The Illinois Appellate Court, First District, recently affirmed a grant of summary judgment allowing a lender to foreclose its mortgage, even though it may not have complied with certain provisions in the federal Truth in Lending Act (TILA).  In so ruling, the Appellate Court found that TILA did not apply because the loan at issue was a commercial loan, not a consumer loan, even though the loan was secured by the borrower’s principal residence.

A copy of the opinion is available at: Link to Opinion.

The husband borrower owned a business that purchased tax certificates.  This business had a $2.3 million revolving line of credit.  That line of credit was secured by the tax certificates the company owned.

In June of 2011, the lender became concerned that this line of credit was under-capitalized.  The lender came to believe the tax certificates were less valuable than originally calculated.  Additionally, the lender was concerned that the husband had pledged the certificates as collateral to secure other loans.

To address the lender’s concerns, the husband and wife personally borrowed $960,000 from the lender, secured by a first mortgage on the residence the husband and wife co-owned and in which they lived.  The funds from this loan were to be used to pay down the husband’s company’s revolving line of credit.

Notably, that loan stated that its purpose was “Consumer.”  However, it also stated that the loan was a “shareholder loan” for the husband’s company.  The loan also contained a paragraph titled “Federal Truth-In-Lending Disclosures.”  Along those lines, the loan included a “Notice of Right of Rescission” stating that the loan “relate[d] to a consumer credit account.”  The husband and wife both signed documents stating that they received two copies of the TILA rescission notice.

That loan went into default quickly, and the lender foreclosed.  The husband and wife raised the lender’s failure to comply with TILA as an affirmative defense.  They alleged that, despite the papers they signed, they did not each receive two copies of the notice of their right to rescission.  Consequently, they claimed they were still entitled to rescind the loan under TILA and attempted to do so.

The lender admitted that there was an issue of fact about whether the husband and wife received the notices.  However, it argued that this fact was not material to the suit, because TILA did not apply to this loan.  The husband and wife argued otherwise, claiming the loan was a consumer loan subject to TILA.

The trial court granted summary judgment to the lender, and the husband and wife appealed.  The Appellate Court noted that the record before it was quite deficient.  In spite of this, the Appellate Court discerned that the trial court had granted summary judgment because the loan at issue was a commercial loan not subject to TILA.

The Appellate Court began by noting that, if a loan is subject to TILA, a borrower can rescind a mortgage loan secured by the borrower’s principal residence within three years of the loan’s origination if the borrower did not receive certain material disclosures required under TILA, including two copies of the Notice of Right to Cancel.  However, the Court noted that only “consumer” loans are subject to TILA, and TILA defines “consumer” loans as “transactions ‘in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes.’”

No Bright-Line Rule to Determine if Loan is Consumer or Commercial

The Appellate Court began its analysis of the consumer versus commercial distinction by saying there is no bright-line rule for making the determination.  Rather, courts consider the transactions as a whole.

First, the Appellate Court confirmed that the debtor’s using his or her personal residence to secure the loan does not automatically make it a consumer loan.  In that vein, including the label “consumer” on the loan documents does not automatically make it a consumer loan as defined by TILA.  Instead, courts must look to the substance of the transaction, not the form.

With this in mind, the Appellate Court found it was “clear” that the loan to the husband and wife was a commercial loan, not a consumer loan subject to TILA.  The Appellate Court noted that the loan stated that it was a shareholder loan to the husband’s company.  Moreover, the Appellate Court found that the loan was for a commercial purpose – i.e., paying down the husband’s company’s line of credit.

The Appellate Court found these factors more persuasive than the “consumer” label on the loan and the fact that the husband and wife’s residence secured the loan.

To avoid this result, the wife argued that, because she had no ownership interest in the company, the loan, to the extent it was to her, was not commercial.  The Appellate Court rejected this argument.  It found that a loan can still be commercial even if a party to it does not own part of the business receiving the proceeds of the loan.

In that vein, the Appellate Court gave weight to the fact that the wife, presumably, would receive a commercial benefit from the loan.  Even if she did not own an interest in her husband’s company, the Appellate Court noted she would benefit from the success of her husband’s business.  As such, the Appellate Court held, she was not just a disinterested consumer mortgaging her residence to help someone else’s unrelated business.