Maryland is considering legislation making it the next state
to codify the “true lender” theory, which would impose new provisions defining
parties involved in loan transactions and prohibit efforts to evade such tests.
House Bill 254 (HB 254), also known as the “True Lender
Act,” would amend the Maryland Commercial Law to incorporate new tests to identify
the “true lender” of a loan. One test would determine the party with a predominant
economic interest in a particular loan. Another would account for the totality
of the circumstances pertaining to a given loan. The bill also would
recharacterize non-bank entities involved with exempt loans as true
lenders.
The language stipulates a person is considered a “true
lender” under the measure if:
“(1) the person holds, acquires, or maintains, directly
or indirectly, the predominant economic interest in the loan or extension of
credit; (2) the person markets, brokers, arranges, or facilitates the loan
or extension of credit and holds the right, requirement, or first right of
refusal to purchase the loan or extension of credit or a receivable or interest
in the loan or extension of credit; or (3) the totality of the circumstances
indicates that the person is the lender and the transaction is structured to
evade the requirements of this title.”
The bill includes an “anti-evasion” provision prohibiting
attempts to evade the requirements of the act by arranging for a loan with a
greater interest rate than permitted under Maryland state law. This provision
would prevent loan sales being disguised as personal property sales and
leaseback transactions, or disguising loan proceeds as a cash rebate for an
installment sale of goods or services.
Specifically, the bill would define attempted evasion as:
“(1) making a loan or an extension of credit that is
purported to be: (i) a personal property sale and leaseback transaction;
or (ii) a cash rebate for a pretextual installment sale of goods or
services; or (2) making or offering, or assisting or arranging for a debtor to
obtain, a loan or an extension of credit with a greater rate of interest,
consideration, or charge than is authorized by this title through any method.”
If passed, the legislation would void loans in violation of
its terms as of the bill’s effective date, set for Oct. 1.
The law firm Troutman Pepper characterized the bill as Maryland’s
latest effort to combat certain bank partnership programs, particularly those
with interest rates of 36 percent or less. In a blog post, the law firm said if
the bill passes, “Maryland could emerge as one of the most stringent
jurisdictions for such programs.” This effort aligns with a broader trend among
states to either enact or propose similar measures targeting bank partnerships.