The U.S. Court of Appeals for the Ninth Circuit recently ruled in Gilliam v. Levine that a loan made to an individual trustee to finance repairs on residential property owned by the trust was a “consumer credit transaction” for purposes of the Truth in Lending Act, the Real Estate Settlement Procedures Act, and California’s Rosenthal Act.
In the case, which the Ninth Circuit described as “present[ing] an issue of first impression under federal and state regulation of consumer credit transactions,” the borrower, an individual acting in her capacity as trustee, obtained a loan from the lender to finance repairs to the residential property that was the trust’s main asset. The loan was secured by the property. The borrower had become the trustee following the death of her sister, who had created the trust for the benefit of the borrower’s niece who resided at the property. The borrower filed a complaint 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. (The Ninth Circuit does not describe the basis for the borrower’s RESPA claim.) The district court dismissed all of 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.
Reversing the district court, the Ninth Circuit concluded that the loan was a “consumer credit transaction” for purposes of the three statutes. The court first considered whether the loan was a “consumer credit transaction” under TILA, which defines the term to mean a loan to a natural person that is primarily for personal, family, or household purposes. It looked to the 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.” The comment discusses the possibility 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. The Ninth Circuit highlighted the comment’s statement 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 concluded that by alleging that she obtained the loan to enable her niece (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” and, based on the commentary discussion, the loan could qualify as a “consumer credit transaction” under TILA. The Ninth Circuit found no case law or other support for the lender’s argument that the trustee must reside at the trust property for the trust to be party to a consumer credit transaction under TILA.
Noting that the Rosenthal Act’s definition of “consumer credit transaction” is identical to the TILA definition and that RESPA-covered transactions are those “for a consumer purpose,” the Ninth Circuit concluded that the loan was also a consumer credit transaction under the Rosenthal Act and RESPA. Accordingly, the Ninth Circuit ruled that the district court had erred by construing the three statutes too narrowly and should not have dismissed the complaint. It therefore reversed the district court and remanded for further proceedings.