[Federal Register: January 10, 2006 (Volume 71, Number 6)]
[Rules and Regulations]
[Page 1637-1664]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ja06-9]
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Part III
Federal Reserve System
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12 CFR Part 205
Electronic Fund Transfers; Final Rule
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FEDERAL RESERVE SYSTEM
12 CFR Part 205
[Regulation E; Docket Nos. R-1210 and R-1234]
Electronic Fund Transfers
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; official staff interpretation.
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SUMMARY: The Board is amending Regulation E, which implements the
Electronic Fund Transfer Act, and the official staff commentary to the
regulation codified in Supplement I to Part 205. The commentary
interprets the requirements of Regulation E to facilitate compliance
primarily by financial institutions that offer electronic fund transfer
services to consumers.
The revisions address the regulation's coverage of electronic check
conversion services. Under the final rule, merchants and other payees
that initiate electronic check conversion transactions must obtain a
consumer's authorization for each transaction. In addition, commentary
revisions address preauthorized transfers, error resolution, and other
matters.
DATES: The final rule is effective February 9, 2006. The mandatory
compliance date is January 1, 2007.
FOR FURTHER INFORMATION CONTACT: Ky Tran-Trong, Senior Attorney, or
Daniel G. Lonergan, David A. Stein or John C. Wood, Counsels, Division
of Consumer and Community Affairs, Board of Governors of the Federal
Reserve System, Washington, DC 20551, at (202) 452-2412 or (202) 452-
3667. For users of Telecommunications Device for the Deaf (TDD) only,
contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Statutory Background
The Electronic Fund Transfer Act (EFTA or Act) (15 U.S.C. 1693 et
seq.), enacted in 1978, provides a basic framework establishing the
rights, liabilities, and responsibilities of participants in electronic
fund transfer (EFT) systems. The EFTA is implemented by the Board's
Regulation E (12 CFR part 205). Examples of types of transfers covered
by the Act and regulation include transfers initiated through an
automated teller machine (ATM), point-of-sale (POS) terminal, automated
clearinghouse (ACH), telephone bill-payment plan, or remote banking
service. The Act and regulation require disclosure of terms and
conditions of an EFT service; documentation of EFTs by means of
terminal receipts and periodic account activity statements; limitations
on consumer liability for unauthorized transfers; procedures for error
resolution; and certain rights related to preauthorized EFTs. Further,
the Act and regulation also prescribe restrictions on the unsolicited
issuance of ATM cards and other access devices.
The official staff commentary (12 CFR part 205 (Supp. I)) is
designed to facilitate compliance and provide protection from liability
under Sections 915 and 916 of the EFTA for financial institutions and
persons subject to the Act. 15 U.S.C. 1693m(d)(1). The commentary is
updated periodically to address significant questions that arise.
II. Background and Overview of Comments Received
On September 17, 2004, the Board published a notice of proposed
rulemaking in the Federal Register (69 FR 55996) (September 2004
proposal) to provide guidance regarding the rights, liabilities, and
responsibilities of parties engaged in electronic check conversion
(ECK) transactions and to provide rules governing the coverage under
Regulation E of payroll card accounts. In addition, proposed commentary
revisions provided guidance on preauthorized electronic transfers from
a consumer's account, error resolution procedures, ATM disclosures, and
other matters.
The Board received nearly 120 comment letters on the September 2004
proposal. Comments were received from a variety of industry commenters,
including banks, thrifts, credit unions, payment card companies,
payment processing companies, and industry trade associations. Comments
were also received from consumer groups, the Department of the
Treasury, the Federal Trade Commission and individual consumers. The
following is a summary of significant proposed revisions to the
regulation and the staff commentary, and the comments received.
Electronic Check Conversion
The EFTA expressly provides that transactions originated by check,
draft, or similar paper instrument are not governed by the Act. In an
ECK transaction, a consumer provides a check to a payee and information
from the check is used to initiate a one-time EFT from the consumer's
account. Specifically, the payee electronically scans and captures the
MICR-encoding on the check for the routing, account, and serial
numbers, and enters the amount to be debited from the consumer's asset
account.
Under the staff commentary, electronic check conversion
transactions are covered by the EFTA and Regulation E if the consumer
authorizes the transaction as an EFT. Under existing commentary
provisions, a consumer authorizes an EFT if the consumer receives
notice that the transaction will be processed as an EFT and the
consumer completes the transaction. See comment 3(b)-3. This standard
applies whether the check conversion occurs at a point-of-sale (where a
person goes to a merchant's physical location to obtain goods or
services) or in an accounts receivable conversion (ARC) transaction
where the consumer mails a fully completed and signed check to the
payee that is converted to an EFT. Although merchants and other payees
are in the best position to provide notice to a consumer for the
purpose of obtaining the consumer's authorization for an ECK
transaction, they are not currently covered by the commentary provision
in Regulation E addressing ECK transactions.
Over the past few years, several issues have arisen relating to ECK
transactions in general, and ARC transactions in particular. Concerns
have been raised about the uniformity and adequacy of some of the
notices provided to consumers about ECK transactions. Some in the
industry would like the flexibility to obtain a consumer's
authorization to process a transaction either as an EFT or as a check.
Board staff also has received inquiries from financial institutions and
other industry participants concerning their obligations under
Regulation E in connection with ECK services.
The Board proposed to revise the regulation to require merchants
and other payees that use information from a check to initiate a one-
time EFT from a consumer's account to provide notice to the consumer
and obtain the consumer's authorization for each EFT. The Board
specifically solicited comment on whether payees should be required to
obtain a consumer's written, signed authorization when the transaction
occurs at POS. To help consumers understand the nature of an ECK
transaction, the Board also proposed to require payees in ECK
transactions to disclose to consumers that when a check is converted,
funds may be withdrawn from their accounts quickly, and that the check
will not be returned by the consumer's financial institution.
Industry commenters supported many of the proposed revisions
addressing ECK transactions, including coverage
[[Page 1639]]
under Regulation E of merchants and other payees for the limited
purpose of providing notice to obtain consumer authorization for ECK
transactions. Some industry commenters, however, raised concerns about
requiring the authorization to be written and signed for POS
transactions. They also raised concerns about providing consumers with
disclosures explaining that funds may be withdrawn from the account
quickly and that checks will not be returned to the consumer.
Commenters asserted, for example, that a written, signed authorization
requirement could stifle industry innovation, and that the additional
information about ECK transactions would result in overly lengthy
disclosures.
Consumer groups also supported many of the proposed revisions
addressing ECK transactions, including merchant coverage and the
additional disclosure requirements. Consumer groups stated, however,
that the Board should require a consumer's written, signed
authorization for other debits that may occur in connection with the
underlying ECK transaction, such as for debits to collect service fees
when consumers have insufficient funds in their account to cover the
underlying transaction, since consumers are unlikely to expect the
additional debits to their accounts.
Error Resolution
Section 205.11(c)(4) provides that a financial institution may
satisfy its obligation to investigate an alleged error by reviewing its
own records if the alleged error concerns a transfer to or from a third
party and there is no agreement between the institution and the third
party for the type of EFT involved. This rule is commonly referred to
as the ``four walls'' rule. The Board proposed to revise the staff
commentary to clarify that an institution would not satisfy its error
resolution obligations solely by reviewing the payment instructions if,
for example, there is additional information within the institution's
own records that would assist in resolving the alleged error.
Many industry commenters opposed the Board's proposed commentary
revisions, expressing concern about the potential scope of information
that might need to be reviewed under the proposed revisions to the four
walls standard. Consumer groups favored the proposed comment, and urged
the Board to revise the comment to state that an institution's review
should consider records that could be helpful to resolving the
consumer's claim, not just those records that were dispositive.
Preauthorized Transfers
Section 205.10(b) requires that recurring electronic debits from a
consumer's account be authorized ``only by a writing signed or
similarly authenticated by the consumer.'' Existing commentary provides
that a tape recording of a telephone conversation with a consumer who
agrees to preauthorized debits does not constitute written
authorization under Sec. 205.10(b). The Board proposed to withdraw the
existing commentary to address industry concerns that the guidance may
conflict with the Electronic Signatures in Global and National Commerce
Act (E-Sign Act), 15 U.S.C. 7001 et seq. Many industry commenters, in
particular those representing retailers, supported the proposed
withdrawal, with some of these commenters asking the Board to
explicitly state that a recorded conversation complies with the E-Sign
Act. Other commenters, however, opposed the withdrawal of the guidance
due to concern about potential abuses and the possible increase in
unauthorized transfers that could result. Consumer groups did not
comment on the proposed withdrawal.
ATM Disclosures
Section 205.16 provides that an ATM operator that imposes a fee
(``surcharge'') on a consumer for initiating an EFT or balance inquiry
must post a sign at ATMs that a fee will be imposed for providing EFT
services or for balance inquiries. The September 2004 proposal included
proposed commentary revisions to provide ATM operators flexibility when
disclosing these surcharges. In particular, the proposal clarified that
ATM operators could disclose on ATM signage that a surcharge ``may'' be
imposed if there are circumstances where the operator would not impose
such a fee for use of its ATM. (Before a surcharge may be imposed by an
ATM operator, the operator must provide a separate on-screen notice or
a receipt informing the consumer that a fee will be charged and the
amount of the fee, and the consumer must elect to continue the
transaction.) In August 2005, the Board withdrew the proposed
commentary revisions and issued a new proposal to incorporate this
clarification into both the regulation and the commentary. See 70 FR
49891 (Aug. 25, 2005) (August 2005 proposal). The Board received
approximately 25 comments on the August 2005 proposal from a variety of
industry commenters, including banks, credit unions and trade
associations. Industry commenters strongly supported the revised
proposal stating that it would provide institutions with flexibility to
provide more accurate disclosures and reduce consumer confusion.
Consumer groups and one consumer rights advocate, however, asserted
that the revised proposal would not ensure that consumers who are
charged a fee will receive adequate notice on ATM signage.
Payroll Cards
The September 2004 proposal also included rules governing the
coverage under Regulation E of payroll card accounts that are
established either directly or indirectly by an employer on behalf of a
consumer for the purpose of providing salary, wages, or other employee
compensation on a recurring basis. An interim final rule is being
published separately in this Federal Register to address payroll card
accounts.
III. Overview of the Final Rule
The Board is adopting final revisions to Regulation E and the staff
commentary largely as proposed. However, several clarifications and
modifications to the proposal have been made to respond to commenters'
concerns. The following is a summary of significant revisions to the
regulation and the staff commentary. All of the revisions are discussed
in detail below in the section-by-section analysis. The rule is
effective February 9, 2006. The mandatory compliance date for the final
rule is January 1, 2007.
Electronic Check Conversion
Merchant coverage. The final rule provides that merchants and other
payees that use information from a check to initiate a one-time EFT
from a consumer's account are subject to the regulation solely for the
limited purpose of obtaining a consumer's authorization for the one-
time transfer. Generally, authorization is obtained when the payee
provides a notice to the consumer that a check received as payment will
be converted to an EFT, and the consumer goes forward with the
transaction. At POS, the notice must be posted in a prominent and
conspicuous location, and a copy of the notice must be provided to the
consumer at the time of the transaction, such as on a receipt. For ARC
transactions, the notice will typically be provided on a billing
statement or invoice. Model clauses are provided to try to minimize the
risk that merchants and other payees will be subject to private
actions.
Alternative authorization. As proposed, the final rule recognizes
that payees may obtain a consumer's authorization to use information
from
[[Page 1640]]
the consumer's check to initiate an EFT, or, alternatively, to process
the transaction as a check.
Additional disclosures about ECK transactions. To help consumers
understand the nature of ECK transactions, the final rule provides that
persons initiating an ECK transaction, whether at POS or in an ARC
transaction, must disclose to the consumer that when a check provided
as payment is used to initiate an EFT, funds may be withdrawn from the
consumer's account as soon as the same day payment is made (for POS
transactions) or received (for ARC transactions). Payees must also
disclose, as applicable, that the consumer's check will not be returned
by the consumer's financial institution. Under the final rule, for POS
transactions, payees may provide these additional disclosures on a
sign. The requirement to provide these disclosures sunsets three years
from the mandatory compliance date of this final rule.
Collection of Service Fees Via EFT
The final rule, as proposed, provides that payees that choose to
collect a service fee via an EFT due to insufficient or uncollected
funds in a consumer's account in connection with the underlying
transaction must obtain the consumer's authorization to collect the
fee. Authorization is obtained when a payee provides notice to the
consumer stating that the fee will be collected via an EFT and the
consumer goes forward with the transaction. Payees also are required to
disclose the amount of the fee on the notice.
Error Resolution
The final rule provides that a financial institution does not
satisfy its error resolution responsibilities under the ``four walls''
rule by solely reviewing the payment instructions; an institution must
review any additional information within the institution's own records
pertaining to the particular account in question that would assist in
resolving the alleged error.
Preauthorized Transactions
The final rule, as proposed, withdraws the existing commentary
stating that a tape recording of a telephone conversation with a
consumer who agrees to preauthorized debits does not constitute written
authorization under the regulation.
Disclosures at Automated Teller Machines
The final rule, as proposed in the August 2005 proposal, revises
the regulation to permit ATM operators to alternatively provide notice
on ATM signage that a surcharge may be imposed (in place of a
disclosure that a surcharge will be imposed) if there are circumstances
in which an ATM fee may not be charged.
Effective Date of Rule
The effective date of the final rule is February 9, 2006. While
institutions may, if they choose, begin complying with the new
requirements on February 9, 2006, compliance with this final rule is
not mandatory until January 1, 2007. The additional time should give
persons affected by this final rule adequate time to implement the new
requirements, including developing the new required notices for ECK
transactions.
IV. Section-by-Section Analysis
Section 205.3 Coverage
3(a) General
Section 205.3(a) is revised to provide that Sec. 205.3(b)(2),
discussed below, applies to any person.
3(b) Electronic Fund Transfer
The term ``electronic fund transfer'' is defined in Sec.
205.3(b)(1) as ``any transfer of funds that is initiated through an
electronic terminal, telephone, computer, or magnetic tape for the
purpose of ordering, instructing, or authorizing a financial
institution to debit or credit an account.'' The term includes POS
transfers, ATM transfers, direct deposits or withdrawals of funds,
telephone transfers and debit card transactions. The final rule
includes language in the existing regulation that was inadvertently
omitted in the September 2004 proposal. Comments 3(b)-1 and 3(b)-2 are
redesignated as comments 3(b)(1)-1 and 3(b)(1)-2, and conforming
changes are made to comments 2(a)-2 and 3(c)(1)-2.
Electronic Check Conversion
The EFTA excludes from the definition of ``electronic fund
transfer'' any transaction ``originated by check, draft, or similar
paper instrument.'' 15 U.S.C. 1693a; see also Sec. 205.3(c)(1). In ECK
transactions, a consumer provides a check to a merchant or other payee
to use as a source of information to initiate an EFT from the
consumer's account as payment for the purchase of goods or services,
and not to initiate a payment by check. The payee electronically
captures the routing, account, and serial numbers from the check and
initiates a one-time EFT from the consumer's account. The Board
proposed to amend Sec. 205.3(b)(2) of Regulation E and comment
3(b)(2)-1 to clarify that ECK transactions are covered by Regulation E
and deemed not to originate by check. Substantially similar guidance
previously had been provided in the commentary to Regulation E. The few
commenters addressing the issue agreed that the guidance regarding the
status of ECK transactions under Regulation E is more appropriately
placed in the regulation. Accordingly, the proposal has been adopted in
Sec. 205.3(b)(2)(i) with minor revisions. Section 205.3(b)(2)(i)
further provides that a consumer must authorize an ECK transaction
(discussed below).
One industry commenter expressed concern that the proposed
regulatory language was too broad in stating that a transaction is
covered by Regulation E where a check is ``used as a source of
information to initiate a one-time EFT.'' According to the commenter,
some may interpret the language to include transactions arising from
electronic check presentment or image exchange. The Board agrees; Sec.
205.3(b)(2)(i) is intended to apply only when a payee uses a check as a
source of information to initiate an EFT from the consumer's account.
New comment 3(b)(1)-2.iv clarifies that transactions arising from the
electronic collection, presentment, or return of checks through the
check collection system, such as through the transmission of electronic
check images, are not EFTs covered by Regulation E.
A few commenters asked the Board to clarify that the rules applying
to ECK transactions were not intended to apply to Internet- or
telephone-initiated transactions (where a consumer provides
information--including the MICR-encoding--from his or her check to pay
for a purchase via these payment channels). While Internet- and
telephone-initiated transactions are covered by Regulation E because
they result in electronic transfers from the consumer's account, the
rules for ECK transactions do not apply to these transactions.
Coverage of merchants and other payees. Currently, a merchant or
other payee that engages in ECK transactions is not covered by
Regulation E because it does not meet the definition of ``financial
institution.'' Under Sec. 205.2(i) the term ``financial institution''
means a ``bank, savings association, credit union, or any other person
that directly or indirectly holds an account belonging to a consumer,
or that issues an access device and agrees with a consumer to provide
electronic fund transfer services.'' The Board has previously
acknowledged that a merchant or other payee is in the best position to
provide notice to a consumer for the purpose of obtaining authorization
of an ECK transaction. See 66 FR 15187, 15189-90
[[Page 1641]]
(March 16, 2001). The Board has not covered merchants and other payees
previously under the regulation because it expected that these persons
would provide consumers with the necessary notice. In response to
concerns about the uniformity and adequacy of some of the notices
provided to consumers about ECK transactions, the Board proposed to
exercise its authority under Sections 904(c) and 904(d)(1) of the EFTA
to require merchants and other payees that initiate a one-time EFT
using information from the consumer's check, draft or similar paper
instrument, to provide notice to obtain a consumer's authorization for
the transfer. The final rule is adopted, as proposed. Coverage of
merchants and other payees under the final rule is solely for the
limited purpose of obtaining consumer authorizations for ECK
transactions. A financial institution will be subject to the
requirement to obtain consumer authorization for the transaction to the
extent that the institution initiates an EFT using information from a
consumer's check (e.g., if the institution converts checks provided as
a payment for a mortgage loan).
Most commenters supported the proposed revision in Sec.
205.3(b)(2)(ii) because they believe the merchant is in the best
position to provide the notice. According to one commenter, the
consumer's financial institution has no control over a consumer
receiving proper notice for purposes of authorization. A few commenters
noted the importance of covering merchants and other payees for
enforcement purposes. Several commenters also noted that requiring
merchants and other payees to adhere to minimum authorization and
related notice provisions will better inform consumers on a consistent
basis about ECK transactions. Moreover, according to these commenters,
the authorization requirement would not pose new or significant
compliance burdens since payment system rules currently impose an
authorization requirement on merchants and other payees. While
supporting the proposed requirement, a few commenters requested
clarification that merchants and other payees would be covered solely
for the limited purpose of the authorization requirement for ECK
transactions.
Some industry commenters opposed the proposed requirement. A few
commenters believed merchants and other payees should not be required
to assume the liability risks that may be associated with ECK
transactions. A few commenters requested clarification of the FTC's
enforcement authority for merchants and other payees not regulated by
federal banking agencies. A few commenters believed the requirement is
an unnecessary duplication of payment system rules.
The Board believes coverage of merchants and other payees in Sec.
205.3(b)(2)(ii) for the limited purpose of providing a notice to obtain
consumer authorization for ECK transactions is appropriate to ensure
consumers understand that checks will be processed as EFTs. Without
such a notice requirement, different information may be given by
merchants to consumers, or information may be given solely by signage
or other forms that may not be easily discernable by consumers. In
addition, coverage of merchants and other payees for the limited
purpose of obtaining consumer authorization for ECK transactions will
provide a mechanism to ensure that consumers, in fact, receive
appropriate notice of check conversion. For those entities subject to
FTC enforcement, the FTC would have enforcement authority pursuant to
Section 917(c) of the EFTA and under the Federal Trade Commission Act.
Merchant coverage would also enable the Board to provide model clauses
that will aid consumer understanding of ECK transactions. The model
clauses provide a safe harbor from liability, thereby reducing
liability risks. See Sec. 205.3(b)(2)(iv).
General authorization requirements. As previously noted, revised
Sec. 205.3(b)(2)(i) provides that a consumer must authorize an ECK
transaction. The current commentary states that a consumer authorizes
an ECK transaction when the consumer receives notice that the
transaction will be processed as an EFT and completes the transaction.
See comment 3(b)-3. This guidance, originally proposed to be placed in
comment 3(b)(2)-1, is moved to Sec. 205.3(b)(2)(ii) of the final rule.
The phrase ``completes the transaction'' is replaced with ``goes
forward with the transaction'' to clarify that it is not necessary for
a transaction to clear or settle in order for authorization to occur.
In addition, under the final rule, for POS transactions, a notice must
be posted in a prominent and conspicuous location, and a copy of the
notice must be provided to the consumer at the time of the transaction,
such as on a receipt.
In the proposal, the Board stated that at POS, a written, signed
authorization may be a more effective means than posted signage for
informing consumers that their checks are being converted. The Board
did not propose to require merchants or other payees to obtain the
consumer's signed authorization to convert checks received at POS, but
specifically solicited comment on whether this should be required. The
final rule does not require a merchant or other payee to obtain the
consumer's signed authorization for an ECK transaction.
Some commenters supported a signed authorization requirement for
POS transactions. Several of these commenters stated the requirement
would be beneficial for enforcement purposes to ensure that consumer
authorization is, in fact, obtained by a payee. A few commenters stated
that the Regulation E rule should be consistent with the rules
established by NACHA--the Electronic Payments Association (NACHA
rule(s))--which requires a consumer's written, signed authorization.
One such commenter stated making the rules consistent would address
consumer confusion issues. Another commenter stated that the current
difference between the NACHA rule and Regulation E creates the
potential for monetary penalties imposed by NACHA if the payee follows
the Regulation E notice rule and does not also comply with NACHA's
signed authorization rule. A few commenters noted that there would be
no additional regulatory burden associated with a signed authorization
requirement since it is already required by NACHA. Some commenters
expressed the view that a signed authorization requirement calls a
consumer's attention to, and reinforces an awareness of, check
conversion.
The majority of commenters opposed a signed authorization
requirement for POS transactions under Regulation E. Specifically, some
of these commenters stated that the NACHA rule is sufficient, and that
a payments system rules-driven approach is preferable to regulation.
Several commenters expressed concern that such a requirement would
unnecessarily delay transactions at POS. According to one commenter, a
signed authorization requirement could impede the general movement
toward facilitating paperless payments. A few commenters stated the
requirement may limit the industry's flexibility to deal with changing
market circumstances. Some commenters expressed concern that a signed
authorization requirement may stifle the creation and development of
payment system innovations.
The final rule sets forth the authorization requirements for ECK
transactions under Sec. 205.3(b)(2)(ii). Generally, a consumer
authorizes a one-time EFT (in providing a check to a merchant or other
payee for the MICR encoding) when the consumer receives a notice that
the transaction will be processed as an EFT and goes forward with the
transaction. This guidance was originally in proposed comment 3(b)(2)-
[[Page 1642]]
1. (Existing comment 3(b)-3 is deleted.) The phrase ``completes the
transaction'' is replaced with ``goes forward with the transaction'' to
clarify that it is not necessary for the transaction to clear or
settle, for example, in order for authorization to occur. Section
205.3(b)(2)(ii) also addresses the possibility that a payee might elect
to obtain a consumer's authorization either to convert a check provided
as payment to an EFT or to process the check as a check transaction.
See also comment 3(b)(2)-2 (further discussed below).
For ARC transactions, a payee (such as a utility company) obtains a
consumer's authorization when it provides notice of its intent to
convert checks received as payment--for example, on a monthly billing
statement or invoice--and the consumer provides or mails a check as
payment.
For transactions at POS, the final rule requires payees to post the
notice in a clear and prominent location. The requirement for posted
signage is necessary to alert consumers that a check provided as
payment will be converted to an EFT before the consumer selects a
payment method. The Board believes that providing this notice on a sign
enables the consumer to authorize the ECK transaction after being given
prior notice. The final rule also requires merchants and other payees
at POS to provide consumers with a copy of the notice in a form the
consumer can keep at the time of the transaction. For example,
merchants and other payees could provide the notice on the receipt
given to the consumer. The written receipt allows consumers to refer to
the notice later, if necessary.
The final rule does not require merchants or other payees at POS to
obtain a consumer's signed authorization for ECK transactions. The
Board believes that a signed authorization requirement would provide
minimal additional benefit given that consumers will be given notice
that their checks will be converted at two different points during the
ECK transaction, first through posted signage which consumers can read
prior to providing a check as payment, and second on a receipt provided
to the consumer, presumably after the check has been provided to the
merchant. In addition, the periodic statement provided by the
consumer's bank will typically reflect ECK transactions in a different
manner than check transactions.
New comment 3(b)(2)-1 provides that a payee at POS does not violate
the requirement to provide a copy of the check conversion notice to the
consumer if the payee is unable to provide notice because of a bona
fide unintentional error, so long as the payee maintains procedures
reasonably adapted to avoid such occurrences. Thus, for example, a
payee will not be deemed to have violated the regulation if it cannot
provide a paper notice if its terminal printing mechanism jams,
provided that the payee maintains procedures reasonably adapted to
avoid such occurrences.
Authorization language. Proposed comment 3(b)(2)-2 provided that a
payee must obtain the consumer's authorization to use information from
his or her check to initiate an EFT or, alternatively, to process a
check. The comment is adopted, largely as proposed. Model notices are
provided in Appendix A-6 to assist merchants and other payees in
complying with the requirements. See Sec. 205.3(b)(2)(iv). Regulation
E coverage of ECK transactions continues to be predicated on the
consumer's authorization to allow the merchant or other payee to use a
check as a source of information to initiate an ECK transaction.
Due to processing or technical errors, a transaction authorized as
an ECK transaction ultimately may not be processed as an EFT.
Furthermore, in some cases, a payee may decide to process the original
check or create a demand draft, or the payee may choose to create a
substitute check in accordance with the Check Clearing for the 21st
Century Act (Check 21).\1\ Currently, if a payee obtained a consumer's
authorization solely to initiate an EFT using information from the
consumer's check, the payee may have difficulty processing the same
document as a check because such an action would arguably fall outside
the consumer's payment instructions. Thus, without the consumer's
authorization to alternatively process the transaction as a check, the
payee may not be able to obtain payment. In other cases, a merchant or
payee operating in multiple states may choose to pilot ECK in some
locations while processing the payments as checks in others. To address
these and similar concerns, and to provide flexibility, the Board
proposed three authorization approaches for ECK transactions.
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\1\ Pub. L. 108-100, 117 Stat. 1177 (codified at 12 U.S.C. 5001-
5018).
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First, the Board proposed to allow a payee to obtain a consumer's
authorization to use information from his or her check to initiate an
EFT or, alternatively, to process the transaction as a check. See
proposed Model Clause A-6(a). The Board specifically solicited comment,
however, on whether this alternative authorization approach may result
in any consumer harm or create any other risks. In particular, comment
was solicited on whether payees that obtain alternative authorization
should be required to specify the circumstances under which a check
that can be used to initiate an EFT will be processed as a check.
Second, the Board proposed an optional authorization clause for use by
payees that intend to convert all checks to ECK transactions. See
proposed Model Clause A-6(b). Third, the Board proposed an optional
authorization clause for use by payees that choose to disclose the
specific circumstances when checks will not be converted to ECK
transactions. See proposed Model Clause A-6(c).
Most industry commenters supported the alternative authorization
approach as illustrated in proposed Model Clause A-6(a), stating that
the approach provides needed flexibility. The majority of these
commenters did not believe any consumer harm would result from the lack
of specification of circumstances under which check conversion would or
would not occur. One commenter did not believe consumers would be
confused about their rights since many account-holding financial
institutions list EFT and check transactions separately on periodic
statements given to consumers. A few commenters stated that consumers
will have sufficient protections regardless of how the transactions are
processed.
Some industry commenters supported alternative authorization, but
stated that the Board should also require payees to disclose the
circumstances under which conversion will not occur. One such commenter
believed the disclosure of the specific circumstances would eliminate
any risk of consumer harm.
One federal enforcement agency observed generally that consumers
may not understand the differences between checks and ECK transactions
or the protections that apply to each, but did not otherwise express a
view on the merits of permitting alternative authorization. This
commenter thought that focus group testing of the model clauses would
be useful to determine what information consumers understand.
A few commenters opposed the alternative authorization clause as
unclear and potentially confusing to consumers. According to one
industry commenter, confusion arising from an alternative authorization
may cause consumers to instruct their financial institutions to state
that ECK transactions were unauthorized. This commenter therefore
believed the rule
[[Page 1643]]
should require the authorization notice to specify the circumstances
when conversion would not occur. According to another commenter,
requiring payees to specify the circumstances when a check will be
processed as a check is consistent with the purpose of the EFTA--for
consumers to know their rights, responsibilities, and liabilities when
they engage in EFT services. This commenter believed such disclosure
also enhances consumer understanding by making it clear that there are
different methods to collect checks and by providing greater certainty
as to which method is most likely to apply to a particular transaction.
The commenter stated that given the efficiency of check conversion,
there should be limited circumstances to disclose. Accordingly, the
commenter requested that the Board delete Model Clause A-6(a) as an
option.
Some industry commenters supported the approach illustrated in
proposed Model Clause A-6(b) for when a payee converted all checks, as
long as the use of the clause is optional. One commenter believed the
clause unworkable absent additional authorization to process the
transaction as a check where the ECK will not clear for technical
reasons.
A few industry commenters also supported the specific authorization
approach illustrated in Model Clause A-6(c) as long as it is optional.
Other industry commenters did not believe the clause would provide a
significant benefit to consumers. Several commenters believed a
specific disclosure would be highly detailed and complex; if
circumstances changed new disclosures would be required. One consumer
group commenter was concerned that the burden of providing this notice
could result in payees favoring substitute checks under Check 21 which
they believed would provide fewer consumer protections. A few industry
commenters thought the clause should not be adopted.
A few industry commenters stated that all three model clauses
should be retained for flexibility. Other commenters believed that all
three clauses should be consolidated to address various payment options
available to payees. Several commenters supported having one model
notice to avoid confusing consumers. Many commenters expressed concern
about the length of the notices. A few commenters requested additional
guidance on the clear and conspicuous standard as it pertains to the
notices.
In the final rule, Model Clause A-6(a) is retained as proposed, but
proposed Model Clauses A-6(b) and (c) have been consolidated in a
single Model Clause A-6(b) for simplicity and to facilitate compliance
by payees. Model Clause A-6(a) may be used in all instances, including
when a payee will process a check as an EFT in all circumstances, when
the transaction is processed as a check for technical reasons, or
because a payee simply chooses to process the transaction as a check.
While the Board believes that most payees will likely choose to use
Model Clause A-6(a) in all cases, the Board is aware that some payees
may want to provide more specific information concerning their ECK
practices for business reasons, such as for customer service and
education, as well as to reduce possible consumer inquiries. Model
Clause A-6(b) offers that flexibility. Thus, for example, payees may
choose to use Model Clause A-6(b) to disclose the circumstances under
which they will not process a check as an EFT, such as when it is
impossible for technical or other processing reasons.
Model Clauses A-6(a) and (b) have also been revised to clarify
their application to transactions where a consumer's check is provided
as payment. Some commenters expressed concern that without this
revision, consumers might mistakenly believe the notice applied to
preauthorized transfers--where a consumer provides a check and a signed
authorization in advance to authorize future payments. See Sec.
205.10.
Consistent with Sec. 205.4(a)(1), notices provided to consumers
regarding check conversion must be clear and readily understandable.
For example, in ARC transactions, notices in small print and buried in
the middle of unrelated information would likely not meet the standard.
Payees may also consider using headings preceding the notice to call
attention to the information presented. For POS transactions, signage
informing consumers about check conversion should not be obscured by
other information or signs that may also be located at POS.
Notice for each transfer. ECK transactions are one-time, and not
preauthorized, transfers. Therefore, under the final rule, a notice
must be provided and an authorization must be obtained from the
consumer for each transfer. Section 205.3(b)(2)(ii) contains the
general rule that the person initiating an ECK transaction must provide
notice of check conversion to the consumer before each transfer.
Some industry commenters stated that while it may be appropriate to
require notice for each transfer for most ECK transactions, there are
certain circumstances where one advance notice may suffice. Coupon
books were the most frequently-cited examples. Lenders provide coupon
books to consumers typically for mortgages, automobile loans, personal
loans, and other recurring loan payments. According to some commenters,
coupon books do not present the same notice opportunities as POS and
ARC transactions because they are provided in advance and include
coupons for several payments. Some credit card issuers suggested that
it may be similarly appropriate to allow a consumer to contract with
its card issuer for regular ECK payments rather than requiring a notice
to be sent on or with each periodic statement sent to the consumer. A
few commenters stated that recurring notice is appropriate only for POS
transactions. One commenter stated that the consumer benefit of
receiving a notice with each periodic statement is negligible compared
to the ongoing cost to institutions.
Because a coupon book is designed so that a consumer must detach a
coupon from the book and provide the coupon with each payment, the
Board believes that it is unnecessary to require that a separate notice
of check conversion be printed on each coupon. New comment 3(b)(2)-3
provides that for coupon books, a notice placed on a conspicuous
location of the coupon book that the consumer can retain is deemed to
constitute the provision of notice on each coupon that accompanies a
check provided as payment, for purposes of obtaining a consumer's
authorization to convert each check. The notice must be placed on a
location of the coupon book that a consumer can retain--for example, on
the first page, or inside the front cover. The Board believes this new
comment will facilitate compliance with the requirements of the Act and
regulation.
Unlike coupon books which contain several payment coupons and are
sent once near the beginning of the payment period, periodic statements
for credit card accounts are typically sent on a monthly basis. Thus,
the Board believes that credit card issuers have the capability of
providing a notice of check conversion with each statement without an
undue burden. In contrast, payees that send coupon books may not
otherwise send monthly information; thus, requiring a separate monthly
notice could be costly for these payees. Accordingly, comment 3(b)(2)-3
in the final rule is limited to coupon books.
If a coupon book is issued before the effective date of the final
rule, and will cover a time period when notice otherwise must be
provided under the final rule, payees may provide a one-
[[Page 1644]]
time notice to obtain the consumer's authorization to convert each
check submitted with a coupon. For example, a payee may provide a
separate mailing informing the consumer that by mailing a check with
each payment coupon included in the book, the consumer authorizes the
payee to convert each check provided as payment to an EFT. Without such
relief, payees would have to re-issue coupon books at considerable
expense in order to comply with the new rule.
The final rule also clarifies that the notice regarding a payee's
intent to collect a service fee for insufficient or uncollected funds
via an EFT and the notice providing additional information about the
nature of ECK transactions (further discussed below) must also be
provided for each transfer. However, the special exception regarding
coupon books would also apply to notices regarding the electronic
collection of service fees for insufficient or uncollected funds and
the nature of ECK transactions.
Imputed notice. Proposed Sec. 205.3(b)(2)(ii) provided that
obtaining authorization from the consumer holding the account for which
a check may be converted constitutes authorization for all checks
provided for a single payment or invoice for that account. Proposed
comment 3(b)(2)-4 stated that notice of check conversion to the person
holding the account for which a check may be converted may be imputed
to anyone who writes a check as payment for the particular invoice or
bill. In the final rule, comment 3(b)(2)-4 is adopted with certain
revisions for clarity. The guidance in proposed Sec. 205.3(b)(2)(ii)
is also moved to comment 3(b)(2)-4, with some revisions for clarity.
All commenters who addressed the issue of imputed notice supported
the proposal. One commenter noted that the rule is consistent with
current industry practice. Another commenter stated that complying with
a different rule would be unduly burdensome, if not impossible. A few
commenters supported the proposal, but stated that alternative
authorization would also be necessary to accommodate payees who may
choose not to process multiple transactions all as EFTs. A few
commenters also suggested that the authorization of the person holding
the billing account should apply to all checks received prior to the
next bill, not just to checks related to the particular invoice.
In the final rule, comment 3(b)(2)-4 provides that notice to the
consumer listed on the billing account constitutes sufficient notice to
convert all checks provided in payment for the billing cycle or the
invoice for which notice has been provided, whether the check(s) is
received from the consumer or someone else for that account. The notice
applies to all checks submitted as payment until the provision of
notice on or with the next invoice or statement. Thus, if a merchant or
other payee receives a check as payment from the consumer listed on the
billing account after providing notice that the check will be processed
as a one-time EFT, the authorization from that consumer constitutes
authorization to convert all other checks provided for a single invoice
or statement.
Other required notices for ECK transactions may also be similarly
imputed to any other consumer who may provide a check for the same
billing cycle or invoice if such notices are provided to the consumer
listed on the billing account. Thus, for example, a notice to the
consumer on the billing account informing the consumer that a service
fee for insufficient or uncollected funds will be debited via an EFT
from the consumer's account constitutes notice to obtain authorization
for electronically collecting the fee to any other consumer who may
provide a check for the same billing cycle or invoice.
Additional ECK disclosures. Consistent with the EFTA's purpose to
enable consumers to understand their rights, liabilities, and
responsibilities concerning EFT services, and given the unique
characteristics of ECK transactions, the Board believes it is
appropriate to provide consumers with additional information to help
them understand the nature and potential consequences of an ECK
transaction. Proposed Sec. 205.3(b)(2)(iii) thus required a person
that initiates an ECK transaction to provide a notice to the consumer
that when a check is used to initiate an electronic fund transfer,
funds may be debited from the consumer's account quickly, and, as
applicable, that the consumer's check will not be returned by the
financial institution holding the consumer's account. Under the
proposal, this information would be provided at the same time a notice
is provided to obtain authorization for the underlying ECK transaction.
Section 205.3(b)(2)(iii) is adopted as proposed, with some revisions to
address commenter concerns. Proposed comment 3(b)(2)-3 is re-designated
as comment 3(b)(2)-5, and provides additional guidance to facilitate
compliance.
Consumer group commenters stated that the additional information
answered many of the common questions they receive from consumers about
ECK transactions; thus, they believed that the additional information
would help avoid consumer confusion and enhance consumer understanding
of ECK transactions. A federal enforcement agency similarly noted that
consumers may be more willing to engage in ECK transactions if they
better understand them. In particular, the agency stated that the
disclosure regarding the quick debiting of deposit accounts through ECK
transactions could help consumers avoid the possibility of overdrafts
for insufficient funds.
Some industry commenters requested that the Board revise the
requirement to state instead that the transaction will be reported on
the consumer's periodic account statement. One industry commenter
stated that much of the consumer education responsibility for ECK
transactions should be borne by the consumer's financial institution. A
few industry commenters were concerned about the length of the
disclosures, particularly in combination with the authorization
disclosure, and expressed concern that consumers may be discouraged
from reading them. One industry commenter stated that the disclosures
may not be feasible as an ongoing requirement. Another industry
commenter expressed concern about the cost of reprogramming terminals.
One industry commenter thought the Board should require financial
institutions to include the disclosures in their account agreements or
on each periodic statement that includes an ECK transaction.
A number of industry commenters opposed the proposed disclosure
that states when a consumer's check is used for an ECK transaction, the
transaction may clear quickly. Many of these commenters stated that in
the majority of cases an EFT and a check will clear in roughly the same
period of time. Other commenters stated that under Check 21, checks may
clear as fast or faster than EFTs, and expressed concern that the
disclosure may mislead consumers. A few commenters stated it might be
impossible to explain the meaning of ``quickly'' in different
circumstances.
Many industry commenters also opposed the proposed disclosure that
the consumer's check will not be returned by the consumer's financial
institution. The majority of these commenters stated the disclosure
would be misleading, particularly to consumers whose checks currently
are not returned by their financial institutions under the terms of
their account agreements. A few commenters
[[Page 1645]]
asserted the disclosure might become less significant to consumers in
light of Check 21. One commenter believed that consumers may confuse
the disclosure with similar statements from their financial institution
about check handling under Regulation CC, as amended to implement Check
21.
As the payment system evolves, consumers' checks are being used
differently than in the past, and consumer rights with respect to EFT
transfers are different than those for check transactions. Given the
unique characteristics of ECK transactions, the Board believes it would
be beneficial to provide additional information to consumers to help
them better understand the nature of these transactions. The additional
information highlights and may draw consumers' attention to some of the
key differences in the way payments are handled under the ECK process,
and possibly reduce consumer confusion about ECK transactions.
Moreover, the Board notes that some payees, particularly in the ARC
environment, are currently providing this information to their
customers to help reduce consumer inquiries and complaints. Requiring
this notice could facilitate consumer understanding by ensuring that
all consumers who engage in ECK transactions receive this information.
Accordingly, the Board is exercising its authority under Sections
904(c) and 904(d)(1) of the EFTA and adopting the proposed notice in
the final rule, with certain modifications to address commenters'
concerns.
The Board recognizes that a check may be processed as fast or
faster than an ECK transaction in some instances based on current
industry practices and potential changes in check processing
facilitated by the Check 21 Act. Nevertheless, the Board believes it is
important to draw a consumer's attention to the fact that an ECK
transaction ``may'' clear quickly. The purpose of the notice is to
emphasize to consumers the importance of having sufficient funds in
their accounts at the time of the transaction, since many consumers may
still believe that use of a check will result in a significant time lag
between the time the consumer provides a check as payment and when
funds are in fact debited from the consumer's account. To address
commenter concerns about potential comparisons with check processing,
the notice in Sec. 205.3(b)(2)(iii) has been revised to state that
funds may be debited from consumers' accounts as soon as the same day
payment is received.
Section 205.3(b)(2)(iii) also retains the requirement to notify
consumers that they will not receive their checks back from their
financial institution if their checks are converted. The disclosure
addresses complaints received by the Board from consumers expressing
confusion about not receiving their checks back in ECK transactions. In
particular, some consumers may rely on the checks they receive back
with their periodic statements for account reconciliation and
recordkeeping purposes. Comment 3(b)(2)-5 clarifies that the statement
that a check will not be returned by the consumer's financial
institution is not required at POS, if, as is typically currently the
case, the merchant returns the check to a consumer.
To provide flexibility and address the concerns about the length of
ECK disclosures, payees at POS may provide the notice in Sec.
205.3(b)(2)(iii) on posted signage, and need not also provide the
notice on the receipt provided to the consumer at the time of the
transaction. However, payees in ARC transactions must provide the
notice with the general notice to obtain consumer authorization for the
ECK transaction. The Board expects that ARC payees will likely provide
the combined notice on a billing statement or invoice. As provided in
Sec. 205.3(b)(2)(iv), model clauses are provided in Appendix A-6 to
help payees comply with the additional disclosure requirements. Model
Clause A-6(c) sets forth two different formulations for the statement
regarding when funds may be debited from a consumer's account,
depending on where the payment is made. If the payment is made at POS,
the statement refers to the possibility that funds may be debited from
the consumer's account as soon as the same day the consumer makes the
payment. For ARC transactions, the statement refers to the date that
the payee receives the payment.
Consistent with Sec. 205.4(a)(1), and as stated above in the
context of the notice to obtain consumer authorization for an ECK
transaction, the notice provided under Sec. 205.3(b)(2)(iii) to
consumers about the nature of ECK transactions must be clear and
readily understandable. For example, notices in small print and buried
in the middle of unrelated information would likely not meet the
standard. Payees may also consider using headings preceding the notice
to call attention to the information presented. If payees elect to
provide the information under Sec. 205.3(b)(2)(iii) separately on a
sign, the notice should not be obscured by other information or signs
that may also be located at POS.
As stated above, with ECK transactions, consumers' checks are being
used differently than in the past, and consumers may not be aware that
the conversion of their checks to EFTs may impact the collection time
for the payment, or that they will not receive their checks (or images
of their checks) back with their statements as has been the case for
check transactions in the past. Thus, the Board believes that these
additional disclosures are appropriate at present. Moreover, many
payees are already providing similar disclosures to reduce possible
consumer inquiries. Nevertheless, the Board expects that over time,
consumers will become more familiar with ECK transactions, thereby
reducing the need for the additional information. Thus, the final rule
provides a sunset date of three years from the mandatory compliance
date of January 1, 2007 for the final rule, after which time payees
will no longer be required to provide the notice set forth in Sec.
205.3(b)(2)(iii).
Transactions initiated by mistake. The supplementary information to
the proposed rule clarified that where a merchant or other payee
initiates an EFT in error, the transaction would not be covered by
Regulation E where the transaction does not meet the definition of an
EFT. Few commenters addressed the statement, but one requested
clarification because the inability to process an item is not
necessarily the result of an ``error.'' The Board agrees that the word
``error'' has a particular meaning in the EFTA, Regulation E and other
rules, and that in some cases a transaction may not be able to be
processed as an EFT for other reasons. Accordingly, the Board believes
that the statement applies to transactions where a payee mistakenly
initiates an ECK transaction, such as when the payee attempts to
convert a money order. Such a transaction is not subject to the
coverage of the EFTA and Regulation E, even if initiated as an ECK
transaction.
Collection of Service Fees Via Electronic Fund Transfer
In the proposal, comment 3(b)-3 was added to clarify that an EFT
from a consumer's account to collect a service fee due to insufficient
funds is covered by Regulation E, and must be authorized by the
consumer. Under the proposal, the provision of notice to the consumer,
coupled with the consumer's decision to proceed with the transaction,
would constitute authorization for the debit. This provision has been
adopted in the regulation in new Sec. 205.3(b)(3), which also requires
payees to notify consumers
[[Page 1646]]
about the specific amount of the fee in order to obtain the consumer's
authorization for the transaction. Consistent with the authorization
requirement at POS for ECK transactions, the final rule requires that
where a service fee for insufficient or uncollected funds in connection
with a POS transfer may be collected via an EFT, the notice must be
posted in a prominent and conspicuous location, and a copy of the
notice must be provided to the consumer. Comment 3(b)(3)-1 clarifies
that the requirement to obtain the consumer's authorization does not
apply to fees imposed against the consumer's account by the consumer's
account-holding institution for paying overdrafts or returning a check
or EFT unpaid.
The majority of commenters generally agreed that EFTs initiated to
collect service fees for insufficient funds should be covered by
Regulation E. A few industry commenters stated coverage was appropriate
as long as a merchant or other payee could obtain authorization of the
service fee when it provides notice to the consumer that the fee will
be debited electronically from the consumer's account, and the consumer
decides to proceed with the transaction. Other industry commenters
generally supported the notice requirement, but believed the Board
should also require signed authorization. Several industry commenters
requested clarification that additional authorization requirements may
be established by payment system rules. A few commenters requested
clarification that the proposed rule did not intend to address ``NSF''
fees assessed by a consumer's financial institution for returning a
check unpaid. Some industry commenters requested revising the comment
to clarify that a check might be returned for reasons other than
``insufficient'' funds.
Consumer group commenters opposed the proposed comment. These
commenters stated that notice and the consumer writing a check alone
should not be sufficient to authorize the debiting of service fees,
noting that while a consumer may reasonably anticipate a withdrawal
from his or her account for the face amount of the check, the consumer
would not expect an additional debit for the fee, absent additional
prior, written authorization. Consumer groups also stated that a
written, signed authorization requirement would encourage consumers to
exercise more care in determining their actual balances before making a
payment.
Some industry commenters also opposed the proposed comment. One
commenter asserted that providing notice at POS would not sufficiently
inform the consumer of the possibility that a service fee could be
debited electronically from the consumer's account. A few commenters
opposed the comment as inconsistent with the NACHA rule, which requires
written, signed authorization for collection of service fees via an
EFT. A couple of commenters believed it important to require signed
authorization so a consumer will know and understand the fee imposed.
One commenter expressed the concern that some payees believe the
current Regulation E notice equals authorization comment grants a
substantive right to collect a service fee, notwithstanding other
federal or state law requirements that might apply.
Proposed comment 3(b)-3 has been moved to the regulation as new
Sec. 205.3(b)(3) in the final rule. In general, Sec. 205.3(b)(3)
provides that a consumer authorizes the electronic collection of a fee
for a check or EFT returned due to insufficient funds when the consumer
receives notice of a payee's intent to collect the fee via an EFT, and
the consumer goes forward with the transaction. The final rule also
requires payees to include the specific amount of the fee imposed in
the notice provided to consumers to ensure that consumers are informed
of the amount of the fee they may be charged in the event they have
insufficient funds in their account. Section 205.3(b)(3) requires
payees to obtain a consumer's authorization for the debit regardless of
whether the underlying transaction is an EFT or is a check transaction,
as long as the payee intends to collect a service fee for insufficient
funds via an EFT to the consumer's account. See also comment 3(c)(1)-1.
In addition, section 205.3(b)(3) has been further revised to
address some commenters' concerns. First, the provision was not
intended to address fees assessed on a consumer's account by the
consumer's financial institution for the return of a check or EFT
unpaid (commonly known as ``NSF fees''), but rather, to address service
charges assessed by a payee because the consumer's check or EFT was
returned unpaid. Accordingly, references to ``NSF fees'' in the
proposed comment have been deleted and replaced with ``service fee(s)''
in the final rule. New comment 3(b)(3)-1 further provides that the
authorization requirement does not apply to fees imposed against the
consumer's transaction account by the consumer's account-holding
institution for paying overdrafts or returning a check or EFT unpaid.
(However, where a financial institution holds the consumer's deposit or
checking account and also acts as a payee, such as in connection with a
loan or credit card account, it would be required to obtain the
consumer's authorization in order to collect a service fee for
insufficient or uncollected funds in connection with the underlying
transaction, but not to collect any separate service fee that may be
assessed against the deposit or checking account for returning the
check or EFT unpaid.)
Second, because a check or EFT may be returned for reasons other
than insufficient funds in the consumer's account, Sec. 205.3(b)(3)
states that the rule applies where an EFT or check is returned for
``insufficient or uncollected'' funds.
Third, consistent with the authorization requirements for the ECK
transaction, the Board is exercising its authority under Sections
904(c) and 904(d)(1) of the EFTA to require payees at POS to provide
notice of their intent to collect service fees for insufficient or
uncollected funds via EFT, and to disclose the amount of the fee, on
signage posted in a prominent and conspicuous location at POS. A copy
of the notice must also be provided to the consumer at the time of the
transaction, such as on the sales receipt. Payees in ARC transactions
will typically provide written notice on a billing statement or
invoice. Model Clause A-6 contains model language that payees may use
to obtain a consumer's authorization for the collection of the service
fee for insufficient or uncollected funds via an EFT.
The final rule does not require payees to obtain a consumer's
signature to authorize the collection of service fees for insufficient
or uncollected funds via an EFT. Particularly at POS, the Board
believes the added benefit of a signature would be minimal in light of
the requirements to provide notice of the intent to collect the service
fee via an EFT both on posted signage, and on a receipt provided to the
consumer at the time of the transaction. The Board further notes that
Sec. 205.3(b)(3) addresses only the requirement that a payee obtain a
consumer's authorization for a service fee for insufficient or
uncollected funds the payee intends to collect via EFT. The final rule
does not, however, address whether a payee has a substantive right to
collect the service fee--that is a matter of state or other law. The
Board notes that other federal or state laws, such as the Fair Debt
Collection Practices Act, as well as payment system rules, may impose
additional requirements.
[[Page 1647]]
3(c) Exclusions From Coverage
When payees re-present checks electronically, they may also seek to
debit a service fee for insufficient funds via EFT from the consumer's
account. Although the electronic re-presentment of the returned check
(RCK) is not covered by Regulation E because the transaction was
originated by check, the separate electronic debit of the service fee
is covered by the regulation. Proposed comment 3(c)(1)-1 clarified that
a consumer authorizes the debit of the service fee when the consumer
goes forward with the transaction after receiving notice that the fee
will be collected electronically. No commenters opposed the
clarification. Comment 3(c)(1)-1 is revised, consistent with Sec.
205.3(b)(3), to add a reference to ``uncollected'' funds and to provide
that authorization at POS for the electronic debit of the service fee
from the consumer's account in connection with a re-presented check
requires notice posted on signage, with a copy of the notice provided
to the consumer.
Section 205.5 Issuance of Access Devices
Section 911 of the EFTA, which is implemented by Sec. 205.5 of
Regulation E, generally prohibits financial institutions from issuing
debit cards or other access devices except (1) in response to requests
or applications or (2) as renewals or substitutes for previously
accepted access devices. Comment 5(a)(2)-1 generally provides that a
financial institution may not issue more than one access device as a
renewal of or substitute for an accepted device (the ``one-for-one
rule''). Section 205.5(b) provides, among other things, that any access
device issued on an unsolicited basis must not be validated at the time
of issuance. Under the proposal, comment 5(b)-5 clarified that a
financial institution may issue more than one access device in
connection with the renewal or substitution of a previously accepted
access device, provided it complied with the conditions set forth in
Sec. 205.5(b) for the additional unsolicited devices. The proposal
retained the general one-for-one rule in comment 5(a)(2)-1; however, a
cross-reference to proposed comment 5(b)-5 was added. The revisions are
being adopted substantially as proposed, with some modifications to
address commenters' concerns.
Most commenters addressing this issue supported the proposal. One
commenter asserted that since liability for unauthorized use is on a
per-account (not per-device) basis, issuing additional devices would
not impose added risk on the consumer. Another commenter agreed that an
additional access device should be issued in unvalidated form, but
suggested that new initial Regulation E disclosures should not be
required to accompany the additional device. (One of the requirements
for issuing an unsolicited access device under Sec. 205.5(b) is to
provide the initial disclosures required by Sec. 205.7 that will apply
to the device. See Sec. 205.5(b)(3).) One commenter suggested that the
proposed commentary changes be expanded to provide financial
institutions flexibility to replace access devices having limited
functions with devices having additional functions. For example, cards
usable only at ATMs could, under this approach, be replaced with cards
usable at POS as well.
A few commenters suggested the Board clarify that when an
additional access device is issued at the time of replacement or
substitution, both the additional device and the device that replaces
the accepted access device may be issued in unvalidated form and a
single validation procedure may be used to validate both devices. Under
such a procedure, the consumer would not have the option to validate
only the device replacing the existing device and refuse to validate
the additional device; the consumer would have to choose to validate
both devices or neither device.
The revisions to the commentary regarding the issuance of
additional access devices are adopted as proposed, with a few
clarifying changes as described below. Unlike credit cards, a
consumer's own funds are at risk of loss in the event of unauthorized
use of a debit card or other access device. The potential for
unauthorized use may increase if validated cards are intercepted in the
mail and consumers are unaware that they may be receiving multiple
cards as replacements for an existing access device. The validation
requirement of Sec. 205.5(b) limits the risk of monetary losses from
the theft of debit cards sent through the mail. Although there would be
no increase in a consumer's liability where multiple access devices are
issued, asserting a claim of unauthorized use can be inconvenient and
time-consuming, and, at least temporarily, the consumer may be deprived
of needed funds. Therefore, the Board believes the benefits afforded by
the one-for-one rule and the validation requirements of Sec. 205.5(b)
are critical in the context of debit cards, and outweigh any benefits
of providing greater flexibility to issue access devices. In addition
to the validation requirement in Sec. 205.5(b), the Board notes that
where additional access devices are issued unsolicited, whether in
connection with the issuance of a replacement or substitute device or
otherwise, the other provisions of Sec. 205.5(b), including the
requirement to provide new initial disclosures, also apply. (See,
however, comment 2(a)-2, providing that the term ``access device'' does
not include a check used as a source of information to initiate an
EFT.)
With respect to the suggestion to expand the proposed comment to
provide financial institutions with flexibility to replace access
devices with limited functions with devices having additional
functions, comment 5(a)(2)-1 already addresses the issue; institutions
are permitted to expand functions upon replacement or substitution of
access devices. When the proposed revisions to comment 5(a)(2)-1 were
issued, existing commentary language on this point was not included for
the sake of brevity. To clarify this matter, the language in question
is set forth in full in the text of the final commentary revisions.
Also, the language is modified slightly to make clear that either the
access device replacing the existing device, or the additional access
device (or both), may provide expanded functions compared to the
existing device.
Regarding validation procedures, an institution may require a
consumer to choose to either validate all access devices provided by an
issuer, including the replacement and any additional devices, or
validate none of the issued devices. Also, although an institution is
permitted to issue a validated access device to replace an existing
accepted access device, the institution may choose instead to issue the
replacement device in a form that requires validation. Furthermore, an
institution may choose to link the validation of one access device with
the validation of another one. Accordingly, comment 5(b)-5 is revised
to include a clarification on this issue. The comment also notes that
an institution using such a validation procedure should disclose to the
consumer in a clear and readily understandable manner that the single
validation will validate both access devices, to ensure that the
consumer will not, for example, improperly discard the additional, now
validated, device.
Section 205.7 Initial Disclosures
7(a) Timing of Disclosures
Electronic check conversion transactions are a new type of EFT
requiring new disclosures. See discussion below under Sec. 205.7(c).
The Board proposed to revise comment 7(a)-1 to provide that an
institution may
[[Page 1648]]
choose to provide disclosures about ECK transactions early, i.e., prior
to the first ECK transaction involving the consumer's account.
Commenters supported the proposed revision. One trade association
representing credit unions observed that early notification is a cost-
effective way of enabling institutions to establish a single means of
notifying and educating consumers about their rights concerning
electronic fund transfers. Comment 7(a)-1 is adopted as proposed, with
a minor revision. See also comment 7(a)-2 (permitting an institution
that has not received advance notice of a third party transfer to
provide required disclosures as soon as reasonably possible after the
first transfer).
7(b) Content of Disclosures
The Board proposed to clarify that financial institutions must list
ECK transactions among the types of transfers that a consumer can make.
See proposed comment 7(b)(4)-4. As further discussed below under Sec.
205.7(c), the Board adopts comment 7(b)(4)-4 as proposed.
7(c) Addition of Electronic Fund Transfer Services
Former comment 7(a)-4 stated that if an EFT service is added to a
consumer's account and is subject to terms and conditions different
from those described in the initial disclosures, disclosures for the
new service are required. Under the final rule, as proposed, this
interpretation is moved to Sec. 205.7(c) of the regulation for
consistency with other regulations. See, e.g., Sec. 226.9(b)(2) of
Regulation Z. New comment 7(c)-1 is adopted as proposed to provide that
ECK transactions are a new type of transfer requiring new disclosures
to the consumer, to the extent applicable. The model clauses for
initial disclosures are revised to provide guidance to institutions
regarding their disclosure obligations to consumers about ECK
transactions. See Appendix A, Model Clauses in A-2.
The Board proposed comment 7(c)-1 to address industry uncertainty
about the extent of an account-holding institution's disclosure
obligations to new and existing consumers regarding ECK transactions.
As stated in the proposal, new disclosures about ECK transactions are
necessary because a consumer's check can be used differently than in
the past, that is, information from the check can be used to initiate
EFTs. Industry comments generally favored including information about
ECK transactions in initial disclosures, and many noted that they
already have adjusted their disclosures to reflect the fact that ECK
transactions are a new type of transfer that may be made to or from the
consumer's account. One commenter stated that ECK transactions should
not be treated as a new type of transfer because the consumer intended
to pay by check, rather than by EFT. The Board notes, however, that if
a merchant or other payee provides proper notice about the transaction
(see Sec. 205.3(b)(2)), a consumer, by providing the check as payment,
authorizes the use of the check as a source of information to initiate
a one-time EFT from the consumer's account. Comment 7(c)-1 is thus
adopted as proposed.
To assist institutions in implementing the new disclosure
requirements, the Board also proposed model initial disclosure language
to reflect that one-time EFTs are a new type of transfer that may be
made from a consumer's account using information from the consumer's
check, and to further instruct consumers to notify account-holding
institutions when an unauthorized EFT has occurred using information
from their check. Commenters supporting the new model language stated
that the proposed language was clear, concise, and helpful. A few
commenters requested sufficient time for institutions to make the new
disclosures.
A few industry commenters stated that certain of the disclosures
were unnecessary. Two commenters observed that referring specifically
to ECK transactions in the initial disclosures regarding error
resolution might mislead consumers to believe that they only had error
resolution rights when their check is converted to an EFT. Another
commenter, however, believed that including information about ECK
transactions in the liability provisions was appropriate, but this
commenter objected to listing ECK transactions as a new type of
transfer since the consumer intended to pay by check, and not by EFT,
and therefore ECK transactions should not be considered to be EFTs. The
Board notes that the model language informs consumers that, in addition
to notifying their bank when their card or code has been lost or
stolen, or when money has been transferred from their account without
their permission, they may also contact their institution if an
unauthorized transfer has been made using the information from their
check.
Consumer groups commented that the new model disclosure language
was helpful, but urged the Board to also include other practical
information about the nature of ECK transactions, and to include
information about consumers' rights under check law to differentiate
such transactions from ECK transactions. For example, while the current
model disclosures describe the 60-day time frame for consumers to
exercise their error resolution rights with respect to EFTs, including
ECK transactions, shorter time periods for asserting errors may apply
to checks processed by means other than check conversion. While
institutions may choose to provide consumers with additional
information regarding their rights when a check is processed by other
means, the model disclosures are solely intended to address consumers'
rights under the EFTA when the transaction involves an EFT to the
consumer's account. Other error resolution rights which may exist under
other laws, including state check law, are outside the scope of this
rulemaking. Consumer groups further suggested that the error resolution
notice should state more clearly that an institution ``must'' correct
any error within 10 business days, rather than use the current language
that an institution ``will correct any error promptly.'' However, under
certain circumstances, including where an institution provides a
provisional credit to the consumer's account or where the error
involves a new account, an institution may extend their investigation
period to up to 90 days. Therefore, the Board believes the current
language is more accurate.
Consumer groups also urged the Board to subject the model notices
to a complete review for readability and understandability. For
instance, consumer groups observed that the term ``code'' may not be as
well understood as ``PIN'' or even ``access code.'' Based on the
Flesch-Kincaid scale, the model initial disclosures in the final rule
score at a 9.9 grade level, with a Flesch reading ease score of 60.3 on
a 100.0 scale, indicating a high level of readability. The Board agrees
that in general consumer disclosures benefit from consumer testing, and
anticipates that testing of this and other notices could be made part
of a future comprehensive review of the regulation.
One trade association and a company that provides compliance forms
for institutions expressed their concerns about the scope of the
proposed disclosures, stating that the Board's model disclosures were
not broad enough to address other types of third-party initiated EFTs
which may be initiated using account information from a check, in
particular those initiated via a telephone or the Internet. As noted
previously in the discussion of Sec. 205.3(b), while telephone and
Internet transactions are covered by Regulation E, the proposed rule
was intended to
[[Page 1649]]
address ECK transactions only; other types of EFTs are not addressed by
these provisions in the final rule.
A few industry commenters asserted that since most banks have
considered electronically converted checks to be EFTs since adoption of
the 2001 commentary, and have already amended their initial disclosures
to include ECK transactions, institutions should not be required to
amend their disclosures again to include additional detail that is only
applicable to ECK transactions. These institutions also stated that the
cost of reprinting and mailing the revised disclosures would far exceed
any consumer benefit of receiving a notice that explains a process that
financial institutions have already been following. Two commenters
asked the Board to clarify that the introduction of ECK services would
not require change-in-terms notices to existing consumers, because none
of the terms of the underlying account agreement are affected by the
new type of transfer.
Under the final rule, for customers opening accounts after the
mandatory compliance date of January 1, 2007, institutions must include
in initial disclosures that ECK transactions are among the types of
transfers that a consumer can make. Where institutions have already
amended their disclosures to notify their consumers that ECK
transactions may be made from their account, they would not be required
to make new disclosures about such transactions to those consumers. New
disclosures to existing customers would be required to be provided
after the mandatory compliance date, however, if an institution has not
disclosed to those consumers that ECK transactions may be made, even if
other terms of the underlying account agreement would equally apply to
the new type of transfer. See comment 7(c)-1.
The Board specifically solicited comment on whether six months
following adoption of the final rule would provide sufficient time for
financial institutions to revise their disclosures to comply with the
rule. The vast majority of industry commenters urged the Board to
extend the time for compliance to one year. The final rule reflects
commenters' suggestions; institutions will have until the mandatory
compliance date of January 1, 2007 to revise their initial disclosures
to reflect ECK transactions, and to provide new disclosures to existing
customers if necessary. The Board anticipates that institutions will
have depleted their existing stocks of initial disclosures by that
time. Institutions are not required to provide new disclosures
reflecting ECK transactions until the mandatory compliance date.
Section 205.10 Preauthorized Transfers
10(b) Written Authorization for Preauthorized Transfers From Consumer's
Account
Under Sec. 205.10(b), preauthorized EFTs from a consumer's account
may be authorized only by a writing signed or similarly authenticated
by the consumer. Under existing comment 10(b)-3, a merchant or other
payee could not obtain authorization by tape recording a telephone
conversation with a consumer who agrees to recurring debits. Comment
10(b)-3 was adopted prior to the enactment of the E-Sign Act. The final
rule withdraws the interpretation in comment 10(b)-3 would be withdrawn
in light of the E-Sign Act, as proposed.
The E-Sign Act provides, in general, that electronic records and
electronic signatures satisfy legal requirements for traditional
written records and signatures. Some have suggested that, given the E-
Sign Act's broad definitions of ``electronic record'' and ``electronic
signature,'' a tape-recorded authorization, or certain types of tape-
recorded authorizations, for preauthorized debits might be deemed to
satisfy the Regulation E signed or similarly authenticated written
authorization requirements. The Board proposed to withdraw the guidance
regarding tape recordings because of E-Sign Act considerations, but did
not propose to amend comment 10(b)-3 to address how the E-Sign Act
should be interpreted with regard to tape recordings of telephone
conversations.
Many commenters, including several financial institutions and
financial trade associations, as well as a retailer trade association,
supported the proposed withdrawal. These commenters stated that without
the proposed change, consumers who do not have, or do not want to use,
credit cards would not be able to use the telephone to purchase goods
or services involving recurring debits to their deposit accounts. One
commenter noted that many less affluent consumers do not own computers,
so such consumers would be unable to electronically authorize recurring
payments unless the proposal is adopted. Another commenter noted that
if the proposal is not adopted, merchants may tend to use alternatives
such as demand drafts, which offer less consumer protection than debit
cards.
Other commenters, including financial institutions and financial
trade associations, retailer trade associations, automated clearing
house organizations, and a federal government agency, supported the
proposal but with modifications or conditions. A few commenters
recommended that merchants be permitted to obtain authorization for
recurring debits by telephone, without recording, followed by written
confirmation, if the consumer was given the option to cancel the
transaction. Because of concerns about deceptive telemarketing, other
commenters suggested that the use of telephone authorization be limited
to situations where (1) the consumer and the merchant have a
preexisting relationship, or (2) the consumer initiates the telephone
call.
Several industry commenters urged the Board to remove uncertainty
by explicitly stating that a recorded telephone conversation complies
with the E-Sign Act and, therefore, Regulation E, to facilitate
telephone authorizations of recurring debits. A few such commenters
argued that merely withdrawing a portion of comment 10(b)-3 as proposed
would cause further confusion and, absent additional guidance, would
lead merchants to adopt differing practices. One commenter, a federal
enforcement agency, recommended that the Board state affirmatively that
if a payee relies upon the E-Sign Act in connection with obtaining the
consumer's authorization, it must also fully comply with the E-Sign Act
with respect to other provisions of the EFTA and Regulation E,
including the requirement to provide a clear and conspicuous copy of
the full authorization to the consumer. In contrast, a law firm
representing retailers asserted that further clarifications regarding
the E-Sign Act in the recurring debit context are unnecessary and may
cause confusion in other instances when such clarifications are not
provided.
A few industry commenters opposed the proposed withdrawal of the
guidance due to the potential abuses and increased unauthorized
transfers that could result. One such commenter contended that tape
recordings do not provide clear evidence of a consumer's authorization,
which may be important in the event of a dispute. This commenter also
asserted that banks receive many complaints from consumers alleging
that the consumer only authorized a one-time electronic debit, but that
recurring debits are being processed.
The final rule withdraws the existing guidance regarding whether a
tape recording may satisfy the requirement to obtain a consumer's
written authorization for recurring debits as
[[Page 1650]]
proposed. The final rule does not interpret Regulation E to treat
recorded telephone authorizations as written authorizations; however,
the Board believes that the E-Sign Act's provisions regarding written
documents are applicable to the EFTA and Regulation E. As a result, if,
under the E-Sign Act, a tape-recorded authorization, or certain types
of tape-recorded authorizations, constitute a written and signed (or
similarly authenticated) authorization, then the authorization would
satisfy the Regulation E requirements.
In addition to complying with the E-Sign Act,\2\ payees will need
to ensure that they comply with the requirements of Sec. 205.10(b) of
Regulation E. Specifically, the authorization must be readily
identifiable as such to the consumer, and the terms of the
preauthorized debits must be clear and readily understandable to the
consumer. See comment 10(b)-6. Payees must also provide the consumer a
copy of the authorization. With respect to additional suggestions from
commenters to permit authorization by telephone without recording but
with written confirmation, or to limit the use of telephone
authorizations to specific circumstances, such changes would require
amendments to the EFTA or Regulation E rather than the staff
commentary, and thus the Board has decided not to consider these
suggestions at this time.
---------------------------------------------------------------------------
\2\ See, e.g., section 106(5) of the E-Sign Act (definition of
``electronic signature'').
---------------------------------------------------------------------------
Comment 10(b)-7 addresses authorizations for recurring payments
obtained by telephone or on-line, and states that the payee's failure
to obtain written authorization is not a violation if the failure was
not intentional and resulted from a bona fide error, notwithstanding
the maintenance of procedures reasonably adapted to avoid any such
error. For example, an error might occur where the consumer indicates
that a credit card (for which no written authorization would be
required) is being used for the authorization, when in fact the card is
a debit card.
Concerns were expressed by retail and other industry groups about
what procedures would be deemed reasonably adapted to avoid error where
a telemarketer seeks to obtain a consumer's authorization for recurring
payments for goods or services, such as newspaper subscriptions, using
the consumer's credit or debit card. The Board proposed to revise
comment 10(b)-7 to state that procedures reasonably adapted to avoid
error will vary with the circumstances. The proposed revision also
stated that asking the consumer to specify whether the card to be used
for the authorization is a debit card or a credit card, using those
terms, is a reasonable procedure.
The Board also proposed to add an example of a payee learning,
after the transaction occurred, that the card used was a debit card as
a result of the consumer bringing the matter to the payee's attention.
For example, the consumer may call the merchant to assert a complaint
about use of a debit card.
Most industry commenters supported the proposal as written, and a
few suggested modifications. No commenters opposed the proposal. One
trade association representing retailers suggested that comment 10(b)-7
not provide the example of asking the consumer whether the card being
used is a debit card or a credit card as the safe harbor for
compliance. Another trade association requested that the comment not
state that a reasonable procedure would require use of the term ``debit
card.'' This commenter also recommended that the Board indicate in the
comment that confirmation of the type of card being used is not
necessary when the authorization is given in writing, including on-
line. In contrast to the comments from the retailer trade associations,
a federal enforcement agency urged the Board to require payees to ask
whether the consumer is using a debit or credit card, in lieu of
creating a safe harbor for that procedure. However, one law firm
representing retailers opposed this suggestion contending that such a
requirement would be unduly restrictive because merchants might have
procedures that would not include asking whether the card is a debit or
credit card.
The federal enforcement agency also suggested that the Board
clarify that, in some cases, merchants should consider additional
information as part of reasonable procedures to avoid error. Such
information might include, for example, repeated consumer complaints
about unauthorized debits. This commenter suggested that the commentary
provide that if a merchant becomes aware of repeated authorization
problems, it should examine and possibly change its procedures. A law
firm, however, argued that such a requirement would be unnecessary
because merchants would have insufficient guidance as to what other
information they should consider and under what circumstances.
One consumer group stated that the final rule should require that
where the merchant learns only later, after the telephone
authorization, that the card used was a debit card, the merchant must
obtain a written and signed (or similarly authenticated) authorization
or cease debiting the consumer's account.
The Board adopts the revisions to comment 10(b)-7 as proposed, with
minor revisions. As stated in the proposal, it may have been reasonable
in the past, when relatively few debit cards were in use compared to
credit cards, for payees to use procedures that did not involve asking
questions about the type of card being used. Today, however, given the
growth of debit card usage, the Board believes that reasonable
procedures should include interaction with the consumer specifically
designed to elicit information about whether a debit card is involved.
Accordingly, the final rule retains the safe harbor example of a
reasonable procedure of asking the consumer to specify whether the card
to be used for the authorization is a debit (or check) card or a credit
card. The final comment includes a reference to ``check cards'' to
reflect current terminology. To illustrate the safe harbor, assume that
a consumer makes a purchase which will result in a series of recurring
payments. After the merchant inquires about the payment method, the
consumer indicates that they intend to use ``Bank X'' card, without
stating whether the card is a debit card or a credit card. In order to
fall under the safe harbor, the merchant should then ask the consumer
whether the card is a debit (or check) card or a credit card.
The final rule does not impose an express requirement of inquiring
whether a card provided is a debit card or a credit card, because the
determination of whether a procedure is reasonably adapted to avoid the
error of failing to obtain a consumer's written authorization for
recurring debits may vary with the circumstances. Similarly, although
it may be reasonable in some cases for a merchant to revise their
authorization procedures to avoid error based on additional information
about potential authorization problems, such as repeated consumer
complaints about unauthorized debits, the Board believes it is
unnecessary to add a specific provision to the commentary that would
require revised procedures in those limited instances.
The Board also does not believe that it is necessary to incorporate
in the final rule a requirement that a merchant should promptly notify
the consumer when it chooses to cease debiting the consumer's account
upon learning that the card used was a debit card. The Board believes
that a merchant, due to its own interest, will likely contact the
[[Page 1651]]
consumer to arrange for some other means of payment.
A few industry commenters also addressed the Board's discussion in
the proposal regarding whether merchants should be required to verify
card numbers presented by consumers against lists of credit and debit
card Bank Identification Numbers, commonly referred to as ``BIN
tables,'' as a reasonable procedure to avoid error. See In re Visa
Check/Mastermoney Antitrust Litigation, No. CV-96-5238 (E.D.N.Y. 2003)
(requiring Visa and MasterCard to make BIN tables available to
merchants as part of a litigation settlement). These commenters agreed
with the Board's observation that to the extent that BIN tables are not
available to merchants in an on-line, real-time form, it would be
burdensome for merchants to verify card numbers presented by consumers
against the BIN tables. Moreover, the Board understands that Visa and
MasterCard debit cards issued after January 1, 2005, display the word
``debit'' on the front of the card. Accordingly, the final rule does
not require merchants to obtain or consult BIN tables to maintain
procedures reasonably adapted to avoid error. Similarly, merchants are
not required to check card numbers already on file against BIN tables.
10(c) Consumer's Right To Stop Payment
Proposed comment 10(c)-3 stated that an institution need not have
the capability to block preauthorized debits, for example, where a
preauthorized debit is made through a debit card system, and may
instead use a third party to block the transfer(s), as long as such
payments are in fact stopped. The proposal revised comment 10(c)-2 to
cross-reference the new proposed comment. Comment 10(c)-2 is adopted as
proposed, and comment 10(c)-3 is adopted with revisions for clarity.
In the proposal, comment 10(c)-3 was added to address procedures
for stopping recurring debits where the account-holding institution is
unable to block a payment from being posted to the consumer's account
because, for example, the posting occurs soon after the transaction has
been approved, such as where the transaction takes place over a debit
card network. In these cases, the institution may not have sufficient
time to identify payments against which stop-payment orders have been
entered. The proposed comment provided an alternative procedure for how
the account-holding institution can comply with the stop payment
requirements of Regulation E in these circumstances.
Most commenters addressing this issue supported the proposal. One
commenter observed that in the case of debit card transactions, the
interception of transactions at the network level may be more effective
than blocking transactions at the level of the account-holding
institution. Some commenters requested clarification on various points.
A few industry commenters asked that the Board clarify that comment
10(c)-3 does not apply to recurring debits processed through batch
systems, such as the ACH network. Consumer groups were concerned that
the proposal might imply that even if a consumer revokes authority for
all future recurring debits by a payee, the financial institution may
comply by stopping a single payment; these commenters believed that the
obligation should be to cancel the debits permanently.
A number of commenters suggested that the Board adopt other
revisions to the existing commentary under Sec. 205.10(c). Several
industry commenters asserted that the EFTA and Regulation E only
require a financial institution to stop a single preauthorized debit,
and do not require the institution to take action to respond to a
consumer's revocation of authority for all future debits from a
particular payee, as stated in comment 10(c)-2. The commenters
suggested that the comment be removed or modified accordingly. In
addition, some commenters suggested revising comment 10(c)-1 to state
that a stop payment order need not be maintained by the consumer's
financial institution for more than six months, maintaining that such a
revision would make the comment consistent with Uniform Commercial Code
(UCC) provisions relating to stop payment orders on checks and with
industry practice.
Comment 10(c)-3 is adopted as proposed. The comment permits an
institution, upon receiving a consumer's stop payment order, to use a
third party to block a preauthorized transfer if the institution does
not have the capability to block the preauthorized debit from being
posted to the consumer's account, as long as the payment is in fact
stopped, i.e., the consumer's account is not debited for the payment.
Comment 10(c)-2 is also revised as proposed. The Board did not intend
to imply that an institution's obligation to honor a stop-payment
request is limited to a single preauthorized debit. If a consumer
revokes authority for all further payments from a particular payee, the
institution (through its own procedures or by using those of a third
party, as provided in new comment 10(c)-3 must make arrangements such
that no further debits originated by that payee are made to the
consumer's account. However, the Board notes that under comment 10(c)-
2, institutions may require the consumer to provide a copy of a written
notice sent to the payee, revoking authority for the payee to originate
debits to the consumer's account. If the consumer does not provide the
copy within 14 days, the institution is not required to continue
stopping payments to the payee.
As stated above, the proposal was intended to address problems in
stopping recurring debits that take place over debit card networks,
where the account-holding institution may not be able to timely block a
debit from being posted to the consumer's account. Nevertheless,
although comment 10(c)-3 primarily focuses on debits over debit card
networks and other ``real-time'' systems, the comment is not limited to
such systems and any institution that does not have the capability to
block a preauthorized debit from being posted to the consumer's account
may instead use a third party to block the debit, so long as the
consumer's account is not debited for the payment.
10(d) Notice of Transfers Varying in Amount
When a preauthorized EFT from a consumer's account will vary in
amount from the previous transfer, or from the preauthorized amount,
Sec. 205.10(d) requires the designated payee or the consumer's
financial institution to send written notice of the amount and date of
the transfer at least 10 days before the scheduled date of the
transfer. Paragraph 10(d)(2) permits the payee or the institution to
give the consumer the option of receiving notice only when a transfer
falls outside a specified range of amounts or only when a transfer
differs from the most recent transfer by more than an agreed-upon
amount. Under the proposal, comment 10(d)(2)-2 would, in limited
circumstances, relieve financial institutions of giving the consumer
the option of receiving notice each time a transfer varies from the
previous transfer. The final rule adopts proposed comment 10(d)(2)-2,
with some revisions for consistency with the regulation.
Some financial institutions have suggested that while the notice
requirement is appropriate where consumer funds are transferred to a
third party, it should not apply when the transfer is between accounts,
as defined under Regulation E, that are owned by the same consumer,
even when the accounts are held at different financial institutions.
These institutions
[[Page 1652]]
assert that the advance notice requirement is particularly burdensome
for institutions that offer certificate of deposit (CD) products that
allow customers to set up preauthorized transfers of interest from the
CD account to another account of the consumer held at a different
institution. For such products, monthly interest payments might vary
solely because of the different number of days in each month, yet such
variance would require the institution to send the consumer advance
notice in each instance before transferring the funds. The proposed
comment would give financial institutions flexibility to provide notice
only when a preauthorized transfer falls outside a specified range
where funds are transferred and credited to an account of the consumer
held at a different financial institution. (Preauthorized transfers
between accounts of the same consumer held at the same institution
qualify for the intra-institutional exclusion from coverage in Sec.
205.3(c)(5).) Also, the proposal provided that the range must be an
acceptable range that could be anticipated by the consumer, and the
institution would have to notify the consumer of the range.
Commenters generally supported the proposed comment. Some industry
commenters believed that the new comment could eliminate the need for
unnecessary notices without detriment to consumers, while providing
cost savings for those institutions that offer consumers the option of
transferring funds to an account at another institution on a
preauthorized basis. One industry commenter requested that the Board
provide examples of acceptable ranges of balances and provide optional
model language. Another industry commenter urged the Board to go
further and exclude CD interest via ACH transfers from the scope of
Sec. 205.10(d) altogether, since CD accounts are not transaction
accounts, and because transfers involve accrued interest only.
In contrast, one ACH trade association suggested that it may not be
appropriate to allow institutions to avoid providing notices with each
varying transfer without first obtaining consumer consent given that
identity theft is an increasingly prevalent problem. This commenter
noted that the NACHA rules already allow for ranges, and few companies
take advantage of that opportunity. Consumer groups believed that the
proposed commentary provision could facilitate transfers out of a
consumer's account to repay payday loans, and urged the Board either to
withdraw the proposed commentary provision, or to strictly limit the
exception to transfers of interest earned in one account to another
account held in the same name.
The final rule adopts comment 10(d)(2)-2 as proposed, with minor
revisions for clarity. Given the express language in Section 907(b) of
the EFTA, it is not appropriate to remove the notice requirement
entirely. Nevertheless, the Board believes that requiring a notice for
each varying transfer where the transfer is between accounts owned by
the same consumer provides little benefit to the consumer while
imposing unnecessary costs on the financial institution making the
transfer. Because this exception is limited to transfers of consumer
funds between accounts held by the same consumer at different
institutions, the Board believes the risk of loss from identity theft
is minimal. In addition, because the transfers must be between consumer
accounts held at different financial institutions, the exception would
not be applicable to transfers to repay loans, including payday loans,
which are not accounts under Regulation E. The Board is not aware of
any other circumstances that pose additional risks to a consumer's
account if this comment is adopted, and thus believes it is unnecessary
to limit the exception to accounts solely involving transfers of CD
interest.
For consistency with Sec. 205.10(d)(2), the final comment is
revised to provide that a financial institution may elect to provide
notice only when a preauthorized transfer falls outside a specified
range, or differs from a specified amount from the most recent
transfer, without providing the consumer the option of receiving notice
of all varying transfers, if the funds are transferred and credited to
an account of the consumer held at another financial institution. The
range or amount of variance must be reasonably anticipated by the
consumer, and the institution must notify the consumer of the range or
amount at the time the institution obtains the consumer's authorization
for the preauthorized transfers. Comment 10(d)(2)-2 includes an example
of an acceptable range where the preauthorized transfers are for
transfers of interest for a fixed-rate CD account. In this case, an
institution could provide a range based on transfers of interest for
months containing 28 days and for months containing 31 days.
Section 205.11 Procedures for Resolving Errors
11(b) Notice of Error From Consumer
The Board proposed to clarify in comment 11(b)-7 that an
institution need not comply with the procedures and time limits in
Sec. 205.11 for investigating a consumer's assertion of an error when
the consumer provides a notice of error after the time period specified
in Sec. 205.11(b). Where the error involves an unauthorized EFT,
however, liability for the unauthorized transfer may not be imposed on
the consumer unless the institution satisfies the requirements of Sec.
205.6. Comment 11(b)-7 is adopted generally as proposed, with some
revisions to address commenters' concerns.
Commenters on the issue uniformly supported the proposed comment,
although some industry commenters asked the Board to provide certain
additional clarifications. A few commenters believed that it was
unclear which provisions of Sec. 205.6 were applicable where the
asserted error involves an unauthorized transaction. For example, one
commenter stated that the generic reference to Sec. 205.6 is confusing
in light of the limitation on liability in Sec. 205.6(b)(1) when the
consumer provides timely notice. The final rule retains the general
reference because the requirements for the consumer to provide timely
notice is different under Sec. 205.6 than under Sec. 205.11. Under
Sec. 205.11, the consumer must provide notice 60 days after the
financial institution sends the periodic statement on which the alleged
error is reflected. In contrast, under Sec. 205.6, the consumer must
provide notice two business days after learning of the loss or theft of
an access device. Moreover, the consequences to the consumer for
failing to provide timely notice differ under Sec. Sec. 205.6 and
205.11. For example, a consumer may not find out about the loss or
theft of an access device until more than 60 days after a periodic
statement is sent.\3\ In such case, the consumer's liability could
still be capped at $50 or less as provided under Sec. 205.6(b)(1), so
long as the consumer notifies his or her financial institution within
two business days after learning of the loss or theft of the access
device, notwithstanding the fact that the procedures and time frames in
Sec. 205.11 would not apply.
---------------------------------------------------------------------------
\3\ Comment 6(b)(1)-2 states that the fact that a consumer has
received a periodic statement that reflects unauthorized transfers
cannot be deemed to represent conclusive evidence that the consumer
had such knowledge.
---------------------------------------------------------------------------
Industry commenters also suggested that the Board conform the 60-
day time
[[Page 1653]]
frame for providing notices of error in Sec. 205.11 to time frames
provided under other laws or payment system rules. Several commenters
urged the Board to conform the time frame for reporting an error in
Sec. 205.11(b)(1) from 60 days after the date of availability of the
periodic statement to 60 days after the settlement date of the
transaction consistent with the NACHA rules. The 60-day time frame for
providing a notice of error in connection with an EFT after a periodic
statement is sent, however, is a statutory requirement under Section
908(a) of the EFTA. Some commenters believed that the Board should
adopt a time limitation for asserting a claim of an unauthorized EFT of
one year from the date of availability of the periodic statement,
consistent with time frames established by Check 21 and Sec. 4-408 of
the UCC. The EFTA does not contain a time limitation for asserting a
claim of unauthorized EFTs, and the Board did not propose such a
limitation. Accordingly, the Board declines to adopt the suggested
changes.
Finally, one banking trade association recommended that the Board
recognize the exception in Sec. 205.6(b)(4) for extending the time
frames for reporting an unauthorized transaction if the consumer's
delay in notification is due to extenuating circumstances. The Board
agrees that where a consumer is unable to provide timely notice for an
unauthorized EFT due to extenuating circumstances, such as extended
travel or a hospitalization, an institution must extend the time frames
provided in Sec. 205.6(b) for reporting the unauthorized transaction.
11(c) Time Limits and Extent of Investigation
Section 205.11(c)(4) permits an institution to limit the
investigation of an alleged error to ``a review of its own records''
where the allegation pertains to a transfer to or from a third party
with whom the institution has no agreement for the type of EFT
involved. This is commonly referred to as the ``four walls'' rule.
Comment 11(c)(4)-4 provides that a financial institution does not have
an agreement with a third party solely because it participates in
transactions that occur under the federal recurring payments programs,
or that are cleared through an ACH or similar arrangement for the
clearing and settlement of fund transfers generally, or because it
agrees to be bound by the rules of such an arrangement. Proposed
comment 11(c)(4)-5 provided that an institution's ``own records'' may
not be limited to the payment instructions where additional information
is available within the institution relevant to resolving the
consumer's particular claim. As explained in the supplementary
information to the proposal, because the number and variety of ACH
payments has expanded significantly since the ``four walls'' rule was
first adopted in 1980, an institution's review of additional
information beyond the payment instructions may be necessary to provide
consumers with a meaningful investigation of an allegedly erroneous or
unauthorized payment. Comment 11(c)(4)-5 is adopted as proposed, with
some modifications to address commenter concerns.
Some commenters favored the proposed comment, including consumer
groups, a federal enforcement agency, and a few industry commenters.
These commenters generally agreed with the Board's stated rationale for
the proposed comment. For example, several credit union commenters
stated that it is reasonable to expect financial institutions to
exhaust their review of internal records when responding to alleged
errors regarding consumers' Regulation E transactions. Consumer groups
urged the Board to revise the comment to state that an institution's
reviews should consider records that could be helpful to resolving a
consumer's claim(s), not just those records that are dispositive. One
industry commenter generally agreed with the proposal in light of both
the increased variety of EFT transaction types and its belief that
information relevant to an assertion of error could likely to be
outside the payment instructions but within the institution's ``four
walls'' and records.
Most industry commenters opposed the proposed comment. Many
industry commenters raised concerns about ambiguity as to the scope of
the required investigation, the potential burden on institutions, and
the low likelihood of yielding additional, helpful information. Several
commenters asserted that it would unnecessarily require institutions to
look beyond their own records and could potentially require that they
seek to obtain information from additional parties to the transaction
when payment instructions could resolve the claim of error.
Many industry commenters were also concerned that the proposed
comment might require that an institution look for any and all
potentially relevant records--even in cases where a consumer may have
many different relationships with the institution (deposit, credit,
investment). One commenter stated that it would be impractical for a
large bank to comply with the proposed comment, since it would require
a review of information relating to other accounts and transactions
stored in various locations. Similarly, a few commenters noted that a
bank employee conducting an investigation might not be aware of all of
these relationships or may lack a practical ability to obtain all
information about the bank's dealings with that customer. These
commenters argued that a reasonable interpretation of the ``four
walls'' rule must limit the bank's duty to inquire not just about
information within the institution's own records relevant to resolving
the consumer's particular claim, but to information that is reasonably
available to the bank employee investigating the consumer's claim.
Several ACH associations asserted that the proposal could further
confuse what is already a troublesome section of the Commentary for
their members. These and other commenters generally believed that
institutions would be unlikely to have readily available information in
their records beyond the payment instructions that would assist in the
review of the particular transaction, noting, for example, that the
consumer's authorization for the transaction would be in the possession
of the originator-payee, not the consumer's institution. These
commenters stated that searching for, and obtaining, such additional
information would be time-consuming and costly. They added that since
authorization is between the consumer and the originator of the
transaction, the proposed comment could inappropriately place the
consumer's institution in the position of deciding the legitimacy of
the authorization. In their view, this issue should be resolved between
the merchant or other payee and the consumer--not by the consumer's
financial institution.
Many industry commenters, including ACH associations, noted that
the NACHA rules already ensure a remedy under which the consumer is
already made whole in a timely manner.\4\ One industry commenter,
however, argued that the NACHA rules were insufficient because of the
shorter time period for reversing transactions (chargebacks), urging
instead that the Board withdraw the proposed comment and encourage
NACHA to amend its rules to conform its chargeback period to the period
set forth under Sec. 205.11 for reporting
[[Page 1654]]
alleged errors.\5\ This commenter asserted that this change would
properly place the burden of assuring proper authorization of
transactions on the originating merchant and financial institution--the
two parties best positioned to monitor and ensure compliance with this
requirement. This commenter maintained that the automatic right to
charge back under the NACHA rules works well for most ACH disputes and
that extending the time period for permitting charge backs would not
impose significant additional costs on merchants or its financial
institution.
---------------------------------------------------------------------------
\4\ Under the NACHA rules, if the consumer executes a written
statement under penalty of perjury within the prescribed time frame
of 60 days from the date of the transaction, the financial
institution will promptly re-credit the consumer's account and
return the transaction to the payee.
\5\ Section 205.11(b) of Regulation E generally requires a
financial institution to investigate a claim of error that is
received no later than 60 days after the institution sends the
periodic statement on which the alleged error is first reflected.
---------------------------------------------------------------------------
Many industry commenters recommended that the regulation require a
``reasonable'' investigation and to provide examples of appropriate
steps to be taken to minimize the compliance burden similar to existing
guidance under Regulation Z. See, e.g., Sec. 226.12(b)-3. In their
view, a reasonable investigation might, for example, consist of an
examination of the institution's records for the account in question,
but not all accounts held by the particular consumer at the financial
institution. These commenters believed that a ``reasonable
investigation'' standard would enable institutions to take measures
appropriate to the nature of the error and the size of the institution.
A few commenters, including consumer groups, asked the Board to
clarify an institution's error resolution responsibilities under the
``four walls'' rule when it has outsourced relevant aspects of its
operations, such as payment processing or the investigation of
disputes. These commenters believe that in such cases an institution's
records should include a review of information that is within the
institution's possession or control and not merely within the
institution's physical offices. Another commenter inquired how the
proposed error resolution process would work where an EFT service
provider (rather than an account holding institution) is providing the
EFT service. This commenter asserted that currently, account holding
institutions have limited error-resolution obligations with respect to
errors resulting from a third-party service provider, and that the
proposed commentary language should clarify whether there is any
intended change in the error resolution responsibilities between the
service provider and account holding institution.
As stated in the proposal, the ``four walls'' rule was adopted when
most third party transfers involved preauthorized credits to a
consumer's account to pay salary or other compensation, or
preauthorized debits from a consumer's account to pay a utility company
or other payee. In the absence of an agreement between the financial
institution and the third party, it was deemed reasonable to permit an
institution to limit its investigation to the institution's own
records. See 45 FR 8248 (Feb. 6, 1980). Historically, alleged errors
often pertained to the amount of the transfer. Consequently, an
institution would likely have very limited information--such as the ACH
payment instructions--for purposes of conducting its investigation. The
``four walls'' approach thus sought to strike a balance between an
institution's investigatory burden relative to the types of errors
commonly asserted and the institution's practical ability to procure
relevant information in light of its lack of an agreement with the
third party.
In the twenty-five years since the ``four walls'' analysis was
adopted, the increasing use of ACH as a means to effectuate a wide
variety of third-party transfers (and preauthorized transfers) has
expanded significantly, and, as a result, the types of errors that may
occur is far greater than those originally contemplated. For example,
the ACH network today is used to process ECK transactions. Similarly, a
merchant may use the ACH network in an on-line or telephone transaction
to initiate an EFT from a consumer's account using the consumer's
checking account number. In these cases, consumers may encounter errors
concerning authorizations and the types of transfers, in addition to
errors regarding the amounts of the resulting ACH debits. The risk that
a consumer's check or checking account number could be used in a
fraudulent manner to make an ACH transfer from the consumer's account
was not a concern when the ``four walls'' analysis was adopted, since
the typical ACH transfer then involved a preauthorized transfer to or
from a known party.
Today, when a consumer believes that a transaction is unauthorized,
information such as the location of the payee, the particular number of
the check (to determine if it is notably out of order), or prior
consumer account transactions with the same payee, that could be
relevant to the investigation would more likely be within the
institution's own records. Thus, for ACH and ECK transactions, for
example, the Board believes that an institution's review of its ``own
records'' should not be confined to a mere confirmation of the payment
instructions when other information within the institution's ``four
walls'' could also be reviewed.
Any investigation conducted under the four walls rule must be
reasonable. Because the nature of a consumer's allegation of error can
vary, the scope of an investigation may vary. In each case, an
institution should use relevant information available within its own
records for purposes of determining whether an error occurred. Given
the potential size and complexity of institutions and their many
different relationships with a single consumer, however, it may be
impractical and burdensome for an institution to look throughout its
entire operation for potentially relevant records. The final rule
clarifies that the information reviewed should pertain to the account
for which the assertion of error is made and cover a reasonable period
of time. The revised comment also provides examples of information that
an institution might review. These examples are not set forth as an
exclusive list.
Institutions have flexibility to determine what information is
relevant to a meaningful investigation of the error in question. To the
extent that an account-holding institution has outsourced relevant
aspects of its operations, the investigation should include a review of
service provider records if such records could help to resolve the
consumer's claim. Under the ``four walls'' rule, the institution need
not, however, include a review of records that are not within its
possession or control--such as the consumer's authorization for the
transaction if such authorization is in the possession of a third-party
payee. Additional requirements may be established by payment system or
other rules, however.
The proposal also solicited comment as to whether there are
circumstances in which the ``four walls'' rule should not apply.
Industry commenters generally stated that they were unaware of such
circumstances at this time, and that there is typically no need to
require banks to conduct investigations outside of their own records.
The Board will continue to monitor institutions' error resolution
practices to assess the continued viability of the ``four walls''
approach to error investigation.
[[Page 1655]]
Section 205.16 Disclosures at Automated Teller Machines
Section 205.16 requires an ATM operator that imposes a fee on a
consumer for initiating an EFT or a balance inquiry to provide notice
to the consumer that a fee will be imposed for providing the EFT
service or for a balance inquiry and to disclose the amount of the fee.
An ATM operator is any person who operates an ATM at which consumers
initiate an EFT or a balance inquiry, and that does not hold the
account to or from which the transfer is made, or about which an
inquiry is made. Notice of the imposition of the fee must be provided
in a prominent and conspicuous location on or at the ATM. The operator
must also provide notice that the fee will be charged and the amount of
the fee either on the screen of the ATM or by providing it on paper,
before the consumer is committed to paying a fee.
In the September 2004 proposal, the Board proposed to revise
comment 205.16(b)(1)-1 to clarify that ATM operators can disclose on
the ATM signage that a fee may be imposed or specify the type of EFTs
or consumers for which a fee is imposed, if there are circumstances in
which an ATM surcharge will not be charged for a particular
transaction. (69 FR at 56005.) After consideration of the comments
received, the Board withdrew the proposed commentary revisions and
instead proposed to amend Sec. 205.16(b) to clarify that ATM operators
may disclose on ATM signage that a fee will be imposed or, in the
alternative, that a fee may be imposed on consumers initiating an EFT
or for a balance inquiry if there are circumstances under which some
consumers would not be charged for such services. (70 FR 49891 (Aug.
25, 2005).) The proposed commentary was revised to clarify that ATM
operators that impose an ATM surcharge in all cases must provide notice
on the ATM signage that a fee will be imposed. The revisions are
adopted largely as proposed, with certain revisions for clarity.
Several large institutions have asked whether it is permissible
under Sec. 205.16 to provide notice on the ATM that a fee ``may be''
charged for providing EFT services because many ATM operators,
particularly those owned or operated by banks, apply ATM surcharges to
some categories of their ATM users, but not others. For example, an ATM
operator might not charge a fee to holders of cards issued by foreign
financial institutions, cardholders of banks that are part of a
surcharge-free network or that have entered into a contractual
relationship with the ATM operator with respect to surcharges, and
holders of cards issued under governmental electronic benefit transfer
(EBT) programs. (While many financial institutions do not impose ATM
surcharges on their own cardholders, they are not ATM operators with
respect to those cardholders for purposes of Sec. 205.16 because the
institutions hold the cardholders' accounts.) More recently, many banks
voluntarily waived surcharges for consumers from areas affected by
Hurricane Katrina. Also, an ATM operator might charge a fee for cash
withdrawals, but not for balance inquiries. Accordingly, the Board
recognized in its two proposals that a disclosure on the ATM that a fee
``will'' be imposed in all instances could be overly broad with respect
to consumers who would not be assessed a fee for usage of the ATM.
Industry commenters strongly supported the August 2005 proposal,
stating that it would give ATM operators the flexibility to more
accurately disclose their surcharging practices, and thereby reduce
consumer confusion. Several industry commenters asserted that a
``will'' disclosure could cause consumers who would not be charged a
fee by the particular ATM to go to a different ATM, which could
inconvenience the consumer, as well as possibly result in a fee
surcharge at the second ATM that could have been avoided with a more
accurate disclosure. Another industry commenter noted that most
consumers will be unaware that the ATM signage disclosure is only
required for consumers who do not hold accounts with the ATM operator,
and that the use of ``may'' could easily be understood by ATM users as
accommodating the ATM operator's cardholders.
Industry commenters also agreed with the Board's observation in the
August 2005 proposal's supplementary information that the signage
disclosure is intended to allow consumers to identify ATMs that
generally charge a fee for use, while the on-screen disclosure made
after the consumer has entered his or her card into the machine but
before the consumer is committed to the transaction provides a more
specific disclosure regarding whether a fee will be incurred in that
particular transaction. To support their view that the proposal is
consistent with Sections 904(d)(3)(A) and (B) of the EFTA, industry
commenters cited a press release issued by the original act's sponsor,
Rep. Marge Roukema, which stated that the act ``simply puts existing
practice into law.'' \6\ One banking trade association noted that prior
to the enactment of the Gramm-Leach-Bliley Act, the operating rules for
one of the country's largest ATM networks required ATM operators
imposing a surcharge for use of their ATMs to post conspicuous notice
on the ATM that the operator ``may'' charge a fee for cash withdrawals.
The trade association further noted that this practice of disclosing
that a fee ``may'' be imposed on signage followed by a more
transaction-specific on-screen disclosure was, and continues to be, the
common practice of some of the other larger ATM networks in the United
States.
---------------------------------------------------------------------------
\6\ Banking Committee OKs Roukema ATM Fee Disclosure (March 10,
1999), http://finanialservices.house.gov/ banking/ 3109rou.htm.
---------------------------------------------------------------------------
Several industry commenters specifically addressed the Board's
decision to amend the regulation in the August 2005 proposal, instead
of revising the commentary as originally proposed. One banking trade
association stated that amending both the regulation and the commentary
would facilitate industry understanding and compliance. Two other
commenters, representing credit unions, observed that the proposal to
amend only the commentary was arguably inconsistent with Sec. 205.16's
current language, and therefore the Board's new proposal was
appropriate. A few industry commenters asked the Board to clarify that
the revisions do not represent a change in the ATM disclosure scheme,
but merely a restatement and clarification of the requirements of
existing law.
Although agreeing that the EFTA permits signage at the ATM machine
indicating that the fee is not charged in every instance, consumer
groups believed that the revised proposal did not sufficiently
implement the statute because it did not ensure that consumers who
``will'' be charged a fee would be adequately notified of that fact.
Consumer groups believed that the circumstances in which fees will not
be charged generally are limited. Therefore, consumer groups proposed
an alternative approach that would require ATM operators to generally
disclose that a fee ``will'' be imposed along with a list of exceptions
when a fee would not be imposed. Consumer groups believed that the
revised disclosure would more adequately apprise consumers of the fact
that a fee will be imposed while still allowing ATM operators the
flexibility to make more accurate disclosures regarding their
surcharging practices.
[[Page 1656]]
Industry commenters, however, noted that a rule requiring a
``will'' disclosure along with a list of the circumstances under which
a fee would not be disclosed would likely result in lengthy and
complicated signs that consumers are unlikely to read. Moreover,
industry commenters also believed that the expense of replacing signs
each time a surcharge policy is changed could have the unintended
effect of discouraging ATM operators from waiving fees to accommodate
consumers in special circumstances, such as in response to a natural
disaster.
A consumer rights attorney who opposed the Board's September 2004
proposal on this issue reiterated his view that the current rule and
commentary more correctly implements the statute's intent, and cited
his prior comments. This attorney urged the Board to withdraw the
current proposal.
The August 2005 revisions are adopted as proposed under the Board's
authority under Section 904(d) of the EFTA. Amending both the rule and
the commentary addresses any potential inconsistencies between the
current language of Sec. 205.16 and the earlier proposed commentary,
thereby facilitating industry compliance. However, while the Board is
amending the regulation to address this issue, this amendment does not
represent a change in the Board's interpretation of the rule's
requirements.
The final rule clarifies the two-part disclosure scheme established
in Section 904(d)(3)(B) of the EFTA. The first disclosure, on ATM
signage posted on or at the ATM, allows consumers to identify quickly
ATMs that generally charge a fee for use. This disclosure is not
intended to provide a complete disclosure of the fees associated with
the particular type of transaction the consumer seeks to conduct. Until
a consumer uses his or her card at an ATM, the ATM operator does not
know whether a surcharge will be imposed for that particular consumer.
Rather, it is the second, more specific disclosure, made either on the
ATM screen or on an ATM receipt, that informs the consumer before he or
she is committed to the transaction whether, in fact, a fee will be
imposed for the transaction and the amount of the fee. Thus, consumers
who are charged a fee would not be adversely affected by a general
notice that a fee ``may'' be imposed because they will have the
opportunity to terminate the transaction after receiving the on-screen
notice or receipt containing the transaction-specific disclosure.
The Board further believes that an alternative rule requiring
institutions to provide a general disclosure that a fee ``will'' be
imposed, while also specifying the circumstances under which a fee will
not be imposed, would impose significant costs on ATM operators without
corresponding benefit to consumers. Commenters indicated at least ten
different circumstances in which a waiver may apply for a given ATM
transaction, including surcharge-free networks, other contractual
relationships, cards issued by foreign financial institutions, cards
delivering governmental benefits, corporate affiliations with the ATM
operator, and in response to special circumstances, such as to provide
disaster relief. Thus, consumers could be confused or discouraged by
signage containing potentially lengthy disclosures listing the many
circumstances under which a fee would not be imposed. Such a rule could
also require ATM operators to modify all of their signs each time they
revised their surcharge practices, at considerable cost. Industry
commenters estimated the cost of a systemwide change in ATM signage
anywhere between $200,000 for an institution with approximately 6,000
ATMs to over $1 million for an institution with over 16,500 ATMs.
Moreover, the time necessary for changing all of the signs would render
at least some of the signs inaccurate for a period of time.
Accordingly, for the reasons discussed above, Sec. 205.16(b) is
revised to explicitly clarify that ATM operators may disclose on ATM
signage that a fee will be imposed or, in the alternative, that a fee
may be imposed on consumers initiating an EFT or for a balance inquiry
if there are circumstances under which some consumers would not be
charged for such services. The flexibility provided in the final rule
allows ATM operators that currently disclose that a fee ``will'' be
charged to continue to use existing signs even if a fee is not charged
in all cases. Comment 16(b)(1)-1 is revised for consistency with the
final rule, and to clarify that ATM operators that impose an ATM
surcharge in all cases must provide notice on the ATM signage that a
fee ``will'' be charged.
Appendix A--Model Disclosure Clauses and Forms
A-2--Model Clauses for Initial Disclosures
Model clauses for initial disclosures contained in Appendix A (Form
A-2) are revised to provide disclosures about ECK transactions. In
particular, model clauses (a) and (b) are revised to instruct consumers
to notify their account holding institution when unauthorized EFTs have
been made without the consumer's permission using information from
their checks. The discussion on the applicable liability limits remains
generally unchanged, however, because the first two tiers of liability
do not apply to unauthorized transfers made without an access device
(for example, those made using information from a check to initiate a
one-time ACH debit). See comments 2(a)-2, 6(b)(3)-2.
Model clause (d) also is revised to list as a new type of transfer
a one-time electronic fund transfer made from a consumer account using
information from the consumer's check. See comment 7(b)(4)-4.
A-3--Model Forms for Error-Resolution Notice
Paragraph (b) of Model Form A-3 is included after its inadvertent
deletion following publication of the March 2001 interim final rule
establishing uniform standards for the electronic delivery of
disclosures required by the EFTA and Regulation E. 66 FR 17786 (April
4, 2001). No changes are intended by the re-inclusion of paragraph (b).
Paragraph (a) is reprinted for convenience.
A-6--Model Clauses for Authorizing One-Time Electronic Fund Transfer
Using Information From a Check (Sec. 205.3(b)(2))
Model Form A-6 is added to provide model clauses for the
authorization requirements of Sec. 205.3(b)(2) for a person that
initiates an EFT using information from a consumer's check. Consistent
with comment 2 for Appendix A, the use of appropriate clauses in making
disclosures will provide protection from liability under Sections 915
and 916 of the EFTA provided the clauses accurately reflect the
institution's EFT services. See also Sec. 205.3(b)(2)(iv). Model
Clause A-6(a), which permits payees to obtain a consumer's
authorization to use information from his or her check to initiate an
EFT or to process the transaction as a check, is adopted generally as
proposed. Model Clause A-6(a) may be used in all instances. Model
Clause A-6(b) is also adopted to accommodate those payees who may want
to provide more specific information concerning their ECK practices for
business reasons, and consolidates proposed Model Clauses A-6(b) and
(c). The additional information about when funds may be debited from
the consumer's account and the non-return of checks is provided in
Model Clause A-6(c) of the final rule.
[[Page 1657]]
V. Final Regulatory Flexibility Analysis
The Board prepared an initial regulatory flexibility analysis as
required by the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.)
in connection with the September 2004 proposal. The Board received no
comments on its initial regulatory flexibility analysis.
Under Section 605(b) of the RFA, 5 U.S.C. 605(b), the regulatory
flexibility analysis otherwise required under Section 604 of the RFA is
not required if an agency certifies, along with a statement providing
the factual basis for such certification, that the rule will not have a
significant economic impact on a substantial number of small entities.
Based on its analysis and for the reasons stated below, the Board
certifies that this final rule will not have a significant economic
impact on a substantial number of small entities.
1. Statement of the need for, and objectives of, the final rule.
The Board is revising Regulation E to require a person initiating an
EFT using information from a consumer's check to obtain the consumer's
authorization. Generally, authorization would be obtained by the payee
providing a notice that a check will or may be converted, and the
consumer providing a check as payment. The requirement would enable the
Board to promote consistency in the notice provided to consumers by
merchants and other payees.
Additional guidance is provided in the staff commentary about a
financial institution's error resolution obligations for certain
transactions, and to clarify financial institution and merchant
responsibilites for preauthorized transfers from consumer accounts.
The EFTA was enacted to provide a basic framework establishing the
rights, liabilities, and responsibilities of participants in electronic
fund transfer systems. The primary objective of the EFTA is the
provision of individual consumer rights. 15 U.S.C. 1693. The EFTA
authorizes the Board to prescribe regulations to carry out the purpose
and provisions of the statute. 15 U.S.C. 1693b(a). The EFTA expressly
states that the Board's regulations may contain ``such classifications,
differentiations, or other provisions, * * * as, in the judgment of the
Board, are necessary or proper to effectuate the purposes of [the
EFTA], to prevent circumvention or evasion [of the act], or to
facilitate compliance [with the EFTA].'' 15 U.S.C. 1693b(c). The EFTA
also states that ``[i]f electronic fund transfer services are made
available to consumers by a person other than a financial institution
holding a consumer's account, the Board shall by regulation assure that
the disclosures, protections, responsibilities, and remedies created by
[the EFTA] are made applicable to such persons and services.'' 15
U.S.C. 1693b(d). The Board believes that the revisions to Regulation E
discussed above are within Congress' broad grant of authority to the
Board to adopt provisions that carry out the purposes of the statute.
2. Issues raised by comments in response to the initial regulatory
flexibility analysis. In accordance with Section 3(a) of the RFA, the
Board conducted an initial regulatory flexibility analysis in
connection with the proposed rule. The Board did not receive any
comments on its initial regulatory flexibility analysis.
3. Small entities affected by the final rule. Merchants or other
payees that initiate one-time EFTs from a consumer's account using
information from the consumer's check are required under the regulation
to obtain the consumer's authorization for the transfers. For POS and
ARC transactions, payees must provide a notice that a check will or may
be converted. For ARC transactions, notice will likely be provided on a
billing statement or invoice. At POS, notice also must be provided on
posted signage, and a copy of the notice must be given to the consumer
at the time of the transaction. Payees in ECK transactions must also
provide notice that funds may be debited from a consumer's account as
soon as the same day payment is made or received and that the
consumer's check will not be returned by the consumer's financial
institution. In addition, before a payee may collect a service fee for
insufficient or uncollected funds via EFT from a consumer's account,
the payee must provide a notice that such a fee may be collected by use
of an EFT and disclose the amount of the fee. Account-holding
institutions are required under the regulation to disclose to their
consumers that electronic check conversion transactions are a new type
of transfer that can be made from a consumer's account.
Merchants and other payees that engage in check conversion
transactions must obtain consumers' authorizations for electronic check
conversion transactions and for the collection of fees debited via an
EFT if a payment is returned unpaid, and generally do so via signage
and on a transaction receipt at the POS. In particular, payment system
rules require that authorization for one-time debits to a consumer's
account must be in writing and signed or similarly authenticated by the
consumer. The Board further understands that many payees provide notice
on receipts at POS. Similarly, payees are generally providing written
notices in ARC transactions because payment system rules require
written notices to be provided to consumers.
Under the amendments to Regulation E, payees must review the
notices that they presently provide in accordance with payment system
rules, and may be required to revise these notices in some cases to
ensure compliance with the amendments to Regulation E. The Board
believes that these amendments will not have a significant economic
impact on small entities because payees are generally providing notices
regarding ECK and the collection of service fees for insufficient funds
electronically in accordance with payment system rules. Furthermore,
the Board believes that obtaining consumer authorization for ECK
transactions via signage at the POS is less costly than obtaining
authorization via signed receipts.
Payees will have to revise their notices to inform consumers in ECK
transactions that funds may be debited from their account soon after
payment is received and, if applicable, that consumers' checks will not
be returned by their financial institutions. At POS, this additional
information may be provided separately from the general authorization
notice. The Board understands that many payees in ARC transactions are
already providing notice to consumers regarding when funds may be
debited from a consumer's account when consumers' checks are converted,
and stating that consumers' checks will not be returned by their
financial institutions. For those payees that are not already providing
some form of notice at POS or for ARC transactions, the final rule
provides model language to facilitate compliance. Thus, the Board does
not believe that the requirement to provide notice about the nature of
ECK transactions will have a significant economic impact on small
entities.
Small financial institutions may need to review their initial
disclosures, and perhaps revise them to reflect that electronic check
conversion transactions are a new type of transfer that can be made
from a consumer's account. This disclosure is also ``generic'' and will
not vary among consumers. Model language is provided in the rule to
facilitate compliance. Thus, the Board believes this requirement also
should not have a significant economic impact on small entities. The
Board also understands that many institutions have already
[[Page 1658]]
revised their periodic statements to reflect that checks may be
converted.
4. Other federal rules. The Board believes no federal rules
duplicate, overlap, or conflict with the final revisions to Regulation
E.
5. Significant alternatives to the proposed revisions. The Board
solicited comment about potential ways to reduce regulatory burden.
Several commenters urged the Board not to require written, signed
authorization for checks converted at POS. In light of the potential
impact on entities and limited additional consumer benefit, the final
rule does not require a payee to obtain a consumer's signature to
convert a check. In the final rule, the Board is also providing a
sunset period of three years for the additional ECK disclosures about
when funds may be debited from the consumer's account and the non-
return of checks. The Board anticipates that increased consumer
familiarity with ECK transactions over time will make unnecessary the
provision of this additional information.
VI. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the rule
under the authority delegated to the Board by the Office of Management
and Budget (OMB). The final rule contains requirements subject to the
PRA. The collection of information that is required by this rule is
found in 12 CFR 205.2(b)(3), 205.3(b)(2) and 205.7. The Federal Reserve
may not conduct or sponsor, and an organization is not required to
respond to, this information collection unless the information
collection displays a currently valid OMB control number. The OMB
control number is 7100-0200. This information is required to provide
benefits for consumers and is mandatory (15 U.S.C. 1693 et seq.). The
respondents/recordkeepers are for-profit financial institutions,
including small businesses. Institutions are required to retain records
for 24 months.
All financial institutions subject to Regulation E, of which there
are approximately 19,300, are considered respondents for the purposes
of the PRA and may be required to provide notice to accountholders that
electronic check conversion (ECK) transactions are a new type of
transfer that may be made from a consumer's account under Sec. 205.7.
In addition, all persons, such as merchants and other payees, that
engage in ECK transactions, of which there are approximately 80,000,
potentially are affected by this collection of information, because
these merchants and payees will be required to obtain a consumer's
authorization for the electronic transfer under Sec. 205.3(b)(2).
The following estimates represent an average across all respondents
and reflect variations among institutions based on their size,
complexity, and practices. The other federal agencies are responsible
for estimating and reporting to OMB the total paperwork burden for the
institutions for which they have administrative enforcement authority.
They may, but are not required to, use the Federal Reserve's burden
estimate methodology.
The first disclosure requirement, described in Sec. 205.7, is the
initial disclosure that a financial institution must provide to their
accountholders reflecting that ECK transactions are a new type of
transfer that can be made from a consumer's account. The Federal
Reserve estimates that each of the institutions, for which it has
administrative enforcement authority (collectively referred to in the
following paragraphs as ``respondents regulated by the Federal
Reserve'') will be required to provide a revised initial disclosure to
their accountholders. Currently, all respondents regulated by the
Federal Reserve are required to provide a disclosure of basic terms,
costs, and rights relating to EFT services under Regulation E. For
purposes of this PRA analysis, the Federal Reserve estimates that it
will take financial institutions, on average, 8 hours (one business
day) to reprogram and update systems to include the new notice
requirement relating to ECK transactions; therefore, the Federal
Reserve estimates that the total annual burden for all financial
institutions for this requirement will be 154,400 hours. With respect
to the 1,289 Federal-Reserve-regulated institutions which must comply
with Regulation E, it is estimated that the total annual burden for
this requirement will be 10,312 hours. The final revisions to
Regulation E provide institutions with model clauses for the initial
disclosure requirement for ECK transactions (provided in Appendix A)
that they may use to comply with the notice requirement.
The second disclosure requirement, described in Sec. 205.3(b)(2),
is required when persons, such as merchants and other payees, engage in
ECK transactions. Under the final rule, merchants and payees are
generally required to provide written notice to obtain a consumer's
authorization for the one-time EFT. Merchants and payees will also be
required to provide a written notice to obtain a consumer's
authorization to collect any service fees for insufficient or
uncollected funds via an EFT to the consumer's account. The notice must
also disclose the amount of the service fee. Finally, merchants and
payees that engage in ECK transactions must provide a notice to
consumers that when a check is used to initiate an EFT, funds may be
debited from a consumer's account as soon as the same day payment is
made or received and consumers' checks will not be returned by their
financial institution.
The Federal Reserve estimates that of the 1,289 respondents
regulated by the Federal Reserve that are required to comply with
Regulation E, approximately 10 originate ECK transactions. The Federal
Reserve estimates that it will take each respondent, on average, 8
hours (1 business day) to reprogram and update their systems to include
the new notice requirement relating to ECK transactions; therefore, the
Federal Reserve estimates that the total annual burden is 80 hours. The
final revisions to Regulation E provide institutions with model clauses
(provided in Appendix A) for the new disclosure requirements. Using the
Federal Reserve's methodology, the total annual burden for all other
merchants and payees engaging in ECK transactions is 639,920 hours.
A third disclosure requirement applies to ATM operators who are
required to provide notice to consumers of an ATM surcharge. Under this
final rule, ATM operators will be permitted to disclose on signage
posted at the ATM that a surcharge ``may'' be imposed if there are
circumstances under which a surcharge is not imposed. All financial
institutions, of which there are approximately 19,300, potentially are
subject to this requirement to the extent they are ATM operators under
the rule. The extent to which this collection of information affects a
particular financial institution depends on the number of ATMs an
institution operates, and on whether the institution elects to revise
its ATM signage disclosures. For purposes of this PRA analysis, the
Federal Reserve estimates that it will take financial institutions, on
average, 8 hours (one business day) to revise and update ATM signage;
therefore the Federal Reserve estimates that the total annual burden
for all depository institutions for this requirement will be 154,400
hours. With respect to the 1,289 Federal Reserve-regulated institutions
which must comply with Regulation E, it is estimated that the total
annual burden for this requirement will be 10,312 hours.
The Federal Reserve's current annual burden for Regulation E
disclosures is
[[Page 1659]]
estimated to be 63,047 hours. The final rule will increase the total
burden under Regulation E for all Federal Reserve-regulated
institutions by 20,704 hours, from 63,047 to 83,751 hours. (This burden
estimate does not include the burden associated with the new disclosure
requirements in connection with payroll card accounts as announced in a
separate interim final rule (Docket No. R-1247).) Using the methodology
explained above, the final rule would increase total burden under
Regulation E for all other financial institutions by approximately
928,096 hours.
Because the records would be maintained by the institutions and the
notices are not provided to the Federal Reserve, no issue of
confidentiality arises under the Freedom of Information Act.
List of Subjects in 12 CFR Part 205
Consumer protection, Electronic fund transfers, Federal Reserve
System, Reporting and recordkeeping requirements.
0
For the reasons set forth in the preamble, the Board amends 12 CFR part
205 and the Official Staff Commentary, as follows:
PART 205--ELECTRONIC FUND TRANSFERS (REGULATION E)
0
1. The authority citation for part 205 continues to read as follows:
Authority: 15 U.S.C. 1693b.
0
2.-3. Section 205.3 is amended by revising paragraph (a), redesignating
paragraph (b) as paragraph (b)(1), revising paragraph (b)(1), and
adding new paragraphs (b)(2) and (b)(3) to read as follows:
Sec. 205.3 Coverage.
(a) General. This part applies to any electronic fund transfer that
authorizes a financial institution to debit or credit a consumer's
account. Generally, this part applies to financial institutions. For
purposes of Sec. Sec. 205.3(b)(2), 205.10(b), (d), and (e) and 205.13,
this part applies to any person.
(b) Electronic fund transfer--(1) Definition. The term electronic
fund transfer means any transfer of funds that is initiated through an
electronic terminal, telephone, computer, or magnetic tape for the
purpose of ordering, instructing, or authorizing a financial
institution to debit or credit a consumer's account. The term includes,
but is not limited to--
(i) Point-of-sale transfers;
(ii) Automated teller machine transfers;
(iii) Direct deposits or withdrawals of funds;
(iv) Transfers initiated by telephone; and
(v) Transfers resulting from debit card transactions, whether or
not initiated through an electronic terminal.
(2) Electronic fund transfer using information from a check. (i)
This part applies where a check, draft, or similar paper instrument is
used as a source of information to initiate a one-time electronic fund
transfer from a consumer's account. The consumer must authorize the
transfer.
(ii) The person that initiates an electronic fund transfer using
the consumer's check as a source of information for the transfer shall
provide a notice that the transaction will or may be processed as an
EFT, and obtain a consumer's authorization for each transfer. A
consumer authorizes a one-time electronic fund transfer (in providing a
check to a merchant or other payee for the MICR encoding, that is, the
routing number of the financial institution, the consumer's account
number and the serial number) when the consumer receives notice and
goes forward with the transaction. For point-of-sale transfers, the
notice must be posted in a prominent and conspicuous location, and a
copy of the notice must be provided to the consumer at the time of the
transaction.
(iii) The person that initiates an electronic fund transfer using
the consumer's check as a source of information for the transfer shall
also provide a notice to the consumer at the same time it provides the
notice required under paragraph (b)(2)(ii) that when a check is used to
initiate an electronic fund transfer, funds may be debited from the
consumer's account as soon as the same day payment is received, and, as
applicable, that the consumer's check will not be returned by the
financial institution holding the consumer's account. For point-of-sale
transfers, the person initiating the transfer may post the notice
required in this paragraph (b)(2)(iii) in a prominent and conspicuous
location and need not include this notice on the copy of the notice
given to the consumer under paragraph (b)(2)(ii). The requirements in
this paragraph (b)(2)(iii) shall remain in effect until December 31,
2009.
(iv) A person may provide notices that are substantially similar to
those set forth in Appendix A-6 to comply with the requirements of this
paragraph (b)(2).
(3) Collection of service fees via electronic fund transfer. A
consumer authorizes a one-time electronic fund transfer from the
consumer's account to pay a fee for the return of an electronic fund
transfer or a check unpaid due to insufficient or uncollected funds in
the consumer's account, when the consumer receives a notice stating
that the fee will be collected by an electronic fund transfer from the
consumer's account, along with a disclosure of the amount of the fee,
and the consumer goes forward with the transaction. If the service fee
for insufficient or uncollected funds may be collected in connection
with a point-of-sale transfer, the notice must be posted in a prominent
and conspicuous location, and a copy of the notice must be provided to
the consumer at the time of the transaction.
* * * * *
0
4. Section 205.7 is amended by adding a new paragraph (c) as follows:
Sec. 205.7 Initial disclosures.
* * * * *
(c) Addition of electronic fund transfer services. If an electronic
fund transfer service is added to a consumer's account and is subject
to terms and conditions different from those described in the initial
disclosures, disclosures for the new service are required.
0
5. Section 205.16 is amended by revising paragraph (c) as follows:
Sec. 205.16 Disclosures at automated teller machines.
* * * * *
(c) Notice requirement. To meet the requirements of paragraph (b)
of this section, an automated teller machine operator must comply with
the following:
(1) On the machine. Post in a prominent and conspicuous location on
or at the automated teller machine a notice that:
(i) A fee will be imposed for providing electronic fund transfer
services or for a balance inquiry; or
(ii) A fee may be imposed for providing electronic fund transfer
services or for a balance inquiry, but the notice in this paragraph
(c)(1)(ii) may be substituted for the notice in paragraph (c)(1)(i)
only if there are circumstances under which a fee will not be imposed
for such services; and
(2) Screen or paper notice. Provide the notice required by
paragraphs (b)(1) and (b)(2) of this section either by showing it on
the screen of the automated teller machine or by providing it on paper,
before the consumer is committed to paying a fee.
* * * * *
0
6. In Appendix A to Part 205,
[[Page 1660]]
0
a. In A-2 Model Clauses for Initial Disclosures (Sec. 205.7(b)),
paragraphs (a), (b) and (d) are revised;
0
b. In A-3 Model Forms for Error Resolution Notice (Sec. Sec.
205.7(b)(10) and 205.8(b)), paragraph (a) is republished, and paragraph
(b) is added;
0
c. Section A-6 Model Clauses for Authorizing One-Time Electronic Fund
Transfer Using Information From a Check (Sec. 205.3(b)(2)) is added.
Appendix A to Part 205--Model Disclosure Clauses and Forms
* * * * *
A-2 Model Clauses for Initial Disclosures (Sec. 205.7(b))
(a) Consumer Liability (Sec. 205.7(b)(1)).
(Tell us AT ONCE if you believe your [card] [code] has been lost or
stolen, or if you believe that an electronic fund transfer has been
made without your permission using information from your check.
Telephoning is the best way of keeping your possible losses down. You
could lose all the money in your account (plus your maximum overdraft
line of credit). If you tell us within 2 business days after you learn
of the loss or theft of your [card] [code], you can lose no more than
$50 if someone used your [card][code] without your permission.)
If you do NOT tell us within 2 business days after you learn of the
loss or theft of your [card] [code], and we can prove we could have
stopped someone from using your [card] [code] without your permission
if you had told us, you could lose as much as $500.
Also, if your statement shows transfers that you did not make,
including those made by card, code or other means, tell us at once. If
you do not tell us within 60 days after the statement was mailed to
you, you may not get back any money you lost after the 60 days if we
can prove that we could have stopped someone from taking the money if
you had told us in time. If a good reason (such as a long trip or a
hospital stay) kept you from telling us, we will extend the time
periods.
(b) Contact in event of unauthorized transfer (Sec. 205.7(b)(2)).
If you believe your [card] [code] has been lost or stolen, call:
[Telephone number] or write: [Name of person or office to be notified]
[Address]
You should also call the number or write to the address listed
above if you believe a transfer has been made using the information
from your check without your permission.
* * * * *
(d) Transfer types and limitations (Sec. 205.7(b)(4))--(1) Account
access. You may use your [card][code] to:
(i) Withdraw cash from your [checking] [or] [savings] account.
(ii) Make deposits to your [checking] [or] [savings] account.
(iii) Transfer funds between your checking and savings accounts
whenever you request.
(iv) Pay for purchases at places that have agreed to accept the
[card] [code].
(v) Pay bills directly [by telephone] from your [checking] [or]
[savings] account in the amounts and on the days you request.
Some of these services may not be available at all terminals.
(2) Electronic check conversion. You may authorize a merchant or
other payee to make a one-time electronic payment from your checking
account using information from your check to:
(i) Pay for purchases.
(ii) Pay bills.
(3) Limitations on frequency of transfers--(i) You may make only
[insert number, e.g., 3] cash withdrawals from our terminals each
[insert time period, e.g., week].
(ii) You can use your telephone bill-payment service to pay [insert
number] bills each [insert time period] [telephone call].
(iii) You can use our point-of-sale transfer service for [insert
number] transactions each [insert time period].
(iv) For security reasons, there are limits on the number of
transfers you can make using our [terminals] [telephone bill-payment
service] [point-of-sale transfer service].
(4) Limitations on dollar amounts of transfers--(i) You may
withdraw up to [insert dollar amount] from our terminals each [insert
time period] time you use the [card] [code].
(ii) You may buy up to [insert dollar amount] worth of goods or
services each [insert time period] time you use the [card] [code] in
our point-of-sale transfer service.
* * * * *
A-3 Model Forms for Error Resolution Notice (Sec. Sec. 205.7(b)(10)
and 205.8(b))
(a) Initial and annual error resolution notice (Sec. Sec.
205.7(b)(10) and 205.8(b)).
In Case of Errors or Questions About Your Electronic Transfers
Telephone us at [insert telephone number], or Write us at [insert
address] [or E-mail us at [insert electronic mail address]] as soon as
you can, if you think your statement or receipt is wrong or if you need
more information about a transfer listed on the statement or receipt.
We must hear from you no later than 60 days after we sent the FIRST
statement on which the problem or error appeared.
(1) Tell us your name and account number (if any).
(2) Describe the error or the transfer you are unsure about, and
explain as clearly as you can why you believe it is an error or why you
need more information.
(3) Tell us the dollar amount of the suspected error.
If you tell us orally, we may require that you send us your
complaint or question in writing within 10 business days.
We will determine whether an error occurred within 10 business days
after we hear from you and will correct any error promptly. If we need
more time, however, we may take up to 45 days to investigate your
complaint or question. If we decide to do this, we will credit your
account within 10 business days for the amount you think is in error,
so that you will have the use of the money during the time it takes us
to complete our investigation. If we ask you to put your complaint or
question in writing and we do not receive it within 10 business days,
we may not credit your account.
For errors involving new accounts, point-of-sale, or foreign-
initiated transactions, we may take up to 90 days to investigate your
complaint or question. For new accounts, we may take up to 20 business
days to credit your account for the amount you think is in error.
We will tell you the results within three business days after
completing our investigation. If we decide that there was no error, we
will send you a written explanation. You may ask for copies of the
documents that we used in our investigation.
(b) Error resolution notice on periodic statements (Sec.
205.8(b)).
In Case of Errors or Questions About Your Electronic Transfers
Telephone us at [insert telephone number] or Write us at [insert
address] as soon as you can, if you think your statement or receipt is
wrong or if you need more information about a transfer on the statement
or receipt. We must hear from you no later than 60 days after we sent
you the FIRST statement on which the error or problem appeared.
(1) Tell us your name and account number (if any).
(2) Describe the error or the transfer you are unsure about, and
explain as clearly as you can why you believe it is an error or why you
need more information.
(3) Tell us the dollar amount of the suspected error.
[[Page 1661]]
We will investigate your complaint and will correct any error
promptly. If we take more than 10 business days to do this, we will
credit your account for the amount you think is in error, so that you
will have the use of the money during the time it takes us to complete
our investigation.
* * * * *
A-6 Model Clauses for Authorizing One-Time Electronic Fund Transfers
Using Information From a Check (Sec. 205.3(b)(2))
(a)--Notice About Electronic Check Conversion
When you provide a check as payment, you authorize us either to use
information from your check to make a one-time electronic fund transfer
from your account or to process the payment as a check transaction.
[You authorize us to collect a fee of $-- through an electronic
fund transfer from your account if your payment is returned unpaid.]
(b)--Alternative Notice About Electronic Check Conversion (Optional)
When you provide a check as payment, you authorize us to use
information from your check to make a one-time electronic fund transfer
from your account. In certain circumstances, such as for technical or
processing reasons, we may process your payment as a check transaction.
[Specify other circumstances (at payee's option).]
[You authorize us to collect a fee of $-- through an electronic
fund transfer from your account if your payment is returned unpaid.]
(c)--Notice For Providing Additional Information About Electronic Check
Conversion
When we use information from your check to make an electronic fund
transfer, funds may be withdrawn from your account as soon as the same
day [you make] [we receive] your payment[, and you will not receive
your check back from your financial institution].
Supplement I to Part 205--Disclosures on Automated Teller Machines
0
7. In Supplement I to Part 205, the following amendments are made:
0
a. Under Section 205.2--Definitions, under 2(a) Access Device,
paragraph 2. is revised;
0
b. Under Section 205.30--Coverage, under 3(b) Electronic Fund Transfer,
a new heading ``Paragraph 3(b)(1)--Definition'' is added, paragraphs 1.
and 2. are redesignated as paragraphs 3(b)(1)1 and 3(b)(1)2, and
paragraph 3. is removed;
0
c. Under Section 205.3--Coverage, under 3(b) Electronic Fund Transfer,
under Paragraph 3(b)(1)--Definition, paragraph 2.iv. is added;
0
d. Under Section 205.3--Coverage, under 3(b) Electronic Fund Transfer,
a new heading ``Paragraph 3(b)(2)--Electronic Fund Transfer Using
Information From a Check'' is added, and paragraphs 1. through 5. are
added;
0
e. Under Section 205.3--Coverage, under 3(b) Electronic Fund Transfer,
a new heading ``Paragraph 3(b)(3)--Collection of Service Fees via
Electronic Fund Transfer'' is added, and paragraph 1. is added;
0
f. Under Section 205.3--Coverage, under 3(c) Exclusions from coverage,
under heading Paragraph 3(c)(1)--Checks, paragraphs 1. and 2. are
revised;
0
g. Under Section 205.5--Issuance of Access Devices, under 5(a)
Solicited Issuance, under Paragraph 5(a)(2), paragraph 1. is revised;
0
h. Under Section 205.5--Issuance of Access Devices, under 5(b)
Unsolicited Issuance, paragraph 5. is added;
0
i. Under Section 205.7--Initial Disclosures, under 7(a) Timing of
Disclosures, paragraph 1. is revised, paragraph 4. is removed, and
paragraphs 5. and 6. are redesignated as paragraphs 4. and 5.;
0
j. Under Section 205.7--Initial Disclosures, under 7(b) Content of
Disclosures, under Paragraph 7(b)(4)--Types of Transfers; Limitations,
paragraph 4. is added;
0
k. Under Section 205.7--Initial Disclosures, a new heading ``7(c)
Addition of Electronic Fund Transfer Services'' is added, and paragraph
1. is added;
0
l. Under Section 205.10--Preauthorized Transfers, under 10(b) Written
Authorization for Preauthorized Transfers from Consumer's Account,
paragraphs 3. and 7. are revised;
0
m. Under Section 205.10--Preauthorized Transfers, under 10(c)
Consumer's Right to Stop Payment, paragraph 2. is revised, and
paragraph 3. is added;
0
n. Under Section 205.10--Preauthorized Transfers, under 10(d) Notice of
Transfers Varying in Amount, under Paragraph 10(d)(2)--Range, paragraph
2. is added;
0
o. Under Section 205.11--Procedures for Resolving Errors, under 11(b)
Notice of Error from Consumer, under Paragraph 11(b)(1)--Timing;
Contents, paragraph 7. is added;
0
p. Under Section 205.11--Procedures for Resolving Errors, under 11(c)
Time Limits and Extent of Investigation, under Paragraph 11(c)(4)--
Investigation, paragraph 5. is added; and
0
q. Under Section 205.16--Disclosures at Automated Teller Machines,
under 16(b) General, under Paragraph 16(b)(1), paragraph 1. is revised.
The revisions and additions read as follows:
Supplement I to Part 205--Official Staff Interpretations
* * * * *
Section 205.2--Definitions
2(a) Access Device
* * * * *
2. Checks used to capture information. The term ``access device''
does not include a check or draft used to capture the MICR (Magnetic
Ink Character Recognition) encoding to initiate a one-time ACH debit.
For example, if a consumer authorizes a one-time ACH debit from the
consumer's account using a blank, partially completed, or fully
completed and signed check for the merchant to capture the routing,
account, and serial numbers to initiate the debit, the check is not an
access device. (Although the check is not an access device under
Regulation E, the transaction is nonetheless covered by the regulation.
See comment 3(b)(1)-1.v.)
* * * * *
Section 205.3--Coverage
* * * * *
3(b) Electronic Fund Transfer
Paragraph 3(b)(1)--Definition
* * * * *
2. Fund transfers not covered.
* * * * *
iv. Transactions arising from the electronic collection,
presentment, or return of checks through the check collection system,
such as through transmission of electronic check images.
Paragraph 3(b)(2)--Electronic Fund Transfer Using Information From a
Check
1. Notice at POS not furnished due to inadvertent error. If the
copy of the notice under section 205.3(b)(2)(ii) for ECK transactions
is not provided to the consumer at POS because of a bona fide
unintentional error, such as when a terminal printing mechanism jams,
no violation results if the payee maintains procedures reasonably
adapted to avoid such occurrences.
2. Authorization to process a transaction as an EFT or as a check.
In order to process a transaction as an EFT or alternatively as a
check, the payee must obtain the consumer's authorization to do so. A
payee may, at its option, specify the circumstances
[[Page 1662]]
under which a check may not be converted to an EFT. (See model clauses
in Appendix A-6.)
3. Notice for each transfer. Generally, a notice to authorize an
electronic check conversion transaction must be provided for each
transaction. For example, a consumer must receive a notice that the
transaction will be processed as an EFT for each transaction at POS or
each time a consumer mails a check in an accounts receivable (ARC)
transaction to pay a bill, such as a utility bill, if the payee intends
to convert a check received as payment. Similarly, the consumer must
receive notice if the payee intends to collect a service fee for
insufficient or uncollected funds via an EFT for each transaction
whether at POS or if the consumer mails a check to pay a bill. The
notice about when funds may be debited from a consumer's account and
the non-return of consumer checks by the consumer's financial
institution must also be provided for each transaction. However, if in
an ARC transaction, a payee provides a coupon book to a consumer, for
example, for mortgage loan payments, and the payment dates and amounts
are set out in the coupon book, the payee may provide a single notice
on the coupon book stating all of the required disclosures under
paragraph (b)(2) of this section in order to obtain authorization for
each conversion of a check and any debits via EFT to the consumer's
account to collect any service fees imposed by the payee for
insufficient or uncollected funds in the consumer's account. The notice
must be placed on a conspicuous location of the coupon book that a
consumer can retain--for example, on the first page, or inside the
front cover.
4. Multiple payments/multiple consumers. If a merchant or other
payee will use information from a consumer's check to initiate an EFT
from the consumer's account, notice to a consumer listed on the billing
account that a check provided as payment during a single billing cycle
or after receiving an invoice or statement will be processed as a one-
time EFT or as a check transaction constitutes notice for all checks
provided in payment for the billing cycle or the invoice for which
notice has been provided, whether the check(s) is submitted by the
consumer or someone else. The notice applies to all checks provided in
payment for the billing cycle or invoice until the provision of notice
on or with the next invoice or statement. Thus, if a merchant or other
payee receives a check as payment for the consumer listed on the
billing account after providing notice that the check will be processed
as a one-time EFT, the authorization from that consumer constitutes
authorization to convert any other checks provided for that invoice or
statement. Other notices required under this paragraph (b)(2) (for
example, to collect a service fee for insufficient or uncollected funds
via an EFT) provided to the consumer listed on the billing account also
constitutes notice to any other consumer who may provide a check for
the billing cycle or invoice.
5. Additional disclosures about ECK transactions at POS. When a
payee initiates an EFT at POS using information from the consumer's
check, and returns the check to the consumer at POS, the payee need not
provide a notice to the consumer that the check will not be returned by
the consumer's financial institution.
Paragraph 3(b)(3)--Collection of Service Fees via Electronic Fund
Transfer
1. Fees imposed by account-holding institution. The requirement to
obtain a consumer's authorization at POS to collect a fee via EFT for
the return of an EFT or check unpaid due to insufficient or uncollected
funds in the consumer's account does not apply to fees assessed against
the consumer's account by the consumer's account-holding institution
for the return of an EFT or a check unpaid or for paying overdrafts.
3(c) Exclusions From Coverage
Paragraph 3(c)(1)--Checks
1. Re-presented checks. The electronic re-presentment of a returned
check is not covered by Regulation E because the transaction originated
by check. Regulation E does apply, however, to any fee debited via an
EFT from a consumer's account by the payee because the check was
returned for insufficient or uncollected funds. The person debiting the
fee electronically must obtain the consumer's authorization.
2. Check used to capture information for a one-time EFT. See
comment 3(b)(1)-1.v.
* * * * *
Section 205.5--Issuance of Access Devices
* * * * *
5(a) Solicited Issuance
* * * * *
Paragraph 5(a)(2)
1. One-for-one rule. In issuing a renewal or substitute access
device, only one renewal or substitute device may replace a previously
issued device. For example, only one new card and PIN may replace a
card and PIN previously issued. A financial institution may provide
additional devices at the time it issues the renewal or substitute
access device, however, provided the institution complies with Sec.
205.5(b). (See comment 5(b)-5.) If the replacement device or the
additional device permits either fewer or additional types of
electronic fund transfer services, a change-in-terms notice or new
disclosures are required.
* * * * *
5(b) Unsolicited Issuance
* * * * *
5. Additional access devices in a renewal or substitution. A
financial institution may issue more than one access device in
connection with the renewal or substitution of a previously issued
accepted access device, provided that any additional access device
(beyond the device replacing the accepted access device) is not
validated at the time it is issued, and the institution complies with
the other requirements of Sec. 205.5(b). The institution may, if it
chooses, set up the validation procedure such that both the device
replacing the previously issued device and the additional device are
not validated at the time they are issued, and validation will apply to
both devices. If the institution sets up the validation procedure in
this way, the institution should provide a clear and readily
understandable disclosure to the consumer that both devices are
unvalidated and that validation will apply to both devices.
* * * * *
Section 205.7--Initial Disclosures
7(a) Timing of Disclosures
1. Early disclosures. Disclosures given by a financial institution
earlier than the regulation requires (for example, when the consumer
opens a checking account) need not be repeated when the consumer later
enters into an agreement with a third party to initiate preauthorized
transfers to or from the consumer's account, unless the terms and
conditions differ from those that the institution previously disclosed.
This interpretation also applies to any notice provided about one-time
EFTs from a consumer's account initiated using information from the
consumer's check. On the other hand, if an agreement for EFT services
to be provided by an account-holding institution is directly between
the consumer and the account-holding institution, disclosures must be
given in close proximity to the event requiring disclosure, for
example, when
[[Page 1663]]
the consumer contracts for a new service.
* * * * *
7(b) Content of Disclosures
* * * * *
Paragraph 7(b)(4)--Types of Transfers; Limitations
* * * * *
4. One-time EFTs initiated using information from a check.
Financial institutions must disclose the fact that one-time EFTs
initiated using information from a consumer's check are among the types
of transfers that a consumer can make. (See Appendix A-2.)
* * * * *
7(c) Addition of Electronic Fund Transfer Services
1. Addition of electronic check conversion services. One-time EFTs
initiated using information from a consumer's check are a new type of
transfer requiring new disclosures, as applicable. (See Appendix A-2.)
* * * * *
Section 205.10--Preauthorized Transfers
* * * * *
10(b) Written Authorization for Preauthorized Transfers From Consumer's
Account
* * * * *
3. Written authorization for preauthorized transfers. The
requirement that preauthorized EFTs be authorized by the consumer
``only by a writing'' cannot be met by a payee's signing a written
authorization on the consumer's behalf with only an oral authorization
from the consumer.
* * * * *
7. Bona fide error. Consumers sometimes authorize third-party
payees, by telephone or on-line, to submit recurring charges against a
credit card account. If the consumer indicates use of a credit card
account when in fact a debit card is being used, the payee does not
violate the requirement to obtain a written authorization if the
failure to obtain written authorization was not intentional and
resulted from a bona fide error, and if the payee maintains procedures
reasonably adapted to avoid any such error. Procedures reasonably
adapted to avoid error will depend upon the circumstances. Generally,
requesting the consumer to specify whether the card to be used for the
authorization is a debit (or check) card or a credit card is a
reasonable procedure. Where the consumer has indicated that the card is
a credit card (or that the card is not a debit or check card), the
payee may rely on the consumer's statement without seeking further
information about the type of card. If the payee believes, at the time
of the authorization, that a credit card is involved, and later finds
that the card used is a debit card (for example, because the consumer
later brings the matter to the payee's attention), the payee must
obtain a written and signed or (where appropriate) a similarly
authenticated authorization as soon as reasonably possible, or cease
debiting the consumer's account.
10(c) Consumer's Right to Stop Payment
* * * * *
2. Revocation of authorization. Once a financial institution has
been notified that the consumer's authorization is no longer valid, it
must block all future payments for the particular debit transmitted by
the designated payee-originator. (However, see comment 10(c)-3.) The
institution may not wait for the payee-originator to terminate the
automatic debits. The institution may confirm that the consumer has
informed the payee-originator of the revocation (for example, by
requiring a copy of the consumer's revocation as written confirmation
to be provided within 14 days of an oral notification). If the
institution does not receive the required written confirmation within
the 14-day period, it may honor subsequent debits to the account.
3. Alternative procedure for processing a stop-payment request. If
an institution does not have the capability to block a preauthorized
debit from being posted to the consumer's account--as in the case of a
preauthorized debit made through a debit card network or other system,
for example--the institution may instead comply with the stop-payment
requirements by using a third party to block the transfer(s), as long
as the consumer's account is not debited for the payment.
10(d) Notice of Transfers Varying in Amount
* * * * *
Paragraph 10(d)(2)--Range
* * * * *
2. Transfers to an account of the consumer held at another
institution. A financial institution need not provide a consumer the
option of receiving notice with each varying transfer, and may instead
provide notice only when a debit to an account of the consumer falls
outside a specified range or differs by more than a specified amount
from the most recent transfer, if the funds are transferred and
credited to an account of the consumer held at another financial
institution. The specified range or amount, however, must be one that
reasonably could be anticipated by the consumer, and the institution
must notify the consumer of the range or amount at the time the
consumer provides authorization for the preauthorized transfers. For
example, if the transfer is for payment of interest for a fixed-rate
certificate of deposit account, an appropriate range might be based on
a month containing 28 days and a month containing 31 days.
* * * * *
Section 205.11--Procedures for Resolving Errors
* * * * *
11(b) Notice of Error from Consumer
Paragraph 11(b)(1)--Timing; Contents
* * * * *
7. Effect of late notice. An institution is not required to comply
with the requirements of this section for any notice of error from the
consumer that is received by the institution later than 60 days from
the date on which the periodic statement first reflecting the error is
sent. Where the consumer's assertion of error involves an unauthorized
EFT, however, the institution must comply with Sec. 205.6 before it
may impose any liability on the consumer.
* * * * *
11(c) Time Limits and Extent of Investigation
* * * * *
Paragraph 11(c)(4)--Investigation
* * * * *
5. No EFT agreement. When there is no agreement between the
institution and the third party for the type of EFT involved, the
financial institution must review any relevant information within the
institution's own records for the particular account to resolve the
consumer's claim. The extent of the investigation required may vary
depending on the facts and circumstances. However, a financial
institution may not limit its investigation solely to the payment
instructions where additional information within its own records
pertaining to the particular account in question could help to resolve
a consumer's claim.
Information that may be reviewed as part of an investigation might
include:
i. The ACH transaction records for the transfer;
[[Page 1664]]
ii. The transaction history of the particular account for a
reasonable period of time immediately preceding the allegation of
error;
iii. Whether the check number of the transaction in question is
notably out-of-sequence;
iv. The location of either the transaction or the payee in question
relative to the consumer's place of residence and habitual transaction
area;
v. Information relative to the account in question within the
control of the institution's third-party service providers if the
financial institution reasonably believes that it may have records or
other information that could be dispositive; or
vi. Any other information appropriate to resolve the claim.
* * * * *
Section 205.16--Disclosures on Automated Teller Machines
16(b) General
Paragraph 16(b)(1)
1. Specific notices. An ATM operator that imposes a fee for a
specific type of transaction--such as for a cash withdrawal, but not
for a balance inquiry, or for some cash withdrawals, but not for others
(such as where the card was issued by a foreign bank or by a card
issuer that has entered into a special contractual relationship with
the ATM operator regarding surcharges)--may provide a notice on or at
the ATM that a fee will be imposed or a notice that a fee may be
imposed for providing EFT services or may specify the type of EFT for
which a fee is imposed. If, however, a fee will be imposed in all
instances, the notice must state that a fee will be imposed.
By order of the Board of Governors of the Federal Reserve
System, December 30, 2005.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 06-145 Filed 1-9-06; 8:45 am]
BILLING CODE 6210-01-P