Mortgage Servicer Must Post ACH Payment on Date of Authorization, Appeals Court Says

Financial Services Litigation & Regulatory Compliance Alert

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In Fridman v. NYCB Mortgage Co., the U.S. Court of Appeals for the Seventh Circuit recently held that If a customer authorizes an electronic payment via the servicer’s website, the servicer must credit the payment as of the date the authorization was given if a delay in posting would result in a late charge or a report of adverse information to a consumer reporting agency.

The case involves these facts:

  • The borrower’s payment was due on the first day of the month.
  • On Friday the 14th, the borrower logged on to the servicer’s website and authorized an electronic (ACH) payment.
  • The servicer’s disclosed policy was that online payments would be credited two business days after the payment authorization was entered, even if funds have not actually been received from the borrower’s bank by that date.
  • The servicer processed the payment authorization, assessed a late charge on or after the 16th day, and posted the electronic payment on Tuesday the 18th (the second business day after the 14th, according to the court).
  • The 18th also happened to be the day funds were actually received by the servicer in this instance.

The court of appeals held that the delay of two business days violated Regulation Z, section 1026.36(c)(1)(I). That section requires a servicer of a loan secured by a consumer borrower’s principal dwelling to credit a payment as of the date of receipt, except when a delay in crediting does not result in a charge to the borrower or in the reporting of negative information to a consumer reporting agency. The same-day crediting requirement is subject to an exception if the servicer accepts a payment even though it is not made in accordance with the servicer’s written requirements. In that case, the servicer must credit the payment within 5 days after receipt.

Judge Easterbrook dissented, arguing that an ACH payment authorization is not a “payment” for purposes of the same-day crediting requirement. He also said that since the servicer had expressly required the borrower’s agreement that an ACH payment is not an immediate payment and that payment would be credited 2 business days after the authorization was entered, the servicer should be entitled to the exception that allows it 5 days to credit a payment that is not made in accordance with the servicer’s written requirements for payments.

The court reversed the district court’s grant of summary judgment in favor of the servicer and remanded the case to the district court for further proceedings.

Opinions of the U.S. Seventh Circuit are precedent in federal courts in Illinois, Indiana and Wisconsin.