A recent decision of the Illinois Appellate Court could affect consumer lenders who obtain authorizations from their borrowers for loan payments to be made through electronic fund transfers (EFTs).

In Randle v. AmeriCash Loans, LLC, the Illinois court ruled that the Truth in Lending Act requires the lender to disclose an EFT authorization as a security interest. Although Randle involved a payday lender, its reasoning is problematic for any lender who obtains an EFT authorization in connection with any type of consumer loan.

Because Randle is now the governing law in Illinois state courts and could be followed by other courts—and because a Federal Reserve Board Official Staff Comment to Regulation Z authorizes creditors to disclose the existence of a security interest in cases of doubt—creditors should consider including language in their notes expressly granting a security interest, when allowed under state law, and then including language in their TILA disclosures referencing that security interest. Lenders obtaining EFT authorizations should review their loan documents and disclosures with counsel to determine whether changes should be made.

In Randle, the appellate court reversed the trial court’s dismissal of the plaintiff’s claims that the lender’s failure to disclose her EFT authorization as a security interest violated TILA and the Illinois Interest Act (IIA). (The IIA incorporates the disclosure requirements of the Illinois Consumer Installment Loan Act, which deems TILA compliance to be compliance with that Act’s disclosure requirements.) The plaintiff had elected to have her loan repaid through payroll deductions. She had also signed an optional EFT authorization form, allowing the lender to electronically debit her checking account to make a loan payment previously made with a dishonored check or to pay an accelerated balance upon default. The form provided that the plaintiff had the right to revoke her authorization.

Rejecting the lender’s argument that the EFT authorization was simply a mechanism to facilitate repayment of the loan rather than a security interest, the Illinois court held that the plaintiff had sufficiently stated a claim that the lender took a security interest in her checking account.  Among the reasons the court gave for its finding was that the EFT authorization gave the lender additional rights because "any debit to the [checking] account that was returned unpaid could be collected in the same manner as an unpaid paper check [under Illinois’ bad check statute]."

We believe the court erred for at least two reasons. First, it incorrectly concluded that Illinois' bad check law would apply to a returned electronic debit. Second, it gave no weight to the fact that the EFT authorization was both voluntary and revocable at the plaintiff’s option. We believe the correct view is that TILA does not require a voluntary and revocable EFT authorization to be disclosed as a security interest. This view would be reinforced where the EFT authorization extends only to regular payments and not to accelerated balances, and also where it represents the primary payment mechanism rather than a mechanism to be used only upon the borrower’s default.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).  For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.

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