The U.S. Court of Appeals for the Ninth Circuit recently reversed the dismissal of a trustee borrower's claims under the federal Truth-In-Lending Act, Real Estate Settlement Procedures Act, and California's Rosenthal Fair Debt Collection Practices Act seeking rescission of a loan obtained to effectuate repairs upon a property inhabited by the trust's beneficiary.
In so ruling, the Ninth Circuit concluded that in her capacity as trustee, the borrower did not lose her rights and protections under the federal and state consumer protection statutes merely because she did not reside at the property, and the loan remained a consumer credit transaction.
A copy of the opinion is available at: Link to Opinion
A borrower ("Borrower") obtained a loan (the "Loan") in her capacity as a trustee from a lender ("Lender") to make repairs to a home occupied by her niece, the trust's beneficiary. The property was the main asset of the trust and secured the Loan.
The Borrower subsequently filed suit against the Lender in federal court seeking rescission of the loan under the federal Truth-in-Lending Act, 15 U.S.C. § 1601, et seq. ("TILA") and the Real Estate Settlement Practices Act, 12 U.S.C. § 2601, et seq. ("RESPA"), alleging that the Loan's disclosures were materially inconsistent with its terms in that they led her to believe the final payment was one year later than the date provided in the loan documents. The complaint additionally sought damages against the Lender under section 1788.1(b) of California's Rosenthal Act California Civil Code §§ 1788 et seq. ("Rosenthal Act") for alleged unfair means to collect a consumer debt.
As you may recall, these remedies are available only in "consumer credit transactions." 15 U.S.C. § 1635(i)(4); 12 U.S.C. § 2606(a); Cal. Civ. Code § 1788.2(e). For a loan to qualify as such under TILA, a borrower must demonstrate that the loan was extended to (1) a natural person, and was obtained (2) "primarily for personal, family, or household purposes"; extensions of credit to organizations and credit transactions performed for non-consumer purposes, such as loans for a business purpose are excluded, even if the loan is obtained by a natural person. Id. § 1603. 15 U.S.C. § 1602(i). Like TILA, RESPA does not apply to "credit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes" (12 U.S.C. § 2606(a)(1) and the Rosenthal Act defines a consumer credit transaction as a loan extended to a natural person for consumer purposes. Cal Civ. Code. § 1788.2(e).
The Lender moved to dismiss the complaint, arguing without statutory or regulatory authority that a residential loan to a trust can be considered a consumer credit transaction only when the trustee-borrower lives at the residence. The trial court granted the motion, and agreed with the Lender's position that the Loan was not a consumer credit transaction and did not afford the Borrower protections under TILA, RESPA, and the Rosenthal Act because the trust property securing the Loan was not her primary residence, but that of her niece. The instant appeal followed.
On appeal, the Ninth Circuit analyzed the federal Consumer Financial Protection Bureau's Official Staff Commentary to Regulation Z, noting that following its general consumer credit rule would result in a different outcome from the trial court.
Specifically, the Commentary's guidance is that "[c]redit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization." 12 C.F.R. pt.1026, Supp. 1, § 1026.3 Comment 3(a)-10. These "certain trusts" include trusts that were created for tax or estate planning purposes. Id. For consumers who place assets in a trust, the regulation thus effectuates TILA's definition of consumer credit transactions: those that are "primarily for personal, family, or household purposes." 15 U.S.C. § 1602(i). Because the trust in this case was for the benefit of the trustee's niece, it would be considered a consumer credit transaction under the Commentary.
The Commentary further explains that it is the substance of the transaction that matters, and that trusts should be considered natural persons under TILA so long as the transaction was obtained for a consumer purpose. 12 C.F.R. pt. 1026, Supp. 1, § 1026.3 Comment 3(a)-10.i.
On appeal, the Lender neglected to meaningfully address the relevant Commentary to Regulation Z, and instead relied upon the facts of three federal cases to support his proposition that when a trust borrows funds to finance repairs to a residence, the collateral for the loan must be the primary domicile of the trustee.
The Ninth Circuit found these cases unpersuasive, as none stood for the general proposition that a trust cannot be a party to a consumer credit transaction under TILA unless the trustee resides at the property or that borrowing for a familial, personal or household purpose of the trust beneficiary is not a consumer credit transaction and makes a loan commercial in nature. See Amonette v. Indymac Bank, 515 F. Supp. 2d 1176 (D. Haw. 2007); Shirley v. Wachovia Mortg. FSB, No. 10-3870 SC, 2011 WL 855943 (N.D. Cal. Mar. 9, 2011); Galindo v. Financo Fin., Inc., No. 07-03991 WHA, 2008 WL 4452344 (N.D. Cal. Oct. 3, 2008).
Because the Borrower alleged a personal, consumer purpose for the Loan — that it was obtained to support a family member — and under the CFPB's Commentary to Regulation Z and TILA's general purpose to "construe the Act's provisions liberally in favor of the consumer", the Ninth Circuit concluded that the Borrower sufficiently alleged that the Loan was obtained for a consumer purpose and that the trial court erred in dismissing the complaint by construing the relevant statutes too narrowly.
In so ruling, the Ninth Circuit did not hold that the TILA remedy of rescission or cancellation is available when the collateral property is not the borrower's principal residence.
Accordingly, the trial court's dismissal of the complaint was reversed and remanded for further proceedings.
Ralph T. Wutscher
Maurice Wutscher LLP
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