The Seventh Circuit has refused to reconsider its troublesome ruling that mortgage servicers violate the Federal Truth in Lending Act (TILA) if they do not credit electronic payments the day they are made even though the funds are not received until several days later.

The TILA requires that payments be posted as of the “date of receipt.”  Ordinarily, when consumer authorizes an electronic payment, there is a lag time before the mortgage servicer can receive the electronic funds transfer through the Automated Clearing House (ACH) from consumers’ bank.  This is what happened in the case at issue.

Plaintiff made her payment on a Thursday evening or Friday morning, one day before the expiration of her grace period.  In accordance with its policy, Defendant mortgage servicer did not credit the payment until two business days later, or Tuesday of the following week.  Thus, because the payment was received after the expiration of the grace period, Defendant assessed a late fee. Consumer brought a class action under TILA.  The district court dismissed Plaintiff’s lawsuit and she appealed.

In determining what constitutes “the date of receipt” under TILA, the Court of Appeals analyzed the Consumer Financial Protection Bureau’s (CFPB) Official Interpretations of TILA-implementing Regulation Z (“Official Interpretations”).  According to the CFPB’s Official Interpretations, the “date of receipt” is the date that the “payment instrument or other means of payment” reaches the mortgage servicers, such as when the mortgage servicer receives an electronic fund transfer.  But does “payment instrument” refer to consumer’s authorization of payment, as Plaintiff argued, or does it mean the mortgage servicer’s actual receipt of funds from the consumer’s bank, as Defendant argued?

After analyzing federal and state statutes’ definitions of “payment instrument,” the Court ultimately resolved the question in Plaintiff’s favor by analogizing an electronic funds transfer to a paper check.  Pursuant to the Official Interpretations, paper checks must be credited when received by the mortgage servicers, not when the servicer acquires funds.  Accordingly, the Court of Appeals reversed the trial court’s dismissal of Plaintiff’s TILA claim and remanded the case for further determination.

We will continue to monitor this important case as it proceeds on remand.  The effect of the Seventh Circuit’s ruling is twofold.  First, it has opened up the gates to a flood of similar claims for failure to credit electronic payments on the date they are made, as opposed to received.  Second, the Seventh Circuit’s reading of the CFPB’s Official Interpretations has potentially cut off mortgage servicers’ defense against liability for actions taken in good faith reliance on CFPB’s Official Interpretations.