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From Banking and Finance Law Daily, March 13, 2015

Payment must be credited when authorized on mortgage servicer’s website

By Richard A. Roth, J.D.

A mortgage loan servicer received a homeowner’s payment when the homeowner used the servicer’s website to initiate a transfer from his bank account, according to the U.S. Court of Appeals for the Seventh Circuit. Since the payment was received when the transfer was authorized, the Truth in Lending Act and Reg. Z—Truth in Lending (12 CFR Part 1026) required the servicer to credit it on the same day, the court said. The appellate court reversed a district court decision that the payment was received two business days later when the electronic funds transfer was completed (Fridman v. NYCB Mortgage Co., LLC, March 11, 2015, Wood, D.).

The homeowner’s payment was due by the first of each month, with a 15-day grace period before late fees would be imposed. In December 2012, she used the website of the loan servicer, NYCB Mortgage Co., LLC, to authorize the company to draw her monthly payment from her bank account. NYCB followed its clearly disclosed payment crediting policies and did not credit the payment until two business days later, by which time the grace period had expired. As a result, the homeowner was charged an $88.54 late fee.

Trial court action. The homeowner filed a class action, claiming that NYCB had violated TILA’s requirement that mortgage loan payments be credited “as of the date of receipt” (15 U.S.C. §1639f). However, the federal district judge agreed with NYCB that the date of receipt was the date the funds actually were transferred to the servicer, not the date the transfer was authorized by the homeowner (see Fridman v. NYCB Mortgage Company, LLC, analyzed at Banking and Finance Law Daily, May 28, 2014). As a result, NYCB had credited the payment correctly, the judge said. The homeowner appealed the dismissal of her suit.

“Date of receipt.” TILA says that as long as a homeowner follows the loan servicer’s instructions, mortgage loan payments must be credited “as of the date of receipt,” and Reg. Z says the same (12 CFR 1026.36(c)). However, neither the law nor the regulation make clear just what the date of receipt is, the appellate court observed.

Reg. Z’s Official Staff Comments are a bit clearer, the court said, in that they say the date of receipt is “the date that the payment instrument or other means of payment reaches the mortgage servicer.” A payment by check is received on the date the servicer gets the check, not the date the funds are collected, the staff comments add.

“Other means of payment.” Noting that it was not irrational for the Consumer Financial Protection Bureau to interpret “date of receipt” as referring to the date the means of payment was received, as opposed to the date the funds were received, the court then passed on to consider whether an electronic authorization was a payment instrument or other means of payment. While neither Reg. Z nor the staff comments defined “payment instrument or other means of payment,” the use of “other means” made clear that a broad definition was appropriate, the court said—broad enough to include an electronic authorization on a mortgage servicer’s website. Other comparable federal and state laws led to the same conclusion.

The court rejected NYCB’s argument that the electronic transfer, not the homeowner’s payment authorization, was the means of payment. Authorizing a payment using the servicer’s website was akin to sending the servicer a paper check, according to the court, in that either method actually constituted permission to draw funds from the homeowner’s bank account. There was no reason to treat them differently.

Preauthorized payments. The appellate court gave more serious consideration to NYCB’s argument based on the staff comments’ use of the term “preauthorized payment.” According to the staff comments, if a homeowner chooses to instruct a third party to make a preauthorized loan payment, the payment is received when the servicer “receives the third-party payor’s check or other transfer medium, such as an electronic fund transfer.” The homeowner’s website authorization constituted such a preauthorized transfer, NYCB asserted. Under that interpretation, the payment did not need to be credited until the funds were received.

However, that argument ultimately was rejected. “Preauthorized payments” should be seen as describing an advance authorization given to the third party, not an authorization to a servicer to draw funds out of a homeowner’s account, the court said. If a homeowner arranged for her bank to send loan payments every month, the servicer would be entitled to credit those payments only when the funds were received because the servicer had no control over the payment process. However, when a homeowner uses the servicer’s website, the servicer can decide how quickly to begin the collection process.

This interpretation was consistent with TILA’s goal of ensuring that servicers had no incentive to cause delays that would permit them to impose late payment penalties, the court added.

Dissenting opinion. Writing in dissent, Judge Easterbrook argued for a bright line—“lenders must give credit when they receive payment.” The homeowner’s authorization on NYCB’s website was not a payment, he said, it was an instruction to NYCB to request a transfer from the homeowner’s bank.

The dissenter disagreed vigorously with the majority opinion’s disposition of NYCB’s “preauthorized payments” argument. The staff comments do not draw a distinction based on who receives a payment instruction, the servicer or the paying bank, he said. No matter who receives the instruction, the payment is preauthorized because the authorization precedes the payment.

Additionally, the dissenter noted, TILA allows a servicer to specify the forms of payments it will accept in writing and to delay crediting any payment it chooses to accept that was made using a different form. NYCB’s list did not include using automated clearing house methods to request funds from a homeowner’s bank, so NYCB was entitled to a five-day delay.

Bad consequences. While he conceded that it is not the place of a court interpreting a law or regulation to worry about the consequences of its decision, Judge Easterbrook then pointed out that the majority’s opinion could, indeed, harm consumers. A loan servicer could restrict the payment forms it would accept, such as by requiring homeowners to mail paper checks or instructing their own banks to make payments—which would be credited only when the funds were received. Servicers also could choose to reduce, or simply eliminate, grace periods. In either case, consumers would be the losers, he said.

The case is No. 14-2220.

Attorneys: Daniel A. Edelman (Edelman Combs Latturner & Goodwin, LLC) for Elena Fridman. LeAnn Pedersen Pope (Burke, Warren, MacKay & Serritella, PC) for NYCB Mortgage Company LLC.

Companies: NYCB Mortgage Co., LLC

MainStory: TopStory ConsumerCredit IllinoisNews IndianaNews Mortgages TruthInLending WisconsinNews

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