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Payday Lender Must Disclose EFT Authorization

By Andy Miofsky, Illinois Bankruptcy Attorney

Payday Loan lenders could be sued in Illinois for failing to disclose the existence of an Electronic Funds Transfer [EFT] agreement in the loan disclosure box, so says the 5th Division of the First District Appellate Court of Illinois in the case of Randle v. Americash Loans, LLC, No. 1-09-2318 (July 30, 2010) Cook Co., 5th Div.

The federal Truth In Lending Act [TILA], and its progeny, Regulation Z, requires lenders provide a clear and conspicuous written disclosure of the finance charge, the annual percentage rate and any security interests taken by the lender to guarantee loan repayment. These disclosures must be grouped together in a “federal box” separate from other non-disclosure information. Lenders typically place this box near the top of the loan document.

In Randle, the lender accepted an electronic funds transfer [EFT] authorization that would permit the lender to deduct money from borrower’s bank account if borrower defaulted on a short term $2000 loan. The lender did not disclose the existence of the EFT authorization in the federal disclosure box, though the borrower signed a separate authorization form granting the lender permission to hit the checking account. Later, the borrower sued the lender for violation of TILA and the Illinois Interest Act disclosure requirements. The lender argued the EFT authorization did not constitute a security interest and therefore did not have to be included in the federal disclosure box. The court disagreed.

The Court relied on a cases decided by the 7th Circuit Court of Appeals and Northern District of Illinois federal courts, In re Hahn, 202 F.3d 998 and Pinkett v First Citizens Bank, No. 09 C 2365 (N.D. Ill May 10, 2010), to decide the EFT authorization had to be disclosed in the federal box because the authorization allowed the lender to debit borrower’s checking account if she reneged on her promise to repay loan. The court stated, “An instrument that grants a creditor rights to collect the debt beyond those contained in the loan agreement must be disclosed as a security instrument.”

Borrowers, and their attorneys, should review the loan documents to see if the Electronic Funds Transfer authorization is disclosed as a security interest in the

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Full post as published by Bankruptcy Law Network on September 20, 2010 (boomark / email).