Consumer Loans and TILA

QUESTION

I am the Associate General Counsel for a bank. Recently, the attorney for one of our credit card borrowers wanted to claim TILA protections. This request has come up several times. I wonder if you would provide some insight into this issue. 

My question, therefore, is do commercial borrowers have access to TILA protections?

ANSWER

I will tell you that this particular request is going to continue to come up no matter what you do. It is one of those questions that never seems to age with time!

Many lawyers know that the Truth-in-Lending Act (TILA) generally does not apply to loans primarily for business, commercial, or agricultural purposes. Portions of Regulation Z governing the issuance of credit cards and the liability for their unauthorized use apply to all credit cards, even if the credit cards are issued for use in connection with extensions of credit that otherwise are exempt

Regulation Z Comment 3(a)-2, which was added in December 2008, explains that if a business purpose credit card is issued to a person, the provisions of the regulation do not apply, other than as provided in §§ 1026.12(a) and (b) (viz., the provisions that govern card issuance and liability for unauthorized use), even if extensions of credit for consumer purposes are occasionally made using that business purpose card.

For instance, the billing error provisions of § 1026.13 do not apply to consumer purpose extensions of credit using a business purpose credit card. The comment also looks at the converse situation, and explains that if a consumer purpose credit card is issued to a person, the provisions of the regulation apply, even to occasional extensions of credit for business purposes made using that consumer purpose credit card. As an example, a consumer may assert a billing error with respect to any extension of credit using a consumer purpose card, even if the specific extension of credit on the credit card or open-end credit plan that is the subject of the dispute was made for business purposes.

Some bank lawyers have wondered whether a commercial borrower might become entitled to TILA protections if their bank funnels a commercial transaction into the consumer loan pipeline, whether intentionally or not. For example, a bank might find it convenient to handle certain types of loans, such as a loan to finance the purchase of a motor vehicle, under the same policies and procedures it applies to a consumer’s purchase of a car. Does the bank’s provision of TILA and other consumer disclosures bind the bank to TILA compliance for that loan?

I think you may want to look at a recent case for some guidance. A federal district court in Florida (in dicta) recently rejected a business borrower’s argument that the bank’s provision of TILA disclosures had bound the bank to TILA’s regulatory requirements. However, the court did not disavow the possibility of a breach of contract claim. [Penton v. Centennial Bank, 2019 U.S. Dist. (N.D. Fla. Nov. 22, 2019)].

Penton obtained a loan from Centennial Bank to purchase real estate. The loan documentation indicated the loan purpose was to “purchase investment home.”

Penton sued the bank and other defendants, alleging, among other things, that the bank had violated TILA by failing to disclose a kickback scheme among the bank and insurance providers to give the insurance providers the exclusive right to monitor the bank’s mortgage portfolio and force-place insurance.

However, the court dismissed the complaint because TILA exempts credit transactions primarily for business, commercial, or agricultural purposes.

The court rejected Penton’s argument that the promissory notes referenced TILA and therefore indicated that the parties intended to be bound by TILA. Alternatively, the court held that even if the parties had intended for TILA to govern their relationship, the bank’s failure to live up to TILA’s terms would constitute a breach of contract rather than a TILA violation.

So, the court highlighted a claim Penton should have made, but apparently did not make. He should have sued for breach of contract! If he could show that the promissory notes had incorporated the provisions of TILA – or perhaps better yet for Penton, the Real Estate Settlement Procedures Act (RESPA) – into the terms of the business loan transaction, then the lender’s failure to comply with TILA (or RESPA) would constitute a breach of contract.

Maybe you should explore that angle!

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Pandemic Challenges: Returning to the Office

QUESTION

We are starting to bring back some employees to our main office. They have a choice to work remotely or return, whatever works for them. Some employees have been infected, and others know people who have died from the coronavirus.

Our offices have a lot of open cubicles and open areas, so everyone is potentially exposed to COVID-19 issues. We want to make the space as safe as possible. We hired a consultant and did some mandatory training, but that is not having the effects we want. The consultant told us what we already know, and the training, based on our survey, did not increase confidence. So, now what? We’re frustrated.

Is there some game plan that we can follow to give people the confidence to return to the office?

ANSWER

Realistically, we can’t expect people to return to the office until they feel safe. Passing laws that lift the shelter-at-home requirement does not necessarily increase confidence, especially when the science and medical advice run counter to a government edict. People instinctively know that they must protect themselves, their families, and one another. You can’t legislate away the risk of contracting COVID-19.

As we go to press, the United States has confirmed 1,596,526 cases, 370,973 recovered cases, and sadly 95,057 deaths.[i] 

It is heartbreaking - all those precious lives lost! 

To understand these numbers, add the recovered cases and the deaths. Those equal 466,030. Using that total, the recovered cases (370,973) equal 80%, and the deaths (95,057) equal 20%. We may quibble about the criteria used for the statistic, but we can’t really argue about the substantial loss of life. 

Unfortunately, insufficient testing and contact tracing mean that people do not actually know their true exposure.

So, it is not surprising that employees are reluctant to return to the office.

Since March 16^th, my firm has been providing a free Business Continuity Plan Checklist & Workbook, Includes COVID-19 Pandemic Response to help you navigate business continuity and the COVID-19 pandemic. It is currently in Update # 6. Update # 7 is about to be published. So, if you haven’t downloaded it yet, do so HERE. I believe it will help.

I have a few suggestions to encourage a safe office environment for returning employees. Other employees may gradually gain the confidence to return if you provide a consistent, reliable, and sincere approach. Let’s check a few actions you might want to implement. These suggestions are not meant to be comprehensive.

Meet Frequently

Schedule mandatory meetings to discuss COVID-91 pandemic challenges and updates.

1. Meetings should be held in the office and remotely at least once a week – or more often if there’s important news.
2. Use PowerPoints and personal interest stories to build confidence and knowledge.
3. Use the meetings to build trust and encourage feedback from employees.
4. Materials should be easy to understand and available in the appropriate language and literacy level for all employees.
5. Create a portal webpage for remote and office employees to obtain news about COVID-19 and the company’s pandemic response actions.

Workplace Safety

Reduce the risk of contagion by protecting the physical conditions of the office.

1. Install high-efficiency air filters.
2. Increase ventilation rates.
3. Install physical barriers, such as clear plastic sneeze guards.
4. Install a drive-through window or counter plastic sneeze guards for customer service.
5. Provide specialized negative pressure ventilation, where possible, for settings where people may congregate.
6. Maintain regular housekeeping practices, including routine cleaning and disinfecting of surfaces, equipment, and other elements of the work environment.

Administrative Controls

Ideally, these controls are going to require rapport and cooperation between employees and management.

1. Encourage sick employees to stay at home – period!
2. Require an employee who shows signs of COVID-19 to immediately go home – period!
3. Inform and encourage employees to self-monitor for signs and symptoms of COVID-19 if they suspect possible exposure.
4. Develop policies and procedures for employees to report when they are sick or experiencing symptoms of COVID-19.
5. Consider offering face masks to employees and consumers as long as these individuals are in the office. Tip: If there is a shortage of masks, the CDC has advised that a reusable face shield can be decontaminated and may be an acceptable method of protecting against droplet transmission.[ii]
6. Minimize contact among employees, clients, and consumers by replacing face-to-face meetings with virtual communications and implementing telework, if feasible.
7. Discourage employees from using other employees’ phones, desks, offices, or other personal items, when possible.
8. Establish alternating days or extra shifts that reduce the total number of employees in the office at a given time, allowing them to maintain distance from one another while maintaining a full on-site work week.
9. Discontinue non-essential travel to locations with on-going COVID-19 outbreaks.
10. Develop emergency communications plans, including a forum for answering employees’ concerns.
11. Provide employees with up-to-date education and training on COVID-19 risk factors and protective behaviors (i.e., cough etiquette, masks, hand washing, gloves, social distancing).
12. Train employees who need to use protecting clothing and equipment how to put it on, use/wear it, and take it off correctly, including in the context of their current and potential duties. For instance, demonstrate how to put on and take off gloves and masks.
13. Where appropriate, limit the public’s access to the office or restrict access to only certain workplace areas.
14. Ensure that sick leave policies are flexible and consistent with public health guidance and that employees are aware of these policies.
15. Talk with companies that provide contract or temporary employees about the importance of sick employees staying home and encourage them to develop non-punitive leave policies.
16. Maintain flexible policies that permit employees to stay home to care for a sick family member. Note: Employers should be aware that more employees may need to stay at home to care for sick children or other sick family members than is usual.
17. Provide on-going notices and updates involving employees’ concerns about pay, leave, safety, health, and other issues that may arise.
18. Work with insurance companies (i.e., those providing employee health benefits) and state and local health agencies to provide information to employees and customers about medical care in the event of a COVID-19 outbreak.

Safe Workplace Practices

Generally, you can use procedures to reduce the duration, frequency, or intensity of a hazard if you implement relatively simple practices. Here are a few suggestions.

1. Provide resources and a work environment that promote personal hygiene. For example, provide tissues, no-touch trash cans, hand soap, alcohol-based hand rubs containing at least 60 percent alcohol, disinfectants, and disposable towels for employees to clean their work surfaces.
2. Require regular hand washing or use of alcohol-based hand rubs. According to OSHA, if soap and running water are not immediately available, provide alcohol-based hand rubs containing at least 60% alcohol.[iii]
3. Post handwashing signs in restrooms.

We are all in this pandemic together. When we act, we do not act alone. Our actions affect others. Wearing a mask, for instance, is just such an action, because it protects others and simultaneously protects the person wearing the mask. When an office reopens, the best way to instill confidence is to show that the employee is not alone, because when management acts to protect its employees, it is protecting the viability of the company. Management should create that spirit, and the employees may be willing to return to the office.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

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[i] Worldometer, Coronavirus, United States  https://www.worldometers.info/coronavirus/country/us 

[ii] See Coronavirus disease 2019 (COVID-19) https://www.cdc.gov/coronavirus/2019-ncov/hcp/respirators-strategy/index.html

[iii] OHSA Guidance Summary: Preparing Workplaces for COVID-19 https://success.ada.org/~/media/CPS/Files/COVID/OSHA_Guidance_on_Preparing_Workplaces_for_COVID-19.pdf (PDF)

COVID-19 Pandemic: Waiting Periods and Changed Circumstance

QUESTION

I am a branch manager with a mortgage lender. We have offices in 20 states. My concern right now is with TRID’s waiting period requirement. 

During the pandemic, I am being told that the personal financial emergency wavier is still on a case by case basis, even though the pandemic is about as much of a financial emergency as I can think of. 

What’s the deal here? Is the pandemic considered to be a personal financial emergency?

ANSWER

I sense your frustration. The personal financial emergency waiver has always been controversial, especially because deciding in favor of the waiver is often a case by case decision process. The crux of the matter is a determination as to what constitutes a bona fide personal financial emergency.

For some context, under TRID creditors generally must deliver or place in the mail the Loan Estimate no later than seven business days before consummation. Consumers must receive the Closing Disclosure no later than three business days before consummation. So, we need to get into the weeds a bit to understand the issue.

Under the TRID Rule, creditors generally must deliver or place in the mail the Loan Estimate to consumers no later than seven business days before consummation and consumers must receive the Closing Disclosure no later than three business days before consummation. [12 CFR 1026.19(e)(1)(iii)(B); 1026.19(f)(1)(ii)(A)]

The Regulation Z Rescission Rules also provide consumers with at least three business days from consummation to rescind certain credit obligations secured by the consumer’s principal dwelling, and creditors are required to provide consumers with a disclosure informing them of this rescission right. [12 CFR 1026.15(a); 1026.23(a)]

After receiving the required disclosure(s), a consumer may modify or waive these waiting periods if the consumer determines that he or she needs credit extended to meet a bona fide personal financial emergency. [12 CFR 1026.15(e); 12 CFR 1026.19(e)(1)(v), (f)(1)(iv); 12 CFR 1026.23(e)]

For the waiting periods to be modified or waived, the creditor must have a dated written statement by the consumer that:

(1) describes the emergency,
(2) specifically modifies or waives the waiting period, and
(3) bears the signature of all consumers who are primarily liable on the legal obligation (for the TRID Rule) or who are entitled to rescind (for the Regulation Z Rescission Rules). [12 CFR 1026.15(e); 12 CFR 1026.19(e)(1)(v), (f)(1)(iv); 12 CFR 1026.23(e)]

In the Commentary to the TRID Rule modification and waiver provisions, there is this clarification: 

“[t]he consumer must have a bona fide personal financial emergency that necessitates consummating the credit transaction before the end of the waiting period.”

Furthermore, the Commentary clarifies that whether these conditions are met is determined by the facts or circumstances of individual situations, and provides one example, to wit, the imminent sale of the consumer’s home at foreclosure, where the foreclosure sale will proceed unless loan proceeds are made available to the consumer during the waiting period. [See Comments 19(e)(1)(v)-1; 19(f)(1)(iv)-1]

Explicitly, the Commentary to the Regulation Z Rescission Rules waiver provision similarly states that for a consumer to waive the rescission waiting period, “the consumer must have a bona fide personal financial emergency that must be met before the end of the rescission period.” [Comment 23(e)-1]

Hopefully, now that I’ve laid out a rough sketch of the regulatory outline, let’s turn to answer your question. At the end of April, the CFPB addressed the scenario of the pandemic affecting the waiting period requirements.[i] The Bureau issued an Interpretive Rule, which would go into effect when published in the Federal Register. It was published there on May 4, 2020, so that is the effective date. [85 FR 26319, pp 26319-26321]

Pursuant to the Interpretive Rule, the following decision tree may be applied:

IF:

(1) A consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency,

(2) The consumer’s brief statement describing the emergency identifies a financial need that is due to the COVID-19 pandemic, and

(3) The emergency necessitates consummating the credit transaction before the end of an applicable TRID Rule waiting period or must be met before the end of the Regulation Z Rescission Rules waiting period,

THEN:

The consumer has a bona fide personal financial emergency that would permit the consumer to utilize the modification and waiver provisions, subject to the applicable procedures set forth in the TRID Rule and the Regulation Z Rescission Rules.

Now, here’s a question that you didn’t ask, but is important to pose:

Is the pandemic a Changed Circumstance?

According to the Bureau, the answer is Yes.

Again, some context. Under the TRID Rule, creditors must estimate in good faith the costs that consumers will incur in connection with their mortgage transaction and disclose them on the Loan Estimate. [12 CFR 1026.19(e)(3)]

For purposes of determining good faith under the TRID Rule, creditors may use revised estimates of such costs in a limited number of situations pursuant to Regulation Z, § 1026.19(e)(3)(iv). [12 CFR 1026.19(e)(3)(iv); 12 CFR 1026.19(e)(4)(i)] One such scenario is if there are “changed circumstances” that affect the settlement charges consumers would incur. [12 CFR 1026.19(e)(3)(iv)(A)]

So, does the COVID-19 pandemic constitute a valid changed circumstance? 

Yes, it does!

The TRID Rule specifies that changed circumstances include “an extraordinary event beyond the control of any interested party,” and the Commentary clarifies that a “war or natural disaster” is an example of such an extraordinary event. [12 CFR 1026.19(e)(3)(iv)(A)(1); Comment 19(e)(3)(iv)(A)-2]

According to the CFPB, “economic disruptions and shortages during the COVID-19 pandemic may affect the ability of stakeholders to provide accurate estimates of some settlement charges.”[ii]

The CFPB has taken the position that the COVID-19 pandemic is an extraordinary event that permits creditors to provide consumers with revised estimates reflecting changes in settlement charges.

So, illustratively, for purposes of establishing good faith, a creditor could provide a revised estimate of the appraisal fee based on changed circumstances where 

(1) the amount disclosed on the Loan Estimate was based on a reasonable market price at the time of the estimate, and 

(2) the actual appraisal fee was higher because of a shortage of available appraisers due to the effects of the COVID-19 pandemic.

Explicitly, the CFPB has concluded that, as with wars or natural disasters, the COVID-19 pandemic is an example of an extraordinary event beyond the control of any interested party, and thus is a changed circumstance. 

Therefore, according to the CFPB, for purposes of determining good faith, creditors may use revised estimates of settlement charges that consumers would incur in connection with the mortgage transaction if the COVID-19 pandemic has affected the estimate of such settlement charges. [12 CFR 1026.19(e)(4)(i)]

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

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[i] Application of Certain Provisions in the TILA-RESPA Integrated Disclosure Rule and Regulation Z Right of Rescission Rules in Light of the COVID-19 Pandemic, 12 CFR Part 1026, Interpretive Rule, Bureau of Consumer Financial Protection

[ii] Idem

COVID-19: PPP and ECOA

QUESTION

I am the General Counsel for a bank. I have read your Checklist and Workbook on business continuity and the pandemic response. Thank you for providing this service! My question relates to the SBA Paycheck Protection Program and the implications involving the Equal Credit Opportunity Act. I have three questions.

1) If we receive an SBA Paycheck Protection Program (PPP) loan application and submit it to the SBA, is the application deemed “completed” before we have received a loan number from the SBA or a response about the availability of funds, thereby requiring us to provide a notice of action taken within 30 days?

2) If we receive a PPP loan application and deny the credit request without ever submitting the PPP loan to the SBA, do we need to provide a Regulation B adverse action notification?

3) If we gather sufficient data from the PPP loan applicant for a credit decision, but we have not received a loan number from the SBA or a response about the availability of funds, can we deny the application based on incompleteness?

ANSWER

Thank you for your question. We expect to publish Update # 7 to the Checklist and Workbook next week.  The Checklist discusses the PPP, which is a program made available by the SBA. The SBA is responsible for providing guidance and information about the requirements for the program. For more information about the PPP, I encourage you to visit the SBA website HERE.

The Equal Credit Opportunity Act (ECOA) can be daunting in its nuances. And never more so where its requirements apply to the SBA Paycheck Protection Program (PPP). As you probably know, each of the questions you pose could get its own FAQ here. But, given the urgency caused by the pandemic, I am going to provide a brief – but hopefully cogent – answer to all three questions. My responses are meant to be specific to the Paycheck Protection Program.

Question 1: If we receive an SBA Paycheck Protection Program (PPP) loan application and submit it to the SBA, is the application deemed “completed” before we have received a loan number from the SBA or a response about the availability of funds, thereby requiring us to provide a notice of action taken within 30 days?

Answer: No.

First, let’s note that the 30-day requirement applies to an applicant that is a business that had gross revenues of $1 million or less in its preceding fiscal year. If an applicant is a business that had gross revenues in excess of $1 million in its preceding fiscal year, you must notify the applicant of the action taken within a reasonable period of time. [12 CFR 1002.9(a)(3)(ii)] For such businesses, notification within 30 days counts as “reasonable” in all instances. [Comment 9(a)(3)-5] Moreover, this clarification regarding what constitutes a completed PPP application under Regulation B generally applies to all applicants, regardless of gross revenue.

Under the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B, creditors are required to notify an applicant of action taken within 30 days after receiving a “completed application” concerning the creditor's approval of, counteroffer to, or adverse action on the application. [12 CFR 1002.9(a)(1)]

A PPP application that you submitted to the SBA for loan processing is not a “completed application” under Regulation B until you (as the creditor) receive a loan number from the SBA or a response about the availability of funds.

Under Regulation B, an application is completed when “a creditor has received all the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested …” [12 CFR 1002.2(f); comment 9(a)(1)-1] This information includes, but is not limited to, “any approvals or reports by governmental agencies or other persons that are necessary to guarantee, insure, or provide security for the credit or collateral.” [12 CFR 1002.2(f)]

Under the PPP requirements, you (as the creditor) have delegated authority to approve a loan but the SBA must issue a loan number for a PPP loan to be guaranteed by the SBA.[*]

Therefore, where the creditor has submitted to the SBA a PPP loan application, the 30-day timeline to notify the applicant of the action taken on a completed application under Regulation B does not begin until a creditor has received a loan number from the SBA or a response about the availability of funds. You must act with reasonable diligence to collect information needed to complete an application. [See 12 CFR 1002.2(f); comment 2(f)-6]

Question 2: If we receive a PPP loan application and refuse to grant credit without ever submitting the PPP loan to the SBA, do we need to provide a Regulation B adverse action notification?

Answer: Yes.

By the term “refus(es) to grant credit,” you may be referring to 12 CFR 1002.2(c)(1)(i). To be clear, under Regulation B a creditor must provide an adverse action notification within 30 days after taking adverse action on a PPP application. If an application is missing information but provides sufficient data for a credit decision, you (as the creditor) may evaluate the application, make the credit decision, and notify the applicant accordingly. [Comment 9(a)(1)-4] If the credit is denied, the applicant must be given the specific reasons for the credit denial (or notice of the right to receive the reasons). [Idem]

Question 3: If we gather sufficient data from the PPP loan applicant for a credit decision, but we have not received a loan number from the SBA or a response about the availability of funds, can we deny the application based on incompleteness?

Answer: No.

Perhaps this seems like a controversial question, but it really isn’t, because under Regulation B an application may be denied for incompleteness only if an application is incomplete regarding information that the applicant can provide and the creditor lacks sufficient data for a credit decision. [Comment 9(a)(1)-3]

Alternatively, if an application is incomplete regarding matters that an applicant can complete, a creditor has the option of providing a notice of incompleteness under section 1002.9(c)(1)(ii).

If you (as the creditor) have not received a loan number or a response about the availability of funds from the SBA, but the PPP application is otherwise complete, you cannot deny the application based on incompleteness or provide a notice of incompleteness because a loan number or response from the SBA is not information that an applicant can provide to the creditor.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

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[*] See PPP Interim Final Rule, 85 FR 20811 (April 15, 2020) (SBA is authorized to guarantee loans made under the PPP), available at https://www.sba.gov/sites/default/files/2020-04/PPP%20Interim%20Final%20Rule_0.pdf; SBA PPP Loans Frequently Asked Questions, at Question 21 and n.6 (April 29, 2020) (notes that a lender may issue a PPP loan if it completes the process of submitting a loan through the E-Tran system and receives a loan number), available at  https://www.sba.gov/sites/default/files/2020-04/Paycheck-Protection-Program-Frequently-Asked-Questions_04%2029%2020_2.pdf.