Lender Liability Under Maryland’s CLEC Statute

The most popular statute these days for the pro-consumer plaintiffs’ bar in Maryland is the state’s Credit Grantor Closed End Credit law, which is commonly referred to as CLEC. It is the statute of choice for those seeking to make a living by suing lenders who finance, either directly or by assignment, consumer purchases, such as automobiles.

Originally enacted as part of the Credit Deregulation Act of 1983 to entice creditors to do business in Maryland (after four Maryland banks transferred their operations to Delaware), the CLEC is voluntarily chosen as the governing law by many Maryland credit grantors, who prefer it to the older Retail Installment Sales Act, which applies by default if CLEC is not elected in a retail installment sales contract. Nevertheless, the pro-debtor litigation bar has learned to love CLEC, filing scores of class-action cases against creditors invoking the statute.

Most of the recent CLEC cases concern automobile financing. Allegations have alleged violations of CLEC regarding allowable interest rates, convenience fees, pre-repossession notices, pre-sale notices, post-repossession redemption notices, post-sale accountings and the benefits of debt cancellation agreements (also known as “GAP agreements”), which may be financed under CLEC.

Unlike the Maryland Consumer Protection Act, which is interpreted as requiring that a plaintiff demonstrate actual injury and damages, CLEC potentially imposes draconian remedies for very minor and technical violations of its terms. If a creditor violates any provision of the statute (other than a simple bona fide computation error), the creditor may collect only the original principal amount of the loan and may not collect any interest, costs or fees. This statutory windfall to the debtor, and the fact that a plaintiff need not demonstrate actual damages, make CLEC very attractive to a lawyer who seeks to bring claims as class actions.

Luckily, there are a few defenses available to creditors sued for CLEC claims. A credit grantor (or the assignee of a credit grantor) may “cure” certain good-faith violations of CLEC if corrections are timely and adequately undertaken in accordance with the terms of the statute. Also, in a federal-court case recently decided in favor of an RMG client, the court ruled that including language in a CLEC contract inconsistent with the statute was not a basis to impose CLEC’s civil remedies provision unless and until the creditor attempted to enforce the inconsistent provision. In essence, the court ruled that the contract’s invocation of CLEC incorporated the statute by reference into the contract and cured the unenforced contract language that was inconsistent with the statute.

To avoid litigation, creditors who originate or hold contracts made under CLEC would be wise to ensure that their contract forms, notice procedures, and repossession and sale procedures are in strict compliance with CLEC, as it has been interpreted by recent court decisions.