A Maryland Circuit Court struck down a Montgomery County bill prohibiting predatory lending practices and authorizing up to $500,000 in damages to Montgomery County citizens who suffer “humiliation and embarrassment” as a result of predatory lending. American Financial Services Assoc. v. Montgomery County, Case No. 269105 (Md. Cir. Ct. November 30, 2006).

    While the court agreed that the Montgomery County Council was entitled to enact local laws confined in substance and subject matter to the territorial limits of the county, the court did not believe that the predatory lending bill was a “local law.” The court found that there was no possibility the bill could be reasonably read to apply only to discriminatory acts occurring in Montgomery County. Thus, the court found that the law was a “general law” and beyond the authority of county officials.

    The court took notice that mortgage lending was a national business and that “loans are often provided by those far removed from the location where the loan is placed.” Given the nature of the mortgage lending industry, the court found that, while the effects would be felt in Montgomery County, the decision to lend or not and, if so, on what terms would be made elsewhere.

    Mortgage lenders testified in court regarding their concerns about the bill and its potential effects. Many lenders said that if the Montgomery County bill were to become law, they would cease doing business in the county because of uncertainty and high risks. The possibility of lenders withdrawing from the market sparked fears of higher interest rates due to diminished competition.

    The court declared that the Montgomery County bill was unconstitutional and unenforceable because the Montgomery City Council exceeded its authority in enacting a general, as opposed to a local, law in violation of the Maryland Constitution.

    This ruling resolves much of the uncertainty experienced by Montgomery County lenders who may have been forced to leave the county if required to comply with the law.

    Elizabeth Anstaett and Kathleen Manley