HB 664
Department of Legislative Services
Maryland General Assembly
2021 Session
FISCAL AND POLICY NOTE
First Reader
House Bill 664 (Delegate Howard)
Economic Matters
Financial Institutions - Consumer Credit - Sales-Based Financing Transactions
This bill establishes a regulatory framework for businesses that engage in “sales-based
financing transactions,” which the bill defines as financing transactions that are repaid over
time as a percentage of sales or revenue (where the payment amount may increase or
decrease depending on the volume of sales made or revenue received by the recipient). The
Office of the Commissioner of Financial Regulation (OCFR) within the Maryland
Department of Labor must oversee the licensing and regulation process of any entities
engaged in these types of activities. The bill prohibits a person from engaging in the
business of making (or soliciting) sales-based financing transactions unless the person is
licensed according to the bill’s requirements. OCFR must adopt regulations to carry out
the bill’s requirements. Violation of the bill is an unfair, abusive, or deceptive trade practice
under the Maryland Consumer Protection Act (MCPA), subject to MCPA’s civil and
criminal penalty provisions.
Fiscal Summary
State Effect: Special fund revenues increase beginning in FY 2022, as discussed below.
General fund revenues increase, potentially minimally, beginning in FY 2022 due to the
bill’s penalty provisions. Implementation and related enforcement can likely be handled
with existing resources.
Local Effect: The bill does not materially affect local government finances or operations.
Small Business Effect: Meaningful.
 Analysis
Bill Summary:
Definitions, Applicability, and Licensing Requirements
The bill specifies entities and activities that are excluded from regulation, including
insurance companies, State-licensed financial institutions, and individual commercial
financing transactions over $500,000. The bill also establishes licensing procedures,
requirements, and qualifications as well as provisions related to the confidentiality of
information for licensees. An application for a license is $850, which is refundable if the
applicant is found not to be eligible for a license; applicants must also pay a nonrefundable
$100 investigation fee. A license may be renewed annually; the renewal fee is also $850.
Licensing revenues (as well as any other fee or revenue received by OCFR under the new
sales-based financing subtitle) must be deposited into the Nondepository Special Fund and
used for related purposes. However, OCFR must pay all fines and penalties into the general
fund.
Recordkeeping Requirements
The bill establishes recordkeeping requirements for licensees; a licensee must retain the
appropriate records for at least two years. At any time, OCFR may investigate the records
and business operations of a licensee (or a person who acts on behalf of a licensee). OCFR
may also subpoena documents (or other evidence) and may summon (and examine) under
oath any person whose testimony is required.
Enforcement
OCFR may enforce the bill’s requirements by issuing an order (1) to cease and desist from
a violation and any further similar violations and (2) requiring the violator to take
affirmative action to correct the violation (including restitution of money or property to
any aggrieved person). OCFR may also impose a civil penalty in an amount of up to
(1) $10,000 for each violation and (2) $25,000 for each violation from which the violator
failed to cease and desist (or for which the violator failed to take affirmative action to
correct). OCFR must consider specified factors (e.g., the seriousness of the violation) when
determining the amount of any penalty imposed.
OCFR may suspend or revoke the license of any licensee who engages in illegal or
otherwise dishonest activities or violates the provisions of the sales-based financing
transactions subtitle, as specified. However, prior to taking any enforcement actions, OCFR
must give the licensee an opportunity for a hearing in accordance with State law.
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The bill prohibits a licensee from directly (or indirectly) advertising, printing, displaying,
publishing, distributing, or broadcasting a false, misleading, or deceptive statement
regarding the rates, terms, costs, or conditions of a sales-based financing transaction.
A person who violates the provisions related to the licensure and regulation of sales-based
financing companies is guilty of a misdemeanor and, upon conviction, is subject to a fine
of up to $5,000 and/or imprisonment for up to three years. In addition, the person is subject
to the enforcement and penalty provisions of MCPA.
OCFR has sole authority to enforce the bill’s requirements. The bill may not be construed
to create (or authorize) a private right of action against a person based on compliance (or
noncompliance) with the bill’s requirements.
Calculation of Repayment Term and Annual Percentage Rate
The bill specifies the manner in which a licensee must calculate certain information related
to sales-based financing transactions (e.g., by using the projected sales volume of a
recipient to calculate the term of repayment, the annual percentage rate (APR), etc.). A
licensee must inform OCFR how it intends to calculate the estimated APR of
each sales-based financing transaction. By January 1 each year, a licensee must report to
OCFR on (1) the estimated annual APR given to each recipient and (2) the actual APR of
each completed sales-based financing transaction. If OCFR finds there was an
unreasonable deviation between estimated and actual APRs of sales-based financing
transactions, the licensee may be required to use a different method to determine projected
sales volume.
Disclosure Requirements
Each licensee must disclose specified information (as required by OCFR) at the time it
extends an offer of a sales-based financing transaction. Specifically, a licensee must
disclose to a recipient:
 the total amount of funds provided;
 the estimated APR of the transaction;
 the term (or estimated term);
 the method, frequency, and amount of payments;
 fees charged (and chargeable);
 a complete copy of the financing agreement; and
 a description of collateral requirements or security interests (if applicable).
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If the recipient pays off (or refinances) the sales-based financing transaction before the end
of the scheduled repayment period, the licensee must disclose additional information, as
specified.
The bill authorizes a licensee to require a recipient to pay off the balance of an existing
sales-based financing transaction as a condition of obtaining a new sales-based financing
transaction. However, any business that makes this a requirement must disclose additional
information, including (1) the amount of the new sales-based financing that will be used to
pay off any required prepayment charges and (2) any unpaid interest that was not forgiven
at the time the new sales-based financing transaction was entered into. The bill specifies
how a prepayment charge must be calculated and reported.
Prohibited Activities
The bill prohibits a licensee from (1) taking a confession of judgment or a power of attorney
authorizing the licensee (or a third party) to confess judgment or to appear for the recipient
in a judicial proceeding; (2) taking a negotiable instrument from a recipient in which blanks
are left to be filled in after contract execution; or (3) entering into a sales-based financing
transaction with an estimated APR that exceeds 24%.
Current Law: Sales-based financing transactions are not regulated by Maryland law.
Maryland Consumer Protection Act
An unfair, abusive, or deceptive trade practice under MCPA includes, among other acts,
any false, falsely disparaging, or misleading oral or written statement, visual description,
or other representation of any kind which has the capacity, tendency, or effect of deceiving
or misleading consumers. The prohibition against engaging in any unfair, abusive, or
deceptive trade practice encompasses the offer for or actual sale, lease, rental, loan, or
bailment of any consumer goods, consumer realty, or consumer services; the extension of
consumer credit; the collection of consumer debt; or the offer for or actual purchase of
consumer goods or consumer realty from a consumer by a merchant whose business
includes paying off consumer debt in connection with the purchase of any consumer goods
or consumer realty from a consumer.
The Consumer Protection Division within the Office of the Attorney General (OAG) is
responsible for enforcing MCPA and investigating the complaints of aggrieved consumers.
The division may attempt to conciliate the matter, issue a cease and desist order, or file a
civil action in court. A merchant who violates MCPA is subject to a fine of up to $10,000
for each violation and up to $25,000 for each repetition of the same violation. In addition
to any civil penalties that may be imposed, any person who violates MCPA is guilty of a
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misdemeanor and, on conviction, is subject to a fine of up to $1,000 and/or imprisonment
for up to one year.
State Fiscal Effect: OCFR notes that the bill’s requirements (i.e., the licensing and
supervisory structure) are similar to those for consumer loan licensees, which is expected
to ease implementation of the bill. Although the bill specifies the licensing and
investigation fees for prospective licensees, OCFR is unable to identify how many entities
may apply for licensure under the bill. While the exact impact on Nondepository Special
Fund revenues cannot be determined at this time, any impact is assumed to be minimal.
Any impact on general fund revenues due to the bill’s penalty provisions is also expected
to be minimal.
Although OCFR indicates it may need additional staff in order to process and oversee the
new licensing scheme, the Department of Legislative Services notes that, due to the
uncertainty of how many entities may apply for licensure, OCFR can likely accommodate
any short-term influx of applications with existing resources. To the extent that there are
significantly more applicants than expected over multiple years, OCFR may need to hire
additional staff.
The Office of Administrative Hearings, the Judiciary, and OAG can handle any increase in
caseloads (likely minimal) with existing resources.
Small Business Effect: OCFR advises that a sales-based financing transaction (as defined
in the bill) can be considered a subset of a commonly used source of business financing
known as factoring. In a factoring transaction, the seller is typically a merchant that has
sold a good or service, holds the resultant account receivable, and then sells that receivable
at a discount to a third party for cash. The party obligated on the receivable then pays its
obligation to the third-party purchaser. OCFR further notes that factoring has been a part
of commerce since Mesopotamian times and is widely available in Maryland and
throughout the United States.
Sales of accounts receivable are used by firms to obtain cash, typically in circumstances
when their cash balance is insufficient to meet immediate or short-term cash needs. For
example, companies may, from time to time, need cash to purchase inventory or goods, or
to enter into contracts, and they face an imbalance between the time in which they expect
their receivables to be paid (i.e., converted to cash) and their more immediate need to make
payments. OCFR further advises that small businesses are likely to engage in these types
of transactions, as they accept credit card payments and those receivables are their greatest
source of liquidity.
The product standards, licensing, and regulatory structure established by the bill may
provide more small businesses the ability to utilize sales-based financing products in a
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transparent and affordable manner. However, because the bill establishes a maximum APR
for these types of commercial transactions (a limitation that has typically been established
for consumer products), OCFR notes this could limit the accessibility of the product. Such
restrictions could discourage small business lenders from establishing operations in
Maryland or from providing services to Maryland businesses.
Additional Comments: As introduced, the bill excludes from regulation a financing
transaction in which the recipient does not intend to use the proceeds primarily for personal,
family, or household purposes. As this provision excludes all business transactions from
regulation, it seems likely that the intent is to exclude transactions in which the proceeds
are intended to be used primarily for personal, family, or household purposes. This analysis
is based on that assumption.
Additional Information
Prior Introductions: None.
Designated Cross File: SB 532 (Senator Kramer) - Finance.
Information Source(s): Judiciary (Administrative Office of the Courts); Maryland
Department of Labor; Office of Administrative Hearings; Department of Legislative
Services
Fiscal Note History: First Reader - February 16, 2021
md/mcr
Analysis by: Eric F. Pierce Direct Inquiries to:
(410) 946-5510
(301) 970-5510
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Statutes affected:
Text - First - Financial Institutions - Consumer Credit - Sales-Based Financing Transactions: 13-301 Commercial Law, 11-610 Financial Institutions, 12-1101 Financial Institutions, 12-1102 Financial Institutions, 12-1103 Financial Institutions, 12-1104 Financial Institutions, 12-1105 Financial Institutions, 12-1106 Financial Institutions, 12-1107 Financial Institutions, 12-1108 Financial Institutions, 12-1109 Financial Institutions, 12-1110 Financial Institutions, 12-1111 Financial Institutions, 12-1112 Financial Institutions, 12-1113 Financial Institutions, 12-1114 Financial Institutions, 12-1115 Financial Institutions, 12-1116 Financial Institutions, 12-1115 Financial Institutions, 12-1117 Financial Institutions, 12-1118 Financial Institutions, 12-1119 Financial Institutions, 12-1120 Financial Institutions, 12-1121 Financial Institutions, 12-1122 Financial Institutions, 12-1123 Financial Institutions, 12-1124 Financial Institutions, 12-1120 Financial Institutions