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When Elena Fridman authorized her mortgage payment online, she thought she'd met her obligations to pay on time. But her mortgage servicer, NYCB Mortgage Co., disagreed. Because it took NYCB two days to process her payment, they did not consider it received "on time" and charged Fridman a late fee. Fridman sued, and the Seventh Circuit recently ruled that her payment was valid on the day she authorized it.
Under the ruling, mortgage services must credit payments made on their websites at the time the borrower approves it, not at the point they actual electronic transfer of funds is completed.
Check's in the Mail?
Fridman brought her suit under the Truth in Lending Act. Under TILA, mortgage services must credit payments "as of the date of receipt." The "date of receipt" is defined by the Consumer Financial Protection Bureau as the date the payment instrument reaches the servicer. If, for example, Fridman had mailed her payment in, payment would be made at the time the check is received, not when the actual funds are collected.
As the court noted, in an opinion by Chief Judge Wood and joined by Judge Hamilton, the case called attention to the differences between electronic authorizations and checks. According to NYCB, Fridman's online authorization is not a payment instrument, only the beginning of a payment process and the payment instrument is the actual transfer of funds from her bank to the mortgage servicer.
The majority opinion rejected NYCB's argument, noting that electronic authorizations easily fit within the definition of payment instruments and are explicitly included in state laws and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Since Fridman's payment instrument was received in time, NYCB must treat her payment as valid.
Avoiding Excess Fees
The court also noted that to allow NYCB to wait until actual funds were received would allow it to needlessly delay receipt of payment in order to maximize fees. Accepting NYCB's interpretation would allow mortgage servicers to collect payments throw slower methods in order to rack up late fees.
This logic was rejected by Judge Easterbrook in his dissent, where he noted that mortgage servicers' desire to protect their reputation would be enough to prevent such actions. Easterbrook also took a more literalist interpretation of the TILA, arguing that "payment" could only be received when actual money was transferred to the mortgage servicer.