Who is a Mortgage Broker? Just Ask the Fed.
The United States Court of Appeals for the Second Circuit recently affirmed a magistrate judge’s decision in the District Court for the Eastern District of New York to dismiss a complaint brought under the Truth in Lending Act (“TILA”) and the Home Ownership Equity Protection Act (“HOEPA”). The complaint sought rescission of two loans secured by a lien on a co-operative apartment on the grounds that certain required disclosures were not made by the lender. Adopting the Federal Reserve’s definition of “mortgage broker” as set forth in 12 C.F.R. §§ 226.36(a)-(b), the Second Circuit affirmed the district court’s finding that the appellant borrower failed to establish that the subject loans were procured by a mortgage broker. Because the loans were not originated through a mortgage broker, the lender was not a “creditor” within the meaning of TILA, and thus was not subject to civil liability under the statute. Krishtul v. VSLP United, LLC, No. 14-1163, 2016 WL 2342056 (2d Cir. May 4, 2016).
Appellant Igor Krishtul purchased the co-op apartment used to secure the subject loans in 1994. In 2007, appellee VSLP United, LLC (“VSLP”) extended a one-year loan (the “2007 VSLP Loan”) to Krishtul of $375,000 at 14% interest, due in full the following year (together with a disputed number of “points”, with each point equal to one percent of the loan) and secured by a lien on Krishtul’s co-op apartment. VSLP later agreed to extend the 2007 VSLP Loan for two additional years at 12% interest with four points financing, and Krishtul signed a new Co-operative Apartment Loan in April 2008 for $390,000 (the “2008 VSLP Loan”). After VSLP informed Krishtul in December 2009 that he was in default of the 2007 and 2008 VSLP Loans and requested payment of all outstanding sums, Krishtul’s attorney notified VSLP that he wished to rescind both loans pursuant to TILA. Krishtul subsequently filed a lawsuit in the Federal District Court for the Eastern District of New York seeking to rescind the loans and void the lien on the co-op.
Whether TILA was applicable to the subject loans depended (1) on whether the loans were “consumer credit transactions” as defined by TILA—essentially whether the loans were primarily for personal purposes (subject to TILA) or for business purposes (not subject to TILA); and (2) whether the 2007 VSLP Loan was originated through a “mortgage broker” such that VSLP would qualify as a “creditor” under TILA. As to the nature of the subject loans, the district court found that most courts seeking to determine the primary purpose of a loan transaction look at “the entire transaction and surrounding circumstances to determine a borrower’s primary motive.” See Krishtul v. VSLP United, LLC, No. 10-0909, 2014 WL 940941, *9 (E.D.N.Y. March 11, 2014) (internal citations omitted). While noting that certain aspects of the 2007 VSLP Loan – including Krishtul’s operation of his business from his home, and his use of a portion of the loan for business ends – suggested that it was made for a business purpose, the district court concluded that Krishtul’s primary motivation in obtaining the 2007 and 2008 VSLP Loans was to refinance an earlier loan that Krishtul had obtained to prevent foreclosure. Therefore, the district court held that the loans qualified as “consumer credit transactions” subject to TILA. See id. at *9-10. The Second Circuit declined to address the nature of the loans in its decision, focusing instead on the second issue – whether VSLP qualified as a “creditor” so as to trigger civil liability under TILA.
Under TILA, a “creditor” is defined as “[a]ny person who originates 2 or more mortgages…in any 12-month period or any person who originates 1 or more such mortgages through a mortgage broker….” 15 U.S.C. 1602(g). Because the term “mortgage broker” was left undefined at the time of the loans, the district court adopted the New York Banking Law’s definition of the term, which includes “an element of compensation or gain.” See Krishtul, 2016 WL 940941 at *10 (internal citation omitted). Applying this definition, the district court found that Krishtul failed to establish that certain third parties had received compensation for their alleged mortgage brokerage activities. First, it held that Krishtul was estopped from arguing that two such third parties had acted as mortgage brokers with respect to the 2007 VSLP Loan because of his representation at the time that they had received payments “for services provided outside of” that loan….” See id. Second, the district court found that the weight of the evidence favored VSLP; while Krishtul could offer nothing but his own testimony to support his contention that several mortgage brokers had been compensated for introducing him to VSLP, three witnesses for VSLP testified that no mortgage broker was involved in originating the subject loans. Finding that the loans had not been originated by mortgage brokers, the district court held that VSLP was not a “creditor” under TILA and dismissed the case. Krishtul appealed.
On appeal, the Second Circuit affirmed the decision and adopted the definition of “mortgage broker” as interpreted by the Federal Reserve in 12 C.F.R. §§ 226.36(a)-(b), which provides that such an individual is one who, “for compensation or other monetary gain,…arranges, negotiates, or otherwise obtains an extension of consumer credit for another person…[and] is not an employee of the creditor.” Id. Observing that all three of VSLP’s witnesses had contradicted Krishtul’s testimony that any third parties were paid for arranging the subject loans, the Second Circuit found no clear error in the district court’s findings. As a result, the Second Circuit could not “second-guess the trial court’s choice between permissible competing inferences,” and thus declined to overturn the district court’s decision.This case is important because it clarifies the important, but undefined, term of “mortgage broker” under TILA. The Second Circuit’s deference to the Federal Reserve’s definition is likewise important because it suggests that the Second Circuit, and potentially other courts, may defer to the Federal Reserve or other federal agencies when attempting to interpret other undefined terms under TILA.