Equitable Life Assurance Society of United States v. Insurance Commissioner

Finan, J., delivered the opinion of the Court. This is an appeal by the Equitable Life Assurance Society of the United States (Equitable), plaintiff below, from a judgment of the Superior Court of Baltimore City in favor of Newton I. Steers, Insurance Commissioner of the State of Maryland, Francis B. Burch, Attorney General and Charles E. Moylan, Jr., State’s Attorney for Baltimore City. Equitable brought this action for a declaratory judgment Code (1967 Repl. Vol.), Art. 31 A, seeking clarification of its rights and liabilities under Maryland’s new Usury Law, Chapter 453, 1968 Laws of Maryland (House Bill No. 11), which repeals §§ 1-16 of Article 49 of the Maryland Code entitled “Interest and Usury” and replaced it with new §§ 1-11.

We shall refer to the new law as the Act. The specific issue before the Court is the question of whether interest as defined in the Act includes insurance premiums received by Equitable on Equitable life insurance policies assigned to Equitable as additional collateral security for the repayment of residential mortgage loans. If such retained premiums were to be considered interest they would have to be included in the loan agreement between the lender and the borrower required by § 3 of the Act; they would have to be reflected as interest in the disclosure statement required by § 10 and in the computation of interest under § 6 in order to determine whether or not the interest exceeded the maximum legal permissive limit of eight per cent (8%). The parties agreed to a stipulation of facts which sets forth that Equitable makes residential mortgage loans in Maryland under two plans, either of which the borrower may elect.

One is the Assured Home Ownership plan known as “AHO” and the other Insured Residential Mortgage plan known as “IRM.” ¹⁴⁵ If the borrower elects to borrow money from Equitable under the AHO plan, he will give as security for the repayment of the loan not only a mortgage on his home but also the assignment to Equitable of new or existing Equitable policies of permanent cash value life insurance which have premiums payable on a monthly basis, so that such premiums will be paid to Equitable in one sum along with principal and interest payments on the mortgage loan. If the borrower elects to borrow money under the IRM plan, he also will give as security for the repayment of the loan a mortgage on his home and the assignment to Equitable of permanent cash value life insurance. However, the borrower may assign not only new or existing Equitable policies, but he may assign new or existing policies from other legal reserve life insurance companies, or he may assign a combination of both. Under this plan, the premiums are paid directly to the insurer (whether it be Equitable or not) independently of payments of principal and interest.

Under both programs (the AHO and IRM plans) the life insurance policies are assigned purely as collateral security. Equitable makes no charges and collects no fees of any sort for the assignment of this collateral security, whether it be an Equitable policy or not. If the borrower elects to assign an Equitable policy, the premiums charged for such policy are identical to those charged any other nonborrower purchasing a similar Equitable policy under similar circumstances and they are competitive with similar policies from other companies. There are no hidden charges.

Any premiums paid Equitable are entirely and solely compensation for the insurance and no portion of such premiums are compensation for the loan. When a policy is assigned, the borrower retains all of the rights he would retain in any other property which he might offer as collateral security. In addition he retains all of the dividends on the policy which, in the case of a mutual company, are the return of surplus after payment of claims and expenses and after providing for adequate reserves. Upon payment of the loan the assignment is cancelled.

During the year 1967 Equitable made over $5,-000,000 worth of loans under these programs in the State of Maryland. ¹⁴⁶ For purposes of this case, the parties stipulated to a typical loan transaction under the program where the collateral security is an Equitable policy. The borrower is 40 years old, is married and has children. He is purchasing a home valued at $40,000. To purchase it he borrows $30,000 under the program from Equitable for a term of 20 years at 7%% interest per year.

In addition to a mortgage on his home, he gives as additional security the assignment of an Equitable adjustable whole life insurance policy with the face amount of $30,000. The premium on the policy at age 40 is $72.00 per month. This premium together with principal and interest totals $309.30 per month. Equitable as the lender retains the entire premium.

If the retained premium is construed as interest under the Act, the average rate of interest during the life of the loan would be 10.98%, a rate in excess of the permissive legal maximum rate of eight per cent (8%). On this premise, if Equitable made the loan retaining the premium and desired to bring the interest rate within the permissive limits of the Act, it could only charge 3.8% interest on the loan, apart from the premium. Equitable argues that such a rate is grossly below the current cost of money being about one-half the alleged going rate of 7.25%. It contends that it could not loan money under its programs and justify such an, investment to tire mutual policy holders.

The pertinent provisions of the Act are as follows: “1. (A) The term interest as used in this article means any compensation