Effective August 1, 2015 the Consumer Financial Protection Bureau (CFPB) has changed its position regarding providing Truth in Lending disclosures in transactions that involve trusts. The revisions clarify that the benefits of the regulation extend to any consumer involved in a transaction that in substance extends consumer credit, regardless of whether that consumer is the direct mortgage obligor or a beneficiary of a trust to which such credit has been extended.
Regulation Z does not apply to extensions of credit to other than a natural person. The CFPB has clarified that credit extended to certain trusts for tax or estate planning purposes is considered to be extended to a natural person rather than to an organization and, therefore, is not exempt from the coverage of Regulation Z under § 1026.3(a)(2).
Existing comment 3(a)-10 covered land trusts, in which the creditor holds title to the property in trust and executes the loan contract as trustee on behalf of the trust. The comment states that, although a trust is technically not a natural person, such arrangements are subject to Regulation Z because “in substance (if not form) consumer credit is being extended.” The recent revisions extend this rationale to more common forms of trusts. Specifically, consumers sometimes place their assets in trust with themselves as trustee(s), and with themselves or themselves and their families or other prospective heirs as beneficiaries, to obtain certain tax benefits and to facilitate the future administration of their estates.
Recent conversations with lenders resulted in widely varying responses to the change. Some lenders are appalled that this long standing rule has changed and state the change will have a profound impact on the numerous transactions that are affected by the change. Others response that trust-related transactions are rare and their institution has always provided disclosures in such transactions, so the change is no big deal.
In recent years there has also been a movement to establishing LLCs or corporations to hold title to real property for tax or estate planning purposes, instead of a trust. Those arrangements continue to be exempt from the regulation.