Maryland Legal Alert for Financial Services

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Maryland Commissioner of Financial Regulation Issues Advisory Concerning New Laws

Fourth Circuit Holds that HELOCs are “Credit Card” Accounts for Offset Purposes

Maryland Commissioner of Financial Regulation Issues Advisory Concerning New Laws

On August 27, 2024, the Office of Financial Regulation (OFR) issued an advisory to provide guidance concerning two new legislative changes that protect criminal record history and limit the use of older information in consumer reports. The first new law, HB 622, restricts the types of criminal background information that consumer reporting agencies may include in consumer reports.  HB 622 prohibits a consumer report from including any criminal charge where the consumer was falsely accused, acquitted or exonerated; received a nolle prosequi; was not found guilty nor pled guilty; or that was later expunged. For additional issues related to this topic, please see: FAQs for the Consumer Reporting Law. 

The second, SB 41, limits the existing exceptions concerning when businesses may consider information that normally disappears from a credit report over time. SB 41 raised a dollar threshold related to specific exceptions allowing a business to consider information that otherwise disappears from a consumer credit report. Negative information typically disappears from consumer reports after either seven or ten years. Current law specifically disallows businesses to consider bankruptcy discharges after ten years, or civil suits and judgments, tax liens, charged-off accounts, and any other adverse item after seven years, unless a consumer applied for a loan or insurance policy of $50,000 or more or employment of $20,000 or more.   

Under the revised law, the otherwise-expired information may only be revealed through a consumer report if the consumer applies for a loan or insurance policy over $150,000 or a job that pays more than $70,000 per year. This change limits the circumstances under which the exceptions may be considered in consumer credit decisions.  Both new laws take effect on October 1, 2024. 

For more information, contact Christopher R. Rahl or Tamia J. Morris.

Contact Christopher R. Rahl | 410-576-4222

Contact Tamia J. Morris | 410-576-4021

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Fourth Circuit Holds that HELOCs are “Credit Card” Accounts for Offset Purposes

For credit card issuers who also maintain deposit accounts for their borrowers, navigating the general "no offset" provisions in Regulation Z (Reg. Z) can be tricky. Reg. Z prohibits a credit card issuer from taking any action to offset "a cardholder's indebtedness arising from a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer." The Official Commentary to Reg. Z provides a mechanism for obtaining a consensual security interest in deposit accounts (under applicable state law) that can be accessed in connection with credit card debt, but specific requirements must be met. The consensual security interest cannot be the functional equivalent of an offset right buried in the issuer's deposit account agreement. It must be affirmatively agreed to by the borrower in such a way that the borrower is aware that they are granting a security interest in deposit accounts as a condition for obtaining a credit card (or more favorable credit card account terms). 

The Official Commentary gives specific examples of the indicia of borrower awareness of an "affirmatively agreed to" consensual security interest, including at least one of the following:

• Separate signature or initials by relevant security interest language;
• Security agreement language on a separate page or otherwise separating the security interest language from other contract/disclosure provisions; and/or
• Reference to a specific amount of deposited funds or to a specific deposit account number. to the lower court for further proceedings (likely examining whether the HELOC agreement included enough language to give the lender a consensual security interest under Reg. Z).   

To address the "no offset" Reg. Z prohibition, many issuers include bolded/segregated security interest language that clearly stands out from other language in their credit card agreement (without a separate signature or borrower initials), and the credit card agreement itself is provided to, but not signed by, borrowers. Many issuers also require a borrower signature on the related credit card application and include clear security interest language just above the credit card application signature line.  

This approach can be used to address most credit card application channels, but a recent case from Maryland’s Fourth Circuit pulls certain home equity lines of credit (HELOC) into the Reg. Z “credit card” definition for offset purposes.  The case involved a HELOC opened and maintained for a consumer borrower where the lender also maintained one or more deposit accounts for the borrower.  When the borrower defaulted under the HELOC, the lender exercised offset rights in balances within the borrower’s deposit accounts (to apply those deposit balances to the outstanding HELOC balance). The borrower challenged the lender’s right to do so because of Reg. Z’s “credit card” offset restrictions, as the HELOC could be accessed by a “card” issued by the lender.  The Fourth Circuit held against the lender and concluded that, despite Reg. Z’s clearly different treatment of HELOCs and unsecured open-end card-accessed credit facilities (fleshed out extremely well in the case’s dissent), a HELOC accessed by a “card” made the HELOC a “credit card plan” under Reg. Z.  The case was remanded to the lower court for further proceedings (likely examining whether the HELOC agreement included enough language to give the lender a consensual security interest under Reg. Z).   

Practice Pointer: Lenders should consider taking steps to obtain a separate, consensual security interest for HELOC offsets to address the implications of this recent decision.

For more information, contact Christopher R. Rahl.

Contact Christopher R. Rahl | 410-576-4222

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