MD Tenn. Holds Auto Finance Creditor’s Telephone Authorization Process Complied With EFTA

The U.S. District Court for the Middle District of Tennessee recently held that a creditor complied with the federal Electronic Funds Transfer Act when it obtained verbal authorization to accept the consumer’s electronic fund transfer and request for enrollment into an autopay system.

In so ruling, the Court held that the creditor was not required to send the consumer a copy of his electronic signature (the recording).  Instead, the Court held, the written confirmation of enrollment need only include the material terms of the autopay system, and sending the confirmation of enrollment within two business days of the date of enrollment was sufficient to meet the creditor’s duty under the EFTA, 15 U.S.C. § 1693, et seq.

A copy of the opinionin Blatt v. Capital One Auto Finance, Inc. is available at:  Link to Opinion.

The consumer purchased a vehicle and executed a retail installment contract.  The retail installment contract was assigned to the creditor, a sales finance company.  After the consumer failed to make his first payment on time, he called the creditor and (1) authorized it over the phone to make a one-time withdrawal from his checking account to cover the missed payment; and (2) requested that he be enrolled in the creditor’s monthly automatic payment system, DirectPay.

To complete the consumer’s second request, he was transferred to an interactive voice response system (IVR).  After the IVR played a message providing the terms of DirectPay system, the IVR asked the consumer to press 1 to authorize the enrollment of his account into DirectPay.  The consumer pressed 1 on his phone.

One business day later, the creditor mailed the consumer a letter confirming the one-time debit from his checking account to make his missed payment.  Two business days after enrolling in DirectPay, the creditor sent a letter containing the following information:  “the amount of the payments to [the creditor], the recurring schedule of the payments, the date on which the first withdrawal would take place, the date on which [the consumer] agreed to the terms via the IVR system, and information on how to cancel or change his DirectPay enrollment.”

The consumer alleged that the creditor violated the EFTA in two ways.  First, the creditor “did not obtain his authorization to the recurring payments in writing, as the EFTA requires.”  Second, the letter confirming his enrollment into DirectPay “was insufficient to meet the EFTA’s requirements that [the creditor] mail a copy of his authorization to him.”

The consumer and the creditor filed competing motions for summary judgment.  The parties stipulated to all the relevant facts.  The only issues that remained were issues of statutory interpretation.

As you may recall, preauthorized electronic fund transfers, such as the ones the consumer agreed to by enrolling in DirectPay, are governed by the EFTA.  “A preauthorized electronic fund transfer from a consumer’s account may be authorized by the consumer only in writing, and a copy of such authorization shall be provided to the consumer when made.”  15 U.S.C. § 1693e(a).

The EFTA is implemented by Regulation E, 12 C.F.R. § 1005, et seq., which also contains official interpretations.  Regulation E allows for the consumer’s written authorization to be provided electronically, as long as the electronic authorization complies with the Electronic Signatures in Global and National Commerce Act (“E-SIGN Act”).

As you may recall, the E-SIGN Act was enacted in recognition of the developing world of electronics, and it mandates that a signature “may not be denied legal effect … solely because it is in electronic form.”  15 U.S.C. § 7001(a)(1).  Moreover, it mandates that a “contract relating to such transaction may not be denied legal effect … solely because an electronic signature or electronic record was used in its formation.”  15 U.S.C. § 7001(a)(2).

In this case, the parties stipulated that the consumer’s telephone call was conducted by “electronic means” through an “electronic agent” (the IVR system) and that the call generated an “electronic record” and “electronic signature” as all terms are defined in the E-SIGN Act.

Turning first to the requirement for a written authorization, the consumer argued that his authorization over the phone did not equate to written authorization as contemplated by the EFTA.  The Court disagreed.

In 2015, the Consumer Financial Protection Bureau issued a Compliance Bulletin stating that the EFTA “does not prohibit companies from obtaining signed, written authorization from consumers over the phone if the E-SIGN Act requirements for electronic records and signatures are met.”

Nevertheless, the consumer argued that the creditor failed to comply with a different portion of the E-SIGN Act, § 7001(c), concerning consumer disclosures.  Section 7001(c) states that “if a statute … requires that information relating to a transaction … be provided or made available to a consumer in writing, the use of an electronic record to provide or make available … such information satisfies the requirement that such information be in writing” if the creditor provided the consumer with certain disclosures.  15 U.S.C. § 7001(c)(1).

However, the Court held, the E-SIGN Act section in question, § 7001(c), did not require the creditor to make the consumer disclosures as the consumer argued, because the creditor did not provide any information in electronic form.

The Court noted that the creditor here obtained the consumer’s signature electronically and then provided a copy of that authorization to the consumer in paper form.  If the creditor had chosen to provide the consumer with a copy of his authorization in the form of an electronic record, it may have been required to comply with § 7001(c)’s consumer disclosure requirements.  But, this was not the situation before the Court.

Therefore, the Court determined that the consumer’s phone call created an electronic signature in accordance with the E-SIGN Act, and the creditor “met the written authorization requirement as contemplated in the EFTA.”

Next, the consumer argued that the creditor violated the § 1693e(a) requirement that “a copy of such authorization shall be provided to the consumer when made.” The consumer argued that the creditor violated this provision in two ways: (1) the creditor “did not send a copy of the authorization ‘when made’ but instead waited two business days; and (2) the copy that the creditor did eventually send was insufficient, in both form and substance, for purposes of the EFTA.”

The consumer argued that “when made” means at the same time as the authorization.  The Court disagreed, holding instead that two business days was an appropriate amount of time to provide a copy of the authorization based on the plain language of the EFTA and other notice requirements in the statute.

For example, the Court noted that (1) with transfers to a consumer’s account, the financial institution must provide “’oral or written notice of the transfer within two business days after the transfer occurs;’” 12 C.F.R. § 1005.10;  (2) “when a consumer notifies a financial institution about an alleged error and the financial institution investigates and determines that no error occurred, the financial institution ‘shall deliver or mail to the consumer an explanation of its finding within 3 business days after the conclusion of its investigation;’” 15 U.S.C. § 1693f; (3) “when a consumer learns of a lost or stolen card, the consumer must inform the financial institution within two business days in order to limit the consumer’s financial responsibility for unauthorized charges;” 15 U.S.C. § 1693g(a); and (4) “the issuer of a prepaid account must provide ‘the consumer a copy of the consumer’s prepaid account agreement no later than five business days after the issuer receives the consumer’s request.’”  12 C.F.R. § 1005.19.

Moreover, the Court explained, a requirement to provide all copies of authorizations “at the very moment in which they are made would be unreasonable and unworkable.”  The Court noted that this ruling did not establish a specific deadline by which a company must mail a copy of the authorization.  Instead, the Court held only that two business days was an appropriate amount of time to meet the EFTA notice requirement in § 1693e(a).

Finally, the consumer argued that the paper copy of the authorization did not meet the requirements of the EFTA in two ways.

First, because the creditor obtained his authorization via the electronic IVR system, the consumer argued that the creditor was then required to give him an audio recording of the phone call.  The consumer argued that this was required by § 7001(e) of the E-SIGN Act, which states that “the legal effect … of an electronic record … may be denied if such electronic record is not in a form that is capable of being retained and accurately reproduced for later reference[.]”  15 U.S.C. § 7001(e).

Second, the consumer argued that the paper copy of his authorization failed to make up for the creditor’s failure to send him a copy of the phone call because the letter did not contain the full terms that he agreed to when he used the IVR system.  Specifically, the consumer cited the following differences:  (1) the IVR system said he would no longer be receiving monthly statements but the paper copy in the mail did not mention this fact; and (2) the IVR system told the consumer that to change or cancel DirectPay he should call an 800 number, while the letter told the consumer that he can stop payment by notifying the creditor three business days or more before his account is charged.

Regarding the form of the confirmation letter, the Court determined that § 7001(e) of the E-SIGN Act did not apply to the consumer’s situation because he was not disputing the contents of the original phone call.

In fact, the Court noted that the consumer stipulated to exactly what the IVR message said – that he agreed to the terms in the message and pressed 1 to confirm his enrollment in DirectPay.  Moreover, the EFTA’s official interpretations allowed financial institutions to comply with the copy requirement by providing the copy of the authorization “either electronically or in paper form.”  12 C.F.R. § Pt. 1005, Supp. I. 10(b) ¶ 5.  Thus, the Court held that the letter mailed to the consumer was a correct form in which to give a copy of the electronic authorization.

As to the contents in the confirmation letter, the Court found that the terms contained in the letter were sufficient to meet the standards of 15 U.S.C. § 1639e(a), and the letter’s failure to recite the exact words in the IVR system is immaterial.

Again, the Court referenced the CFPB’s Compliance Bulletin.  CFPB Compliance Bulletin 2015-06 states that “[t]wo of the most significant terms of an authorization are the timing and amount of the recurring transfers from the consumer’s account.”

Here, the Court noted that the confirmation letter that was mailed to the consumer contained the amount of the payments to the creditor, the recurring schedule of the payments, the date of the first withdrawal, the date when the consumer agreed to the terms via the IVR system, and information on how to cancel or change his DirectPay enrollment.  These terms, according to the Court, were the material and important terms of the consumer’s DirectPay enrollment, and the letter was sufficient to meet the creditor’s duty under 15 U.S.C. § 1693e(a).

Accordingly, the Court granted summary judgment in favor of the creditor, and denied the consumer’s motion for summary judgment.

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Eric Tsai practices in Maurice Wutscher’s Commercial Litigation and Consumer Credit Litigation groups, and in its Regulatory Compliance group. He concentrates his practice primarily on the defense of consumer and commercial financial services companies, including mortgage lenders and servicers, mortgage loan investors, third party debt collectors, and other financial services providers. He also counsels clients on regulatory compliance, licensing, and other consumer protection matters. Eric earned his undergraduate degree from the University of California, Irvine. Prior to attending law school, he worked as a loan officer for national direct lenders. He earned his Juris Doctor from California Western School of Law and thereafter obtained a Master of Laws (LLM) in Taxation from the University of San Diego School of Law. Eric publishes extensively on various issues affecting consumer lending and litigation, including both federal and California-specific developments. He is licensed to practice law in California, Nevada, and Oregon, and is admitted in all United States District Courts in the State of California, the United States District Court for the District of Oregon, the United States District Court for the District of Nevada, the U.S. Tax Court, and the Ninth Circuit Court of Appeals. He is also a licensed real estate broker in the State of California.