A California federal court recently ruled that a lender violated the Electronic Fund Transfer Act (EFTA) prohibition on “condition[ing] the extension of credit” on a borrower’s repayment “by means of preauthorized electronic fund transfers.” The court found the lender violated this prohibition by requiring borrowers to agree to repay their installment loans by payments using the Automated Clearing House (ACH) network, even though borrowers were given the right to revoke the ACH authorization at any time, including before the first payment was due.
In Eduardo De La Torre, et al. v. CashCall, Inc., the court ruled that the plaintiffs were entitled to partial summary judgment on their class EFTA claim because the uncontroverted evidence showed that the lender only made loans to borrowers who consented to repay them through preauthorized electronic fund transfers (EFTs). Agreeing with last year's decision from a South Dakota federal court in FTC v. Payday Financial LLC, the court rejected the lender’s argument that it did not violate the EFTA prohibition because its promissory notes provided that the borrower could cancel his or her authorization of EFTs “at any time (including prior to my first payment due date) by sending written authorization to CashCall.” According to the court, the lender’s “loan application and loan agreement forms do not state that a consumer need not consent to EFT to obtain a loan from CashCall or explain how a consumer could obtain a loan from CashCall without consenting to EFT.”
We think that both CashCall and Payday Financial can be criticized for misreading the language of Regulation E, which implements the EFTA. Regulation E prohibits creditors from conditioning credit “on the consumer's repayment by preauthorized electronic fund transfers” (emphasis added) and does not prohibit by its terms conditioning credit on the consumer's agreement to repay by preauthorized EFTs. In CashCall, fully 16 percent of the borrowers actually canceled their EFT authorizations at some point after the loan was funded, thereby demonstrating that they were not required to repay through preauthorized EFTs.
In light of CashCall and Payday Financial, creditors will be safer if they give borrowers an alternative at or before the time of loan origination to making regularly recurring loan payments through EFTs, and not merely a right to revoke their EFT authorization post-origination. While creditors are permitted to encourage borrowers to authorize EFTs through the use of pricing incentives, creditors offering such incentives should consult with legal counsel to make sure they are complying with applicable Regulation E limitations.
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