Commissions on Insurance Premiums Are Not “Fees” Under Maryland’s Credit Grantor Closed End Credit Provisions (CLEC)

1. Introduction

In Paul French v. 21^st Mortgage Corporation, the United States Court of Appeals for the Fourth Circuit affirmed a district-court judgment holding that a lender’s retention of a 35 percent commission from a borrower’s insurance premium does not constitute a prohibited “fee” under Maryland’s Credit Grantor Closed End Credit Provisions (CLEC), Md. Code Ann., Com. Law §§ 12-1001 to -1030.

The appeal arose from a putative class action brought by Paul French, who purchased a manufactured home in Maryland through a $55,000 loan from 21^st Mortgage Corporation. As part of the loan agreement—governed by CLEC—French was required to maintain property insurance. He elected to procure the policy through 21^st Mortgage, paying premiums directly to the lender. Unknown to French, 21^st Mortgage and the underwriting insurer (American Bankers Insurance Co.) had agreed that the lender would withhold 35 percent of each premium as a commission for “placing” the insurance. French alleged this commission violated CLEC’s fee restrictions.

The district court granted the lender judgment on the pleadings; the Fourth Circuit, reviewing de novo, affirmed. The decision crystallises a new federal appellate precedent on how “fee” is construed within CLEC and clarifies the relationship between that statute and Maryland’s Insurance Article.

2. Summary of the Judgment

• Holding: A lender’s retention of a percentage commission from an insurance premium does not constitute a “fee” under CLEC § 12-1005(d)(1); therefore, the practice is not prohibited.
• Outcome: The Fourth Circuit affirmed dismissal of French’s CLEC and contract claims pursuant to Fed. R. Civ. P. 12(c).
• Key Rationale: Because the borrower paid exactly the state-approved premium rate and no additional amount, the retained commission was not a separate “charge or payment for services” and thus fell outside CLEC’s fee restrictions.
• Standard of Review: De novo review of a Rule 12(c) judgment on the pleadings, accepting the complaint’s factual allegations as true.

3. Analysis

3.1 Precedents Cited

The court relied heavily on Maryland state authority and interpretive rules for Erie predictions:

1. Pulte Home Corp. v. Montgomery County, 909 F.3d 685 (4th Cir. 2018) – standard for Rule 12(c) motions.
2. Massey v. Ojaniit, 759 F.3d 343 (4th Cir. 2014) – plausibility standard and incorporation-by-reference doctrine.
3. Assicurazioni Generali, S.p.A. v. Neil, 160 F.3d 997 (4th Cir. 1998) – deference to Maryland intermediate appellate decisions when the Court of Appeals has not spoken.
4. Len Stoler, Inc. v. Wisner, 115 A.3d 720 (Md. Ct. Spec. App. 2015) – definitive Maryland precedent defining a “fee” under CLEC as “a charge or payment for services” that the borrower would not otherwise have paid.
5. Older interest-and-usury cases (B.F. Saul Co. v. West End Park N., 246 A.2d 591, and Equitable Life Assurance Society v. Insurance Comm’r, 246 A.2d 604 (Md. 1968)) were cited by the plaintiff but rejected as inapposite.

Notably, Len Stoler provided the analytical fulcrum. There, a dealer’s retention of a “tax allowance” did not constitute a fee because it did not increase the statutory excise tax owed. The Fourth Circuit found that reasoning “on all fours” with the present insurance-commission arrangement.

3.2 Legal Reasoning

1. Statutory Text. CLEC § 12-1005(d)(1) allows a credit grantor to “charge and collect a fee… not retained by him” when the fee is an actual, verifiable expense. The court emphasised that the provision only applies to something that is, in fact, a “fee.”
2. Meaning of “Fee.”
   • The term is undefined in CLEC.
   • Applying Len Stoler, the court adopted the ordinary meaning: a payment for services beyond the underlying cost.
   • Because French paid the same premium rate approved by the Maryland Insurance Administration (MIA)— and would have paid that amount irrespective of the commission—no extra payment occurred; thus, no fee existed.
3. Deference to State Intermediate Courts. Under Assicurazioni Generali, federal courts must follow state intermediate-court precedent unless clearly inconsistent with statutes or high-court precedent. The Fourth Circuit found Len Stoler harmonious with CLEC and not overruled.
4. Legislative History Arguments Rejected.
   • French pointed to the last-minute addition of “not retained by him” during CLEC’s enactment to assert a legislative intent to bar commissions.
   • The court held the phrase irrelevant once a charge is not a “fee.”
5. Alleged Conflict with Maryland Insurance Article.
   • The Insurance Article expressly permits commissions on insurance placements.
   • Because the commission falls outside CLEC’s coverage, no statutory conflict arises and the court declined to address the hierarchy issue.

3.3 Impact

This ruling carries several practical and doctrinal consequences:

• Clarifies Lender Practices. Lenders operating under CLEC may safely retain insurer-paid (or premium-funded) commissions so long as borrower out-of-pocket cost equals the regulator-approved premium.
• Guidance for Class Actions. Consumer class actions attacking similar commission structures will face a heightened pleading burden: plaintiffs must identify a separate payment or premium “markup” to bring the practice within CLEC’s fee prohibition.
• Statutory Harmony. The decision signals that courts should strive to harmonise CLEC with the Insurance Article, avoiding conflict determinations unless truly unavoidable.
• Erie Doctrine. The opinion underscores Fourth Circuit methodology—deference to Maryland’s Court of Special Appeals— reinforcing Len Stoler’s statewide authority unless and until the Maryland Court of Appeals says otherwise.

4. Complex Concepts Simplified

CLEC (Credit Grantor Closed End Credit Provisions)

A Maryland statutory scheme lenders may elect to govern non-revolving (closed-end) consumer loans, providing both interest-rate flexibility and consumer-protection restrictions.

Fee vs. Commission

Fee: A charge to the borrower for services the borrower would not otherwise pay.
Commission: Compensation retained by, or paid to, a party (here, the lender) out of an existing payment (here, the insurance premium) without increasing the borrower’s total cost.

Judgment on the Pleadings (Rule 12(c))

A procedural device allowing a party to win on the legal sufficiency of the pleadings alone, after all factual allegations are accepted as true and viewed most favorably to the non-movant.

Erie “Prediction” and Deference

In diversity or supplemental-jurisdiction cases, federal courts apply state substantive law. Where the state’s highest court is silent, federal courts follow intermediate-state-court decisions unless clearly incompatible with state statutes or high-court rulings.

Filed-Rate Principle (implicit)

Insurance premiums must be filed with and approved by the MIA; once approved, the rate is deemed reasonable and non-excessive, reinforcing that a borrower paying a filed rate suffers no overcharge.

5. Conclusion

The Fourth Circuit’s decision in French v. 21^st Mortgage Corp. decisively answers a previously unsettled question: Is a lender’s retention of a portion of a state-approved insurance premium a “fee” under Maryland’s CLEC? The court’s answer—“No”—rests on ordinary-meaning interpretation, alignment with Maryland’s intermediate appellate authority, and a reluctance to find statutory conflict where none exists.

Practically, the ruling shields lenders and dealers from CLEC liability for insurance-placement commissions, so long as the borrower pays only the approved premium. Conceptually, it clarifies that CLEC’s consumer-protection reach is triggered by “additional” charges, not by redistributions within a regulated price. As such, French becomes a key citation for any future litigation over ancillary charges and commissions in Maryland closed-end credit transactions.