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ILLINOIS APPELLATE COURT DETERMINES EFT AUTHORIZATION MAY BE A SECURITY INTEREST

On July 30, 2010, in reversing the trial court's granting of a lender's motion to dismiss, an Illinois appellate court found that an electronic fund transfer ("EFT") authorization could constitute a security interest in a checking account under Illinois law, which the lender would have to disclose in accordance with the Truth in Lending Act ("TILA"). See Randle v. AmeriCash Loans, No. 1-09-2318 (Ill. App. Ct. July 30, 2010).

The plaintiff took out an installment loan from an Illinois-based short term lending company, which provided for repayment by (i) payroll deduction, (ii) personal check or EFT or (iii) cash or money order. The plaintiff chose the payroll deduction option and signed an optional EFT authorization, which permitted the lender to electronically debit or issue a bank draft against the plaintiff's checking account if the plaintiff was in default of the loan agreement. The lender wrote "your wage assignment is security for this loan" in the segregated federal disclosures in the loan agreement.

The plaintiff filed a complaint alleging violations of the TILA and the Illinois Interest Act on the basis that the lender failed to include the security interest taken in the EFT authorization in the segregated federal disclosures. The plaintiff argued that the EFT authorization conferred on the lender additional rights and remedies beyond those in the loan agreement. The lender argued that the EFT authorization constituted nothing more than a method of payment. The trial court found that the EFT authorization was not a security interest because it did not create additional rights and remedies, nor was it a check, a negotiable instrument or collateral.

The appellate court first reviewed the definition of "security interest" under the TILA's Regulation Z and the Illinois Uniform Commercial Code. Although not identical, both definitions generally define the term as an interest in property securing payment or performance of an obligation. The appellate court further analyzed whether the EFT authorization was equivalent to a traditional check, which the Seventh Circuit has found to be a security interest under Illinois law. The appellate court relied on the Seventh Circuit's holdings that an instrument (including a post-dated check) that grants a creditor rights to collect the debt beyond those contained in the loan agreement must be disclosed as a security interest.

The EFT authorization at issue stated that (i) the lender could initiate debit entries into the plaintiff's checking account, (ii) the plaintiff could not terminate the authorization without written notice to the lender in time for it to act on its rights and (iii) unpaid debits could be collected in the same way as an unpaid paper check. The appellate court thus found that the plaintiff sufficiently stated a claim that the lender took a security interest in the plaintiff's checking account because the EFT authorization granted the lender rights to debit the plaintiff's checking account if she failed to repay through her selected repayment option.

Similar arguments could be made in other jurisdictions regarding EFT authorizations depending on the scope of the authorization, the definition of "security interest" and the operation of laws governing the collection of dishonored checks. Small loan lenders might wish to review their security interest disclosure practices for state law compliance.

  • Judy Scheiderer