When representing clients, attorneys rely on the words of the law (a “statute”) and ask the court to implement the plain, obvious meaning of its words. When it comes to federal statutes, however, it is easy to overlook the “comments” by the lawyers for the Congressional committees that draft the statutes, or the agencies which implement them.
In a recent unanimous 9th Circuit decision by the Honorable Mary M. Schroeder, the comments to a consumer lending statute were critical to holding a bank accountable.
In Gilliam v. Levine, Case No. 18-56373 (9th Circuit, 2020), the court recounts that the borrower obtained a loan as trustee for a family trust. The purpose of the loan was to make home repairs. the home itself was the sole asset of the trust. Another family member, who occupied the home, with the trust beneficiary.
The home, i.e., the asset of the family trust, secured the loan.
The borrower later discovered that the due date for the final loan payment was 1 year earlier than she had been led to believe. The borrower was alarmed, and sued to cancel (rescind) the loan under federal law, Truth in Lending Act (TILA), 15 U.S.C. § 1601, et seq., and the Real Estate Settlement Practices Act (RESPA), 12 U.S.C. § 2601. The borrower also asserted a claim under California’s Fair Lending Law [Rosenthal Act], 1788.1(b) of California’s Rosenthal Act, California Civil Code §§ 1788.1(b).
This relief is only available where the borrower is a consumer. 15 U.S.C. § 1635(i)(4); 12 U.S.C. § 2606(a); Cal. Civ. Code § 1788.2(e). The trial court, Hon. Philip Gutierrez, concluded that because the loan went to the trust, it was not a consumer loan. The trial court dismissed the case.
The 9th Circuit reversed the trial judge. The appellate court noted federal Consumer Financial Protection Bureau’s Official Staff Commentary to Regulation Z (mortgage loans), which suggested the opposite result in this case. The Commentary, for example, stated that “[c]redit extended for consumer purposes to certain trusts is considered to be credit extended to a natural person rather than credit extended to an organization.” 12 C.F.R. pt.1026, Supp. 1, § 1026.3 Comment 3(a)-10.
The “certain trusts” that fall under the rubric of “natural persons,” entitled to protection for loans made to benefit a natural person, and not an organization, include the trust in this case, which was formed for tax or estate planning purposes [which benefit people]. As a result, where individuals invest assets in the trust, the regulation thus effectuates TILA’s definition of consumer credit transactions. 12 C.F.R. pt.1026, Supp. 1, § 1026.3 Comment 3(a)-10.
The trust in question was “primarily for personal, family, or household purposes.” 15 U.S.C. § 1602(i). The borrower was the aunt (as Trustee); the niece was the beneficiary; and the trust property was a private home. As a result, the loan was a “consumer credit transaction,” which was subject to the Fair Lending Laws. And the Comment makes the point: Look to the substance of the transaction. Here it was to benefit a consumer, not a company. 12 C.F.R. pt. 1026, Supp. 1, and § 1026.3 Comment 3(a)-10.i.
For as much as it has been vilified by certain political interests, the CFPB remains in force, and fortunately, it remains a source of protection for consumers. It will be interesting to see if the case if appealed to the Supreme Court (quite likely), and whether it will be upheld.
WARNING: THIS POST DOES NOT CONSTITUTE LEGAL ADVICE; PLEASE CONSULT AN ATTORNEY
#law #fairlending #mortgages #truthinlending #codeoffederalregulations #courts
The popular wisdom is that student loans are not dischargeable in bankruptcy. One will often hear a potential client say, “I know I can’t discharge a student loan.”
This is not true. Although the bar is high, student loans can be discharged in bankruptcy.
The debtor must initiate a trial in the bankruptcy court, against the lender. (The case is heard by the bankruptcy judge; there is no jury in bankruptcy court).
Then, the debtor must make a very thorough, detailed evidentiary showing:
“In Polleys [(Educational Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302 (10th Cir.2004)], we held that under the Brunner test [(Brunner v. New York State Higher Education Servs. Corp., 831 F.2d 395 (2d Cir.1987)] in order to establish an undue hardship a debtor must prove:
“(1) that the debtor cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to repay the loans;
“(2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
“(3) that the debtor has made good faith efforts to repay the loans.
“Under the Brunner analysis, if the court finds against the debtor on any of the three parts, the inquiry ends and the student loan is not dischargeable. Id. at 1307 (internal citation omitted).”
In re Aldrete, 412 F.3d 1200 (10th Cir., 2005), cited in In re Nys, 446 F.3d 938 (9th Cir., 2006).
Therefore, a debtor who seeks discharge of a student loan in bankruptcy must make a very thorough, detailed showing. And the debtor (and the lender) have the right of appeal, no matter how the Bankruptcy Court decides.
A difficult road, yes; but not an impossible one.
WARNING: THIS POST DOES NOT CONSTITUTE LEGAL ADVICE, AND READING IT DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP. PLEASE CONSULT WITH AN ATTORNEY!! BANKRUPTCY LAW (Automatic Stay): In these times, creditors should be generous in allowing borrowers to repay balances. If debtor files for bankruptcy, insisting on collection may be costly.When the debtor files for bankruptcy, 11 USC Sec. 362(a) prohibits further attempts to collect the debt, except in certain specifically defined circumstances. A creditor who does not respect the automatic stay risks liability.The text of 11 USC Sec. 362(a), states, in pertinent part, the following:“(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of—(1)the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;(2)the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
(3)any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(4)any act to create, perfect, or enforce any lien against property of the estate;
(5)any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6)any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
(7)the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and
(8)the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor that is a corporation for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.”
For example, in an en banc opinion, the 9th Circuit held that debtor can recover all fees spent in resisting creditor who violates automatic stay in seeking to collect debt (America’s Servicing Co. v. Schwartz-Tallard, originally issued 4/16/2014, San Francisco, modified Autumn 2015). The court cited a previous opinion that stated: “The automatic stay is intended to give ‘the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions.’ S.Rep. No. 989, 95th Cong., 2d Sess. 54, reprinted in 1978 U.S. Code Cong. Admin. News 5787, 5840.” In re Bloom, 875 F.2d 224, 226 (9th Cir.1989).
US Constitution Provides for bankruptcy in Article I. It is a serious law.
WARNING: This post does not constitute legal advice, nor does reading it create an attorney/client relationship.
US Code cited by Cornell University, Legal Information Institute
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