A bill that would grant major interest rate relief to Maryland banks, lenders and retailers has won the combined endorsement of Gov. Harry Hughes, Attorney General Stephen H. Sachs and key legislative leaders.
The proposed bill, a compromise between consumer advocates and supporters of total decontrol of the lending industry, would raise Maryland's present 18 percent interest-rate ceiling to 24 percent for consumer goods purchased on credit and to 36 percent for consumer loans from financial institutions.
A sweeping rewrite of present state lending laws, the proposal stops short of the total deregulation advocated by industry lobbyists. But state officials involved in drafting the measure say the 24 percent ceiling in effect would represent interest-rate deregulation for bank credit card operations and for major retail stores. Those groups are now governed by 18 percent interest ceilings on balances up to $700, and 12 percent on amounts above $700.
The proposed 36 percent ceiling for consumer loans by financial institutions was also termed "effective rate deregulation" for loans from banks and credit unions and for second mortgages. However, variable rates would be banned on second mortgages, a restriction expected to encounter heavy opposition from bankers.
Both state officials and industry leaders expressed general satisfaction with the compromise.
"I feel very, very positive. Twenty-four percent is plenty. A lot of our concerns have been addressed," said Edward McNeal, the retail stores lobbyist who served as the financial industry's point man on the issue.
"Obviously, this is a compromise," said Attorney General Sachs. "I think it has ample, indeed strong, protections for the borrower, along with a recognition of the problems in the marketplace."
State officials said they believe major relief is necessary this year because the lending industry is being pinched by persistent inflation, and may leave the state unless Maryland creates a more favorable business climate. One key official said he expects the consensus bill, with some amendments, will dissuade Suburban Trust Bank from following the state's three biggest banks in moving all credit card operations to Delaware.
The top-level backing for the measure is expected to give it a good chance of passing in this election year--a dramatic change from last year when the legislature defeated all bids for lending-industry relief.
Hughes and others at first advocated abolishing all present interest rate ceilings and setting 36 percent as the outside limit, creating criminal penalties for lenders who charged higher, "unconscionable" rates. However, they said the 24 percent limit for interest on merchandise would prove more politically palatable in an election year. Still, some officials said they fear the lower limit may discourage competition since lenders may tend to raise rates to that new ceiling rather than competing for the lowest rate.
The consensus proposal represents less relief for the state's troubled small loan industry, which serves high risk borrowers, than for its major financial institutions. Small loan companies can already charge up to 33 percent interest on the first $500 of a loan. Smaller retail stores that sell on installment to the poor are also expected to push for more relief, since they and their customers are said to have been hard-hit by the recession.
The bill includes broad consumer protections advocated by Attorney General Sachs, a longtime standard-bearer for consumerism and recent convert to the campaign for lending-industry relief. The protections are intended to spur competition while also preventing abuse by lenders, state officials said.
The bill would require lenders to notify state officials whenever they raise interest rates. And it would require those officials to publish regular announcements in newspapers throughout Maryland listing all interest rates available from each creditor: car dealers, furniture dealers, retail stores, banks, credit unions, savings and loans, small loan companies and the like.
"We think this will have the effect of increasing competition. Nobody wants to be at the bottom of that list," one administration official said.
Some of the strongest consumer protections include a ban on compounded interest charges and on variable interest rates--both expected to encounter fire from bankers, small loan companies and retail merchants. Others include a requirement that all credit agreements be worded in "plain language" instead of legal terms. The bill would create stiff criminal sanctions--up to a $1,000 fine or one year in prison--for lenders who knowingly violate the law.
The key areas for debate are expected to be the bill's ban on variable rates, which would apply to second mortgages, and its ban on credit card membership fees that banks and other credit card concerns want to charge. Legislators are said to be willing to negotiate both controversial features.