Consumers have a variety of laws to protect them against fraud or other unfair business practices, and in Maryland one of the most important is the Consumer Protection Act. It is enforced by the Division of Consumer Protection of the State Attorney General’s Office. How their enforcement efforts work is illustrated in the recent case from Maryland’s highest court, Consumer Protection Division v. Morgan.
The Consumer Protection Act is found in the Commercial Law Article of the State Code, Sections 13-101 through 501. Among the protections offered by the Act are prohibitions against unfair and deceptive trade practices, defined broadly in the statute. This is in addition to the more traditional criminal laws that protect against theft and other crimes, and allows the Consumer Protection Division to institute administrative proceedings to try to stop deceptive trade practices. The Division may seek court orders or injunctions to stop such practices, imposition of fines, and restitution by the offender to compensate consumers for losses from such practices.
The Morgan case originated in Baltimore City, and involved a “flipping” scheme related to the purchase and resale of distressed housing to first time home buyers with poor credit histories. The complicated scheme was alleged to involve holding companies that would buy a dilapidated row house, make some repairs, and then sell the home at an artificially inflated price to these first time buyers. To accomplish this, they needed to obtain FHA loans backed by the federal government, which required help from appraisers of the property to assess them at the values alleged by the sellers. With a fraudulently high appraisal in hand, lenders who were in on the alleged scheme would then make high loans to otherwise unqualified buyers with FHA guarantees on their loans.
In order to accomplish this, buyers were given blank loan applications to sign, which would then be filled in with false information as to credit history or other buyer qualifications. Misleading applications were filed with FHA, relying on the artificially high appraised values given by the appraisers. Each member of the scheme then made money, either through an inflated sale price, extra appraisal work, or high interest rates on improper loan amounts. The Division charged a number of members of the scheme with unfair and deceptive trade practices.
An administrative law judge held hearings, and then filed proposed recommendations finding the defendants in violation of some provisions of the Act and exonerating defendants on other charged violations. On appeal to the Chief of the Consumer Protection Division, each defendant was held to have violated the Act. A cease and desist order was issued to stop these practices, along with imposition of civil fines and restitution in the millions of dollars to a large number of consumers. The case made its way to the Maryland Court of Appeals, which in a complicated opinion held that violators who acted in concert with one another could be held jointly responsible to consumers to repay them for their losses, but only to pay consumers who had testified in the proceedings and thus had clearly been duped by the scheme and not been willing participants.
Administrative law is full of technicalities and procedural hurdles, but can be used by the State to protect consumers from this type of financial scheme that we hear about all too often these days.