PANEL: ONLINE PAYMENT VALID ON DAY CLICKED
Diane P. Wood
Frank H. Easterbrook
Banks and other entities that service mortgages must credit any payment made through their websites at the time the borrower approves the payment, a divided federal appeals court has held.The 7th U.S. Circuit Court of Appeals rejected the argument that the federal Truth in Lending Act allows mortgage servicers to wait until an electronic transfer of funds is completed before crediting a payment.
Such a holding, the majority wrote, would be contrary to Congress’ intent.
“The interpretation we adopt promotes an important purpose of TILA: [T]o protect consumers against unwarranted delay by mortgage servicers,” Chief Judge Diane P. Wood wrote in an opinion joined by Judge David F. Hamilton.
In a dissent, Judge Frank H. Easterbrook contended his colleagues were misinterpreting TILA’s requirement that a mortgage servicer credit a payment “as of the date of receipt.”
Under Section 1639f(a) of TILA and an implementing regulation, Easterbrook wrote, an instruction to make a payment is not actually a payment.
“We should read the statute and regulation to mean what they say: [L]enders must give credit when they receive payment,” he wrote.
Elena Fridman’s mortgage is serviced by NYCB Mortgage Co. LLC. Her payments are due on the first of each month, but she has a 15-day grace period before she is required to pay a late fee.
Borrowers may authorize payments on their mortgages through NYCB’s website.
Every business day, NYCB puts all the authorizations it received before 8 p.m. into an Automated Clearing House file.
The following day, NYCB uses the ACH file to request that funds be transferred from the borrowers’ bank accounts.
NYCB credits payments made through its website two business days after the payment is authorized.
Late on Dec. 13, 2012, or early the next morning, Fridman accessed NYCB’s website and authorized a mortgage payment from her account at Bank of America.
NYCB placed the authorization into an ACH file on Dec. 14 and credited Fridman’s mortgage account for the payment on Tuesday, Dec. 18, which was two business days later. It charged her a late fee of $88.54.
Fridman sued NYCB, alleging TILA required it to credit her payment on the day she submitted the authorization.
U.S. District Judge Sara L. Ellis ruled in favor of NYCB, and Fridman appealed.
In its opinion Wednesday, the 7th Circuit majority wrote that a mortgage servicer decides how quickly to collect a payment when it receives a check or gets authorization on its website or over the phone to transfer funds.
Without TILA’s requirement that payment be credited on receipt of the “payment instrument,” the majority wrote, “the servicer could decide to collect payment through a slower method in order to rack up late fees.”
But Easterbrook countered that fear of losing business would prevent a mortgage servicer from engaging in such tactics.
“Playing games would put its reputation at risk,” he wrote. “Users of the Internet proclaim their grievances loudly, and many sites rate merchants based on users’ observations.”
The case is Elena Fridman v. NYCB Mortgage Co. LLC, No. 14-2220.
Daniel A. Edelman of Edelman, Combs, Latturner & Goodwin LLC argued the case before the 7th Circuit on behalf of Fridman.
“I think Judge Wood got it right,” he said.
An authorization made through a website, he said “is an electronic form of a paper check.”
And TILA requires a payment made with a check to be credited when the mortgage servicer receives the check, he said.
Edelman rejected Easterbrook’s assertion that concern over borrowers’ reaction to underhanded conduct would keep mortgage servicers in line.
Servicers don’t care what borrowers think of them, he said.
Instead, he said, servicers have an incentive to collect late fees from borrowers so they can keep their own costs down and attract more business.
“Where Judge Easterbrook went wrong is thinking market forces constrain bad behavior on the part of mortgage servicers,” Edelman said.
LeAnn Pedersen Pope of Burke, Warren, MacKay & Serritella P.C. argued the case on behalf of the bank.
She is still analyzing the ruling, Pope said.