Schmidt v. Beneficial Finance Co. of Frederick

• Decision Date: 08 May 1979
• Docket Number: No. 118,118
• Citation: 400 A.2d 1124,285 Md. 148
• Parties: Paul K. SCHMIDT, Jr. et ux. v. BENEFICIAL FINANCE COMPANY OF FREDERICK.
• Court: Maryland Court of Appeals

Page 148

285 Md. 148

400 A.2d 1124

Paul K. SCHMIDT, Jr. et ux. v. BENEFICIAL FINANCE COMPANY OF FREDERICK.

No. 118.

Court of Appeals of Maryland.

May 8, 1979.

Charles H. Slingluff, Frederick, for appellants.

Thomas B. Hudson, Baltimore (Alan N. Gamse and Semmes, Bowen & Semmes, Baltimore, on the brief), for appellee.

Argued before MURPHY, C. J., and SMITH, DIGGES, ELDRIDGE, ORTH, COLE and DAVIDSON, JJ.

ORTH, Judge.

On 30 March 1977 Paul K. Schmidt, Jr. and Patricia Schmidt, his wife, executed and delivered a mortgage to Beneficial Finance Co. of Frederick, a Delaware corporation qualified to do business in Maryland, and licensed to engage in making loans under the Maryland Consumer Loan Law. The mortgage secured a loan of $3,500 made by Beneficial to the Schmidts. It called for repayment, "together with interest on the unpaid balance thereof at the rate of Eighteen percent (18%) per annum (1 1/2% per month) . . . in 60 successive monthly installments of $88.87 each, commencing one month from the date" thereof. The indebtedness and the manner and terms of payment were further evidenced by and set forth in a promissory note of even date. The mortgage conveyed to Beneficial certain real property of the Schmidts located in Frederick County, Maryland, which was subject to a prior incumbrance and had on it a dwelling designed principally as a residence with accommodations for not more than four families. The Schmidts repaid the loan by 19 May 1977. ¹

A question arose as to the legality of the interest charged. The question was presented for judicial determination upon the filing of a class action in assumpsit by the Schmidts against Beneficial in the Circuit Court for Frederick County on 22 February 1978. The Schmidts sought, on behalf of themselves and all other persons so similarly situated, the return of all monies over and above the principal amount of the loan proceeds, damages in the amount of three times the amount of interest and charges collected, attorneys' fees and costs of suit. Beneficial demurred. The demurrer was sustained without leave to amend. The Schmidts noted an appeal to the Court of Special Appeals. We ordered the issuance of a writ of certiorari before decision by that court.

The Secondary Mortgage Loan Law added new §§ 39-70 to Art. 66 of the Code (1957, 1964 Repl.Vol.). It was enacted, effective 1 January 1968, by Acts 1967, ch. 390, according to its title,

to Generally provide for the licensing of persons in the business of negotiating secondary mortgage loans, and to Generally provide for the regulations of such persons and such loans, to give the Banking Commissioner certain duties and powers in the regulation of such persons and such loans, to provide penalties for violations and to Generally relate to secondary mortgage transactions and the regulation of persons in this business. (Emphasis added).

At the time Beneficial made the loan to the Schmidts, the Maryland Secondary Mortgage Loan Law, with respect to the licensing provisions, was as set out in Maryland Code (1957, 1972 Repl.Vol.) Art. 66, §§ 39-71, and, with respect to credit provisions, was as set out in Code (1975) §§ 12-401 to 12-415 of the Commercial Law Article. ² It is manifest that the Schmidt loan was the type of loan subject to regulation under the Secondary Mortgage Loan Law. Although Beneficial was not licensed under that law, ³ it was permitted to make a loan under it as exempt from its licensing requirements. § 12-402(a). ⁴ Acts 1975, ch. 574, § 1, effective 1 July 1975, rewrote the licensing provisions of the Secondary Mortgage Loan Law prescribed by § 41, Article 66 of the Code (1957, 1972 Repl.Vol.). As rewritten, § 41 has two aspects. It first provides that "(n)o person, ( ⁵ other than any banking institution, savings bank, or association subject to Article 11 of this Code, any federal savings and loan association, insurance company, State-chartered building and loan association or any other financial institution which is subject to any other law of this State or of the United States regulating the power of such institution to engage in mortgage loan transactions shall make or negotiate, or offer to make or negotiate, any secondary mortgage loan except under the provisions of (the Secondary Mortgage Loan-Licensing Provisions) subtitle." It then requires, with five express exceptions, any person who makes a secondary mortgage loan to first obtain a license from the Bank Commissioner of Maryland or the deputy bank commissioner. Beneficial was exempt from the licensing requirements under the first exception which designates the same financial institutions excepted from the prohibition in the first aspect. Code (1957, 1972 Repl.Vol., 1978 Cum.Supp.) Art. 66, § 41(1). Beneficial expressly declared in its brief and in oral argument before us that it was a financial institution which in fact was subject to a law of this State regulating the power of such institutions to engage in mortgage loan transactions. ⁶ Therefore, Beneficial clearly had the authority to make a loan under the Secondary Mortgage Loan Law. § 12-402.

The loan to the Schmidts which Beneficial was authorized to make under the Secondary Mortgage Loan Law was patently "a secondary mortgage loan" within the meaning of that law.

"Secondary mortgage loan" means a loan or deferred purchase price secured in whole or in part by a mortgage, deed of trust, security agreement, or other lien on real property located in the State, which property:

(i) Is subject to the lien of one or more prior encumbrances, except a ground rent or other leasehold interest; and

(ii) Has a dwelling on it designed principally as a residence with accommodations for not more than four families. (§ 12-401(j)(1).)

The amount of a secondary mortgage loan is qualified only to the extent that it may be "in such an amount that the net proceeds of the loan equal a predetermined sum . . . ." § 12-404(a)(1).

Beneficial's exemption from the licensing requirements of the Secondary Mortgage Loan Law also served to make it a "lender" in the contemplation of that law.

"Lender" means:

(1) A licensee; or

(2) A person who makes a secondary mortgage loan but is exempt expressly from the licensing requirements of the Maryland Secondary Mortgage Loan Law Licensing Provisions. (§ 12-401(c).)

As a lender under the Secondary Mortgage Loan Law, Beneficial could not

make or offer to make any secondary mortgage loan except within the terms and conditions authorized by (the Secondary Mortgage Loan Law) subtitle. (§ 12-412.)

Specifically, it was bound by the express proscription that a lender

may not directly or indirectly, contract for, charge, or receive, any interest, discount, fee, fine, commission, brokerage, charge, or other consideration in excess of that permitted by (the Secondary Mortgage Loan Law) subtitle. (§ 12-411.)

A lender may "(t)ake interest in advance on the full amount of the loan for the period from the date the loan is made to the date of maturity of the final installment." § 12-404(a)(2). But

(t)he total amount of interest may not exceed the amount that would accrue throughout the term of the loan if charged at the rate of 12 percent per annum on the unpaid principal balances outstanding from time to time. (§ 12-404(b).) ⁷

With exceptions not here relevant, a secondary mortgage loan

shall be amortized in equal or substantially equal monthly installments without a balloon payment at maturity . . . . (§ 12-404(c).)

The mortgage here called for the Schmidts to repay Beneficial a loan in the amount of $3,500 "together with interest on the unpaid balance thereof at the rate of Eighteen percent (18%) per annum (1 1/2% Per month) . . . in 60 successive monthly installments of $88.87 each, commencing one month from the date (of the mortgage)." The rate of interest charged was in excess of that permitted to be charged on a secondary mortgage loan and, thus, was in violation of the Secondary Mortgage Loan Law. ⁸

Beneficial does not appear to dispute any of this. It recognizes, implicitly at the least, that the loan fell within the definition of a secondary mortgage loan which it was authorized to make, and that the rate of interest exceeded that authorized. But, it urges, the loan was not subject to the Secondary Mortgage Loan Law. In its view, that law did not come into play. Rather, it claims, the loan was governed by the Maryland Consumer Loan Law, Code (1957, 1976 Repl.Vol.) Art. 11, §§ 163-206 (licensing provisions) and Code (1975) §§ 12-301 to 12-316 of the Commercial Law Article (credit provisions). Beneficial's argument boils down to this. It was a licensee under the Consumer Loan Law. § 12-301(d). As a licensee, it could engage in the business of making loans thereunder. § 12-302. The loan it made to the Schmidts was in an amount permitted for a consumer loan, that is, not to exceed $3,500. § 12-303. It was not prohibited from taking a mortgage on real property to secure the loan. ⁹ Therefore, it was entitled to charge interest of 18% Per annum as within the rate authorized by the Consumer Loan Law. § 12-306(a). The Secondary Mortgage Loan Law does not expressly except loans meeting the criteria set out in the Consumer Loan Law, but Beneficial would have us read such an exception into the law. The definition of "secondary mortgage loan," it urges, "can be read to include only loans such as those set forth in the definition which are not otherwise regulated by Maryland Law." But, we have often said that "(a) court may not insert . . . words to make a statute express an intention not evidenced in its original form." Police Comm'r v. Dowling, 281 Md. 412, 419, 379 A.2d 1007, 1011 (1977), citing Harden v. Mass Transit Adm., 277 Md. 399, 406, 354 A.2d 817 (1976); Patapsco Trailer v. Eastern Freight, 271 Md. 558, 563-564, 318 A.2d 817 (1974); Giant of Md. v. State's Attorney, 267 Md. 501, 512, 298 A.2d 427, Appeal dismissed, 412 U.S. 915, 93 S.Ct. 2733, 37 L.Ed.2d...