The United States District Court for the Southern District of Alabama granted summary judgment in favor of a bank, ruling that defendant’s policy of applying excess payments to accrued finance charges was not a violation of the Truth in Lending Act and its implementing regulation, Regulation Z, where the terms of the contract indicated that excess payments would be applied in that manner. Plaintiff alleged that defendant violated TILA by misapplying her payments and unilaterally changing the terms of the HELOC, which increased the price of credit in the form of additional interest. Defendant obtained plaintiff’s HELOC after the original lender was placed in receivership. Under the original lender’s policy, payments in excess of the minimum payment were applied to the principal. However, under defendant’s policy, any payment in excess of the minimum payment is first applied to all accrued finance charges.
The Court noted that TILA and Regulation Z generally prohibit creditors from unilaterally changing the material terms of an open-end consumer credit plan. However, the Court did not find defendant had acted unlawfully, noting that the terms of defendant’s policy clearly stated that excess payments would be applied to unpaid finance charges. In reaching its decision, the Court noted that the payment application provision did not “become ambiguous simply because [plaintiff’s original lender] applied the payment in a different manner.” Plaintiff also alleged that defendant’s principal reduction payments option (e.g., sending a separate payment by phone or mail) was a unilateral change to the terms of the HELOC and, as such, a violation of TILA and Regulation Z. The Court also rejected this argument, agreeing with defendant that the principal reduction payment option was a benefit to plaintiff, holding that the bank’s “principal-only payment method is simply a way to avoid having the extra payment applied to accrued interest and fees,” and therefore not in violation of TILA, which states that any change made to the terms of the loan is generally prohibited except a change that benefits the consumer.