Friday, March 27, 2015

FYI: 7th Cir Says TILA Requires Immediate/Same-Day Crediting of Direct Online Payments

The U.S. Court of Appeals for the Seventh Circuit recently held that a mortgage servicer’s failure to credit online payments on the same day the consumer authorized them violates the federal Truth in Lending Act (“TILA”).


A copy of the opinion is available at:  Link to Opinion


The borrower made her mortgage payments electronically “online” using the servicer’s website, which then would withdraw funds from the borrower’s account through the Automated Clearing House (“ACH”) network.


The process involved the servicer compiling daily ACH batch files, which were then sent the following day to the ACH network. The servicer would credit payments made through its website two business days after an electronic payment was submitted, which was supposedly the earliest that it could receive the funds transfer through the ACH network from the borrower’s bank.  Payments were credited in this fashion regardless of whether the funds had actually been received and cleared in the servicer’s account.


The borrower’s mortgage loan required payment on the first of the month, and allowed a 15-day grace period before a late charge would be assessed.


The borrower made her December 2012 payment using the servicer’s online payment system.  She did so on a Thursday or Friday morning. The servicer did not credit her account until the following Tuesday, which was 2 business days later, pursuant to the policy published on its website.  However, due to the 2-business-day interval, the payment was not credited until after the 15th of the month, and the servicer charged a late fee.


The borrower sued, alleging that TILA requires mortgage servicers to credit online ACH payments the same day the payment authorization is made by the borrower, not when the payment is actually received and cleared in the account of the servicer or at any other later time.


The lower court granted the servicer’s motion for summary judgment, agreeing that TILA requires that an electronic payment be credited when the servicer receives the funds from the consumer’s bank account.


On appeal, the Seventh Circuit reversed.


As you may recall, TILA requires that a mortgage servicer credit payments “as of the date of receipt,” unless a delay in crediting does not result in a late fee or an adverse consumer credit report. See 15 U.S.C. § 1639(a). The issue here was what constitutes the “date of receipt.”


The Seventh Circuit turned to the Consumer Financial Protection Bureau’s official interpretation of TILA’s implementing Regulation Z for guidance, which defines “date of receipt” as “the date that the payment instrument or other means of payment reaches the mortgage servicer.” The Court held that the CFPB’s interpretation was not irrational because, “[w]hile the CFPB (and the FRB before it) could have determined that "payment" means the receipt of funds by the servicer, the conclusion that ‘payment’ refers to the consumer's act of making a payment is equally sensible.”


The Court noted that Regulation Z and the CFPB’s Official Interpretations do not define the term “payment instrument or other means of payment,” an online electronic payment authorization according to the Court fell within the broad “other means of payment” language. 


Moreover, the Seventh Circuit noted that “[p]aper checks must be credited when received by the mortgage servicer, not when the servicer acquires the funds.”  Accordingly, the Court rejected the servicer’s argument that the actual receipt of funds electronically, not the borrower’s electronic authorization starting the process, was the “payment instrument or other means of payment,” because if a paper check must be credited on the day it is received, not when the funds clear, the Court believed there was no reason why a mortgage servicer can legitimately complain about a similar process when it receives an online electronic authorization to start the process of withdrawing funds from the borrower’s bank account as in a check transaction.


Finally, the Seventh Circuit rejected the servicer’s last argument as the term “preauthorized payment” in the last line of the Official Interpretations:


If the consumer elects to have payment made by a third-party payor such as a financial institution, through a preauthorized payment or telephone bill-payment arrangement, payment is received when the mortgage servicer receives the third-party payor's check or other transfer medium, such as an electronic fund transfer.


CFPB’s Official Interpretation of 12 CFR § 1026.36(c)(1)(i).


The servicer argued that “preauthorized payment” refers to when the borrower transmits her authorization to the servicer to withdraw funds from her account, meaning that the servicer could wait until it received the electronic funds from the borrower’s bank to credit the account.  However, the Court reasoned that the better reading was the one urged by the borrower, under which “preauthorized payments” means advance authorizations given to third parties such as automatic bill payments set up by a borrower through her bank or other third party bill paying services, not a payment authorization given directly by the borrower to the servicer to collect the payment.


This interpretation, the Seventh Circuit opined, promotes one of the purposes of TILA, which is to protect consumers from unwarranted delay by mortgage servicers. To do otherwise, according to the Court, would give servicers an incentive to collect payments through a slower method in order to generate late fees, because when the consumer deals directly with the servicer, the servicer controls the timing of submitting the authorization for payment to the ACH network. According to the Seventh Circuit, this potential for abuse does not occur when the borrower arranges payment through a third party payment company or automatic bill payment service, because in that situation there is no opportunity for the servicer to delay as it must credit the payment when it receives it from the third party, as required by the last sentence of the CFPB’s Official Interpretations.


The Seventh Circuit concluded that a borrower’s electronic authorization for a mortgage payment made through mortgage servicer’s website constitutes a “payment instrument or other means of payment” under TILA, and that TILA requires mortgage servicers to credit such payment authorizations when the authorization is received by the servicer.


The Court held that, because the servicer here did not credit the borrower’s payment when it received her authorization, it was not entitled to summary judgment, and therefore reversed and remanded for further proceedings.






Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874


Admitted to practice law in Illinois



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