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Requiring Repayment of Loan by Electronic Fund Transfer Is Illegal

A California federal court recently held that a lender violated the Electronic Fund Transfer Act (EFTA) prohibition on “condition[ing] the extension of credit” on a borrower’s repayment “by means of preauthorized electronic fund transfers.” The court found the lender violated this prohibition by requiring borrowers to agree to repay their loans by payments made through Automated Clearing House (ACH) debits, even though borrowers were given the right to revoke the ACH authorization at any time, including before the first payment was due.

In Eduardo De La Torre, et al. v. CashCall, Inc., the court held that such a requirement violated the EFTA as a matter of law, because the uncontroverted evidence showed that the lender only made loans to borrowers who consented to repay them through preauthorized electronic fund transfers. Agreeing with last year’s decision from a South Dakota federal court in FTC v. Payday Financial LLC, the court rejected the lender’s argument that it did not violate the EFTA prohibition because its promissory notes provided that the borrower could cancel his or her authorization of EFTs “at any time (including prior to my first payment due date) by sending written authorization to CashCall.” According to the court, the lender’s “loan application and loan agreement forms do not state that a consumer need not consent to EFT to obtain a loan from CashCall or explain how a consumer could obtain a loan from CashCall without consenting to EFT.”