QUESTION
We are a mid-size lender. I am the company’s Chief Compliance Officer. I do not believe a claim can be brought against a lender if the lender is not the creditor. We are no longer involved in the loan, having sold it. We do not own it, and we do not service it.
Yet we are being caught up in litigation that alleges we have assignee liability. We are being forced to defend against a claim I do not think has merit. I would like some clarification about the meaning of the term “creditor” and whether assignee liability can reach us.
What is the meaning of “creditor?”
Do we have assignee liability?
ANSWER
My response will be somewhat limited without knowing more facts than you provided in your question. I strongly urge you to seek appropriate legal counsel with substantial experience in these matters. My reply is not meant to be taken as legal advice and does not infer same. Not all lawyers are sufficiently expert in issues like the one you describe. Faced with a lawsuit along these lines, you need an attorney who is an expert with considerable experience, not someone who is going to learn on the job. If you want a recommendation, please contact me separately here.
I will offer a working definition of the term “creditor” under the Truth in Lending Act (TILA). Based on your question, I think TILA would be foundational to providing a worthwhile response.
Regulation Z, the implementing regulation of TILA, defines the term “creditor” to mean:
“A person (a) who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a down payment), and (b) to whom the obligation is initially payable, either on the face of the note or contract, or by agreement where there is no note or contract.”[i]
Courts often dismiss TILA claims filed against persons to whom the obligation is not initially payable (i.e., persons who are not “creditors”) as did a federal district court in Florida.[ii] This case, Walters v. Fast AC, may sound familiar to my lawyer friends and subscribers, as the U.S. Court of Appeals for the 11th Circuit previously considered a constitutional standing issue.[iii] Let’s drill down a little here because the case touches not only on the meaning of “creditor” but also the implications of assignee liability.
I’ll sketch the case out in bullet points so we don’t get too entangled in the legalese.
· In 2018, an air conditioning technician for Fast AC, Mike, told Walters that the ductwork for his air conditioning unit needed to be replaced.
o When Walters hesitated about the cost, Mike assured him he could obtain financing.
o Mike then accessed Walters’ computer and e-signed several documents on Walters’ behalf, none of which Walters had a chance to read.
o Due to Mike’s actions, Walters “signed” a revolving account credit agreement with FTL Capital Partners, which contained TILA open-end disclosures.
· Walters called Fast AC to cancel the job before Walters paid any money and before Fast AC began any work. Fast AC said they could not help him.
o This left Walters with no immediate way of canceling the agreement because he had no idea who was financing the repairs. After he received his first bill, he called FTL to say the ductwork had been canceled.
o FTL refused to believe Walters because Fast AC had incorrectly represented that it had commenced work.
· Walters brought multiple claims, including TILA claims, against Fast AC and FTL.
o He claimed that his loan was a closed-end, not open-end, transaction for which he had received the wrong TILA disclosures.
Ø The district court dismissed the action, concluding that Walters lacked standing because he had not suffered any injury in fact.
o The 11th Circuit:
§ sent the case back to the district court, holding that Walters had Article III standing to allege TILA disclosure violations because he had sufficiently alleged injury in fact.[iv]
§ found that if Fast AC’s conduct were independent of FTL, then Walters’ injuries were not traceable to FTL, but concluded that Walters had “sufficiently pleaded that Fast AC was acting as FTL’s agent when it allegedly signed up Walters for a loan without disclosing the loan’s terms.”
§ expressed no opinion on the merits of Walters’ claims, nor did it address whether or under what circumstances a creditor may be held liable under TILA for the actions of an agent or whether sufficient evidence showed an agency relationship between FTL and Fast AC.
Ø On remand, the district court examined Walters’ claim against FTL.
§ Fast AC had become an FTL-licensed contractor in 2016 and was expelled in 2019 for falsely representing to FTL that it had completed installation work for customers.
§ As mentioned above, in 2018, Fast AC contracted with Walters to replace HVAC ductwork. Walters sought to cancel the contract and eventually discovered that FTL had financed the deal.
· Walters asked the district court to consider his argument that his agreement with FTL was a closed-end transaction and FTL had violated TILA by only disclosing the information TILA required for open-end transactions.
o Walters contended that FTL should be vicariously liable for its agent’s (Fast AC’s) misconduct under TILA.
Ø Unfortunately for Walters, the court granted summary judgment for FTL.
o It concluded that FTL was not a “creditor” under TILA.
§ As a result, the court did not need to consider whether a creditor might be liable for its agent’s misconduct under TILA or whether Fast AC had acted as FTL’s agent.
Now, let’s go to the contract. The credit agreement had clearly indicated that FTL was a potential assignee by stating, for example, that the “Dealer may assign all rights under this Agreement and any credit sale…to FTL…” Thus, if the court construed the agreement as being initially payable to FTL, it would render this provision meaningless.
The court also found that FTL was not liable as an assignee because whether the agreement with Fast AC reasonably contemplated repeated transactions was not apparent on the face of the documentation. Walters’ arguments that the loan was closed-end relied entirely on FTL’s corporate testimony and not anything on the face of the loan documents.
As I stated above, unless the potential defendant is a “creditor” as defined in Regulation Z, such TILA claims generally cannot successfully be brought against the potential defendant.
However, TILA specifically addresses assignee liability by providing:
“Except as otherwise specifically provided in [TILA][v], any civil action for a violation [of TILA] or proceeding under [TILA § 108 by an enforcement agency][vi] which may be brought against a creditor may be maintained against any assignee of such creditor only if the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement, except where the assignment was involuntary. For the purpose of this section, a violation apparent on the face of the disclosure statement includes, but is not limited to (1) a disclosure which can be determined to be incomplete or inaccurate from the face of the disclosure statement or other documents assigned, or (2) a disclosure which does not use the terms required to be used by [TILA].”[vii]
It should also be mentioned that any consumer who has the right to rescind (i.e., right to cancel) a transaction under TILA may rescind the transaction as against any assignee of the obligation.
To be classified as an “assignee,” the assignment must be voluntary on the part of the creditor. The assignee in an assignment for the benefit of creditors would not be coverable under TILA.[viii] As pointed out by the court, the definition of “creditor” plays an important role here: the creditor is the one to whom the obligation is initially payable on the face of the contract. Accordingly, as this court concluded, the seller in a credit sale contract assigned to a financial institution would be the “creditor,” while the financial institution would be the “assignee” under TILA.[ix]
Note that the Home Ownership and Equity Protection Act (HOEPA) separately addresses assignee liability in connection with high-cost mortgage loans (HCMs is a term defined by Regulation Z).[x] HOEPA amended TILA to eliminate holder-in-due-course protections for purchasers and assignees of HCMs.[xi] Under TILA,[xii] consumers are entitled to assert against assignees all claims and defenses in connection with HCMs they could assert against creditors.
To ensure that the assignee liability provision of HOEPA does not reach beyond HCMs, TILA insulates an assignee from liability if an assignee can demonstrate, by a preponderance of the evidence, that a reasonable person, exercising ordinary due diligence, could not determine the loan was an HCM after reviewing the loan documentation, the itemization of the amount financed, and other disclosure of disbursements.[xiii] The determination would require a review of the documentation required by TILA, including, but not limited to, the required disclosures and a disclosure of the disbursements or itemization of the amount financed. While the exception limits the liability of an assignee of an HCM, it was not intended to limit the liability under other TILA provisions.
Indeed, to ensure that assignees are aware of their potential liability, TILA requires any party assigning an HCM to include a prominent notice of potential liability. Regulation Z[xiv] implements this requirement by specifying that a creditor may not sell or assign an HCM without furnishing the following statement to the purchaser or assignee:
“Notice: This is a mortgage subject to special rules under the Federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the consumer could assert against the creditor.”
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
[i] §1026.(a)(17)(i)
[ii] Walters v. Fast AC,
2023 U.S. Dist. (M.D. Fla. October 24, 2023)
[iii] Walters v. Fast AC, 60
F.4th 642 (11th Cir. 2023)
[iv] Generally, for a party
to establish Article III standing, he must allege (and ultimately prove) that
he has a genuine stake in the outcome of the case because he has personally
suffered (or will imminently suffer): (1) a concrete and particularized injury;
(2) that is traceable to the allegedly unlawful actions of the opposing party;
and (3) that is redressable by a favorable judicial decision. These
requirements seek to ensure that federal courts do not exceed their Article III
power to decide actual cases or controversies.
[v] See 15 USC §1635(c) of
this title.
[vi] See 15 USC § 1607
[vii] TILA § 131; 15 U.S.C.
§ 1641
[viii] TILA § 131
[ix] Idem
[x] 12 CFR § 1023.32
[xi] Op. cit. vii
[xii] TILA § 131(d)
[xiii] Idem
[xiv] 12 CFR § 1023.34(a)(2)
