In December 2020, the Federal Reserve held an Outlook Live Webinar, “Regulation E – Error Resolution Examiner Insights”, focusing not only on the procedures in §1005.11 for resolving errors but also the circumstances under which a consumer can have liability for an unauthorized transaction, found in §1005.6. To be in line with these error resolution requirements, you of course need to understand what triggers them. While we often think only of unauthorized transactions, that is just one of the potential types of electronic fund transfer (EFT) errors that can trigger the requirements found in §1005.11. Other triggers include:
- Incorrect EFTs
- EFTs omitted from a consumer’s statement;
- Computational/bookkeeping errors;
- A request for further information on an EFT;
- An EFT not correctly identified on a terminal receipt or periodic statement; or,
- Preauthorized transfers where proper notice wasn’t given.
It’s important to reiterate that while an institution may not have to comply with §1005.11 if notice of an error is received more than 60 days after delivering the statement where an error first appeared, an institution must still follow the §1005.6 limits for unauthorized transactions before imposing liability on the consumer. The §1005.6 limits can essentially be broken down into the following three tiers when an access device, such as a card, is involved. If a consumer:
- Notifies the financial institution within two business days after learning of the loss or theft of the access device, the consumer’s maximum liability is $50
- Fails to notify the financial institution within two business days of learning of the missing card and the institution establishes that these transfers would not have occurred had it been notified, the consumer’s liability increases to a total possible liability of $500
- Fails to report unauthorized EFTs that appear on a periodic statement within 60 days of the financial institution sending it, the consumer faces unlimited liability for all unauthorized transfers made after the 60-day period. However, the consumer’s liability for unauthorized transfers before the statement is sent and up to 60 days following is determined based on the first two tiers of liability, when an access device is involved.
For unauthorized EFT’s that don’t involve an access device, only the last tier (#3) applies. In that case, the consumer’s liability is based solely on when they notify you in relation to the statement. If the consumer notifies you within 60 days of the statement where the error first appeared, the consumer has no liability. This is what we often refer to as the “statement + 60” period.
Challenges and Requirements
As we know, Regulation E doesn’t do financial institutions any favors. It truly focuses on consumer protection. This means, of course, that financial institutions will usually lose. That mere fact may sometimes tempt institutions into finding creative ways to “win”, even when the options are few. As the Federal Reserve reiterated, under The Electronic Funds Transfer Act, the burden of proof is upon the financial institution to show that the electronic fund transaction was authorized…
When a consumer notifies you of a potential error (verbally or otherwise) you must conduct an investigation to determine whether an error has occurred. Under Regulation E, there are all kinds of specific time limits for completing an investigation and notifying the customer of the results. Generally, an alleged error must be investigated and resolved within 10 business days of a consumer reporting it to you. You can extend that time if you provide provisional credit within 10 business days. The provisional credit must include any lost interest; however, in the case of an unauthorized EFT, a maximum of $50 may be withheld, if an access device was involved and you were notified within two business days.
There are additional timing requirements for correcting any error and reporting the results to the consumer, including providing notice that any provisional credit has been made final. This final credit must include interest and any fees that were imposed as a result of the error, as applicable. Even if you determine there wasn’t an error or there was a different error than what was alleged by the consumer, specific timing requirements apply. You must then give the results of your investigation in writing within three business days, and you also must tell the consumer of their right to request the documents you relied on in your determination.
Another aspect of this process that institutions often struggle with is the requirement to notify the consumer that the provisional credit will be debited. An institution may either notify a consumer:
- Upon debiting the provisional credit, giving the date and amount of debiting and that checks, drafts, similar instruments and preauthorized transfers will be honored without overdraft fees for five business days after notification; or,
- That the provisional credit will be debited five business days after notification, also providing the date of debiting. While this second method may be easier, it also gives a consumer the chance to withdraw and walk away with the funds.
The webinar also provided a reminder that the error resolution requirements were expanded to more prepaid accounts with the Prepaid Card Rule, effective April 1, 2019.
Violations and Complaints
When a regulatory agency has a topic to discuss and enough information to host a webinar, it’s likely that they are seeing a need to address noted issues. Here are some of the issues mentioned during the webinar that are leading to complaints and violations:
Failure to Initiate Investigation
The failure to start an investigation has been “repeatedly identified” by examiners. Your practices cannot discourage consumers from notifying you of an error. You must begin an investigation promptly, even after an oral notice.
You cannot require anything additional, such as a written dispute, notarized documents, affidavits, police reports, in-person visits, or require the consumer to contact the merchant.
While there were no instances noted of directly charging consumers for error resolution, it was noted that some charges may indirectly violate this prohibition, such as charges for general customer contact. For example, if there is a charge for telephone contact, as is sometimes found on certain prepaid card programs, that charge should not apply if a customer is calling to report an error.
The biggest issues noted were not providing the provisional credit in a timely manner or not including interest, as applicable.
Denying Claims Without Adequate Investigation
Claims cannot be denied for failing to provide additional information (beyond what is allowed under Regulation E). You also need to take care to review all relevant information you have. The example provided was from the USAA consent order. In that case, the bank would deny a claim because a customer previously authorized transactions with the same merchant.
Issues When Denying Claims
One area that seems to continually see violations is related to providing notice. Specifically, instances where the notice:
• Is not timely;
• Is not in writing;
• Does not state that the customer has a right to request the documents relied on (You must also be prepared to actually provide the consumer copies of the documents that you used in your investigation, in an understandable form); and/or,
• Does not include required language for reversing provisional credit (i.e. that you will honor checks, drafts, and similar instruments as well as preauthorized transfers for five business days, as applicable). Also, make sure that any provisional credit is not debited sooner than disclosed!
Issuing When Honoring Claims
There have also been issues with both the timing of notices and crediting when a claim is honored. Another shortcoming with crediting is not including interest or refunding fees.
Note: Issues with the timing of notices have been seen regardless of whether a claim is honored or denied. You need to make sure to have some type of log or other documentation to spell out when certain milestones during the error resolution process are reached, including when the investigation is complete.
The Federal Reserve did note that once you consider an investigation complete, the investigation cannot be “reopened”. You cannot reverse finalized credit, even if the merchant gives the consumer credit as well. The one alternative they gave was that you could ask the customer to return the funds. We’ve always been of the opinion that the consumer should not “profit” from the transaction and aren’t sure we necessarily agree with this statement but regardless, especially if you’re a Federal Reserve Bank, it’s important to know that they feel the regulation prohibits the ability to automatically reclaim funds once you’ve communicated the investigation is complete and given the corresponding final credit.
Not only is Regulation E tough because of how it’s aimed at protecting the consumer, it’s also a regulation that continues to evolve. There are so many detailed requirements that it’s almost impossible to keep it all straight. It can also involve any and all your employees, because any one of them could be the first to receive notice of a potential error. Of course, this is also an area that can easily lead to complaints. Effective controls, including training, are an absolute must to get your error resolution process right. If you’re looking for training, we have a webinar available NOW, On-Demand, “Regulation E: Errors and Disputes”. Stay tuned to our store for registration information. Regulation E is one of those areas where you’re likely to pick up on something new each time you get to attend training!
David’s banking career began as a field examiner for the FDIC in 1990. He later became a Compliance Officer and Loan Officer for a small bank. In 1993, he established Banker’s Compliance Consulting. Along with his amazingly talented Team, he has written numerous compliance articles for prestigious banking publications and has developed compliance seminars that Banker’s Compliance Consulting produces.
He is an expert in compliance regulations. He is also a motivational speaker and innovative educator. His quick wit and sense of humor transform the usually tiring topic of compliance into an enjoyable educational experience. David is on the faculty of the American Bankers Association National Compliance Schools and has served on the faculty of the Center for Financial Training for many years. He also is a frequent speaker at the ABA’s Regulatory Compliance Conference. He is also a trainer for hundreds of webinars, is a Certified Regulatory Compliance Manager (CRCM), and has been a BankersOnline Guru for many years. The American Bankers Association honored David with their Distinguished Service Award in 2016.
David and his wife Karen have 3 adult children and 2 grandsons (none of whom live at home!) and 3 cats (of which Dave is allergic … the cats, not the children!). They live on a lake in Nebraska and when possible he can be found fishing or making sawdust in his shop. David plays the guitar & piano and enjoys singing with Karen. They occasionally lead worship at their church.