Trust Borrower Shelters Under Consumer Protection Laws
Have you ever considered a mortgage loan to a living trust? Most of you know that loans to estate planning trusts occupied by the creators of the trust are regarded as owner-occupied consumer loans. The reason for this treatment is the following language in the CFPB Commentary:
Trusts for tax or estate planning purposes. In some instances, a creditor may extend credit for consumer purposes to a trust that a consumer has created for tax or estate planning purposes (or both). Consumers sometimes place their assets in trust, with themselves or themselves and their families or other prospective heirs as beneficiaries, to obtain certain tax benefits and to facilitate the future administration of their estates. During their lifetimes, however, such consumers may continue to use the assets and/or income of such trusts as their property. A creditor extending credit to finance the acquisition of, for example, a consumer’s dwelling that is held in such a trust, or to refinance existing debt secured by such a dwelling, may prepare the note, security instrument, and similar loan documents for execution by a trustee, rather than the beneficiaries of the trust. Regardless of the capacity or capacities in which the loan documents are executed, assuming the transaction is primarily for personal, family, or household purposes, the transaction is subject to the regulation because in substance (if not form) consumer credit is being extended.
Thus, if the creators of the living trust live in the collateral, you treat it as owner-occupied. What if the trustee of the living trust does not live in the property, but the beneficiary of the trust does?
That question was answered on April 14, 2020 by the 9th Circuit Court of Appeals in Gilliam v. Levine. Maxine Gilliam, as trustee of the Lou Easter Ross Revocable Trust, obtained a hard money loan from a private investor to finance repairs to a house occupied by her niece, a beneficiary of the Trust. Apparently, the lender treated it as a non-consumer loan. Gilliam sued for violations of TILA, RESPA and other consumer protections statutes. The District Court found for the lender, holding the transaction did not involve consumer credit because the borrower/trustee did not occupy the property.
On appeal, the lender pointed to three federal district court cases to support the view that only a loan to finance the primary residence of the trustee of a living trust can be considered a consumer credit transaction. The 9th Circuit did not agree. It reasoned that TILA should be “construed… liberally in favor of the consumer.” It reversed the District Court, finding that a “consumer, by placing assets in a trust for personal estate planning purposes, does not lose all protection for the trust beneficiary under these federal and state consumer protection laws.”
The moral of this story is that living trusts are treated as natural persons for compliance purposes. If the creators of the trust or any beneficiary of the trust occupies your collateral, treat the loan as an owner-occupied consumer loan.
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