Federal District Court in New York Extends Consumer Protection Laws to Loans for Corporations

In Carla Barker v. Izia Rokosz, 2024 WL 3322087 (E.D.N.Y. 2024), U.S. District Judge Kiyo A.  Matsumoto held the Truth in Lending Act (“TILA”), 15 U.S.C. §1601 et seq, applied a “consumer credit transaction” where the party that received the mortgage loan proceeds was a corporate entity but the “party to whom the credit was offered or extended” was, in actuality, a natural person who the lender required to create such corporate entity as a condition precedent to the extension of credit to the corporate entity. The Defendant conceded it did not comply with any TILA requirements on the grounds that the Act did not apply because the credit was extended to a corporate entity rather than a natural person.

Based on the evidence in the record, the District Judge surmised the lender required the natural person to create the corporate entity at the lender’s behest to evade TILA and other regulations that protect consumers, which weighed heavily in the District Court’s analysis. Under these circumstances, the federal trial court found the loan transaction was not “primarily for business” or “commercial” purposes that, according to 15 U.S.C. §1603(e), would exempt it from TILA. District Judge Matsumoto also relied on the fact that TILA’s plain text does not impose a rule that the party whose name appears on the face of the mortgage is “the party to whom credit is offered or extended” within the purview of 15 U.S.C. §1602(i).

Based on the exact analysis of the circumstances surrounding the loan consummation and extension of credit, the District Judge found New York State Banking Law §6-l and federal Home Ownership and Equity Protection Act (“HOEPA”) – which protect natural person consumers – applied under the facts presented. The Court similarly concluded that the Defendant violated Banking Law §6-l and HOEPA by failing to provide the statutorily mandated disclosures and notices.

This fact-specific decision runs counter to the conventional decisional law and wisdom, according to which TILA and HOEPA (federal “consumer” protection statutes) as well as the state’s Banking Law §6-l do not apply where only a corporate entity was the borrower on the loan documents. However, based on this decision, mortgage lenders should not presume TILA, HOEPA, or Banking Law §6-l are inapplicable to loans made to business entities where a lender required someone who met the statutory definition of “consumer” and sought a loan to create a corporate entity whose name would appear on the loan documents instead of the name of the “consumer.” With that said, the decision is merely persuasive authority and not binding on any federal or state trial or appellate court.

Blog Post by Stephen Vargas, Senior Appellate Counsel