By Thomas G. Wolfe, J.D.
Recently, the U.S. Court of Appeals for the Fourth Circuit reviewed a borrower’s claims against a finance company for alleged violations of the Maryland Credit Grantor Closed End Credit Provisions (CLEC) stemming from the borrower’s purchase of a car. In rejecting the consumer’s CLEC claims, the Fourth Circuit decided that the finance company was entitled to the protection of CLEC’s applicable “safe harbor” provision.
According to the court’s Jan. 11, 2016, opinion in Askew v. HRFC, LLC, the retail installment sales contract for the car purchase contained a 26.99 percent interest-rate provision. Since the maximum allowable rate of interest under CLEC was 24 percent, the stated rate in the contract exceeded the maximum rate by nearly 3 percent. However, the finance company, HRFC, LLC—doing business as Hampton Roads Finance Company—later recognized the discrepancy. About a month after discovering the discrepancy, HRFC sent a letter to the borrower acknowledging that the interest rate applied by the company “was not correct.” Further, HRFC made the necessary credits and adjustments outlined in its letter, and indicated that it would compute interest at a new rate of 23.99 percent.
Under CLEC, “credit grantors” are afforded an opportunity to avoid liability through self-correction. Accordingly, under the 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.”
In support of his claims that HRFC violated CLEC and was not entitled to any protection afforded by the safe-harbor provision, the borrower contended that HRFC was strictly liable for failing to expressly disclose an interest rate below the 24 percent statutory maximum. Rejecting the borrower’s argument, the Fourth Circuit determined that CLEC only mandated that the interest rate be expressed as “a simple interest rate” but did not impose strict liability for an interest rate erroneously expressed in a written contract at a rate higher than 24 percent.
Next, the borrower argued that the “discovery rule”—derived from a statute-of-limitations context—should apply to the pertinent CLEC safe-harbor provision. Noting that the meaning of the term “discovering” in the statutory provision (§12-1020) was “a question of first impression,” the Fourth Circuit again rejected the borrower’s stance.
The court maintained that if the “discovery rule” were to be applied to the CLEC safe-harbor provision, “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.”
The borrower further contended 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. While the court acknowledged that HRFC’s letter was a bit cryptic, the court concluded that 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 the “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.”
Consequently, 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. Because the court also decided that unresolved factual issues remained in the case on the borrower's claims against HRFC under the Maryland Consumer Debt Collection Act, the court remanded the matter for consideration of those claims.
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