Ninth Circuit Gives Interesting Definition of “Consumer Credit” Under TILA and RESPA

Business Litigation Update

Date: April 20, 2020

Key Notes:

  • Loans involving trusts could be subject to RESPA, TILA, and the FDCPA.
  • Lenders’ origination and servicing practices should be examined in light of a recent Ninth Circuit holding.

Traditionally, the protections afforded by consumer protection statutes, such as the Truth in Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), Fair Debt Collection Practices Act (FDCPA), and various state equivalents, have been available only to individuals who are obtaining financing for personal, family, or household purposes. On April 14, 2020, in a self-proclaimed case of first impression, the U.S. Circuit Court for the Ninth Circuit reversed a district court’s order of dismissal and held that “a trust created by an individual for tax and estate planning purposes … does not lose all state and federal consumer disclosure protections when it seeks to finance repairs to a personal residence for the trust beneficiary” and, as a result, such transactions are considered consumer credit transactions.

Background

In Gilliam v. Levine, No. 18-56373 (9th Cir. 2020), a borrower obtained a loan in her capacity as trustee to make repairs to a personal residence occupied by her niece, the trust beneficiary. The personal residence was the main trust asset and the collateral for the loan.

The trustee subsequently sued the lender, seeking to rescind the loan and recover monetary damages, alleging that the disclosures she received when the loan was originated were not compliant with TILA’s requirements and constituted an unfair means to collect a consumer debt pursuant to California’s Rosenthal Act.

The district court dismissed the complaint, holding that because the property securing the loan was not the trustee’s personal residence, the loan was not a consumer credit transaction, and TILA and the Rosenthal Act did not apply.

Ninth Circuit Decision

The Ninth Circuit reversed, holding that a trust created by an individual does not lose state and federal consumer disclosure protections when it seeks to finance repairs to a personal residence for the trust beneficiary.

In reaching its conclusion, the court acknowledged that TILA’s definition of “consumer credit transaction” expressly excludes loans to organizations. Dispositive to the court’s holding, however, was the Consumer Financial Protection Bureau’s (CFPB) Official Staff Commentary to Regulation Z (TILA’s implementing regulation), which says 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.” Included within this trust exception are trusts created for tax or estate planning purposes. As a result, the Ninth Circuit concluded that “[f]or consumers who place assets in a trust, the regulation thus effectuates TILA’s definition of consumer credit transactions: those that are for ‘primarily for personal, family, or household purposes.’”

The court also relied on the CFPB’s position that substance should take precedence over form because “‘[r]egardless of the capacity … in which the loan documents are executed,’ trusts should be considered natural persons under TILA, so long as the transaction was obtained for a consumer purpose, because, ‘in substance (if not form) consumer credit is being extended.’” According to the Ninth Circuit, by arguing otherwise, the lender “draws an artificial distinction between a loan obtained for the benefit of the trustee alone, and a loan obtained for the benefit of the trust beneficiaries.”

The Ninth Circuit relied on the CFPB’s Official Staff Commentary to conclude that because the trustee alleged in the complaint that she obtained the loan to make repairs so the trust beneficiary could continue living in the home, she sufficiently pled the existence of a consumer credit transaction, and that the complaint survived the plausibility analysis applicable to motions to dismiss. At least in the Ninth Circuit, “trusts like the one in this case can be considered natural persons under the Rosenthal Act, and … the transaction here is to be regarded as a consumer credit transaction under” TILA, RESPA, and the Rosenthal Act. The Ninth Circuit reversed and remanded the case back to the district court.

Conclusion

As a result of the Ninth Circuit’s holding in Gilliam, transactions involving trusts may now be subject to TILA, RESPA, FDCPA, California’s Rosenthal Act and other state equivalents. Lenders, servicers and debt collectors should reexamine their disclosure and collection practices when it comes to loans involving trusts. Failure to do so could involve significant risk from both a compliance and litigation perspective.

FOR MORE INFORMATION

For more information, please contact:

Jessica E. Salisbury-Copper
937.443.6854
Jessica.Salisbury-Copper@ThompsonHine.com

Richard A. Freshwater
216.566.5764
Richard.Freshwater@ThompsonHine.com

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