Under the Truth in Lending Act (TILA), the assignee of a mortgage note is not considered a "creditor" and is therefore not bound by TILA requirements imposed solely on creditors. One federal appellate court, however, has recently expressed concern that mortgage note assignees being excluded from TILA's "creditor" definition makes little sense in connection with TILA obligations that exist throughout the life of the loan. The court invited Congress to address the issue.
In the recent case, the plaintiff borrowers alleged, among other things, that the assignee of their mortgage notes violated Section 1666d of TILA by charging unauthorized fees and expenses to their accounts exceeding what is permitted under state law. This allegedly resulted in credit balances that the assignee failed to refund as required by the statute. The district court rejected that claim, reasoning that, because the borrowers' mortgage documents did not name the assignee as the entity to whom the debt was initially payable, the assignee was not a "creditor" under TILA and was thus not subject to liability under Section 1666d.
The Second Circuit agreed. The court acknowledged that, under TILA, "[w]henever a credit balance in excess of $1 is created in connection with a consumer credit transaction... the creditor shall... refund any part of the amount of the remaining credit balance." The court observed, however, that TILA "imposes general liability only on creditors and greatly circumscribes the liability of assignees."
The court further observed that TILA defines a "creditor" to include only an entity that both "(1) regularly extends… consumer credit… for which the payment of a finance charge is or may be required, and (2) is the person to whom the debt arising from the consumer credit transaction is initially payable on the face of the evidence of indebtedness" (emphasis added). The court explained that "[t]his definition is restrictive and precise, referring only to a person who satisfies both requirements of the provision." The court also noted that the Federal Reserve Board's Official Staff Commentary to Regulation Z, which mirrors the second prong of TILA's "creditor" definition, provides that "[i]f an obligation is initially payable to one person, that person is the creditor even if the obligation by its terms is simultaneously assigned to another person."
The borrowers contended that the assignee should be held liable as a creditor because the assignments occurred before the first payment was due on the loan and that, consequently, the "initial payment" would have been made to the assignee. But the court stated that the assignment's timing "is irrelevant under the Federal Reserve Board's Commentary to Regulation Z," because otherwise "the Commentary's guidance that simultaneous assignments do not alter the identity of the 'creditor' under TILA would make no sense; the assignee of a simultaneous assignment will presumably always be the first 'person' to whom an initial loan payment is made."
The court also pointed out that "TILA does not define 'creditor' as the person to whom the first loan payment is made; rather, it asks to whom the loan is 'initially payable on the face of the evidence of indebtedness.'" Accordingly, the court concluded that, because an assignee of a mortgage note is not the party to whom the loan is initially payable, an assignee is not a "creditor" under TILA, regardless of when the assignment takes place.
Despite that conclusion, the court recognized that the borrowers had "identified an apparent oversight in the statute." The court agreed with the borrowers that "restricting the application of section 1666d to the initial lender does not make much sense," since "[u]nlike most of TILA's provisions, which require creditors to make certain disclosures to debtors at the time of a loan's execution… section 1666d imposes obligations on creditors throughout the life of the loan." The court added that it could "think of no reason why Congress would require a credit balance in a consumer's account be refunded only if the balance was maintained by the original creditor and not a subsequent assignee."
Looking to the legislative history of TILA, the court found that "this gap may be an unintended consequence of congressional reform to TILA," citing the 1980 amendment to TILA aimed at limiting assignees' exposure to liability and simplifying the definition of "creditor" to eliminate confusion. The court stated further: "[W]hen Congress amended TILA, its primary concern was limiting assignee liability for an initial creditor's violations of TILA's disclosure requirements[.]" But because Congress amended "the definition of 'creditor' to exclude assignees without also creating an explicit carveout for a consumer's ongoing right to be refunded a credit balance, consumers cannot rely on TILA as a remedy to force an assignee to refund a credit balance, as is the case here."
In defending its conclusion, the court declared that it could not "rewrite the text of the statute." The court nevertheless opined that "[w]e may think it unwise to allow an assignee to escape TILA liability when it overcharges the debtor and collects unauthorized fees, where the original creditor would otherwise be required to refund the debtor promptly." In addition, the court stated: "We note this discrepancy. . . for the benefit of Congress and the Federal Reserve."
Lenders should be aware that this recent decision could prompt Congress to amend TILA to bring mortgage assignees within the definition of "creditor" regarding TILA obligations—like those under Section 1666d—that exist over the life of the loan. For the time being, however, such assignees are considered to not be "creditors" under TILA, which means they are not obligated under such provisions.