The Consumer Financial Protection Bureau filed a joint amicus brief with the state of Maine last week in a case that has implications in determining how the Truth in Lending Act might be enforced.
At the crux of the case Franklin Savings Bank v. Bordick is whether the regulation known as TILA can be applied based upon the intended purpose of a loan rather than the specific classification of the lien. The mortgage in question was originally deemed commercial in nature by Franklin Savings Bank at issuance, while TILA regulations are aimed specifically at consumer-purpose transactions.
In last week’s amicus brief, the CFPB and Maine officials stated that “the fact that the contract labels a loan ‘commercial’ is not dispositive of whether the loan is covered by TILA.” The filing also said “allowing creditors to evade TILA merely by stamping the loan documents with the term ‘commercial’ is at odds with the statute’s remedial purpose.”
At the center of the case is a second home built on land purchased in Rangeley, Maine, by defendants Michael and Monica Bordick in 2008, with financing provided by Franklin Savings. In 2014, the Bordicks attempted to sell the property, but because it had depreciated in value during the Great Financial Crisis, sale proceeds were not enough to fully pay back the lien. The Bordicks subsequently took out a new loan from Franklin Savings to cover the sale of the home, backed by a hunting cabin they owned elsewhere in Maine.
Terms of the new loan called for regular monthly payments over a four-year period followed by a final balloon remittance for the remaining unpaid balance due in early 2019. Although the Bordicks fulfilled monthly obligations, the loan went into default after the Bordicks were unable to fully cover the final amount due, which amounted to over $300,000. Franklin Savings Bank subsequently moved to take possession of the cabin property being used as collateral.
The Bordicks attempted to argue that the bank violated TILA because it had not provided them with mandatory disclosures nor made a reasonable determination that they had the ability to repay. A motion by defendants to dismiss the case, citing that the loan in question applied to personal property and fell under TILA policy, was previously dismissed last year.
While previous court rulings helped establish that TILA did not apply to business or commercial loans, text within the act also specifically notes its rules cover consumer-credit transactions where “the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes.”
In the amicus brief, the CFPB and the state noted the courts did not allow the Bordicks to present relevant evidence showing that, even though the loan was labeled “commercial,” it should qualify as a TILA-protected consumer loan, as it was issued for household purposes.
However, John Culhane, partner at Ballard Spahr, noted some flaws within the CFPB filing, pointing out that the agency “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 nonowner occupied rental property, and thus that the first loan was a business loan,” he wrote in an online post.
Similarly, the CFPB never mentioned how the proceeds of the second loan were being used apart from paying off the initial mortgage. “Thus it seems quite possible that both loans were business-purpose credit under TILA,” Culhane said.
The authors of the amicus brief cited previous rulings that might support the defendants’ argument and said the initial judgment should be vacated and be sent back so their evidence could be considered. “Courts across the country agree that contractual language is not determinative of whether a loan is covered by TILA,” the brief said.
