Truth-in-Lending Cases: New and Noteworthy Precedents
Dennis H. Doss breaks down four (4) new significant lending cases:
- Certificate of Business Purpose is a Winner
- Sham Corporate Borrower
- Equitable Estoppel Saves a Hard Money Lender
- Zombie Mortgage Meets the Unfair Competition Law
1.
Certificate of Business Purpose is a Winner
Russell v. Wadot Capital, Inc. (Washington District Court October 9, 2024)
Russell is a tale of “dead men tell no lies,” with a touch of “when it rains, it pours.” Poor Patra Russell moved out of her home after it was damaged by a natural gas explosion. She moved into another house she owned where her son lived. The same month as the explosion, a law firm to which she owed $200,000 obtained a $250,000 judgment against her and soon thereafter started judicial foreclosure. Things kept rolling downhill from there. Russell obtained a loan from a hard money lender, Wadot, for “minor home repairs [damaged house] and get it rented and interest reserves.” In her loan application and business purpose certificate, she stated that this former home of many years was an investment property, not her primary residence. The following year, she refinanced the Wadot loan with Wadot, again making the same representations as to purpose and occupancy. When Wadot attempted to foreclose, she sued, claiming in declarations and pleadings that she verbally told Wadot’s loan officer the damaged property was her home and that she intended to resume living there. However, before trial, she passed away. Her son tried to get the court to consider her prior court declarations, but the court declined, deeming them inadmissible hearsay. The court then concluded that her loan application and written statement as to the purpose of the loan forced the conclusion that the loan was business purpose and secured by a non-principal residence. Regulation Z has 5 factors to determine if credit is consumer or business. The court put the most emphasis on her written statement of purpose and granted summary judgment in favor of Wadot.
Note: In this case, the borrower [Russell] was unable to testify (as she was deceased) to contest the written statement of purpose and non-occupancy, so the Certificate of Business Purpose prevailed by default. Don’t count on the Certificate of Business Purpose form alone to protect your case. A handwritten purpose letter— and even better yet, a video recorded closing, like a ZoomLockTM are smart precautions.
2.
Sham Corporate Borrower
Barker v. Rokosz (District Court New York July 8, 2024)
Carla Barker sued her hard broker’s private investors for Truth in Lending violations. The careless lender, Rokosz, required the borrower to transfer title to her home to a corporation, J&M, and for it to apply for the loan. The proceeds paid off Barker’s creditors. The court cut through this ruse like the proverbial hot knife: “There is no evidence in the record that J&M served any purpose beyond an attempt by Rokosz to skirt statutory protections against predatory lending. *** A contrary reading of TILA would greenlight an obvious method for lenders to circumvent the statute and “eviscerate the protection” that it creates.”
Note: Truth-in-Lending only exempts loans to bona fide entities, not entities that merely hold title for consumers. Bona fide entities have business activities besides holding title to a home.
3.
Equitable Estoppel Saves this Hard Money Lender
In Kalaydzhan v. Ross (B.K. Mass. 2024), a bankruptcy judge sided with a hard money lender after a trial on the merits. The borrower signed the typical Certificate of Business Purpose and Declaration of Non-Owner Occupancy but testified that she told the closing agent they were not accurate. Her attorney told her she had to sign them if she wanted the loan. The court applied the doctrine of equitable estoppel to uphold the business purpose and non-owner occupancy of the loan.
Note: This is a somewhat rare decision. Don’t count on it saving you.
4.
Zombie Mortgage Meets the Unfair Competition Law
Campos v. O’Neal (federal court Eastern District 2024) involved a so-called Zombie Mortgage. Zombie Mortgages are loans that encumber a borrower’s property but are not enforced for years after they go into default. In California, the ability to enforce the deed of trust survives the passage of the statute of limitation on the promissory note. However, many courts are having a closer look at other defenses to these mortgages. In Campos, the mortgage was piggyback second that sat quietly for 14 years until an investor bought the old debt and attempted to foreclose. The district court restrained the foreclosure, finding the borrowers had a plausible claim for violation of California’s Unfair Competition Law, Business and Professions Code 17200 et seq., because the lender had not sent billing statements as required by 12 USC 1637d(b) of the Truth-in-Lending Act. The court said: “On this record, it is a serious question whether a lender or servicer acts ‘unfairly’ under this standard by allowing interest to accrue on a mortgage loan for many years without notice, then demanding immediate repayment in full under threat of a foreclosure sale.”
Note: Avoid Zombies of all kinds.
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