Debt ruling alarms Md. lenders, retailers Millions in loans could be questioned

November 14, 1992|By David Conn | David Conn,Staff Writer John W. Frece of the Annapolis Bureau contributed to this article.

An arcane ruling from the state's highest court last month has prompted a panic among Maryland bankers and retailers, who fear the decision could cost them millions and slow consumer lending at a crucial time of year.

The case is already conjuring up nightmarish images of consumers walking away from loans, lawyers rushing to file lawsuits by the thousands, the economy's credit crunch worsening and regulators raising doubts about the health of some Maryland lenders.

The ruling itself, stemming from a car-repossession case, Biggus vs. Ford Motor Credit Co., favored the giant automobile financier. But other issues the court chose to tackle, not directly related to the repossession, could mean that a number of installment loans -- including those for automobile or retail purchases -- do not comply with the law.

That could open the door much further than this single legal battle would suggest, threatening the soundness of millions of dollars' worth of loans and curtailing banks' willingness to lend.

"While all of the consequences of the Biggus decision cannot be predicted, the worst-case scenario is indeed a dire one," Attorney General J. Joseph Curran Jr. wrote yesterday in a letter to Del. Casper R. Taylor Jr., D-Allegany, chairman of the House Economic Matters Committee.

Bankers are pressing the General Assembly to solve the problem during its special session next week. The proposed bill, which Gov. William Donald Schaefer has agreed to sponsor, would freeze the impact of the court ruling for a year, giving the General Assembly time to deal with the issue during the regular session that starts in January.

The Biggus decision doesn't mean that consumers with outstanding auto loans or credit card debt can simply stop making their monthly payments. But the uncertainty surrounding the court ruling has driven segments of Maryland's business and political communities into action.

Bankers in the past week or so have met with legislative leaders, banking regulators and the governor. The General Assembly plans to meet in special session to take up the governor's proposed budget cuts and tax increases.

"I think right will prevail, and the appropriate time will be allotted to this issue in the regular session," said John Bowers, executive director of the Maryland Bankers Association.

Whether the bankers will succeed is unclear, as legislators are likely to give this issue secondary priority.

"We would absolutely consider it, but subsequent to our consideration of the budget issues before us," said John Steirhoff, administrative assistant to Senate President Thomas V. Mike Miller Jr., D-Prince George's.

House Speaker R. Clayton Mitchell Jr. couldn't be reached for comment yesterday, but the Kent County Democrat has said he was unwilling to open up the session to any matter except the budget.

"The governor has indicated he is concerned about the case, and the uncertainty it creates for the banking industry at an important time in the economic calendar," said David S. Iannucci, Mr. Schaefer's chief legislative officer, referring to the Christmas retail season.

The ruling by the Court of Appeals dealt with a 9-year-old section of the state law that governs consumer installment loans.

In 1983, the General Assembly was faced with threats from some financial institutions that they would leave Maryland unless the state's consumer lending laws were made less onerous.

A new consumer loan law was created, but someone forgot to remove the old law, considered more favorable to the consumer, from the books. The court in Biggus v. Ford Motor Credit said that for any specific issue that the new law failed to address, the old law still applied.

For instance, the old law requires a lender to mail a signed copy of the loan contract to the borrower within 15 days, but the new law says nothing about that. Under the Biggus ruling, a lender that failed to fulfill the old requirement could be penalized.

Bankers fear that many existing loans that comply with the new law might not comply with the old one, and that making new loans with the current contracts is now risky business. Failure to follow some aspects of that old law, according to Mr. Curran, "can have severe consequences," including forcing the lender to refund some portion of the loan.

The court decision applies not only to banks and thrifts, but also to any company, including department stores, auto companies and other retailers, that makes installment loans secured by purchased items.

The uncertainty created by the ruling has led some to worry that bankers and retailers might stop making loans, just when consumers are getting ready to invade the stores for their Christmas shopping spree.

The lenders have another reason to sweat. The court's logic "also could apply to credit card loans," according to Assistant Attorney General Jack Schwartz, because the General Assembly took the same action for that section of the law: It created a new, less burdensome law governing credit card loans, but it failed to override the old one.

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