The Maryland Court of Appeals, the state’s highest appellate court, last week agreed to review an October 2015 Maryland Court of Special Appeals (MCSA) decision that illustrated how the bank partner structure used by many marketplace lenders can be threatened by state licensing issues.
The Court of Appeals granted certiorari on December 18 in Maryland Commissioner of Financial Regulation v. CashCall, Inc. The MCSA had reversed a lower court order and directed CashCall to cease doing business in Maryland without a Credit Services Business Act (MCSBA) license and pay $5.6 million in penalties in connection with loans already made. The case arose out of a business in which CashCall advertised its website to consumers so they could apply for loans online. The loans were made by out-of-state, state-chartered banks at interest rates significantly in excess of the maximum rate permitted by Maryland law, and the banks also charged loan origination fees. Shortly after origination, the banks sold the loans to CashCall, which collected all payments on the loans.
The Commissioner contended that CashCall met the statutory definition of a “credit services business,” which includes a person that assists a consumer in obtaining an extension of credit “in return for the payment of money or other valuable consideration.” In upholding the Commissioner’s position and resulting sanctions against CashCall, the MCSA rejected CashCall’s argument that, in the absence of a direct payment to it from the consumer, it could not be properly classified as a credit services business.
The Court of Appeals granted certiorari to review two issues: (1) whether the MCSA erred in holding that the MCSBA does not require a direct payment from the consumer despite a contrary 2012 ruling by the Court of Appeals that the MCSBA requires any payment to come directly from the consumer; and (2) whether a borrower’s repayment of principal and interest can be treated as a direct payment in return for CashCall’s assistance in obtaining the loan simply because the principal included an origination fee, the economic benefit of which inured entirely to the banks. Notably, the Court will not address federal preemption of the state licensing scheme because that defense was not raised below.
The Maryland action is part of a significant uptick we have observed in state regulatory focus on state licensing requirements and usury limits. The California Department of Business Oversight recently announced that it has launched an inquiry into the marketplace lending industry that is directed not only to consumer and small business lenders, but also to merchant cash advance providers. Given these developments, marketplace lenders would be well-advised to revisit their compliance with state licensing laws and their vulnerability to “true lender” and Madden v. Midland Funding, LLC challenges. By the same token, merchant cash advance companies should revisit their true sale compliance both in their purchase agreements and at the operations level.
