The U.S. Court of Appeals for the Third Circuit has ruled that a borrower could not rescind her mortgage loan under the Truth in Lending Act because the loan was primarily for a business rather than consumer purpose.

The Third Circuit's decision in St. Hill v. Tribeca Lending Corporation, issued on December 8, 2010, affirmed the district court's rejection of the borrower’s TILA rescission claim. However, unlike the district court, which considered the merits of the borrower's claim, the Third Circuit reached its decision based on an analysis of the loan's principal purpose. Ballard Spahr partner Martin C. Bryce, Jr., who handled the appeal on the lender's behalf, successfully urged the Third Circuit to examine the loan's purpose, despite the district court's failure to do so.

According to the Third Circuit, the record showed that although the borrower's loan was secured by her home, its primary purpose was to pay her business creditors. The borrower had argued otherwise because only 29 percent of the loan proceeds went towards her business debts, with the balance going to settlement charges, satisfaction of an existing mortgage, and trustee fees in her personal bankruptcy.

The Third Circuit found that refinancing the existing mortgage was not the loan's primary purpose because the new loan had a higher rate and monthly payments, and repayment of the existing loan was an express condition of the new loan rather than its primary purpose. The Court also found that the other items paid with the new loan's proceeds would have been paid regardless of the loan's purpose or the nature of her bankruptcy debts. In the Third Circuit's view, how the remaining proceeds were used was "the most relevant consideration in the designation of the loan as consumer or commercial." Concluding that the loan should be designated commercial because the remaining proceeds were paid directly to creditors of her defunct business, the Third Circuit ruled that it was unnecessary to reach the merits of the borrower's rescission claim because TILA did not apply to her loan as a matter of law.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; or Martin C. Bryce, Jr., 215-864-8238 or bryce@ballardspahr.com.


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