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