A recent Oregon Court of Appeals case illustrates how difficult it can be for a real estate investor or developer to try to invoke consumer laws against a foreclosing bank.
In Washington Mutual Bank and JP Morgan Chase Bank v. Freitag, et al., the borrower had obtained two construction and permanent loans from Washington Mutual Bank. The loans were used to build two houses on separate lots located in Newport, Oregon. After the two homes were constructed, a dispute arose between the borrower and the Bank regarding the final disbursement to be made on the construction loans. When the parties could not resolve the dispute, the borrower stopped making payments on the loans, and the Bank initiated an action foreclosure on both of the lots.
To defend against the foreclosure, the borrower claimed, among other things, that the Bank had violated the federal Truth in Lending Act (“TILA”) and federal Real Estate Settlement Procedures Act (“RESPA”) in the way it handled the final disbursement and by “force-placing” insurance on the properties (obtaining insurance coverage on the property and then charging the borrower for the premiums). The Bank moved for summary judgment on these defenses, claiming that the two loans were for investment purposes and were not consumer loans, and therefore neither the TILA nor RESPA applied. The trial court ruled in favor of the Bank and determined the loans were made for business purposes and that the TILA and RESPA were therefore inapplicable.
On appeal, the Oregon Court of Appeals agreed with the trial court’s analysis and affirmed the trial court’s grant of summary judgment in favor of the Bank. The Court of Appeals considered the borrower’s affidavit, submitted in opposition to the Bank’s summary judgment motion, which indicated that the borrower had used one or the other homes as a “secondary personal residence 15 to 20 percent of each calendar year since completion of the construction.” The borrower had argued that such personal use created an issue of fact as to whether the loans were covered by the TILA or RESPA. However, the Court concluded that the “undisputed evidence” at the summary judgment stage established that the borrower specifically represented in the loan application that the loans were for “investment purposes” and not for a primary or secondary residence. The borrower had also represented in the loan application that following construction the borrower would then own three rental properties – the two beach homes and another rental disclosed in the loan application. Also, the loan documents executed by the borrower contemplated that the borrower would be renting the properties and specifically eliminated any obligation on the borrower to reside in one or both of the homes.
As a result, although the borrower had occupied “one or the other” of the rental homes for part of each year, the Court determined the loans were for investment purposes. In arriving at that conclusion, the Court looked at the purpose of the loan at the time it was extended, rather than the borrower’s subsequent use of the property. The Court concluded that the defendants failed to create any genuine issue of fact as to whether the loans were primarily for personal rather than business purposes.
The TILA and RESPA laws are important consumer laws that are intended to assure consumers receive adequate disclosure regarding the terms of their mortgage loans, as well as protection from abusive lending practices. However, the protections of these laws do not reach loans for business or investment purposes. And as this case demonstrates, a borrower’s representations about the intended purpose of the loan plays a significant factor in determining whether these laws apply.
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