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MoFo Reenforcement The Enforcement Blog

When Is “Payment Authorization” the Same as a “Payment”? Seventh Circuit Weighs In

Posted in CFPB, Electronic Payments, Mortgage

A divided Seventh Circuit found that the Truth in Lending Act (TILA), 15 U.S.C. § 1601 et seq., requires mortgage servicers to credit online electronic payments on the day the customer authorizes the payment, despite not actually receiving the payment at that time. Fridman v. NYCB Mortg. Co., LLC, No. 14-2220 (7th Cir. Mar. 11, 2015).

TILA generally requires mortgage servicers to credit payments to consumer accounts on “the date of receipt,” unless the delay has no impact on credit reporting or fees incurred. 15 U.S.C. § 1639f(a). In finding that “date of receipt” of payment meant date of receipt of authorization, the Seventh Circuit relied heavily on the Consumer Financial Protection Bureau (CFPB) regulation that defines “date of receipt” and its example that a payment by check is received when the mortgage servicer receives the check, not when the funds are collected.

The court expressed skepticism about how much deference the CFPB regulations on the topic should be given (i.e., whether they’re due greater deference than the prior Federal Reserve Board (FRB) Staff Commentary). But, it did not ultimately decide the issue because it found deference was warranted even under the prior standard. Previously, courts gave deference to the FRB Staff Commentary unless the opinion was “demonstrably irrational.” The court acknowledged that it was rational for “payment” to mean receipt of funds, but it found it equally rational for “payment” to mean receipt of a consumer’s authorization to pay. The court missed the demonstrable irrationality of defining “payment” to include something that by definition precedes the payment itself.

In another confounding move, the court rejected the servicer’s reliance on FRB Staff Commentary, which provides that when a consumer preauthorizes a payment through a third-party payor, like the consumer’s bank, the payment is received when the servicer receives the third party’s check or transfer. Despite the absence of any such limitation in the text, the court found that this provision only applied where the consumer made the authorization directly to the third-party payor, not through the mortgage servicer.

Judge Easterbrook’s dissent points out many problems with the majority opinion. It criticizes the majority’s use of two state statutes to define “payment instrument”—where neither “payment” nor “payment instrument” is defined in TILA, the corresponding regulations, or the Uniform Commercial Code (UCC). It further blasts the majority for inserting a limitation out of whole cloth on the commentary on preauthorized third-party payments. Lastly, it notes that, under Regulation Z, mortgage servicers are not required to accept any and all forms of payment; they are only required to accept cash, money orders, and negotiable instruments. Outside of that specific list—unless the servicer expressly lists a method as expressly accepted—servicers are permitted to defer giving credit for as long as five days.