On April 14, 2020, the U.S. Court of Appeals for the Ninth Circuit ruled that a loan which was obtained by the trustee of a family trust for the benefit of the trust beneficiary qualified as a consumer credit transaction under the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), and the State of California’s Rosenthal Act—all of which provide certain protections to borrowers in consumer credit transactions. This decision resolved an “issue of first impression” under federal and state regulation of consumer credit transactions.
This case involved a borrower who was the trustee of a trust containing a residential property. The trust beneficiary was the borrower’s niece, who resided at the property. While acting in her capacity as trustee, the borrower obtained a loan secured by the property to finance repairs on the trust property. Under TILA, in a consumer credit transaction, a creditor must disclose to the borrower the amount of payments and when each is due. Here, the lender’s due date disclosures did not accurately reflect the terms of the loan, and the borrower filed a complaint in district court seeking rescission of the loan under TILA and damages under the Rosenthal Act for the lender’s alleged use of “unfair means to collect a consumer debt.” She also brought RESPA claims which were not addressed directly by the Ninth Circuit opinion. Additionally, the borrower sought damages caused by the inaccurate disclosure, which were only available in “consumer credit transactions.”
TILA defines consumer credit transactions as ones where a borrower can demonstrate that “the loan was extended to (1) a natural person, and was obtained (2) “primarily for personal, family, or household purposes.” Excluded from this definition is credit which is extended to organizations or even to natural persons, if obtained for non-consumer purposes. Similarly, the Rosenthal Act defines a consumer credit transaction as a “loan that was extended to a natural person for consumer purposes.” Additionally, RESPA does not apply to “credit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes.”
The district court dismissed the borrower’s claims, holding that the loan was not a “consumer credit transaction” because the property securing the loan was not the borrower’s primary residence, and therefore none of the three statutes applied to the loan. The borrower appealed. On appeal, the lender argued that a trust does not qualify as a natural person under TILA, and cannot be party to a consumer credit transaction. The appeals court disagreed.
Reversing the district court, the Ninth Circuit concluded that the loan was a “consumer credit transaction” within the meanings of the three statutes. First, the court ruled that the loan was a “consumer credit transaction” under TILA. It found instructive the CFPB’s Official Staff Commentary to Regulation Z (Comment 3(a)-10), which states that “credit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization,” and explains that a creditor may “extend credit for consumer purposes to a trust that a consumer has created for tax or estate planning purposes (or both)” and into which a consumer has placed his or her assets “with themselves or themselves and their families or other prospective heirs as beneficiaries, to obtain certain tax benefits and to facilitate the future administration of their estates” while continuing to use the assets and/or trust income as the consumer’s property. Further, the comment states that “regardless of the capacity or capacities in which the loan documents are executed, assuming the transaction is primarily for personal, family, or household purposes, the transaction is subject to the regulation because in substance (if not form) consumer credit is being extended.”
The Ninth Circuit reasoned that because the borrower obtained the loan to allow the trust beneficiary to continue to live in the trust property, the borrower had sufficiently alleged that the loan was obtained “primarily for personal, family, or household purposes.” Therefore, the loan was a “consumer credit transaction” under TILA. The court concluded that the loan was also a consumer credit transaction under the RESPA and the Rosenthal Act because (1) RESPA covers transactions “for a consumer purpose,” and (2) the Rosenthal Act’s definition of “consumer credit transaction” was identical to the TILA definition.