Banking and Finance Law Daily Loan financed by trust for repairs to beneficiary’s residence is a consumer credit transaction
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Wednesday, April 15, 2020

Loan financed by trust for repairs to beneficiary’s residence is a consumer credit transaction

By Nicole D. Prysby, J.D.

A trustee’s loan for repairs to a residence occupied by the trust beneficiary is a consumer credit transaction for purposes of federal consumer disclosure protections, even though the borrower did not intend to live in the house.

In a case of first impression, the Ninth Circuit Court of Appeals held that a transaction in which a trustee-borrower obtained a loan to make repairs to a personal residence occupied by the trust beneficiary is a consumer credit transaction for purposes of federal consumer disclosure protections. The borrower, acting in her role as a trustee, obtained a loan to make repairs to a personal residence that is occupied by her niece, who is the trust beneficiary. She brought claims against the lender under the Truth-in-Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), Reg. Z, and California’s Rosenthal Fair Debt Collection Practices Act. Because the borrower did not herself intend to live in the house, the district court held that it was not a consumer credit transaction, and dismissed the complaint. The Ninth Circuit reversed, citing the Official Staff Commentary to Reg. Z, which provides that a loan for personal, family, or household purposes of the beneficiary of a trust created for tax or estate planning purposes is a consumer credit transaction. The definitions of consumer credit transaction under TILA and the Rosenthal Act are identical. And RESPA requires only that the transaction be for a consumer purpose. Therefore, the transaction is a consumer credit transaction under all three statutes (Gilliam v. Levine, April 14, 2020, Schroeder, M.).

The borrower, acting in her role as a trustee, obtained a loan to make repairs to a personal residence occupied by her niece, who is the trust beneficiary. The borrower alleged that the lender’s loan disclosures were materially inconsistent with the terms of the loan and that the lender used unfair means to collect a consumer debt. She brought claims under the TILA, RESPA, Regulation Z, and the Rosenthal Fair Debt Collection Practices Act. Because the borrower did not herself intend to live in the house, the district court held that it was not a consumer credit transaction and dismissed the complaint. The consumer appealed.

On appeal, the lender asserted that a trust does not qualify as a natural person under TILA, and cannot be party to a consumer credit transaction (subject only to a limited exception where the loan is to finance the residence of the trustee). The Ninth Circuit rejected that argument because the Official Staff Commentary to Regulation Z provides 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 CFR Part 1026, Supp. 1, section 1026.3 Comment 3(a)-10). These "certain trusts" include trusts that were created for tax or estate planning purposes. Therefore, under the Commentary, a loan for personal, family, or household purposes of the beneficiary of this type of trust is a consumer credit transaction. Further undermining the lender’s position is the Commentary’s explanation that it is the substance of the transaction that matters; there is no distinction between a loan obtained for the benefit of the trustee alone, and a loan obtained for the benefit of trust beneficiaries. None of the authority cited by the lender stands for the proposition that a trust cannot be 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 makes a loan commercial in nature.

The definitions of consumer credit transaction under TILA and the Rosenthal Act are identical. And RESPA’s definition of protected transactions requires only that the transaction be for a consumer purpose. Therefore, trusts like the one in this case can be considered natural persons under the Rosenthal Act, and the transaction is a consumer credit transaction under all three statutes.

The case number is No. 18-56373.

Attorneys: Donald Reid (Law Office of Donald W. Reid) for Maxine Gilliam. William Derek May (Law Office Of W Derek May) for Joel Levine

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