On July 8, 2024, the United States District Court for the Eastern District of New York held that a mortgage loan from a private lender was within the scope of the Truth in Lending Act (TILA) and Home Ownership and Equity Protection Act (HOEPA) even though the recipient of the funds was a business entity, not an individual consumer. [1]

Case Background

In Barker, plaintiff asserted claims against several defendants under TILA, HOEPA, Section 6-l of the New York Banking Law, and New York’s usury statute arising from an allegedly unlawful home mortgage loan on which she defaulted. Specifically, plaintiff obtained the loan from a private “hard money” lender through a corporate entity, which plaintiff was required to form as a condition of the loan transaction and whose shares were given to the lender as further collateral. Notably, such corporate entity’s sole purpose was to borrow funds from the lender and hold title to plaintiff’s property following the loan closing.

After all other defendants either settled or were dismissed from the case, plaintiff moved for summary judgment against the lender, who cross-moved to foreclose on plaintiff’s home. There was no dispute that the lender failed to provide any TILA disclosures or to comply with HOEPA and state predatory lending laws. The lender, however, argued that TILA and HOEPA claims failed because the mortgage loan was not a “consumer credit transaction” since the party to whom credit was extended was not a natural person.

Court’s Analysis

The Court rejected the lender’s argument that “the party to whom credit is offered or extended,” as specified in 15 U.S.C. § 1602(i), is always the party whose name appears on the face of the mortgage. Instead, the Court looked to the broader context and primary purpose of TILA and HOEPA in holding that the transaction was within the scope of TILA and HOEPA notwithstanding that credit was extended to an organization “where that organization [wa]s created at the lender’s behest as a condition of transacting with the individual borrower and serves no discernible function other than evading TILA and other regulations that protect consumers.”

Key Takeaway from the Barker Decision

The Barker decision is a keen reminder that courts are inclined to employ a substance-over-form analysis in evaluating the scope of statutory protections for consumer credit transactions.

[1] Barker v. Rokosz, 19-CR-514 (KAM) (JRC), 2024 WL 3322087 (E.D.N.Y. July 8, 2024).