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From Banking and Finance Law Daily, January 12, 2016

Auto finance company complies with Maryland’s ‘safe harbor’ by correcting error

By Thomas G. Wolfe, J.D.

Rejecting a borrower’s claims against HRFC, LLC—doing business as Hampton Roads Finance Company—for alleged violations of the Maryland Credit Grantor Closed End Credit Provisions (CLEC) stemming from the borrower’s purchase of a car, the U.S. Court of Appeals for the Fourth Circuit decided that HRFC was entitled to the protection of CLEC’s applicable “safe harbor” provision. Although the interest rate contained in the retail installment sales contract for the car purchase exceeded CLEC’s maximum allowable rate by nearly 3 percent, HRFC recognized the discrepancy later, sent a letter to the borrower about it, and made the necessary credits and adjustments outlined in its letter (Askew v. HRFC, LLC, Jan. 11, 2016, Diaz, A.).

According to the court’s opinion, while the 2008 contract assigned to HRFC called for a 26.99 percent interest rate, the maximum allowable rate of interest under CLEC was 24 percent. In August 2010, HRFC recognized the discrepancy. About a month later, the finance company sent the borrower a letter acknowledging that the interest rate applied by HRFC “was not correct.” Accordingly, the finance company credited the borrower’s account $845 and indicated that it would continue to compute interest at a new rate of 23.99 percent.

CLEC safe-harbor provision. Under CLEC, credit grantors are afforded an opportunity to avoid liability through self-correction. Accordingly, under the pertinent safe-harbor provision (§12-1020), a “credit grantor is not liable for any failure to comply with [CLEC] if, within 60 days after discovering an error and prior to institution of an action under [CLEC] or the receipt of written notice from the borrower, the credit grantor notifies the borrower of the error and makes whatever adjustments are necessary to correct the error.”

Borrower’s arguments. In support of his claims that HRFC violated CLEC and was not entitled to any protection afforded by the safe-harbor provision, the borrower advanced three main arguments: (1) HRFC was strictly liable for failing to expressly disclose an interest rate below CLEC’s statutory maximum; (2) the “discovery rule”—derived from the statute-of-limitations context—should apply to the pertinent CLEC safe-harbor provision, thereby requiring a finding that HRFC failed to cure an error within 60 days of discovery; and (3) HRFC failed to properly notify him of the interest-rate error and did not sufficiently make the necessary adjustments to fully correct the error.

Court’s response, reasoning. In connection with the borrower’s contention that HRFC should be held strictly liable for the interest-rate discrepancy, the Fourth Circuit determined that while CLEC mandated that the interest rate be expressed as “a simple interest rate” (§12-1003(a)), the CLEC provision did not imposestrict liability for an interest rate erroneously expressed in a written contract at a rate higher than 24 percent. In the court’s view, the CLEC provision merely prevented credit grantors from charging usurious interest rates while simultaneously protecting consumers by “eliminating confusion caused by difficult-to-decipher interest rates.”

In connection with the borrower’s argument that the “discovery rule”—derived from the statute-of-limitations context—should apply to the pertinent CLEC safe-harbor provision, the Fourth Circuit noted that the “meaning of the term ‘discovering’ in section 12-1020 is a question of first impression.”

In rejecting the borrower’s stance, the Fourth Circuit maintained that if the “discovery rule” were to be applied to the CLEC safe-harbor provision (§12-1020), “HRFC would have had little reason to inform [the borrower] of its error, lower his interest rate, and provide a refund. Instead, HRFC might well have chosen to do nothing, leaving it to [the borrower] to discover the error.” Accordingly, the Fourth Circuit asserted that “interpreting the term ‘discovering an error’ in section 12-1020 to mean actually uncovering a mistake constituting a violation of the statute better comports with CLEC’s text, public policy, and the statute’s purpose.”

Concerning the borrower’s contention that HRFC’s letter to him about the interest-rate error was so vague that it failed to satisfy the safe-harbor provision of CLEC, the court determined that although HRFC’s letter was a bit cryptic, the letter provided adequate notice. Moreover, despite the borrower’s argument that HRFC should have refunded to him far more than $845 and should not have collected any interest on the car loan, the Fourth Circuit maintained that the borrower was not entitled “to a windfall upon the credit grantor’s cure of an error” and that “section 12-1020 safe harbor is intended to encourage credit grantors to self-correct, which they would have little incentive to do if forced to refund all interest collected.”

Final disposition. The Fourth Circuit upheld the federal trial court’s summary judgment for HRFC on the borrower’s CLEC claims and separate breach-of-contract claims. However, determining that there were unresolved, material factual issues in the case concerning the consumer’s claims arising under the Maryland Consumer Debt Collection Act, the court reversed the lower court’s order granting summary judgment for HRFC on those claims and remanded the matter.

The case is No. 14-1384.

Attorneys: Cory Lev Zajdel (Z Law, LLC) for Dante Askew. Kelly Marie Lippincott (Carr Maloney P.C.) for HRFC, LLC, doing business as Hampton Roads Finance Company.

Companies: Hampton Roads Finance Company; HRFC, LLC

MainStory: TopStory ConsumerCredit DebtCollection InterestUsury Loans MarylandNews NorthCarolinaNews SouthCarolinaNews StateBankingLaws VirginiaNews WestVirginiaNews

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