Part I
Financial Institutions, Commercial Law, and Corporations
Commissioner of Financial Regulation - Investigative and Enforcement Powers
The Commissioner of Financial Regulation supervises the operation of all State-chartered banking institutions, State-chartered credit unions, consumer loan companies, sales finance companies, mortgage companies, and collection agencies. The commissioner inspects the banks and credit unions annually, receives periodic reports from and regularly examines licensees, and handles consumer complaints against financial institutions and licensees under the commissioner's jurisdiction.
Senate Bill 830/House Bill 727 (both passed) expand the investigative and enforcement powers of the commissioner in several areas. The powers granted under the bills are very similar to the powers of the Securities Commissioner of the Division of Securities in the Office of the Attorney General. Specifically, the bills authorize the commissioner to make investigations to determine whether any person has violated any law, regulation, rule, or order over which the commissioner has jurisdiction. For the purpose of an investigation or proceeding, the commissioner may: (1) administer oaths and affirmations; (2) subpoena witnesses and compel their attendance; (3) take evidence; and (4) require the production of books and records that the commissioner considers relevant.
If the commissioner determines that a person has engaged in an act that constitutes a violation of a law, regulation, rule, or order over which the commissioner has jurisdiction, and that immediate action is in the public interest, Senate Bill 830/ House Bill 727 authorize the commissioner to issue, without a prior hearing, a summary cease and desist order. The summary order must give notice of the opportunity for a hearing before the commissioner to determine whether the summary order should be vacated, modified, or entered as final.
After proper notice and a hearing, unless waived, if the commissioner finds that a person has engaged in an act that constitutes a violation of any law, regulation, rule, or order over which the commissioner has jurisdiction, the bills authorize the commissioner to: (1) issue a final cease and desist order; (2) suspend or revoke the person's license; or (3) issue a civil penalty order up to a maximum of $1,000 for a first violation and $5,000 for each subsequent violation.
If the commissioner believes that a person is about to engage or has engaged in an act that constitutes a violation of any law, regulation, rule, or order over which the commissioner has jurisdiction, the commissioner is authorized to bring an action in court to obtain remedies that include: (1) a temporary restraining order; (2) a temporary or permanent injunction; (3) civil penalties; (4) a declaratory judgment; (5) rescission; and (6) restitution.
Fiduciary Institutions - Disclosure of Customers' Financial Records
Generally, a fiduciary institution or its officers, employees, agents, and directors may not disclose to any person any financial record relating to a customer of the fiduciary institution. Under State law, a "fiduciary institution" means a national or State-chartered bank, an out-of-state bank that maintains a branch in the State, a federal or State-chartered credit union or savings and loan association, or any other entity that is organized under the banking laws of this State and subject to the supervision of the Commissioner of Financial Regulation.
Senate Bill 816/House Bill 736 (both passed) create an exception to the general prohibition against the disclosure of a customer's financial records to allow reports of suspected financial exploitation to be made to local departments of social services. A fiduciary institution or its officers, employees, agents, or directors may disclose the financial records and any other information relating to a customer if the fiduciary institution or its officers, employees, agents, or directors:
No civil or criminal liability or cause of action arises against a fiduciary institution or its officers, employees, agents, or directors for making a disclosure or report, participating in an investigation or a judicial proceeding resulting from a report filed under the bills, or declining to provide information about whether or not a report was filed. The bill may not be construed to create a duty to make a disclosure or file a report.
Generally
Laws to Facilitate E-Commerce
In July 1999, the National Conference of Commissioners on Uniform State Laws (NCCUSL) adopted two uniform model laws concerning commercial transactions and information technology, the Uniform Electronic Transactions Act (UETA), introduced as Senate Bill 3/House Bill 18 (both passed), and the Uniform Computer Information Transactions Act (UCITA), introduced as Senate Bill 142/House Bill 19 (both passed).
The Maryland Uniform Electronic Transactions Act: Certain provisions of Maryland law, including the Maryland Uniform Commercial Code (UCC), and common law require many commercial transactions to be documented in writing and signed by the person who intended to be bound by the agreement before they are enforceable. This requirement applies to transactions such as the sale of goods exceeding $500, a lease for goods exceeding $1,000, interests in real property, and contracts that cannot be performed within one year.
The UCC defines the term "signed" to mean any symbol executed or adopted by a party with the intent to sign a writing. Case law has interpreted this definition to include not only traditional handwritten signatures, but also marks such as an "x", a thumbprint, or any other symbol, so long as it is executed by the party with the intent to authenticate a writing.
Electronic Signatures: Senate Bill 3/House Bill 18 establish the Maryland Uniform Electronic Transactions Act, which provides that a record or signature may not be denied legal effect or enforceability solely because it is in electronic form. The bills do not alter the legal requirements that relate to contract formation, including offer and acceptance, consideration or reliance, standards of care, or regulation of contract terms. Substantive legal rules calling for more than a writing or signature, such as acknowledgments or certifications, are also unchanged. The bills apply only to transactions in which each party has agreed to conduct transactions by electronic means.
If a law requires a signature or record to be notarized, acknowledged, verified, or made under oath, Senate Bill 3/House Bill 18 recognize the electronic signature of a person authorized to perform those acts for electronic signatures or records.
Electronic Records: Under Senate Bill 3/House Bill 18, a law requiring that a record be retained is satisfied by retaining an electronic record that accurately reflects the information in the record and remains accessible for later reference. Record retention in this manner satisfies a law requiring a record to be presented or retained in its original form. If a law requires a signature, or provides consequences in the absence of a signature, the law is satisfied with respect to an electronic record if the electronic record includes an electronic signature.
Exclusions: Senate Bill 3/House Bill 18 exclude transactions covered by parts of the UCC; laws governing the execution of wills; and laws or regulations governing notice concerning the cancellation of utility services, rental or mortgage agreements for a primary residence, or the cancellation of health or life insurance.
The Maryland Uniform Computer Information Transactions Act: Senate Bill 142/House Bill 19 establish the Maryland Uniform Computer Information Transactions Act, a commercial contract statute that provides substantive rules governing electronic commerce contracts and licenses for computer information or programs. Through enactment of UCITA by the states, the National Conference of Commissioners on Uniform State Laws intends to address concerns that expansion of the nation's economy could be impeded by differences in the commercial laws of each state.
Scope: Senate Bill 142/House Bill 19 are limited in scope to "computer information transactions," which are agreements with the primary purpose to create, modify, transfer, or license computer information or informational rights in computer information. The bills generally apply to a computer information transaction unless the parties agree otherwise.
The provisions of the bills also apply to mixed transactions. If the transaction involves "non-goods," Senate Bill 142/House Bill 19 apply only to that part of the transaction that involves computer information; other applicable law will govern the other part of the transaction. If the transaction involves "goods," the Maryland UCC, Title 2 of the Commercial Law Article applies to the "goods" and UCITA applies to the computer information. If the computer information is embedded in the goods, such as on a diskette, UCITA only applies if the goods are "a computer or computer peripheral" or "access to or use of the [computer] program is ordinarily a material purpose of the transaction."
Senate Bill 142/House Bill 19 do not apply to: (1) financial services transactions; (2) contracts to create audio or visual programming provided by broadcast, satellite, or cable; (3) certain agreements in the development of motion pictures; (4) sales of books, prints, magazines, or newspapers, except online books or other similar online products; (5) contracts for the employment of individuals who are not independent contractors; or (6) certain insurance service transactions.
Contract Formation: A valid contract may be formed under Senate Bill 142/House Bill 19 in any manner sufficient to show an agreement, including offer and acceptance and the conduct of the contracting parties, or the operations of the electronic agents. In the absence of conduct or performance by both parties, a contract is not formed if there is a material disagreement about a material term.
Pre-emption of UCITA: Senate Bill 142/House Bill 19 expressly state that conflicting federal law and consumer protection laws in Maryland supersede provisions of UCITA and that a court may invalidate a contract term that is unconscionable or would violate a fundamental public policy of this State. The bills clarify that a contract term is unenforceable if it conflicts with a statute, rule, or procedure that cannot be varied by agreement under federal copyright law, including fair use provisions.
Choice of Forum and Choice of Law: Senate Bill 142/House Bill 19 authorize parties to agree to a choice of forum to litigate a dispute unless the choice is unreasonable or unjust. The bills provide that a Maryland court must determine the enforceability of a choice of forum term in a mass market transaction. The bills also clarify that Maryland courts may exercise personal jurisdiction over out-of-state persons dealing in computer information and computer programs in the same manner as if they were dealing in goods or services. UCITA also allows parties to agree to a choice of law, but specifies that Maryland law applies in mass market transactions if an agreement is not made.
Mass Market Transactions: Also addressed are standard form non-negotiable contracts for computer information called "shrink-wrap" (in the box) and "click wrap" (on-line) agreements. The bills follow the holdings of all case law since 1993, including four federal Circuit Court decisions, that uphold the enforceability of these types of agreements. If such an agreement is with a consumer or certain non-consumer in the retail marketplace, the bills define the agreement as a "mass market transaction" and certain protections are granted. The protections for mass market transactions include:
Consumer Protection: In addition to the protections available in all consumer contracts as within the definition of mass market transaction, Senate Bill 142/House Bill 19 provide specific consumer protections, including:
Warranties: Senate Bill 142/House Bill 19 maintain a licensor's obligation to meet express warranties and add new implied warranties including:
In a consumer contract, a disclaimer or modification of the implied warranties of merchantability and system integration and the remedies for these warranties are prohibited unless the computer program is given to the consumer free of charge or is for the purposes of a beta test.
Breach of Contract: In the event of a breach of contract, the bills provide remedies and damages to place the aggrieved party in the same position as the party would have been in had the other party performed as agreed. Access contracts may be discontinued for a material breach; however, a three-day notice must be provided before discontinuation unless the breach involves a violation of a contractual use term.
Cancellation and Electronic Self-Help: A license may only be canceled under Senate Bill 142/House Bill 19 for a material breach and, if canceled, the licensor has the right to the possession of the copies of the information and to prevent the continued use of the information by the licensee. The only non-judicial means to exercise these rights under the bills is the limited remedy of electronic self-help.
Senate Bill 142/House Bill 19 expressly prohibit electronic self-help unless the parties agree to permit its use and electronic self-help is strictly prohibited in mass market transactions regardless of what the agreement provides. If the parties agree to permit the use of electronic self-help, certain limitations still apply, including:
Joint Technology Oversight Committee: Senate Bill 142/House Bill 19 also establish a Joint Technology Oversight Committee comprised of five senators and five delegates to review the implementation of UCITA and to make any appropriate recommendations to the Governor, the Legislative Policy Committee, the Senate Finance Committee, and the House Economic Matters Committee. The joint committee may also study and make recommendations on other technology related issues. The joint committee terminates in five years.
Consumer Contracts
Contract Late Fees: In United Cable v. Burch, 354 Md. 658 (1999), the Maryland Court of Appeals held that a $5 per month late fee charged by a cable provider was invalid as a penalty. The court held that under Maryland law, damages for breach of a contract for the payment of money equal the amount due plus interest set at the legal rate. Article III, § 57 of the Maryland Constitution sets the legal rate of interest at 6 percent per annum, unless provided otherwise by the General Assembly. The court recognized that the modern view is that late charges are not penalties but reasonable compensation in commercial transactions, but declined to adopt that rule judicially because of the constitutional nature of the interest rate.
The court noted that late charges have been authorized by statute in various instances, including mortgages, residential leases, service charges for commercial loans secured by inventory or accounts receivable, retail credit accounts, charges by a government or governmental agency, and condominium assessments and installments. However, without authorization by the General Assembly, a contract for the payment of money may not contain a late fee beyond the legal rate.
The United Cable decision brought into question the validity of late fees not authorized by statute, including late fees on homeowners' association fees and assessments; any type of service agreement; contracts with plumbers, contractors, electricians, and home repair companies; agreements for the provision of professional services; leasing agreements; membership agreements; tuition payments; and medical and dental services.
Senate Bill 145 (passed) authorizes the parties to a "consumer contract" to agree to the payment of a "late fee" when a party fails to make a payment by the due date as an exception to the legal rate of interest established in the Maryland Constitution. A late fee is any charge or fee imposed because a payment is not made when due under the terms of the contract. A late fee imposed under a consumer contract is neither interest, a finance charge, liquidated damages, nor a penalty. A consumer contract imposing a late fee must disclose the amount of the late fee, the conditions under which the late fee will be imposed, and the timing for the late fee's imposition.
Senate Bill 145 places a cap on the imposition of late fees for consumer contracts. Specifically, the cap that would apply retroactively and up until October 1, 2000, is the greater of up to $10 per month or up to 10 percent per month of the payment amount that is past due.
Beginning October 1, the late fee in a consumer contract is subject to one of the following cap limitations. The first limitation allows the late fee to be the greater of up to $5 per month or up to 10 percent per month. However, for this limitation, the late fee may not be imposed more than three times for any single payment amount that is past due. The alternative limitation allows the late fee to be up to 1.5 percent per month. For either limitation, the amount of the late fee must be disclosed in at least ten-point bold type.
In addition, Senate Bill 145 provides for a grace period before the imposition of a late fee. The late fee may not be imposed until 15 days after the bill was rendered or, if no bill was rendered, then 15 days after the payment becomes due.
Senate Bill 145 terminates October 1, 2005.
Credit Regulation
The Mortgage Lending Industry
Regulation by the Commissioner of Financial Regulation: During the 1999 interim, newspaper reports revealed instances in Baltimore City where distressed houses were bought cheaply and then, after having received inflated appraisals, were resold for significantly higher amounts, a procedure known as "flipping." Often, the properties were sold to unsophisticated buyers with limited resources, poor credit histories, and a strong desire to own a home. After closing, a buyer who experienced difficulty in paying the mortgage might be unable to refinance because of an inflated original mortgage. The buyer may then be forced to default on the loan. Apparently, more than 2,000 Baltimore houses were bought and quickly resold in the last four years for price increases of 100 percent or more. In most cases, little if any work was done on the dilapidated houses and both buyers and lenders were defrauded.
In response to these reports, Senate Bill 872/House Bill 1337 (both passed) tighten regulation by the Commissioner of Financial Regulation of the mortgage lending industry. The bills require licensed mortgage lenders to notify the commissioner in writing of a proposed change in location or ownership and to obtain the commissioner's approval. For a change in ownership, the commissioner may require the licensee to provide information necessary to determine whether a new application is required because of a change of control. The commissioner must approve or deny a request within 60 days after receiving it, or the request is deemed approved.
Examinations: Senate Bill 872/House Bill 1337 require the commissioner to examine a licensed mortgage lender at least once during any 36-month period. New licensees must be examined within 18 months from the date the license is issued. The bills increase the fee a licensee must pay, from $100 to $250 per day, for each of the commissioner's employees working on an examination or investigation. The bills clarify the conditions under which the commissioner may suspend a license.
Finders' Fees: The bills prohibit a mortgage broker from charging a finder's fee in any transaction in which the mortgage broker or an owner, part owner, partner, director, officer, or employee of the mortgage broker is the lender or an owner, part owner, partner, director, officer, or employee of the lender. The bills require the finder's fee to be based on a written agreement between the mortgage broker and the borrower which is separate and distinct from any other document. A copy of the agreement will be provided to the borrower within ten business days after the loan application is completed.
Violations: Senate Bill 872/House Bill 1337 remove the requirement that a violator of the Mortgage Lender Law must have failed to comply with a cease and desist order before the commissioner may impose a civil penalty. The bills also change violation of the Mortgage Lender Law from a misdemeanor to a felony and subject violators to a maximum penalty of a $50,000 fine and/or ten years imprisonment.
Continuing Education for Mortgage Lenders: Chapter 760, Acts of 1998 enacted the recommendations of the Task Force to Examine the Mortgage Lending Business and required the Commissioner of Financial Regulation to adopt regulations establishing continuing education requirements for mortgage lenders by July 1, 2000.
The continuing education requirements for mortgage lenders do not apply to the first renewal of a license, meaning that the compliance requirement for the first group of licensees is scheduled for fiscal 2003. House Bill 1203 (passed) implements continuing education monitoring by the commissioner in 2001, two years earlier than required by Chapter 760.
Access to Home Equity Credit through Use of a Credit Device
Senate Bill 340/House Bill 698 (both passed) allow a person to access the funds of the person's home equity line of credit through the use of a check cashing card in a manner similar to using a credit card. Currently, a person can only access the funds available in a home equity line by writing a check. Senate Bill 340/House Bill 698 apply to Maryland chartered banks and credit unions. Federal chartered banks and credit unions already have authority under federal law to offer this service to their customers.
Licensing of Check Cashing Services
A growing concern among many consumer advocates is the existence of a two-tiered financial system: one is regulated, with consumer protections and many choices for creditworthy households; the other is a booming, unregulated network of small businesses that typically serve lower-income households and charge fees for financial services that are significantly higher than those permitted by law to be charged by banks for virtually the same services. The major player in the unregulated tier is the check cashing industry.
While various experts have differing opinions as to why the check cashing industry has experienced tremendous growth in the past several years, most point to the following reasons: the increasing number of financial institution mergers and the resulting departure of mainstream financial institutions largely from poorer, urban areas; rising bank fees in general; and banks' disinterest in handling basic accounts or making small consumer loans. The consumers that these banks seem to have left behind still have a need for basic financial services, and check cashing companies, pawnbrokers, and "payday lenders" are stepping in to fill the need.
Senate Bill 450/House Bill 516 (both passed) require check cashing services, with certain exceptions, to be licensed and regulated by the Commissioner of Financial Regulation. A separate license is required for each place of business.
Check cashing services that are exempt from the bills include: (1) services for which a fee of up to 1.5 percent of the payment amount is charged and that are incidental to the retail sale of goods or services; (2) transactions that are subject to the Maryland Consumer Loan Law where a maximum 33 percent interest rate per annum applies; and (3) financial institutions. This includes a transaction in which an additional fee is charged to defer the presentment or deposit of a payment instrument until a subsequent date (pay day loan). Affiliates and subsidiaries of financial institutions are only exempt from the licensing provisions under certain conditions.
To qualify for a license, an applicant must show that: (1) the applicant's business will promote convenience and advantage to the community; (2) the applicant or owner has sufficient experience, character, and financial responsibility; and (3) the applicant has not committed an act that would be grounds for a license suspension or revocation. The applicant or licensee must provide fingerprints for use in conducting a criminal history records check at application and other times. The applicant's cost for each license includes: (1) a $100 non-refundable investigation fee; and (2) a $1,000 two-year license fee -- the fee is $500 if the applicant applies with only one year left in the two-year licensing term. Licensees must make books and records available to the commissioner.
The licensee must pay a customer, after reviewing acceptable identification, the face value of the check, less the fee charged. The licensee may not charge any other fee, including late fees or other service fees, in excess of the greater of: 2 percent or $3 for government checks; 10 percent or $5 for personal checks; and 4 percent or $5 for other checks. The licensee may charge a customer a one-time membership fee not to exceed $5.
The commissioner may impose administrative penalties for violations, subject to the opportunity for a hearing, including a cease and desist order, suspension or revocation of the license, and a civil penalty of up to $1,000 for a first offense and up to $5,000 for a subsequent offense. A knowing violation is a misdemeanor, punishable by a fine of up to $5,000 or imprisonment for up to three years, or both. A person injured by a violation has a private cause of action and may be awarded up to three times the amount of actual damages, the amount paid by the plaintiff to the defendant, reasonable attorney's fees, and costs.
Consumer Protection
Motorized Wheelchair Warranty Enforcement Act
House Bill 35 (passed) includes motorized scooters and other motorized wheeled devices designed to provide mobility assistance for individuals with disabilities within the protections of the Motorized Wheelchair Warranty Enforcement Act. A manufacturer selling a motorized wheelchair to a consumer is required to furnish a customer with a written warranty for parts and performance.
Telephone Solicitation
During the 1999 interim, a work group of the Senate Finance Committee studied the issues relating to unwanted telephone solicitations. Based on the recommendations of the work group, Senate Bill 185/House Bill 339 (both failed) would have required the Public Service Commission to create and operate a database of residential telephone subscribers in the State who chose not to receive telephone solicitations. The bills would have required telephone solicitors to purchase the latest updated version of the database and to refrain from soliciting telephone numbers listed in the database. A violation would have been an unfair trade practice. The Office of the Attorney General (Consumer Protection Division) would have had responsibility for enforcing the bills. These bills are also discussed under the Public Service Companies section under Part H.
House Bill 1097 (failed) would have regulated the practices of telemarketing businesses in the State by requiring merchants engaged in telephone solicitations to disclose specified information to consumers before any sales presentation. Telemarketing businesses would also have been required to register annually with the Division of Consumer Protection.
Corporations
The State Department of Assessments and Taxation (SDAT) currently is authorized to charge fees for processing business documents on an expedited basis, in addition to the fees associated with normal business document processing. The revenue generated from the expedited processing fees is deposited in the State general fund. Because the demand for expedited processing services has grown over the years, but departmental funding has remained fairly constant, SDAT does not have sufficient resources available to process in a timely manner all the requests it receives.
To address concerns about the backlog of expedited service requests, House Bill 16 (passed) increases from $30 to $50 the fee SDAT is authorized to charge for recording documents on an expedited basis. All revenue derived from expedited processing fees will be credited to a special fund, which will be used to finance the costs of reviewing, processing, and auditing business documents on an expedited basis. SDAT has indicated that it plans to use the special fund to upgrade its computer system and hire additional staff.
Corporations and Real Estate Investment Trusts
House Bill 851 (passed) makes a number of changes in the laws governing Maryland corporations and real estate investment trusts (REITs). The bill:
Business Trusts
Chapter 452 of the Acts of 1999 created a statutory basis for the formation of business trusts in Maryland and required the name of a business trust to comply with Title 1, Subtitle 5 of the Corporations and Associations Article. This law requires a business entity name to be distinguishable on the records of the State Department of Assessments and Taxation from other business entity names. While Chapter 452 of 1999 required a business trust's name to comply with Title 1, Subtitle 5, it failed to make a corresponding change in that law. Senate Bill 37 (passed) corrects this omission by adding business trusts to the definition of "entity" for purposes of Title 1, Subtitle 5 of the Corporations and Associations Article.