The CFPB has filed an amicus brief jointly with Maine’s Attorney General, Bureau of Financial Institutions, and Bureau of Consumer Credit Protection in the Maine Supreme Judicial Court in a case, Franklin Savings Bank v. Bordick, involving whether the Truth in Lending Act (TILA) applied to the defendants’ loan.  Although Maine was granted an exemption from certain parts of TILA, the Maine Consumer Credit Code incorporates TILA and Regulation Z.

The factual background set forth in the CFPB’s brief states that the defendants took out a loan from the Bank in 2008 to purchase land and then built a second home on the land.  They sold the home in 2014, but the sale proceeds were not sufficient to pay off the loan.  To cover the shortfall, the defendants obtained a second loan from the Bank which was secured by a hunting cabin owned by the defendants.  The defendants subsequently defaulted on the second loan.

The procedural history set forth in the CFPB’s brief states that after the defendants defaulted, the Bank filed a complaint seeking to take possession of the hunting cabin.  At trial, the defendants asserted that the Bank had not complied with TILA in connection with making the second loan because it did not give them TILA disclosures or make a reasonable determination that they had the ability to repay the loan.  They argued that the Bank’s TILA liability offset the amounts they owed on the loan.

The trial court did not allow the defendants to present evidence relevant to their TILA claims.  It determined that TILA did not apply to the loan because the loan documents stated that the loan had a commercial purpose.  In rejecting the defendants’ attempt to introduce extrinsic evidence showing the loan was actually issued for consumer purposes, the court relied on a Maine Supreme Judicial Court opinion dealing with the application of Maine’s notice of default statute for residential real property foreclosure.  In that case, the court held that to determine if the statute applies, courts should not look to extrinsic evidence to determine whether the loan had a commercial or consumer purpose if the loan documents state on their face that the loan has a commercial purpose.  The trial court thereafter denied the defendants’ motion for reconsideration.

The CFPB’s primary arguments are:

  • Case law provides that contractual language is not determinative of whether a loan is covered by TILA.  There is “a strong, national consensus that courts must ‘look at the entire transaction and surrounding circumstances to determine a borrower’s primary motive.’”
  • The Maine Supreme Judicial Court opinion on which the trial court relied involved a different state statute and thus does not speak to how a loan’s purpose should be determined under TILA.
  • Allowing contractual language to control whether TILA applies to a transaction would undermine TILA’s remedial purpose because it would allow a creditor to circumvent TILA by merely labeling loan documents “commercial.”

The CFPB argues that the trial court’s judgment should be vacated and the case should be remanded so the trial court can consider evidence relevant to the loan’s purpose.  We note, however, that the CFPB never offers any facts to indicate that the defendants ever actually occupied the second home that was built on the property purchased with the first loan, which strongly suggests that it was non-owner occupied rental property, and thus that the first loan was a business loan.  Likewise the CFPB never mentions the proceeds of the second loan being used for any purpose other than to pay off the first loan.  Thus it seems quite possible that both loans were business purpose credit under TILA.