After Maryland cracked down on lenders disguising abusive home-secured loans as "commercial" loans, which lenders had to give borrowers a written reason when they turned down a credit application?

Plain-English summary

A state senator asked the Attorney General to interpret two 1985 consumer protection laws passed in response to documented cases of lenders labeling loans "commercial" to charge unlimited interest and take homes through foreclosure. Chapter 115 extended existing consumer protections to commercial loans of $75,000 or less secured by a lien on residential property, and Chapter 669 required lenders to give consumers a written explanation when a completed credit application was denied.

On Chapter 115, the opinion concluded that a provision letting a borrower "postpone the maturity date one time" on a balloon-payment commercial loan had to give the borrower a real, meaningful choice, not a token or artificially limited one, consistent with the well-established rule that remedial consumer-protection statutes are construed liberally to advance their purpose. It also concluded that a loan not made to a corporation and under $15,000 was now subject to interest-rate limits even without a residential lien, closing off a prior exemption. On Chapter 669, the opinion concluded that the credit-denial disclosure duty applied to any lender "regulated under" the lending subtitles of Title 12 of the Commercial Law Article, regardless of whether that particular lender happened to be licensed, so long as the consumer had submitted a "completed application for credit," and confirmed that the Commissioner of Consumer Credit's authority to investigate complaints under the new law extended to licensees and nonlicensees alike.

Currency note

This opinion was issued in 1985. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Could a lender comply with Maryland's 1985 balloon-payment protections by only technically letting a borrower postpone their payment, for example by one day?
No, according to this opinion. The Attorney General concluded that the statutory phrase "authorized to postpone the maturity date one time" required a meaningful right to postpone within the statutory limits, and that an artificially narrow "authorization" would not satisfy the requirement that a borrower actually be authorized to postpone.

Did Maryland's new credit-denial disclosure law only apply to lenders who were licensed by the state?
No. The opinion concluded that licensure was irrelevant; the disclosure duty in Chapter 669 applied to any "lender" or "credit grantor" regulated under Title 12 of the Commercial Law Article, whether or not that particular lender or credit grantor held a license, once the consumer had submitted a completed application for credit.

Did an informal request like "can you lend me $5 until payday?" trigger a lender's duty to explain a credit denial in writing?
No. The opinion explained that Chapter 669 required a "completed application for credit" before its disclosure requirements attached, and that everyday informal requests for money were clearly outside the law's reach, though it left open, for future administrative clarification, whether a routine telephone credit application would count as "completed."

Background and statutory framework

Chapter 115, Laws of Maryland 1985, responded to a documented pattern of lenders fabricating a "commercial" purpose for loans secured by a homeowner's residence in order to charge unconscionable interest rates, ultimately leading to loss of the home on default. Rather than requiring better loan documentation or redefining "commercial loan," the General Assembly simply extended existing Secondary Mortgage Loan Law protections to any commercial loan of $75,000 or less secured by a residential lien, amending §12-404(c) of the Commercial Law Article to add a parallel balloon-payment provision, §12-404(c)(3), modeled closely on the existing noncommercial provision in §12-404(c)(2). The opinion read the "authorized to postpone" language in §12-404(c)(3) consistently with §12-404(c)(2)'s "[r]equired to be postponed... at the borrower's request" language, applying the rule from State v. Barnes, 273 Md. 195, 208 (1974), that remedial statutes designed to redress existing grievances are construed liberally to advance the remedy. The opinion also addressed how a loan modification adding a secondary mortgage as collateral could pull an existing commercial loan into the Secondary Mortgage Loan Law under §12-401(i), citing Duckworth v. Bernstein, 55 Md. App. 710 (1983), and Schmidt v. Beneficial Fin. Co., 285 Md. 148 (1979), and drew on a line of recordation-tax opinions, including guidance interpreting Article 81, §277(h), for determining whether a modification was genuinely supplemental to an original loan.

Chapter 669, Laws of Maryland 1985, created a new Subtitle 17 in Title 14 of the Commercial Law Article requiring lenders and credit grantors to give consumers a written statement on the disposition of a "completed application for credit" under §14-1702, with additional information required for adverse decisions under §14-1703. The opinion applied the ordinary-meaning canon of construction from In re Arnold M., 298 Md. 515 (1984), to conclude that the statute's definition of "lender" or "credit grantor" in §14-1701(d), tied to entities "regulated under Title 12" rather than to licensure under the separate Financial Institutions Article, showed the General Assembly intended broad coverage regardless of licensing status. The opinion further found that §14-1706(a)'s grant of investigatory and hearing authority to the Commissioner of Consumer Credit over complaints about "any other law of this state regulating loans or other extensions of credit" extended to nonlicensees as well as licensees, reinforced by a separate provision in §14-1706(e) exempting certain financial institutions from cease-and-desist orders.

Citations

Statutes:

• §12-404(c)(3) of the Commercial Law Article (balloon-payment provision for commercial loans of $75,000 or less)
• §12-404(c)(2) of the Commercial Law Article (parallel noncommercial secondary mortgage balloon-payment provision)
• §12-401(i) of the Commercial Law Article (definition of "secondary mortgage loan")
• §12-103(e) of the Commercial Law Article (loans exempt from interest rate limitations)
• §14-1701(d) of the Commercial Law Article (definition of "lender" or "credit grantor")
• §14-1702 of the Commercial Law Article (written statement required on completed credit application)
• §14-1703 of the Commercial Law Article (additional disclosure required for adverse credit decisions)
• §14-1706(a) of the Commercial Law Article (Commissioner of Consumer Credit's investigatory authority)
• §14-1706(e) of the Commercial Law Article (exemption of certain financial institutions from cease-and-desist orders)
• §12-302 of the Financial Institutions Article (Secondary Mortgage Loan Law licensing exemption)
• Article 81, §277(h) of the Maryland Code (recordation tax exemption for loan modifications)
• Chapter 115, Laws of Maryland 1985 (commercial loan consumer protections)
• Chapter 669, Laws of Maryland 1985 (credit denial disclosure requirements)

Cases:

• State v. Barnes, 273 Md. 195, 208 (1974)
• Duckworth v. Bernstein, 55 Md. App. 710 (1983)
• Schmidt v. Beneficial Fin. Co., 285 Md. 148 (1979)
• Hammond v. Philadelphia Electric Power Co., 192 Md. 179 (1949)
• Hampton Plaza Joint Venture, Inc. v. Clerk, 55 Md. App. 50 (1983)
• In re Arnold M., 298 Md. 515 (1984)

Source

• Landing page: https://oag.maryland.gov/resources-info/Pages/attorney-general%E2%80%99s-opinions.aspx
• Original PDF: https://oag.maryland.gov/resources-info/Documents/pdfs/Opinions/1985/Volume70_1985.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain, the linked PDF is authoritative.

CREDIT REGULATION

Consumer Protection—Commercial Loans—Credit Denial Disclosure Requirements.

December 9, 1985

The Honorable Laurence Levitan
Senate of Maryland

You have requested our views on several issues that have been posed under the recently enacted Chapters 115 (House Bill 1288, providing consumer protection for individuals receiving commercial loans) and 669 (House Bill 1001, amending the disclosure requirements for denials of credit), Laws of Maryland 1985. Specifically, you have asked the following questions:

Chapter 115

1. What is the effect of the phrase "if the borrower is authorized to postpone the maturity date one time" in §12-404(c)(3)(i) of the Commercial Law Article ("CL Article")?

2. Does the subsequent modification of a commercial loan agreement by including a secondary mortgage on residential real property in an amount less than $75,000 subject the entire transaction to the limitations of Title 12, Subtitle 4?

3. What limitations are placed on a commercial loan of less than $15,000 that are not secured by a mortgage residential real property?

Chapter 669

1. Does Title 14, Subtitle 17 of the Commercial Law Article apply only to lenders who must be licensed in order to extend credit?

2. Does CL §14-1706 vest the Commissioner of Consumer Credit with authority to investigate and adjudicate violations of general lending laws by nonlicensees of the Commissioner?

These issues are discussed in the order posed in your inquiry.

I
Chapter 115, Commercial Loans to Individuals

This bill was enacted as a result of vividly-documented cases of abuse by unscrupulous lenders who gouged unsuspecting borrowers in loan transactions documented as "commercial" loans in order to reap practically unlimited interest rates. The record before the legislative committees was replete with instances in which a lender would fabricate a commercial purpose for a loan and charge the borrower unconscionable rates of interest with the end result being the loss of a family home upon the inevitable loan default.

Chapter 115 clearly evidences a solution to this devastating loophole in consumer protection that is both equitable and easily applied. Rather than requiring improved loan documentation or revising the definition of a "commercial loan," the General Assembly simply imposed existing consumer protections on all commercial loans less than $75,000 if the loan is to be secured by a lien on residential property. Accordingly, the painstaking analysis inherent in other approaches to determine on a case-by-case basis whether a particular loan was a legitimate "commercial" loan was largely eliminated by this legislative scheme. It is against this abundant legislative history and unambiguous legislative intent that we parse the enactment in the Secondary Mortgage Loan Law that is the subject of your inquiry.

CL §12-404(c)(3) provides as follows:

"A commercial loan of $75,000 or less made under this subtitle need not be amortized in equal or substantially equal payments and may contain a balloon payment at maturity if the borrower is authorized to postpone the maturity date one time and continue to make installment payments as provided in the original loan agreement and the postponed maturity date does not exceed:

1. 24 months if the original maturity date is more than 12 months after the loan is made; or

2. 6 months if the original maturity date is 12 months or less after the loan is made.

(ii) No new closing costs, processing fees, or similar fees may be imposed on a borrower who elects to postpone the maturity date in accordance with this subsection." (Emphasis added.)

You have inquired about the parameters of the phrase "if the borrower is authorized to postpone the maturity date one time" for purposes of providing for a balloon payment in the loan transaction under this new provision. Your inquiry suggests that the substitution of this phrase for the formulation "[r]equired to be postponed one time, upon becoming due, at the borrower's request..." contained in CL §12-404(c)(2)(iii) evidences an intent to apply a different standard for "commercial", as opposed to "noncommercial", secondary mortgages.

In order to comply with the provisions of CL §12-404(c)(3), the loan transaction must clearly give the borrower the right to postpone on a one-time basis (and subject to the applicable limitations) the maturity date of the loan. This reading results from the ordinary meaning and import of the phrase "authorized to postpone". You have advised on the commonly accepted industry interpretation that CL §12-404(c)(2) authorizes the borrower to determine the length of the extension up to the statutory limitations. In our opinion, CL §12-404(c)(3) does not command a different result simply because a different formulation is stated. Indeed, any artificially-imposed limitation on the borrower's authorization by the lender could easily result in a determination that a borrower has not been "authorized to postpone" the maturity date.1

Several elements of analysis militate in favor of this approach. The legislative history reveals a general intent to apply existing protections to this newly-defined class of transactions. This intent is manifested by the substantial parallel between CL §12-404(c)(2) and CL §12-404(c)(3). Additionally, the protections against new fees for "a borrower who elects to postpone the maturity date" in CL §12-404(c)(3)(ii) further evidence an intent to provide the borrower with a meaningful right to opt for the postponement of the balloon payment. In substance, this language differs little from the "at the borrower's request" formulation in CL §12-404(c)(2). In the absence of bright lines demarcating a clear difference between these two sections, prudent counsel would dictate that the accepted practice in the industry be continued for loans made under CL §12-404(c)(3). Finally, this result is entirely consistent with a well-established rule of statutory construction requiring that where enactments are remedial in nature, designed to correct existing law, to redress existing grievances and to introduce regulations conducive to the public good, they are to be liberally construed in order to advance the remedy and obviate the mischief. State v. Barnes, 273 Md. 195, 208 (1974), and numerous cases cited therein. Anything less would run a substantial risk of failing to meet the purview of the CL §12-404(c)(3) requirement that a borrower is "authorized to postpone the maturity date".

Your second question concerns whether Title 12, Subtitle 4 of the Commercial Law Article would apply to a prior commercial loan that is subsequently modified to include a secondary mortgage taken as additional collateral. Because your inquiry does not pose a specific factual circumstance, our response must necessarily be correspondingly general.

The issue you raise was posed, from a complementary perspective, in 54 Opinions of the Attorney General 19 (1969). That opinion established the following interpretative guidelines under the Secondary Mortgage Loan Law:

"The authorization of a higher rate in the Secondary Mortgage Loan Law is designed to compensate lenders for the greater risk entailed in making loans which are effectively unsecured save for a junior lien on real property. It would be anomalous if taking of a secondary mortgage loan as additional security to other collateral such as stocks and bonds were to automatically entitle a lender to a higher rate... Where the security for a loan is partially made up of stocks and bonds, not sufficient in themselves to fully secure the loan, and partially of a secondary mortgage, a different result might obtain." 54 Opinions of the Attorney General at 20. (Emphasis in the original.)2

We also note that if the structure of the "modification" referred to in your inquiry could be characterized as a "loan" for purposes of applying the definition of "secondary mortgage loan" set forth in CL §12-401(i), then all the limitations of the Secondary Mortgage Loan Law would apply. Duckworth v. Bernstein, 55 Md. App. 710 (1983); Schmidt v. Beneficial Fin. Co., 285 Md. 148 (1979). This result would inure even if the secondary mortgage were not the entire security for the loan. See CL §12-401(i)(1) (defining a secondary mortgage loan as a loan secured "in whole or in part" by a secondary mortgage).3 General guidance for determining whether the modification is truly supplemental to the original loan can be found in a series of published opinions and letters of advice from the Office of the Attorney General interpreting the necessity of paying a recordation tax for the recorded instrument under the exemption set forth in Article 81, §277(h) of the Maryland Code. See 24 Opinions of the Attorney General 966 (1939); 43 Opinions of the Attorney General 116 (1958); 44 Opinions of the Attorney General 373 (1959); Letter of Advice to J. Basil Wisner, Jr., Chief Deputy Comptroller (September 9, 1983). See also Hammond v. Philadelphia Electric Power Co., 192 Md. 179 (1949); Hampton Plaza Joint Venture, Inc. v. Clerk, 55 Md. App. 50 (1983).

Your final inquiry about Chapter 115 can be resolved without extensive analysis. CL §12-103(e) sets forth types of loans for which Title 12, Subtitle 1 of the Commercial Law Article prescribes no interest limitation. As amended by Chapter 115, a commercial loan not made to a corporation that is less than $15,000 is subject to the applicable limitations on the rate of interest set forth in the subtitle even if the loan is not secured by a lien on residential real property. Accordingly, the prior authorization to lend free of interest limitations if the loan were a commercial loan in excess of $5,000 has been altered by Chapter 115.

II
Chapter 669, Disclosure Requirements for a Denial of Credit

Chapter 669 has raised an issue of applicability to the following factual situation:

"a) Does [Chapter 669] require the occasional individual maker of a secondary mortgage loan to comply with the requirements of Sections 14-1702 and 14-1703 if, pursuant to Section 12-302 of the Financial Institutions Article, the individual is exempt from the Maryland Secondary Mortgage Loan Law—Licensing Provisions?

b) If the individual is not exempt from the Maryland Secondary Mortgage Loan Law—Licensing Provisions, does the answer to the question differ?"

For the reasons stated below, we conclude that the licensure of a lender is irrelevant in determining the application of Chapter 669. Accordingly, if a lender is subject to the "lending" provisions, as opposed to the "licensing" provisions, of the Secondary Mortgage Loan Law, the lender is potentially subject to the requirements of Chapter 669.

By Chapter 669, the General Assembly created a new Subtitle 17 in Title 14 of the Commercial Law Article requiring a written statement to a consumer upon receipt of a "completed application for credit" that informs the consumer of the action taken on the application. See CL §14-1702. If the action is adverse, the consumer is entitled to receive additional information. See CL §14-1703. Subtitle 17 applies to all "lenders" or "credit grantors" defined, in pertinent part, as follows:

"'Lender' or 'credit grantor' means:

(1) Any lender or credit grantor regulated under Title 12 of this article...."

CL §14-1701(d).

It is a cardinal rule of statutory interpretation that the primary source of legislative intent is the language of the statute itself, with the words used being given their ordinary and popularly understood meaning, absent a manifest contrary legislative intent. A corollary to this rule states that a statute must be construed without resorting to subtle or forced interpretations for the purpose of extending or limiting its operation. In re Arnold M., 298 Md. 515 (1984). It is with these principles that your inquiry can be resolved.

Black's Law Dictionary defines "regulate" as meaning "to fix, establish or control; to adjust by rule, method or established mode". Black's Law Dictionary 1156 (5th ed. 1979). Coupled with the express reference to Title 12 of the Commercial Law Article in the definitional section, the legislative intent is clear and unambiguous, Subtitle 17 applies to any person extending credit under the various subtitles contained in Title 12 of the Commercial Law Article. Accordingly, given the ordinary meaning of "regulate" and the reference to a "lending" article (and not the Financial Institutions Article, a "licensing" article), we must conclude that a broad application was intended by the enactment. Restricting its application to licensed lenders would, therefore, appear to be contrary to legislative intent.

Subtitle 17 contains additional indices of an intent to provide an expansive coverage. The terms "lender" and "credit grantor" are the commonly defined terms of art used in various lending subtitles in Title 12 of the Commercial Law Article. Furthermore, the "purpose" clause of the statute begins with no indication that the act is limited to "certain" lenders:

"For the purpose of requiring a lender or credit grantor to provide a consumer with certain information... and generally relating to the denial of credit to consumers by lenders or credit grantors."

Finally, if the scope of Subtitle 17 were to be limited simply to licensed lenders, the General Assembly could have easily effected this result by substituting "licensed to lend" for "regulated" or referencing the Financial Institutions Article instead of the Commercial Law Article.

In reaching this conclusion, we are mindful of the potential application of this subtitle to virtually all persons extending credit.4 Express requirements in the subtitle, however, restrict its application from applying to unwarranted situations. CL §14-1702 requires a certain formality in the process of seeking credit before the rights afforded under the subtitle attach. There must be a "completed application for credit" before the lender is required to comply with the statute.5 Everyday informal "applications" for credit (i.e., "Can you lend me $5 until payday?" or "Will you take a second mortgage?") are clearly beyond the purview of Subtitle 17. Where an application process can be reasonably determined to exist, however, an extender of credit under any subtitle in Title 12 of the Commercial Law Article should comply with the provisions of Subtitle 17 as enacted by Chapter 669.

Your final inquiry raises an issue identified by our office during a bill review for legal sufficiency. It is an issue that deserves further legislative analysis and refinement. You have inquired as follows:

"Has [Chapter 669] expanded the jurisdiction and authority of the Commissioner of Consumer Credit to conduct investigations, hold hearings and issue sanctions on acts or omissions of individuals who occasionally make loans or extend credit and persons regularly engaged in the business of lending or extending credit and licensed by a Commissioner other than the Commissioner of Consumer Credit?"

This question may be simply answered in the affirmative.

CL §14-1706(a) provides the following:

"If a written complaint for violation of any provision of this subtitle or any other law of this state regulating loans or other extensions of credit is filed with the Commissioner of Consumer Credit, the Commissioner may investigate the complaint and hold a hearing on it in accordance with §11-413 of the Financial Institutions Article." (Emphasis added).

The plain meaning of this provision empowers the Commissioner to investigate and hold hearings not only on violations of Subtitle 17 but also on violations of any lending law of the State. Such a statutory interpretation would include licensees as well as nonlicensees of the Commissioner. This intent to grant the broad scope of the investigatory authority contained in CL §14-1706(a) is confirmed by the necessity of limiting the effect of a cease and desist order on certain financial institutions not licensed by the Commissioner. See CL §14-1706(e) exempting banks, savings and loan associations, and credit unions from the effect of a cease and desist order.

We are advised by the Commissioner that every complaint received is investigated. Investigation of recalcitrant lenders may, of course, be more easily carried out if the lender is also a licensee. Where nonlicensees are involved, we understand that the Commissioner has reached administrative accords with the primary financial regulators. The General Assembly may well wish to examine the operation of this regulatory scheme from the perspective of the Commissioner's office as well as the lending industry.

We trust this letter has been responsive to your inquiry.

Stephen H. Sachs, Attorney General
Robert deV. Frierson, Assistant Attorney General

Jack Schwartz
Chief Counsel
Opinions and Advice

Editor's Note: The preceding opinion was originally written as a letter of advice. Because of the guidance it offers, it is published here in a slightly revised format.

1 You have suggested that a lender could hypothetically comply with the literal language of CL §12-404(c)(3) by "authorizing" the postponement of the debt for one day. However, such a stratagem falls woefully short of the requirement that a borrower be "authorized to postpone" the maturity date.

2 Unrelated portions of this opinion were subsequently modified in 55 Opinions of the Attorney General 17 (1970).

3 We are advised by the Office of the Commissioner of Consumer Credit that modifications of an existing loan constituting a novation of the loan are administratively viewed as secondary mortgage loan transactions and, as such, subject to applicable statutory constraints. In light of the statutory formulation "in whole or in part", it is not immediately apparent under what circumstances a subsequent loan transaction requiring a secondary mortgage could be viewed as not constituting a loan secured "in part" by the secondary lien.

4 As a practical matter, it would appear that this subtitle will normally be applicable only to persons engaged in the business of lending or granting credit since it is only from such persons that an applicant for credit would have the right to expect a reason if the credit application were denied.

5 Whether such an application must be in writing before the subtitle applies is not made express in the statute and should be the subject of further administrative clarification. If a lender routinely completes credit applications by telephone, however, prudence would dictate that until resolution to the contrary, compliance with this subtitle would be in the interest of good order.