In a recent putative class action by borrowers against a mortgage servicer alleging violations of the Truth in Lending Act (“TILA”), the Seventh Circuit Court of Appeals found that mortgage servicers must credit electronic payments on the date a customer authorizes payment, rather than the date the servicer actually receives the funds from the customer’s bank account. Therefore, mortgage payments made online were timely when the borrowers authorized the payments on or before the date their payments were due.

The servicer in this case did not credit the funds for two business days. The servicer’s payment system allowed the borrower/customer to pay the mortgage servicer using a third-party bank account by signing onto her account with the servicer and providing the routing and account numbers for her bank account. The borrower could then authorize the payment by clicking a “submit payment” button. 

Each business day, the servicer compiled electronic authorizations submitted before 8 p.m. that day, and the day after that, used those authorizations to request the funds from the customers’ banks. In other words, it took at least two days between the date a customer authorized a payment online and the date the servicer received the funds and credited the customer’s account. If a customer submitted the authorization after 8 p.m., it would be added to the list of authorizations for two business days later, adding more lag time between the authorization and the actual debiting of the customer’s bank account.

The servicer argued that two business days was the earliest it could obtain funds from its customers’ banks. 

The putative class representative in the case was a customer who submitted a payment on a Thursday evening or Friday morning. Her account was not credited until the next Tuesday -- after the expiration of a grace period in which she had to make a timely payment. Had her account been credited when she authorized the payment, it would have been timely. The servicer charged her a late fee.

TILA and Regulation Z require servicers to credit payments to customer accounts “as of the date of receipt” of payment, unless delayed crediting would not affect late fees or credit reporting. The servicer argued that because a customer’s authorization was not the point at which the servicer actually received the funds, it should not need to credit the customer’s account on the date of authorization. The Seventh Circuit rejected this argument, analogizing that when payment is received in the form of a paper check, the payment is credited on the date of receipt of the check even though the servicer still must use the banking system to obtain funds authorized by that particular instrument. 

The court also rejected the servicer’s definitional argument under the CFPB’s Official Interpretations that the plaintiff had “preauthorized” the servicer to obtain funds from her bank, such that the date of receipt of the funds would be the date a payment should be credited. Rather, she had in fact authorized the bank (a third party) to send funds to the servicer, and had not authorized the servicer to do anything.

The Seventh Circuit ended its opinion with a policy statement that this outcome furthers one purpose of TILA: to protect consumers against unwarranted delay by mortgage servicers. Mortgage servicers should be aware of this opinion in determining when to credit customers’ online mortgage payments.