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Thursday, May 28, 2020

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