9th Circuit: Trustees’ loan transaction is entitled to state and federal consumer disclosure protections

Courts Appellate Ninth Circuit RESPA TILA State Issues Disclosures

On April 14, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s dismissal of claims under TILA, RESPA, and California’s Rosenthal Fair Debt Collection Act, holding that a loan transaction made by a borrower in her capacity as a trustee (appellant-borrower) remained a consumer credit transaction entitled to state and federal consumer disclosure protections. According to the opinion, the appellant-borrower obtained a loan to finance repairs to a personal residence that was occupied by her niece—the trust’s sole beneficiary. The appellant-borrower alleged that the lender’s (defendant-appellee) loan disclosures were materially inconsistent with the loan’s terms and filed a complaint alleging that “the due date disclosures did not accurately reflect the terms of the loan.” The complaint sought rescission of the loan under TILA, damages against the defendant-appellee under the Rosenthal Fair Debt Collection Act due to the alleged use of unfair means to collect her debt, and inaccurate disclosure damages and reimbursements for payments she claimed she was not obligated to make. Under TILA and RESPA, rescission and damage remedies are only available to consumer credit transactions, and the defendant-appellee moved to dismiss on the ground that a residential loan to a trust can only qualify as a consumer credit transaction where a trustee-borrower lives at the residence. The appellant-borrower countered that the CFPB’s Official Staff Commentary (Commentary) to Regulation Z, which implements TILA, explains “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.’” The district court agreed with the defendant-appellee’s position that the loan was not a consumer credit transaction and dismissed the complaint.

On appeal, the 9th Circuit noted that the Commentary states that “a loan for ‘personal, family, or household purposes’ of the beneficiary of this type of trust is a consumer credit transaction,” and that furthermore, “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.” The appellate court rejected the defendant-appellee’s argument and concluded that the loan should be considered a consumer credit transaction under all three statutes. Holding that the district court erred in dismissing the complaint by construing the statutes too narrowly, it reversed and remanded for further proceedings.