Doss Law, LLP
As most readers know, loans to business entities, such as corporations and limited liability companies, are exempt from nearly all consumer protection statutes, including the Federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Safe Act and California High Cost Law contained in Financial Code Sections 4970 and 4995. However, we have always advised that the business entity borrower must be a “bona fide” business endeavor for the exemption to apply.
The doctrine of form over substance is alive and well. In a November 27, 2019 case from a Michigan Federal Court, Rau v. Calvert Investments, LLC (Citation), Calvert Investments, LLC made a mortgage loan to Rau to purchase a new home. Rau alleges that Calvert knew that the property was to be used as Rau’s primary residence, and despite that knowledge, Calvert required Rau to form a limited liability company to take title and to provide a mortgage loan from Calvert. Rau personally guaranteed the loan.
When the loan went into default, Rau sued Calvert for various claims including violation of the TILA and RESPA, claiming that the loan was a consumer loan disguised as an exempt loan to a business entity. He asserted the various powerful remedies available to a consumer borrower, including rescission. Calvert moved to dismiss the case, claiming the loan was exempt from TILA and RESPA as an entity loan, but the court flatly rejected the lender’s motion:
Ultimately, in determining whether a transaction was primarily consumer or commercial in nature, courts “must examine the transaction as a whole and the purpose for which the credit was extended.” Riviere v. Banner Chevrolet, Inc., 184 F.3d 457 (5th Cir. 1999). Plaintiffs have alleged that Calvert advised Rau in 2015 to form a limited liability company… Plaintiffs have also alleged that Calvert was aware at the time the Windmill Mortgage was executed that Rau intended to use the Windmill Property as his primary residence—and that Rau did, in fact, reside at the property for a period of time… However, Plaintiffs allege that Calvert required Mchrenzie to execute the mortgage in order to circumvent the regulations applicable to consumer mortgages… Taken as true, these facts are sufficient to raise a plausible claim that the Windmill Mortgage was a consumer mortgage disguised as a commercial transaction and that, consequently, RESPA and TILA apply. Although Calvert maintains that the Windmill Mortgage was executed by Rau, a licensed realtor, on behalf of his business… the Court must accept as true the facts pleaded by Plaintiffs. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
The lesson here is to be wary of business entity borrowers whose only reason to exist is to hold title to a home occupied by the owner of the entity. Look for signs that the entity has real business activity, such as a product, service, website, income, business bank account, and/or other indications of business activity separate and beyond from just holding title to an owner-occupied home. Also, be sure to find out the age of the entity. The newer it is, the higher the chances are that the borrower (or his broker) is attempting to game the system. Courts are notorious, and rightly so, for disregarding shams designed to bypass consumer protection laws.
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