Maryland has joined the ranks of states considering legislation that would codify elements of “true lender” theory in an effort to impose federally preempted state licensing requirements and rate caps on loans to Maryland residents.

House Bill 254 (HB 254), introduced on January 10, 2024 in the Maryland House of Delegates, would add Subtitle 15 – the “True Lender Act” – to Title 12 (Credit Regulations) of the Maryland Commercial Law. Like bills recently adopted in several states, and introduced in other states and jurisdictions including Florida, Washington state, and the District of Columbia, Maryland HB 254 includes broad “anti-evasion” language, and seeks to recharacterize non-bank entities that facilitate, acquire, or otherwise are involved with exempt loans as “true lenders”, thus subjecting the loans to Maryland law, based on enumerated factors or catch-all “totality of the circumstances” language.

The “anti-evasion” language to be added in proposed new Section 12-1502(a) would provide:

(a) a person may not engage in any device, subterfuge, or pretense to evade the requirements of this title, including by:

    (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.

Under proposed Section 12-1502 (b), a loan that violates Section, 12-1502(a) would be void and unenforceable.

HB 254 also would add “true lender” language in new Section 12-1503:

(a) a person is a lender subject to the requirements of this title notwithstanding a claim by the person to be acting as an agent, as a service provider, or in another capacity for a covered lender, 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.

(b) for purposes of subsection (a)(3) of this section, circumstances that weigh in favor of a determination that a person is a lender include those in which the person:

    (1) indemnifies, insures, or protects a covered lender for any costs or risks related to the loan or extension of credit;

    (2) predominantly designs, controls, or operates the loan or credit program;

    (3) holds the trademark or intellectual property rights in the brand, underwriting system, or other core aspect of the loan or credit program; or

    (4) purports to act in the state as an agent or a service provider or in another capacity for a covered lender while acting directly as a lender in other states.

On January 23, 2024, the Maryland House Committee on Economic Matters heard testimony on HB 254. Those in favor of the bill used the predictable catch phrases and inflammatory language typically invoked by “true lender” theory proponents, claiming the legislation would “close loopholes” in order to protect Maryland residents from “predatory actors” and “rent-a-bank schemes”. A fintech industry representative explained the legislators should not support HB 254’s broad-brush approach, which would eliminate Maryland consumers’ access to reasonably priced products offered through numerous bank – fintechs partnerships that conform to safe and responsible lending practices.

Even without the benefit of “anti-evasion” and “true lender” recharacterization statutes, Maryland’s financial regulators have asserted, and Maryland courts have held, that Maryland’s laws require licensing of non-bank partners that facilitate loans by out-of-state, state-chartered banks. It is to be anticipated that if it becomes law, Maryland will aggressively enforce its True Lender Act.

If enacted as currently proposed, the Maryland True Lender Act would take effect October 1, 2024.