A Maryland administrative action recently removed to the state’s federal district court illustrates how Maryland law continues to present challenges for the bank partner structure used by many lenders.

Last month, Bank of Missouri, an FDIC-insured, Missouri state-chartered bank, and Atlanticus Service Corporation and Fortiva Financial, LLC, the Bank’s non-bank service providers, removed an administrative matter filed against them in January 2021 by the Maryland Department of Labor, Office of the Commissioner of Financial Regulation (OCFR) alleging that the Bank and Atlanticus/Fortiva violated Maryland law by failing to hold required Maryland lending and other licenses.  According to the factual allegations in the OCFR’s Charge Letter:

• The Bank offers in-store retail credit financing as well as store-branded credit cards to Maryland consumers.
• The Bank retains ownership of the credit accounts and the debtor-creditor relationship with Maryland consumers for the life of the loan account.
• Atlanticus/Fortiva assists Maryland consumers in obtaining an extension of credit from the Bank by accepting and processing credit applications from consumers.
• Atlanticus/Fortiva performs all of the collections, servicing, payment and remittance operations in connection with the accounts.

The OCFR charges the Bank with having violated Maryland licensing laws regarding installment loans, consumer loans, and open-end/revolving credit.  As to Atlanticus/Fortiva, the OCFR charges them with violating the licensing requirements of Maryland’s Credit Services Business Act and Collection Agency Licensing Act.  The OCFR claims that the Bank’s failure to hold the required lending licenses makes the loans unenforceable and prohibits Atlanticus/Fortiva from collecting any amounts on the loans.

In their Notice of Removal, the Bank and Atlanticus/Fortiva claim that the Maryland Office of Administrative Hearings functions as a “state court” for purposes of the statute governing federal removal.  They assert that the district court has federal question jurisdiction over the OCFR’s claims against the Bank because those claims are completely preempted by Section 27 of the Federal Deposit Insurance Act, which prescribes the interest rate that state-chartered, federally insured banks can charge and grants such banks interest rate exportation authority.  They also argue that the court should exercise supplemental jurisdiction over the claims against Atlanticus/Fortiva because they are bank service companies and part of the same case or controversy as the completely preempted claims against the Bank.

In 2016, the OCFR brought an enforcement action against CashCall, a nonbank operating a high-rate bank model program.  In the litigation that followed, Maryland’s highest court held that nonbanks cannot market loans originated by a bank without being licensed as credit services businesses, and affirmed $5.6 million in penalties against CashCall.  It also concluded that Maryland’s Credit Services Business Act does not permit a credit services business to assist a consumer in obtaining a loan from any in-state or out-of-state bank, at an interest rate prohibited by Maryland law.

The new Maryland matter demonstrates that participants in bank model programs continue to face state licensing threats.  In addition, legal challenges to the OCC and FDIC “Madden-fix” rules and the OCC’s “true lender” rule continue to create uncertainty for participants.  As a result, participants would be well-advised to revisit their compliance with state licensing laws and their vulnerability to “true lender” and Madden challenges.