Maryland Gets Tough About Consumer Protection


Maryland is gearing up to join the ranks of the nation’s toughest financial regulators. In May 2018 the Maryland General Assembly passed the “Financial Consumer Protection Act of 2018” (MD Act), which will bring sweeping changes to the state’s enforcement of its consumer finance laws. Here’s what’s in the new law:

Stronger State-Level Enforcement

Expanded Enforcement Authority: The MD Act adds the term “abusive” to Maryland’s laws prohibiting “unfair or deceptive trade practices.” Thus, Maryland now prohibits “unfair, abusive, or deceptive trade practices” (UADTP). This change brings Maryland in line with the Consumer Financial Protection Bureau’s (CFPB) authority over “unfair, deceptive and abusive acts or practices” (UDAAP), as provided in the Dodd-Frank Act, and the law also encourages Maryland’s financial regulators to bring actions under Dodd-Frank’s federal UDAAP statute. The new Maryland law also redefines violations of the federal Military Lending Act and the Service members Civil Relief Act as violations of the state’s UADTP statute. Finally, the law subjects unlicensed entities to the same compliance and consumer protection provisions as licensed entities by explicitly stating that such laws apply “regardless of whether the person is actually licensed.” This change provides a foundation for state regulators to pursue unlicensed companies that have previously attempted to evade state laws.

Increased penalties: The MD Act also dramatically increases the penalties for violations of the state’s consumer finance laws. UADTP violations can now result in a $10,000 fine per violation, which is a ten-fold increase from the state’s previous limit of $1,000 per violation. Repeat offenders can be charged $25,000 per violation, which is a five-fold increase from the previous limit. Violations of Maryland’s statutes for specific financial services, such as consumer lending, check cashing, money transmission, and mortgage transactions, will also fetch higher penalties under the new law.

What it means: These developments show that Maryland is looking to become a serious watch-dog over financial services companies.  Maryland is joining a growing list of states that are seeking to create “mini-CFPBs” – state agencies that will aggressively enforce consumer finance laws. Indeed, the very name of the new Maryland law – the “Financial Consumer Protection Act” – is identical to the name of Title X of Dodd-Frank that created the CFPB. Maryland now joins states like New Jersey and Pennsylvania, which have similarly enhanced the powers of their financial regulators, as states look to fill the void left behind by a less-aggressive CFPB after the departure of the agency’s first director, Richard Cordray.

Supervising Student Loan Servicers

The MD Act creates a “Student Loans Ombudsman” and requires student loan servicers to designate an individual to communicate with the ombudsman. The ombudsman will study the student loan servicing industry and issue reports to the legislature. The law also directs the ombudsman to compile and analyze complaint data from borrowers, and to recommend enforcement actions to the Attorney General’s Office and the Commission of Financial Regulation.

What it means: Maryland is taking a step in the direction of regulating the student loan servicing industry. Notably, an earlier draft of the MD Act went further and required a state license for servicers of student loans, attempting to follow in the footsteps of other states like California, Connecticut and Washington. However, the licensing requirements and related provisions were removed before final passage of the bill, possibly to avoid a confrontation with the federal government, as Education Secretary Betsy DeVos has declared that state efforts to regulate the student loan industry are invalid due to federal preemption of state laws. The approach taken in the final version of the MD ACT avoids that conflict by creating an office that merely observes the industry and refers information to others. 

Fintech

The MD Act directs the Commissioner of Financial Regulation to assess its own authority to regulate fintech companies, and to identify potential gaps in the regulation of fintech. The Commissioner shall also report to the legislature with recommended changes to the state’s laws governing fintech.

What it means: New York passed a similar law in June 2018 requiring the state’s financial regulator, the New York Department of Financial Services (NYDFS), to study the online lending industry and make recommendations for potential legislative changes. The NYDFS released its report in July 2018, in which it recommended several major changes to New York’s lending laws, including requiring more companies to obtain a lender license, applying the state’s usury limit to every type of loan, and applying a “true lender” approach to all bank-fintech partnerships. It will be interesting to see what direction Maryland’s Commission of Financial Regulation takes with its own recommendations, how they will compare to those made by the NYDFS, and whether the state legislatures will take up and pass any of the recommended measures.

Increased Consumer Protection Studies and Reports

The MD Act directs the Maryland Financial Consumer Protection Commission, which was created by legislation in 2017, to study and issue reports with recommendations on: 

  • Cryptocurrencies, blockchain, Initial Coin Offerings (ICOs), and crypto exchanges.
  • The CFPB’s arbitration rule, which was repealed by Congress via the Congressional Review Act in October 2017; and
  • The Department of Labor’s Fiduciary Rule, which imposed a fiduciary standard of care on broker-dealers when offering investment advice, but was killed by a Fifth Circuit Decision in June 2018.

What it means: These required studies and reports suggest that the Maryland legislature is considering pushing for aggressive pro-consumer legislation that could regulate ICOs and cryptocurrencies, ban mandatory arbitration agreements, and impose a stricter standard of care on investment advisers. The inclusion of the arbitration agreements study is particularly notable, as it is another example of how Maryland may “fill the void” left by the post-Cordray CFPB. 

Substantive Law Changes

The law also makes pro-consumer changes to existing Maryland consumer finance laws. Effective January 1, 2019, the definition of “goods” in the state’s Sales Finance law will cover up to $100,000 in personal property (previously capped at $25,000), and credit reporting companies will be prohibited from charging fees for security freezes on consumers’ accounts.

However, while most of the MD Act seems to contemplate robust enforcement efforts and future regulation of various industries, there is one change that might be welcomed by financial service providers – consumer loan licensees will now be allowed to make loans of up to $25,000 (these lenders were previously limited to loans of $6,000 or less).

Conclusion

Maryland’s Financial Consumer Protection Act enacts sweeping changes to the state’s financial services industry. While consumer lenders will enjoy the ability to make larger loans to Maryland borrowers, much of the bill is geared towards stricter oversight and regulation of the industry. The state’s financial regulators now have increased enforcement power, and will conduct studies that could ultimately lead to increased regulation of fintech, student lending, and the use of arbitration clauses in financial services agreements.