Legislators plan to change Md.'s consumer credit law

December 03, 1992|By David Conn | David Conn,Staff Writer

ANNAPOLIS -- State lawmakers yesterday pledged to rework an important consumer credit law whose impact on lenders and borrowers may have been dramatically changed by a recent court ruling.

The House Economic Matters Committee heard from bankers, retailers, consumer advocates and state officials on the importance of fine-tuning Maryland's consumer lending law. A similar effort to change the law failed in the recent special session when legislative leaders chose not to allow a bill to be introduced.

Business officials warned that without any changes, consumer lending in Maryland could drop off, banks and other lenders might face countless lawsuits, and some consumers may receive an unexpected financial windfall, although there was no evidence such problems have started to occur.

"I'm sure that today's exercise will undoubtedly lead us to some sort of legislation," said Del. Casper R. Taylor Jr., an Allegany County Democrat and chairman of the committee.

The need for the change, lenders and state officials explained, came from an Oct. 16 Court of Appeals ruling in an automobile repossession case called Biggus v. Ford Motor Credit Co.

"We are forced right now to try to be making loans with a very real possibility, under this case, that the borrower might not have to repay the money," said Robert Enten, a lobbyist for the Maryland Bankers Association.

That could occur if the loan, whether for a car, a refrigerator or a house, failed to comply with some legal requirements that most lenders believed did not apply to their lending contracts before the court decided otherwise.

The question lawmakers will struggle with over the next few months is how far to go in "correcting" the problems generated from the court ruling. Lenders say they merely want to remove the "cloud of uncertainty" the ruling placed over countless loans made before and since the Oct. 16 decision. That uncertainty could cause regulators to question the health of some financial institutions, bankers argued, and it could make it difficult for Maryland lenders to sell their consumer loans to institutional buyers.

Consumer advocates fear bankers and retailers will persuade the legislature to rewrite the lending law without important consumer protections. Some of those protections have been given new weight by the Court of Appeals opinion.

The Biggus ruling revolved around the differences between old, pro-consumer sections of the state's consumer lending law and two new sections enacted a decade ago. The new sections were created to appease lenders that were threatening to leave the state if regulatory burdens were not eased.

Although lenders believed the new, less restrictive law supplanted the old law, the court declared that lenders could be held responsible for the old tougher, pro-consumer provisions as long as the two versions did not contradict each other.

For instance, the old law required the lender to sign the loan contract and provide a copy to the borrower within 15 days. But the new law says nothing about that. Because the two laws did not contradict each other, if a borrower did not receive the copy within that 15-day period, the contract could be rendered unenforceable.

The confusion for lenders resulted from the failure of the legislature 10 years ago to declare their intent when they created the new consumer lending law. Lawmakers made no mention in the new statute of whether they wanted to abolish or retain the old consumer protections.

The upshot of the case, according to lenders and state officials, is twofold:

First, an unknown amount of consumer loan contracts executed before and since the Biggus decision could be declared invalid if they failed to abide by the relevant provisions of the older law. Bankers have told Gov. William Donald Schaefer in recent weeks that "they believed there are millions of dollars [in loans] at risk," said David Iannucci, Mr. Schaefer's chief legislative officer, adding the governor intends to sponsor the corrective legislation.

Second, lenders, including retailers, credit unions, home finance and auto finance companies, could become shy about making new loans knowing they could turn out not to be legally binding.

"We would note that this comes at a very critical time in the state's economy," Mr. Iannucci said, referring to the Christmas retail season. While it's too late for the General Assembly to do anything about the Christmas season, the legislation recommended yesterday would prevent legal challenges from consumers based on the Biggus case at least until next October. Such a temporary "moratorium" would give lenders a chance to change their loan contracts to comply with the court ruling, bankers argued, and would discourage any consumer lawsuits.

The bill should be passed as soon as possible when the legislature convenes in January, giving lawmakers the rest of the session to come up with a more lasting solution to the problem, according to Attorney General J. Joseph Curran Jr.

The permanent solution, Mr. Curran and the business groups agreed, would lay out once and for all how lender-friendly the legislature wants Maryland to be.

But consumer advocates urged that businesses not be allowed to exert too much influence. "Anything that's done, we have to make sure . . . we aren't rushing into legislation that's going to destroy important consumer protections," said Cheryl L. Hystad, attorney with the Legal Aid Bureau.

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