102. Although federal law⁶ allows federally insured banks to charge out-of-state consumers the same interest rate permitted by the bank's home state, regardless of the interest rate caps imposed by the law of the consumer's resident state, “a credit services business may not, under the MCSBA, assist a consumer in obtaining a loan, from any in-state or out-of-state bank, at an interest rate prohibited by Maryland law.” Maryland Comm'r of Fin. Regulation v. CashCall, Inc., 225 Md.App. 313, 325, 124 A.3d 670, 677 (2015)

.

CashCall's Business Activities

CashCall marketed high-interest loans to consumers through television and internet advertisements. The advertisements contained information regarding CashCall's website and telephone number. CashCall offered loans to consumers at three different interest rates: 59%, 89%, or 96%.⁷ These interest rates greatly exceeded the interest rates permitted by Maryland law, which caps the interest rate at 33% on all loans below $6,000.⁸ Between January 2006 and December 2010, through CashCall, Maryland consumers received 5,651 loans in amounts less than $6,000 with interest rates greater than 33%.

Maryland consumers who visited the CashCall website or called CashCall directly were directed to fill out an online loan application though CashCall's website. CashCall then forwarded the completed application to a federally insured out-of-state bank that is exempt from Maryland's usury laws. Once a bank approved a loan application, the bank would place, in the consumer's bank account, the requested loan amount less a $75 fee designated as an “origination fee.”⁹ The following example is illustrative of a typical transaction: In the case of a $2,600 approved loan, the consumer receives $2,525, which is the principal amount owed on the loan less the $75 origination fee. The consumer is required to pay the holder of the loan $2,600, plus interest. In other words, “the consumer ultimately pa[ys] the origination fee as he or she repa[ys] the loan in monthly installments to whomever [holds] the loan.” CashCall, Inc., 225 Md.App. at 318, 124 A.3d at 673

.

Specifically, CashCall had entered into partnerships with First Bank & Trust, a South Dakota-chartered bank and First Bank of Delaware, a Delaware-chartered bank. Pursuant to contracts between CashCall and each bank, CashCall was required to purchase a loan three days after¹⁰ the loan was originated and the funds dispersed to the consumer.¹¹ CashCall paid the bank the full value of the loan, i.e., the $2,600 from the example above, plus the three days of interest that had accrued on the loan. The banks also paid CashCall a “royalty” fee of $5 to $72.22 per loan depending on the amount of the loan and the bank that disbursed the funds. Upon CashCall's purchase of the loan, all of the bank's rights and interests in the loan were assigned, without recourse, to CashCall. This gave CashCall the right to enforce the terms provided in the loan documents, including the right to collect payments of the principal, interest and other fees.¹² In fact, if the bank mistakenly received a payment from a consumer on a loan CashCall purchased, the bank was required to hold the payment “in trust” and forward the payment to CashCall no later than the following business day.

Given the nature of the partnership between CashCall and the banks, Maryland consumers who obtained loans through CashCall dealt primarily with CashCall. A consumer's contact with the bank was limited to a single transaction: the bank's deposit of money into the consumer's bank account. Maryland consumers communicated with CashCall, and made all loan payments whether it be for principal, interest, or any other fees directly to CashCall.

The Enforcement Action

Between 2007 and 2011, eighteen Maryland residents filed complaints with the Commissioner. Based on these complaints, the Commissioner initiated an investigation into the business practices of CashCall and Reddam.¹³ On June 23, 2009, in a “Summary Order to Cease and Desist,”¹⁴ the Commissioner found that “[Petitioners] engaged in illegal and predatory business activities which directly resulted in Maryland consumers obtaining usurious loans from national banks” in violation of the MCSBA. In response, on July 7, 2009, Petitioners requested a hearing in the Office of Administrative Hearings (“OAH”).

On September 14, 2010, administrative law judge (“ALJ”) Nancy E. Paige held a hearing on the Summary Order. In ALJ Paige's December 2, 2010 “Proposed Decision,” she concluded that Petitioners violated the MCSBA and the licensing provisions of the Maryland Consumer Loan Law.¹⁵ Characterizing each of the 5,651 loans Petitioners offered to a Maryland consumer as a first offense, ALJ Paige proposed a penalty of $1,000 for each loan, for a total civil penalty of $5,651,000. ALJ Paige further recommended that the Commissioner “[e]nter a final Order that [Petitioners] cease and desist from engaging in the ‘credit services business[ ]’ ” and ordered CashCall to pay the full civil penalty of $5,651,000. Petitioners filed exceptions to the ALJ Paige's “Proposed Order” on January 20, 2011. The parties agreed to stay the matter pending the outcome of a case for which we had granted certiorari on October 24, 2011, Gomez v. Jackson Hewitt, Inc., 422 Md. 352, 30 A.3d 193 (2011)

This Court issued its opinion in Gomez, 427 Md. at 128, 46 A.3d at 443 on June 22, 2012.

In the aftermath of Gomez, Commissioner Mark Kaufman held a hearing on the exceptions filed in this case on August 10, 2012 and issued an “Opinion and Final Order” (“Final Order”) on November 8, 2012. In his Final Order, Commissioner Kaufman explained that the representative promissory note and disclosure statement ALJ Paige admitted into evidence demonstrates how consumers made payments directly to CashCall:

[Petitioners'] Exhibit # 1 (admitted in the OAH hearing) is the First Bank & Trust Promissory Note and Disclosure Statement, dated as of December 12, 2006 (the “Promissory Note”) for a $2,600 consumer loan. The “financed” amount of the loan is shown as $2,525.00. This is the amount received by the consumer. A “Prepaid Finance Charge/Origination Fee” is listed at $75.00. The $75.00 fee is rolled into the principal amount of the loan. As a result, the total amount of principal

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