Md. Commissioner of Fin. Regulation v. Cashcall, Inc.

• Citation: 124 A.3d 670,225 Md.App. 313
• Decision Date: 27 October 2015
• Docket Number: No. 1477, ,1477,
• Parties: MARYLAND COMMISSIONER OF FINANCIAL REGULATION v. CASHCALL, INC., et al.
• Court: Court of Special Appeals of Maryland

225 Md.App. 313

124 A.3d 670

MARYLAND COMMISSIONER OF FINANCIAL REGULATION

v.CASHCALL, INC., et al.

No. 1477,

Court of Special Appeals of Maryland.

Oct. 27, 2015.

Christopher B. Lord(Douglas F. Gansler, Atty. Gen., on the brief), Baltimore, MD, for Appellant.

Barry Levenstam(Daniel T. Fenski, Jenner & Block LLP, Chicago, IL, Richard M. Kreman, Jodie Buchman, Kristy Grace, DLA Piper LLP, Baltimore, MD, Katya Jestin, Neil M. Barofsky, Brian J. Fischer, Jenner & Block, LLP, New York, NY), on the brief, for Appellee.

Opinion

KRAUSER, C.J.

This appeal requires that we delve into the question of what constitutes a “credit services business” under the Maryland Credit Services Business Act (“MCSBA”).¹This issue arose when, prompted by consumer complaints, the Maryland Commissioner of Financial Regulation,²appellant, conducted an investigation into the business activities of CashCall, Inc., a California corporation, and its president and sole share-holder, John Paul Reddam, appellees. The Commissioner found that CashCall had arranged, from 2006 to 2010, more than 5,000 loans for Maryland consumers, loans which were issued by two federally insured out-of-state banks, at interest rates significantly greater than the rates permitted by Maryland law. Then, three days after the issuance of each and every loan, CashCall, pursuant to an agreement it had with each of the two out-of-state banks, promptly purchased the loan from the issuing bank and thereafter collected all payments, interest, and fees due on that loan from the borrowing Maryland consumer. Concluding that CashCall and Reddam had engaged in the “credit services business” without a license to do so and without complying with any of Maryland's remedial statutes governing such enterprises, the Commissioner ordered appellees to cease and desist from such activities and imposed upon them a civil penalty for each of the more than 5,000 loans they had arranged for interested Maryland consumers.

Vigorously disagreeing with the Commissioner's assessment of its business activities in Maryland, CashCall petitioned the Circuit Court for Baltimore City for judicial review. Before that court, as it did before the Commissioner, CashCall insisted that, at no time, during its marketing, facilitation, and ultimate acquisition of the loans it arranged, was it acting as a “credit services business,” as defined by the MCSBA, because it never received any compensation “directly” from a Maryland consumer for its services and, therefore, under extant Maryland caselaw, did not qualify as such a business. The Baltimore City circuit court agreed and reversed the Commissioner's order, prompting the Commissioner to note this appeal.

Because we believe that the Commissioner was correct in concluding that CashCall was a “credit services business,” under the MCSBA, we shall reverse the decision of the circuit court and remand for that court to affirm the Commissioner's decision in this matter.

I.

CashCall, a California corporation, and its president and sole share-holder, John Paul Reddam, were engaged in the business of marketing small loans, through a range of media outlets, to Maryland consumers. The loans were to be issued, at interest rates significantly greater than those permitted by Maryland law, by two federally insured out-of-state banks: First Bank & Trust, a South Dakota-chartered state bank; and First Bank of Delaware, a chartered bank of that state. Three types of loans were offered by CashCall to interested Marylanders: a loan of $5,025 at an annual interest rate of 59%; a loan of $2,600 at an annual interest rate of 96%; and a loan of $1,025 at an annual interest rate of 89%. From January of 2006 through the end of 2010, CashCall arranged 5,651 such loans for Maryland consumers.

CashCall's advertisements directed interested Maryland consumers to its website where they could obtain a loan application and instructions on how to complete that form. They also provided a telephone number that consumers could call to obtain assistance in filling out the website's loan application. And, once a loan application was completed by an interested Maryland consumer, CashCall would forward that application to one of the two federally insured out-of-state banks for approval.

Once the application was approved by one of the two banks, that bank would disburse the loan to the consumer, though subtracted from the amount of the loan was an “origination fee,” that is, “a fee charged by a lender for preparing and processing a loan.”³Illustratively, for an approved loan of $2,600, the Maryland consumer received only $2,525 from the bank, that is, the loan amount less a $75 origination fee. The consumer was then to pay the bank, or whomever thereafter held the loan, $2,600, the origination fee having been rolled into the loan amount, plus interest.

Thus, the consumer ultimately paid the origination fee as he or she repaid the loan in monthly installments to whomever held the loan.

After the loan was made, CashCall, under the contract it had entered into with each of the two out-of-state banks, would promptly purchase the loan from the issuing bank. Although its initial contracts with the two banks required CashCall to purchase the loan “on the same business day” that the loan was issued, those agreements were later amended to grant CashCall three days to purchase the loan after it was disbursed to the consumer. The purchase price for each loan, as noted, was the amount of the loan actually received by the consumer plus the origination fee. Thus, for the $2,600 consumer loan described earlier, CashCall would purchase the loan from the bank for $2,600—that figure comprised the $2,525 actually loaned to the consumer plus the $75 “origination fee” to be paid by the consumer.⁴The banks, in turn, paid CashCall a “royalty fee” of between $5.00 and $72.22 per loan, depending on the amount of the loan and which of the two out-of-state banks had made the loan.

Upon purchasing a loan, CashCall acquired the right to enforce the loan's terms and to collect the payments that were to be made by the borrowing consumer under the terms of the loan, including all interest, penalties, and fees. Indeed, if a consumer mistakenly sent a loan payment to the bank, rather than to CashCall, after CashCall had purchased the loan, the bank was, pursuant to its contract with CashCall, obligated to “promptly” forward that payment to CashCall.

Thus a Maryland consumer, who used CashCall to obtain such a loan, never paid any loan payments or, for that matter, any fees or other payments of any nature, to the out-of-state bank that initially issued the loan, but, instead, made all such payments directly to CashCall. That meant, in making loan payments to CashCall, the consumer paid CashCall the origination fee, which had been “rolled into” the amount of the loan, a fact that will play a role in our pending analysis of whether CashCall was a “credit services business.”

II.

From 2007 to 2009, the Commissioner received complaints from fourteen Maryland consumers “concerning high-interest loans which [CashCall] arranged for them” and its “collection activities” with respect to those loans. At the hearing that was held before an administrative law judge (“ALJ”) on this matter, testimony was provided that showed that the consumers, who contacted CashCall seeking a loan, were often responding to difficult and pressing situations, such as loss of employment or the death of a family member. Moreover, in the words of the ALJ who presided over that hearing, the “borrowers who availed themselves of CashCall's services” were “pushed to borrow more than they wanted” by CashCall, encountered “serious difficulty in determining a payoff amount” when they sought to pay off their loans early, and were “unable to extricate themselves from the burden of the debts they had incurred.”

On June 23, 2009, after investigating CashCall's business activities, the Commissioner issued a summary order⁵directing CashCall to, among other things, “cease and desist” from engaging in its current business activities in Maryland, which, in the Commissioner's view, amounted to the unlicensed provision of “credit services.” In response to that preliminary order, CashCall requested a hearing in the Office of Administrative Hearings. After that request was granted, the aforementioned hearing was held before an ALJ. And, following that hearing, the ALJ issued, on December 3, 2010, a “proposed decision,” recommending that the Commissioner find that CashCall had violated the MCSBA and the Maryland Consumer Loan Law by engaging in the credit services business without a license to do so, that the Commissioner issue a final cease and desist order prohibiting CashCall from operating a “credit services business” in Maryland, and that CashCall be directed to pay a civil penalty for each of the 5,651 loans it had assisted consumers in obtaining. Then, generously treating each of the 5,651 loans as a “first offense,” rather than as a “second” or “subsequent offense,” the ALJ suggested that CashCall be ordered to pay a penalty of $1,000 per loan⁶for a total civil penalty of $5,651,000. On January 3, 2011, the Commissioner issued a “proposed order” adopting those recommendations.

CashCall thereafter filed exceptions to the Commissioner's “proposed order.” The hearing on those exceptions, however, was subsequently stayed, at CashCall's request, pending the Court of Appeals' decision in Gomez v. Jackson Hewitt, Inc.,427 Md. 128, 46 A.3d 443 (2012). When that decision was issued, the stay was lifted and a hearing was held before the Commissioner on November 8, 2012. Upon the conclusion of that hearing, the Commissioner issued a “final order,” requiring both CashCall and Reddam to cease and desist from engaging in “credit services business” activities in Maryland, and he imposed a civil penalty of $5,651,000, for which appellees were jointly and severally liable. On December 7, 2012, CashCall—but not...