Mass. and Maryland Premium Finance Companies Penalized

The Maryland Court of Appeals has ruled that eight of the state’s largest premium finance companies charged illegally-high interest rates on loans to consumers buying vehicle coverage through a state-run insurance program.

In a decision that could mean lower overall costs for residents who obtain Maryland car insurance through the state’s insurer of last resort, the court decided that the companies illegally “front-loaded” loans by assessing premium finance charges of more than 1.15 percent for each 30 days.

The court noted that the manner in which the companies calculated the amount of interest due “operates to the disadvantage of consumers because the interest charges are weighted more heavily in the early months of the contract repayment period.”

State regulators say most consumers are able to establish interest-free plans to pay their vehicle coverage premiums in installments. But the Maryland Automobile Insurance Fund (MAIF), which insures motorists who cannot find coverage from private insurers, is barred by state law from accept installment payments, so program participants must finance their policies through a private finance company if they cannot pay up front.

The state insurance commissioner issued a cease-and-desist order to the eight companies in 2008 to prevent them from charging interest greater than that allowed under state law. The finance companies responded by requesting that the case be transferred to the state Office of Administrative Hearings, but the commissioner instead handed the authority to rule on the matter over to an associate deputy commissioner, who upheld the order that the financiers stop charging so much interest.

The finance companies appealed to a Baltimore circuit court, claiming they were denied a fair hearing. That court agreed, as did the state’s Court of Special Appeals.

In a decision handed down last week, however, the Court of Appeals disagreed, ruling that the commissioner’s original order was justified and that the finance companies violated state law with their method of applying interest.

Maryland Law Has Restrictions on Finance Companies

State law lays out specific guidelines for various charges that finance companies may impose, including a maximum $20 initial service fee and a delinquency fee capped at a maximum of 5 percent of the installment that is in default.

The law also specifies that companies may charge no more than 1.15 percent for each 30-day period during which the loan is outstanding. But the commissioner found—and the Court of Appeals agreed—that consumers who canceled their finance agreements in the first five months, or whose policies were declared void from the start, paid excessive finance charges because of a convoluted method of calculating interest that applied higher interest charges in the first months of the installment plan.

The companies had argued that state statutes allowed them to “charge whatever interest rate they wanted for each 30-day period, so long as the overall finance charge paid and received over the life of the loan does not exceed 1.15 percent,” according to court documents.

The court, however, said that because the law makes no mention of annual interest rates, finance charges cannot exceed the state-specified level for any month during the loan period.

“We assume that the General Assembly meant what it said, and the interest charge may not exceed 1.15 percent of the entire amount of the loan during any 30-day period,” the justices wrote.

The ruling vacates earlier court judgments in the case and sends it back to circuit court. The appellate panel ordered court costs to be split among the eight finance companies.

Massachusetts Premium Finance Company Also in Hot Water

In a separate matter in Massachusetts, attorney General Martha Coakley announced last week that she has fined premium finance company IPFS Corporation $82,000 for violating state law by prematurely canceling the vehicle policies of dozens of residents and small businesses.

Coakley said IPFS illegally issued cancellation requests that afforded consumers only three days in which to bring their accounts current or be dropped, despite the fact that state law requires a 20-day window.

The notices were sent to customers of another company that IPFS took over in 2010.

“In these challenging economic times, we need to be particularly vigilant in monitoring and enforcing our existing legal protections for consumers,” Coakley said in a news release.

According to the attorney general’s office, IPFS has agreed to pay $62,042 to the more than 50 consumers affected by the cancellations, as well as $20,000 to the state. The company has also reportedly agreed to amend its cancellation procedures.

[This article was updated on 12/29/2011 to reflect the fact that the MAIF is prohibited by law from accepting installment payments.]

About Matthew Morisset
Matthew Morisset is a proud alumnus of the University of Redlands, where he obtained a degree in English Literature. Utilizing his passion for analysis and writing, Matthew looks for important trends in the auto insurance industry and their implications for consumers and the market as a whole.

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