Ensuring consumers receive critical lending protections

July 12, 2023 / Source: CFPB

Today, the Consumer Financial Protection Bureau (CFPB) joined the State of Maine to help ensure that consumers receive critical consumer protections when taking out loans. Maine law incorporates the federal Truth in Lending Act. That law provides crucial consumer protections, including requiring lenders to provide precise information about the amount of a loan, its interest rate and other costs, and when it must be repaid. Why the consumer borrowed the money – not the label that the company sticks on the loan – determines whether the loan is covered by the law.

As the primary regulator responsible for the Truth in Lending Act, the CFPB is committed to ensuring that lenders comply with the law’s requirements. For that reason, the CFPB joined with Maine’s Attorney General, Bureau of Financial Institutions, and Bureau of Consumer Credit Protection to file an amicus brief in the Maine Supreme Judicial Court in a case involving a married couple’s loan.

In this case, the couple took out a mortgage in 2008 to purchase land and build a home. They sold the home in 2014, but the sale proceeds weren’t enough to pay off the loan because it had lost value due to the 2008 financial crisis. To cover the shortfall, the couple took out a new loan, on which they made regular monthly payments for about four years. However, at the end of the loan’s term, the couple was unable to make the balloon payment that was due. When they failed to pay the whole amount, the bank sued, and the couple tried to present evidence that the bank had not provided them with disclosures required by the Truth in Lending Act or determined that they could repay the loan. The bank has argued that because the loan documents stated that the loan had a commercial purpose, the law does not apply.

To the contrary, as the CFPB’s brief with the State of Maine explains, lenders can’t escape coverage under the Truth in Lending Act by labeling their loans as “commercial.” As many courts have held, and as the law clearly states, the borrower’s purpose for taking out the loan determines whether the law applies. Indeed, the United States Supreme Court has even noted that the Truth in Lending Act’s language “evinces the awareness of Congress that some creditors would attempt to characterize their transactions so as to fall one step outside whatever boundary Congress attempted to establish.” Accordingly, letting lenders escape coverage just by sticking a particular label on their loans would be inconsistent with the law that Congress wrote.

The Truth in Lending Act provides critical protections that must be applied appropriately — and not evaded — as markets continue to evolve. The CFPB will continue working to ensure that the federal consumer financial laws are interpreted in the way that Congress intended so that companies meet their obligations under the law.

The case is Franklin Savings Bank v. Bordick, No. BCD-23-56 (Me.).

Read the CFPB’s amicus brief.

If you have encountered problems with consumer lending, you can submit a complaint with the CFPB.