Where the Truth in Lending Act requires mortgage servicers to credit payments made by Automatic Clearing House transfer on the date that the authorization is made, the lower court ruling was in error.
The 7th U.S. Circuit Court of Appeals reversed a decision by U.S. District Judge Sara L. Ellis.
Elena Fridman made her mortgage payments electronically, using the online payment system on the website of her mortgage servicer, NYCB Mortgage Co. LLC. By using the system, Fridman authorized NYCB to collect funds from her Bank of America account. NYCB withdrew the funds through the Electronic Payments Network, which is an automated clearing house (ACH).
Consumer electronic authorizations submitted before 8 p.m. Eastern Time on a business day are including in that day’s ACH file, while authorizations submitted later are placed in the next business day’s file.
NYCB typically credits payments made through its website two business days after an electronic payment is submitted, on the rationale that two business days represents the earliest point at which NYCB can receive the electronic funds transfer through the ACH network. Fridman’s mortgage required payment on the first day of each month with a 15-day grace period.
In December 2012, Fridman used NYCB’s website to authorize a payment from her Bank of America checking account. Fridman completed the transfer on the evening of Dec. 13, 2012, after the 8 p.m. cutoff time. NYCB credited Fridman’s account two business days later, on Dec. 18. Because this was after the grace period, NYCB charged Fridman a late fee of $88.54.
Fridman sued under the Truth in Lending Act’s civil liability provision. Fridman argued that the act requires mortgage servicers to credit payments on the day of the authorization. NYCB argued in response that the relevant time is when NYCB receives funds from the consumer’s external bank account. The U.S. District Court agreed. Fridman appealed.
The majority began by stating that TILA generally requires mortgage servicers to credit payments to consumer accounts “as of the date of receipt” of payment, unless delayed crediting has no effect on either late fees or consumers’ credit reports. The “date of receipt” is defined in the implementing regulations as the date at which the servicer receives the payment instrument or other means of payment.
Fridman argued that an electronic authorization of payment qualified as a payment instrument or other means of payment. The majority analogized an electronic payment authorization to a check, finding that both means of payment are, in a sense, “incomplete.”
The majority noted that, in both cases, the servicer must take an additional step upon receipt of the instrument in order to obtain funds, and the act expressly includes written checks as payment instruments that must be credited upon receipt of the instrument.
NYCB argued in response that a line in the official interpretations stated that if a consumer elects to have payment made by a third-party payor, through a pre-authorized payment or telephone bill payment arrangement, payment is received when the mortgage servicer receives the third-party payment medium.
NYCB continued, arguing that Fridman only pre-authorized NYCB to extract money from her bank account. The majority rejected the argument. The majority agreed with Fridman that the clause that NYCB pointed to referred to systems such as the automatic bill payment systems many banks had adopted in which consumers authorized their banks to pay bills at specified intervals.
The majority determined that this approach protected consumers from unwarranted delay by mortgage servicers. The majority stated that to read TILA as NYCB desired would allow servicers to potentially delay processing of payments solely to collect late fees from consumers. The majority, therefore, reversed the decision of the district court.
Judge Frank H. Easterbrook dissented. Easterbrook argued that Fridman’s authorization of payment was not a payment, but rather an “instruction” permitting NYCB to draw funds from Fridman’s bank account.
Easterbrook argued that adopting the majority’s position could lead to servicers refusing to accept electronic transfers as a form of payment.
As result, the panel overturned the district court’s decision.
Elena Fridman, individually and on behalf of a class v. NYCB Mortgage Co. LLC
No. 14-2220
Writing for the majority: Chief Judge Diane P. Wood
Concurring: Judge David F. Hamilton
Dissenting: Judge Frank H. Easterbrook