Amicus Brief Filed by CFPB Requests Fourth Circuit to Avoid Creating a Home Loan Arbitration Loophole

The Truth in Lending Act (TILA) generally prohibits arbitration clauses in home loan transactions. Last year, a class action was filed in state court and later removed to federal court. (Lyons v. PNC Bank, N.A. (D. Md., Jan. 6, 2021) 2021 WL 50918.) The plaintiff alleged that he obtained a Home Equity Line of Credit (HELOC) from PNC Bank’s predecessor-in-interest in 2005. The plaintiff signed a HELOC agreement that did not contain an arbitration clause.

Separately, the plaintiff opened two deposit accounts with the bank, one in 2010 and one in 2016, and for each account, agreed in writing to be bound by the bank’s account agreement and any amendments. The account agreement included a set-off provision and gave the bank a security interest in deposit accounts, and also was amended to add an arbitration clause. The bank later used the set-off provision to make a HELOC payment from each deposit account.

The plaintiff sued the bank, alleging that the withdrawals were unauthorized under TILA. The bank moved to compel arbitration based on the arbitration clause in the account agreement. The issue was the scope of the statutory language that prohibits arbitration clauses in home loan transactions. The bank argued that the prohibition did not apply because the arbitration clause was in the separate account agreement, not the HELOC agreement. The bank also argued that the arbitration clause should control because the plaintiff’s claims arose out of the bank’s set-off payments and the account agreement authorizing them.

The District Court denied arbitration as to the second set-off claim, finding that “[t]o conclude that the Account Agreement’s arbitration clause is not part of the HELOC credit transaction would be to improperly ignore [the bank’s] own intertwining of the Agreement with the HELOC.” (Lyons at *4.) (The Court granted arbitration as to the first set-off, but only on the procedural ground that that account and its related arbitration clause predated the effective date of the TILA restriction.)

The bank appealed to the Fourth Circuit Court of Appeals, and on May 24, 2021, the Consumer Financial Protection Bureau (CFPB) filed an amicus curiae (“friend of the court”) brief, urging the Court to affirm the ruling denying arbitration, because to allow it “would create a broad loophole that would harm consumers” by allowing lenders to evade the TILA restriction by placing arbitration clauses into “related but ostensibly separate agreements.”

The CFPB argued that the TILA restriction by its terms applies not only to home-loan agreements themselves but also to any other contract between the borrower and lender “relating to” the loan, and that “[b]ecause the agreement governing those accounts purported to provide the bank with a means of collecting payment on Mr. Lyons’s home loan, the agreement ‘related to’ that loan – just as much as if the agreement had expressly named the loan.” (Brief for the CFPB as Amicus Curiae, 5/24/21, USCA4th, No. 21-1289, pp. 1, 8-9, 12.)

Stay tuned, as arguments in the appeal have not yet been scheduled.

By Brad R. Becker
Associate at Frandzel Robins Bloom & Csato, L.C.