Maine Adopts Legislation Aimed at Bank-Model Lending

Manatt, Phelps & Phillips, LLP

For at least the past 20 years, Maine has capped interest rates for most closed-end unsecured loans at 30% for loans of $2,000 or less, and at 18% on loans of $4,000 or more. See, e.g., 9-A M.R.S.A. Sec. 2-401.

Following the lead of Illinois, Maine has now adopted legislation attempting to circumvent federal preemption of these caps for bank-model loans.

What Happened

Tracking largely the same text as the Illinois bill that we previously reported on (and which is now law), the Maine legislation purports to subject an entity to its interest rate caps if the entity “holds, acquires or maintains, directly or indirectly, the predominant economic interest in the loan,” “markets, brokers, arranges or facilitates the loan and holds the right, requirement or first right of refusal to purchase the loan or a receivable or interest in the loan,” or the “totality of the circumstances” otherwise indicates attempted evasion of the interest rate cap. The totality of the circumstances test looks to whether the terms of the arrangement provide for indemnity to an otherwise exempt entity (like a national bank), whether the nonexempt entity predominantly designed, controls or operates the loan program, and whether the nonexempt entity directly lends in other states.

Like in Illinois, transactions that violate the interest rate cap are declared “void and uncollectible” including as to the principal. Maine law previously provided for merely a waiver of fees and portions of the finance charges in the event of a violation. The law also specifies that the loan may not be referred for collection or reported as delinquent.

A similar bill is pending in New Mexico (HB 149 and SB 66).

Why It Matters

Consumer advocates have been aggressively promoting this type of “reverse preemption” legislation, which indirectly attacks the federal lending powers of banks by purporting to regulate their marketing and servicing agents. It remains to be seen whether courts will find the gambit effective or not. Stay tuned!

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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