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January 10, 2006

Part III

Federal Reserve
12 CFR Part 205
Electronic Fund Transfers; Final Rule
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1638 Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations

FEDERAL RESERVE SYSTEM conditions of an EFT service; amount to be debited from the
documentation of EFTs by means of consumer’s asset account.
12 CFR Part 205 terminal receipts and periodic account Under the staff commentary,
[Regulation E; Docket Nos. R–1210 and R– activity statements; limitations on electronic check conversion transactions
1234] consumer liability for unauthorized are covered by the EFTA and Regulation
transfers; procedures for error E if the consumer authorizes the
Electronic Fund Transfers resolution; and certain rights related to transaction as an EFT. Under existing
preauthorized EFTs. Further, the Act commentary provisions, a consumer
AGENCY: Board of Governors of the and regulation also prescribe authorizes an EFT if the consumer
Federal Reserve System. restrictions on the unsolicited issuance receives notice that the transaction will
ACTION: Final rule; official staff of ATM cards and other access devices. be processed as an EFT and the
interpretation. The official staff commentary (12 CFR consumer completes the transaction.
part 205 (Supp. I)) is designed to See comment 3(b)–3. This standard
SUMMARY: The Board is amending applies whether the check conversion
Regulation E, which implements the facilitate compliance and provide
protection from liability under Sections occurs at a point-of-sale (where a person
Electronic Fund Transfer Act, and the goes to a merchant’s physical location to
official staff commentary to the 915 and 916 of the EFTA for financial
institutions and persons subject to the obtain goods or services) or in an
regulation codified in Supplement I to accounts receivable conversion (ARC)
Part 205. The commentary interprets the Act. 15 U.S.C. 1693m(d)(1). The
commentary is updated periodically to transaction where the consumer mails a
requirements of Regulation E to fully completed and signed check to the
facilitate compliance primarily by address significant questions that arise.
payee that is converted to an EFT.
financial institutions that offer II. Background and Overview of Although merchants and other payees
electronic fund transfer services to Comments Received are in the best position to provide notice
consumers. to a consumer for the purpose of
The revisions address the regulation’s On September 17, 2004, the Board
published a notice of proposed obtaining the consumer’s authorization
coverage of electronic check conversion for an ECK transaction, they are not
services. Under the final rule, merchants rulemaking in the Federal Register (69
FR 55996) (September 2004 proposal) to currently covered by the commentary
and other payees that initiate electronic provision in Regulation E addressing
check conversion transactions must provide guidance regarding the rights,
ECK transactions.
obtain a consumer’s authorization for liabilities, and responsibilities of parties
Over the past few years, several issues
each transaction. In addition, engaged in electronic check conversion
have arisen relating to ECK transactions
commentary revisions address (ECK) transactions and to provide rules in general, and ARC transactions in
preauthorized transfers, error resolution, governing the coverage under particular. Concerns have been raised
and other matters. Regulation E of payroll card accounts. In about the uniformity and adequacy of
addition, proposed commentary some of the notices provided to
DATES: The final rule is effective
revisions provided guidance on consumers about ECK transactions.
February 9, 2006. The mandatory preauthorized electronic transfers from
compliance date is January 1, 2007. Some in the industry would like the
a consumer’s account, error resolution flexibility to obtain a consumer’s
FOR FURTHER INFORMATION CONTACT: Ky procedures, ATM disclosures, and other
Tran-Trong, Senior Attorney, or Daniel authorization to process a transaction
matters. either as an EFT or as a check. Board
G. Lonergan, David A. Stein or John C. The Board received nearly 120 staff also has received inquiries from
Wood, Counsels, Division of Consumer comment letters on the September 2004 financial institutions and other industry
and Community Affairs, Board of proposal. Comments were received from participants concerning their obligations
Governors of the Federal Reserve a variety of industry commenters, under Regulation E in connection with
System, Washington, DC 20551, at (202) including banks, thrifts, credit unions, ECK services.
452–2412 or (202) 452–3667. For users payment card companies, payment The Board proposed to revise the
of Telecommunications Device for the processing companies, and industry regulation to require merchants and
Deaf (TDD) only, contact (202) 263– trade associations. Comments were also other payees that use information from
4869. received from consumer groups, the a check to initiate a one-time EFT from
SUPPLEMENTARY INFORMATION: Department of the Treasury, the Federal a consumer’s account to provide notice
Trade Commission and individual to the consumer and obtain the
I. Statutory Background consumers. The following is a summary consumer’s authorization for each EFT.
The Electronic Fund Transfer Act of significant proposed revisions to the The Board specifically solicited
(EFTA or Act) (15 U.S.C. 1693 et seq.), regulation and the staff commentary, comment on whether payees should be
enacted in 1978, provides a basic and the comments received. required to obtain a consumer’s written,
framework establishing the rights, signed authorization when the
Electronic Check Conversion
liabilities, and responsibilities of transaction occurs at POS. To help
participants in electronic fund transfer The EFTA expressly provides that consumers understand the nature of an
(EFT) systems. The EFTA is transactions originated by check, draft, ECK transaction, the Board also
implemented by the Board’s Regulation or similar paper instrument are not proposed to require payees in ECK
E (12 CFR part 205). Examples of types governed by the Act. In an ECK transactions to disclose to consumers
of transfers covered by the Act and transaction, a consumer provides a that when a check is converted, funds
regulation include transfers initiated check to a payee and information from may be withdrawn from their accounts
through an automated teller machine the check is used to initiate a one-time quickly, and that the check will not be
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(ATM), point-of-sale (POS) terminal, EFT from the consumer’s account. returned by the consumer’s financial
automated clearinghouse (ACH), Specifically, the payee electronically institution.
telephone bill-payment plan, or remote scans and captures the MICR-encoding Industry commenters supported many
banking service. The Act and regulation on the check for the routing, account, of the proposed revisions addressing
require disclosure of terms and and serial numbers, and enters the ECK transactions, including coverage

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Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations 1639

under Regulation E of merchants and Preauthorized Transfers stating that it would provide institutions
other payees for the limited purpose of Section 205.10(b) requires that with flexibility to provide more accurate
providing notice to obtain consumer recurring electronic debits from a disclosures and reduce consumer
authorization for ECK transactions. consumer’s account be authorized ‘‘only confusion. Consumer groups and one
Some industry commenters, however, by a writing signed or similarly consumer rights advocate, however,
raised concerns about requiring the authenticated by the consumer.’’ asserted that the revised proposal would
authorization to be written and signed Existing commentary provides that a not ensure that consumers who are
for POS transactions. They also raised tape recording of a telephone charged a fee will receive adequate
concerns about providing consumers conversation with a consumer who notice on ATM signage.
with disclosures explaining that funds agrees to preauthorized debits does not Payroll Cards
may be withdrawn from the account constitute written authorization under
quickly and that checks will not be The September 2004 proposal also
§ 205.10(b). The Board proposed to included rules governing the coverage
returned to the consumer. Commenters withdraw the existing commentary to
asserted, for example, that a written, under Regulation E of payroll card
address industry concerns that the accounts that are established either
signed authorization requirement could guidance may conflict with the
stifle industry innovation, and that the directly or indirectly by an employer on
Electronic Signatures in Global and behalf of a consumer for the purpose of
additional information about ECK National Commerce Act (E-Sign Act), 15
transactions would result in overly providing salary, wages, or other
U.S.C. 7001 et seq. Many industry employee compensation on a recurring
lengthy disclosures. commenters, in particular those
Consumer groups also supported basis. An interim final rule is being
representing retailers, supported the published separately in this Federal
many of the proposed revisions proposed withdrawal, with some of
addressing ECK transactions, including Register to address payroll card
these commenters asking the Board to accounts.
merchant coverage and the additional explicitly state that a recorded
disclosure requirements. Consumer conversation complies with the E-Sign III. Overview of the Final Rule
groups stated, however, that the Board Act. Other commenters, however, The Board is adopting final revisions
should require a consumer’s written, opposed the withdrawal of the guidance to Regulation E and the staff
signed authorization for other debits due to concern about potential abuses commentary largely as proposed.
that may occur in connection with the and the possible increase in However, several clarifications and
underlying ECK transaction, such as for unauthorized transfers that could result. modifications to the proposal have been
debits to collect service fees when Consumer groups did not comment on made to respond to commenters’
consumers have insufficient funds in the proposed withdrawal. concerns. The following is a summary of
their account to cover the underlying significant revisions to the regulation
transaction, since consumers are ATM Disclosures
and the staff commentary. All of the
unlikely to expect the additional debits Section 205.16 provides that an ATM revisions are discussed in detail below
to their accounts. operator that imposes a fee in the section-by-section analysis. The
Error Resolution (‘‘surcharge’’) on a consumer for rule is effective February 9, 2006. The
initiating an EFT or balance inquiry mandatory compliance date for the final
Section 205.11(c)(4) provides that a must post a sign at ATMs that a fee will rule is January 1, 2007.
financial institution may satisfy its be imposed for providing EFT services
obligation to investigate an alleged error or for balance inquiries. The September Electronic Check Conversion
by reviewing its own records if the 2004 proposal included proposed Merchant coverage. The final rule
alleged error concerns a transfer to or commentary revisions to provide ATM provides that merchants and other
from a third party and there is no operators flexibility when disclosing payees that use information from a
agreement between the institution and these surcharges. In particular, the check to initiate a one-time EFT from a
the third party for the type of EFT proposal clarified that ATM operators consumer’s account are subject to the
involved. This rule is commonly could disclose on ATM signage that a regulation solely for the limited purpose
referred to as the ‘‘four walls’’ rule. The surcharge ‘‘may’’ be imposed if there are of obtaining a consumer’s authorization
Board proposed to revise the staff circumstances where the operator for the one-time transfer. Generally,
commentary to clarify that an institution would not impose such a fee for use of authorization is obtained when the
would not satisfy its error resolution its ATM. (Before a surcharge may be payee provides a notice to the consumer
obligations solely by reviewing the imposed by an ATM operator, the that a check received as payment will be
payment instructions if, for example, operator must provide a separate on- converted to an EFT, and the consumer
there is additional information within screen notice or a receipt informing the goes forward with the transaction. At
the institution’s own records that would consumer that a fee will be charged and POS, the notice must be posted in a
assist in resolving the alleged error. the amount of the fee, and the consumer prominent and conspicuous location,
Many industry commenters opposed must elect to continue the transaction.) and a copy of the notice must be
the Board’s proposed commentary In August 2005, the Board withdrew the provided to the consumer at the time of
revisions, expressing concern about the proposed commentary revisions and the transaction, such as on a receipt. For
potential scope of information that issued a new proposal to incorporate ARC transactions, the notice will
might need to be reviewed under the this clarification into both the regulation typically be provided on a billing
proposed revisions to the four walls and the commentary. See 70 FR 49891 statement or invoice. Model clauses are
standard. Consumer groups favored the (Aug. 25, 2005) (August 2005 proposal). provided to try to minimize the risk that
proposed comment, and urged the The Board received approximately 25 merchants and other payees will be
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Board to revise the comment to state comments on the August 2005 proposal subject to private actions.
that an institution’s review should from a variety of industry commenters, Alternative authorization. As
consider records that could be helpful to including banks, credit unions and trade proposed, the final rule recognizes that
resolving the consumer’s claim, not just associations. Industry commenters payees may obtain a consumer’s
those records that were dispositive. strongly supported the revised proposal authorization to use information from

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1640 Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations

the consumer’s check to initiate an EFT, alternatively provide notice on ATM and deemed not to originate by check.
or, alternatively, to process the signage that a surcharge may be Substantially similar guidance
transaction as a check. imposed (in place of a disclosure that a previously had been provided in the
Additional disclosures about ECK surcharge will be imposed) if there are commentary to Regulation E. The few
transactions. To help consumers circumstances in which an ATM fee commenters addressing the issue agreed
understand the nature of ECK may not be charged. that the guidance regarding the status of
transactions, the final rule provides that ECK transactions under Regulation E is
persons initiating an ECK transaction, Effective Date of Rule more appropriately placed in the
whether at POS or in an ARC The effective date of the final rule is regulation. Accordingly, the proposal
transaction, must disclose to the February 9, 2006. While institutions has been adopted in § 205.3(b)(2)(i) with
consumer that when a check provided may, if they choose, begin complying minor revisions. Section 205.3(b)(2)(i)
as payment is used to initiate an EFT, with the new requirements on February further provides that a consumer must
funds may be withdrawn from the 9, 2006, compliance with this final rule authorize an ECK transaction (discussed
consumer’s account as soon as the same is not mandatory until January 1, 2007. below).
day payment is made (for POS The additional time should give persons One industry commenter expressed
transactions) or received (for ARC affected by this final rule adequate time concern that the proposed regulatory
transactions). Payees must also disclose, to implement the new requirements, language was too broad in stating that a
as applicable, that the consumer’s check including developing the new required transaction is covered by Regulation E
will not be returned by the consumer’s notices for ECK transactions. where a check is ‘‘used as a source of
financial institution. Under the final information to initiate a one-time EFT.’’
IV. Section-by-Section Analysis According to the commenter, some may
rule, for POS transactions, payees may
provide these additional disclosures on Section 205.3 Coverage interpret the language to include
a sign. The requirement to provide these transactions arising from electronic
3(a) General check presentment or image exchange.
disclosures sunsets three years from the
mandatory compliance date of this final Section 205.3(a) is revised to provide The Board agrees; § 205.3(b)(2)(i) is
rule. that § 205.3(b)(2), discussed below, intended to apply only when a payee
applies to any person. uses a check as a source of information
Collection of Service Fees Via EFT to initiate an EFT from the consumer’s
3(b) Electronic Fund Transfer
The final rule, as proposed, provides account. New comment 3(b)(1)–2.iv
that payees that choose to collect a The term ‘‘electronic fund transfer’’ is clarifies that transactions arising from
service fee via an EFT due to defined in § 205.3(b)(1) as ‘‘any transfer the electronic collection, presentment,
insufficient or uncollected funds in a of funds that is initiated through an or return of checks through the check
consumer’s account in connection with electronic terminal, telephone, collection system, such as through the
the underlying transaction must obtain computer, or magnetic tape for the transmission of electronic check images,
the consumer’s authorization to collect purpose of ordering, instructing, or are not EFTs covered by Regulation E.
the fee. Authorization is obtained when authorizing a financial institution to A few commenters asked the Board to
a payee provides notice to the consumer debit or credit an account.’’ The term clarify that the rules applying to ECK
stating that the fee will be collected via includes POS transfers, ATM transfers, transactions were not intended to apply
an EFT and the consumer goes forward direct deposits or withdrawals of funds, to Internet- or telephone-initiated
with the transaction. Payees also are telephone transfers and debit card transactions (where a consumer
required to disclose the amount of the transactions. The final rule includes provides information—including the
fee on the notice. language in the existing regulation that MICR-encoding—from his or her check
was inadvertently omitted in the to pay for a purchase via these payment
Error Resolution September 2004 proposal. Comments channels). While Internet- and
The final rule provides that a 3(b)–1 and 3(b)–2 are redesignated as telephone-initiated transactions are
financial institution does not satisfy its comments 3(b)(1)–1 and 3(b)(1)–2, and covered by Regulation E because they
error resolution responsibilities under conforming changes are made to result in electronic transfers from the
the ‘‘four walls’’ rule by solely comments 2(a)–2 and 3(c)(1)–2. consumer’s account, the rules for ECK
reviewing the payment instructions; an transactions do not apply to these
Electronic Check Conversion
institution must review any additional transactions.
information within the institution’s own The EFTA excludes from the Coverage of merchants and other
records pertaining to the particular definition of ‘‘electronic fund transfer’’ payees. Currently, a merchant or other
account in question that would assist in any transaction ‘‘originated by check, payee that engages in ECK transactions
resolving the alleged error. draft, or similar paper instrument.’’ 15 is not covered by Regulation E because
U.S.C. 1693a; see also § 205.3(c)(1). In it does not meet the definition of
Preauthorized Transactions ECK transactions, a consumer provides ‘‘financial institution.’’ Under § 205.2(i)
The final rule, as proposed, a check to a merchant or other payee to the term ‘‘financial institution’’ means a
withdraws the existing commentary use as a source of information to initiate ‘‘bank, savings association, credit union,
stating that a tape recording of a an EFT from the consumer’s account as or any other person that directly or
telephone conversation with a consumer payment for the purchase of goods or indirectly holds an account belonging to
who agrees to preauthorized debits does services, and not to initiate a payment a consumer, or that issues an access
not constitute written authorization by check. The payee electronically device and agrees with a consumer to
under the regulation. captures the routing, account, and serial provide electronic fund transfer
numbers from the check and initiates a services.’’ The Board has previously
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Disclosures at Automated Teller one-time EFT from the consumer’s acknowledged that a merchant or other
Machines account. The Board proposed to amend payee is in the best position to provide
The final rule, as proposed in the § 205.3(b)(2) of Regulation E and notice to a consumer for the purpose of
August 2005 proposal, revises the comment 3(b)(2)–1 to clarify that ECK obtaining authorization of an ECK
regulation to permit ATM operators to transactions are covered by Regulation E transaction. See 66 FR 15187, 15189–90

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(March 16, 2001). The Board has not regulated by federal banking agencies. A whether this should be required. The
covered merchants and other payees few commenters believed the final rule does not require a merchant or
previously under the regulation because requirement is an unnecessary other payee to obtain the consumer’s
it expected that these persons would duplication of payment system rules. signed authorization for an ECK
provide consumers with the necessary The Board believes coverage of transaction.
notice. In response to concerns about merchants and other payees in Some commenters supported a signed
the uniformity and adequacy of some of § 205.3(b)(2)(ii) for the limited purpose authorization requirement for POS
the notices provided to consumers about of providing a notice to obtain consumer transactions. Several of these
ECK transactions, the Board proposed to authorization for ECK transactions is commenters stated the requirement
exercise its authority under Sections appropriate to ensure consumers would be beneficial for enforcement
904(c) and 904(d)(1) of the EFTA to understand that checks will be purposes to ensure that consumer
require merchants and other payees that processed as EFTs. Without such a authorization is, in fact, obtained by a
initiate a one-time EFT using notice requirement, different payee. A few commenters stated that the
information from the consumer’s check, information may be given by merchants Regulation E rule should be consistent
draft or similar paper instrument, to to consumers, or information may be with the rules established by NACHA—
provide notice to obtain a consumer’s given solely by signage or other forms the Electronic Payments Association
authorization for the transfer. The final that may not be easily discernable by (NACHA rule(s))—which requires a
rule is adopted, as proposed. Coverage consumers. In addition, coverage of consumer’s written, signed
of merchants and other payees under merchants and other payees for the authorization. One such commenter
the final rule is solely for the limited limited purpose of obtaining consumer stated making the rules consistent
purpose of obtaining consumer authorization for ECK transactions will would address consumer confusion
authorizations for ECK transactions. A provide a mechanism to ensure that issues. Another commenter stated that
financial institution will be subject to consumers, in fact, receive appropriate the current difference between the
the requirement to obtain consumer notice of check conversion. For those NACHA rule and Regulation E creates
authorization for the transaction to the entities subject to FTC enforcement, the the potential for monetary penalties
extent that the institution initiates an FTC would have enforcement authority imposed by NACHA if the payee follows
EFT using information from a pursuant to Section 917(c) of the EFTA the Regulation E notice rule and does
consumer’s check (e.g., if the institution and under the Federal Trade not also comply with NACHA’s signed
converts checks provided as a payment Commission Act. Merchant coverage authorization rule. A few commenters
for a mortgage loan). would also enable the Board to provide noted that there would be no additional
Most commenters supported the model clauses that will aid consumer regulatory burden associated with a
proposed revision in § 205.3(b)(2)(ii) understanding of ECK transactions. The signed authorization requirement since
because they believe the merchant is in model clauses provide a safe harbor it is already required by NACHA. Some
the best position to provide the notice. from liability, thereby reducing liability commenters expressed the view that a
According to one commenter, the risks. See § 205.3(b)(2)(iv). signed authorization requirement calls a
consumer’s financial institution has no General authorization requirements. consumer’s attention to, and reinforces
control over a consumer receiving As previously noted, revised an awareness of, check conversion.
proper notice for purposes of § 205.3(b)(2)(i) provides that a consumer The majority of commenters opposed
authorization. A few commenters noted must authorize an ECK transaction. The a signed authorization requirement for
the importance of covering merchants current commentary states that a POS transactions under Regulation E.
and other payees for enforcement consumer authorizes an ECK transaction Specifically, some of these commenters
purposes. Several commenters also when the consumer receives notice that stated that the NACHA rule is sufficient,
noted that requiring merchants and the transaction will be processed as an and that a payments system rules-driven
other payees to adhere to minimum EFT and completes the transaction. See approach is preferable to regulation.
authorization and related notice comment 3(b)–3. This guidance, Several commenters expressed concern
provisions will better inform consumers originally proposed to be placed in that such a requirement would
on a consistent basis about ECK comment 3(b)(2)–1, is moved to unnecessarily delay transactions at POS.
transactions. Moreover, according to § 205.3(b)(2)(ii) of the final rule. The According to one commenter, a signed
these commenters, the authorization phrase ‘‘completes the transaction’’ is authorization requirement could impede
requirement would not pose new or replaced with ‘‘goes forward with the the general movement toward
significant compliance burdens since transaction’’ to clarify that it is not facilitating paperless payments. A few
payment system rules currently impose necessary for a transaction to clear or commenters stated the requirement may
an authorization requirement on settle in order for authorization to occur. limit the industry’s flexibility to deal
merchants and other payees. While In addition, under the final rule, for with changing market circumstances.
supporting the proposed requirement, a POS transactions, a notice must be Some commenters expressed concern
few commenters requested clarification posted in a prominent and conspicuous that a signed authorization requirement
that merchants and other payees would location, and a copy of the notice must may stifle the creation and development
be covered solely for the limited be provided to the consumer at the time of payment system innovations.
purpose of the authorization of the transaction, such as on a receipt. The final rule sets forth the
requirement for ECK transactions. In the proposal, the Board stated that authorization requirements for ECK
Some industry commenters opposed at POS, a written, signed authorization transactions under § 205.3(b)(2)(ii).
the proposed requirement. A few may be a more effective means than Generally, a consumer authorizes a one-
commenters believed merchants and posted signage for informing consumers time EFT (in providing a check to a
other payees should not be required to that their checks are being converted. merchant or other payee for the MICR
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assume the liability risks that may be The Board did not propose to require encoding) when the consumer receives
associated with ECK transactions. A few merchants or other payees to obtain the a notice that the transaction will be
commenters requested clarification of consumer’s signed authorization to processed as an EFT and goes forward
the FTC’s enforcement authority for convert checks received at POS, but with the transaction. This guidance was
merchants and other payees not specifically solicited comment on originally in proposed comment 3(b)(2)–

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1642 Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations

1. (Existing comment 3(b)–3 is deleted.) consumer if the payee is unable to comment, however, on whether this
The phrase ‘‘completes the transaction’’ provide notice because of a bona fide alternative authorization approach may
is replaced with ‘‘goes forward with the unintentional error, so long as the payee result in any consumer harm or create
transaction’’ to clarify that it is not maintains procedures reasonably any other risks. In particular, comment
necessary for the transaction to clear or adapted to avoid such occurrences. was solicited on whether payees that
settle, for example, in order for Thus, for example, a payee will not be obtain alternative authorization should
authorization to occur. Section deemed to have violated the regulation be required to specify the circumstances
205.3(b)(2)(ii) also addresses the if it cannot provide a paper notice if its under which a check that can be used
possibility that a payee might elect to terminal printing mechanism jams, to initiate an EFT will be processed as
obtain a consumer’s authorization either provided that the payee maintains a check. Second, the Board proposed an
to convert a check provided as payment procedures reasonably adapted to avoid optional authorization clause for use by
to an EFT or to process the check as a such occurrences. payees that intend to convert all checks
check transaction. See also comment Authorization language. Proposed to ECK transactions. See proposed
3(b)(2)–2 (further discussed below). comment 3(b)(2)–2 provided that a Model Clause A–6(b). Third, the Board
For ARC transactions, a payee (such payee must obtain the consumer’s proposed an optional authorization
as a utility company) obtains a authorization to use information from clause for use by payees that choose to
consumer’s authorization when it his or her check to initiate an EFT or, disclose the specific circumstances
provides notice of its intent to convert alternatively, to process a check. The when checks will not be converted to
checks received as payment—for comment is adopted, largely as ECK transactions. See proposed Model
example, on a monthly billing statement proposed. Model notices are provided in Clause A–6(c).
or invoice—and the consumer provides Appendix A–6 to assist merchants and Most industry commenters supported
or mails a check as payment. other payees in complying with the the alternative authorization approach
For transactions at POS, the final rule requirements. See § 205.3(b)(2)(iv). as illustrated in proposed Model Clause
requires payees to post the notice in a Regulation E coverage of ECK A–6(a), stating that the approach
clear and prominent location. The transactions continues to be predicated provides needed flexibility. The
requirement for posted signage is on the consumer’s authorization to majority of these commenters did not
necessary to alert consumers that a allow the merchant or other payee to believe any consumer harm would
check provided as payment will be use a check as a source of information result from the lack of specification of
converted to an EFT before the to initiate an ECK transaction. circumstances under which check
consumer selects a payment method. Due to processing or technical errors, conversion would or would not occur.
The Board believes that providing this a transaction authorized as an ECK One commenter did not believe
notice on a sign enables the consumer transaction ultimately may not be consumers would be confused about
to authorize the ECK transaction after processed as an EFT. Furthermore, in their rights since many account-holding
being given prior notice. The final rule some cases, a payee may decide to financial institutions list EFT and check
also requires merchants and other process the original check or create a transactions separately on periodic
payees at POS to provide consumers demand draft, or the payee may choose statements given to consumers. A few
with a copy of the notice in a form the to create a substitute check in commenters stated that consumers will
consumer can keep at the time of the accordance with the Check Clearing for have sufficient protections regardless of
transaction. For example, merchants the 21st Century Act (Check 21).1 how the transactions are processed.
and other payees could provide the Currently, if a payee obtained a Some industry commenters supported
notice on the receipt given to the consumer’s authorization solely to alternative authorization, but stated that
consumer. The written receipt allows initiate an EFT using information from the Board should also require payees to
consumers to refer to the notice later, if the consumer’s check, the payee may disclose the circumstances under which
necessary. have difficulty processing the same conversion will not occur. One such
The final rule does not require document as a check because such an commenter believed the disclosure of
merchants or other payees at POS to action would arguably fall outside the the specific circumstances would
obtain a consumer’s signed consumer’s payment instructions. Thus, eliminate any risk of consumer harm.
authorization for ECK transactions. The without the consumer’s authorization to One federal enforcement agency
Board believes that a signed alternatively process the transaction as observed generally that consumers may
authorization requirement would a check, the payee may not be able to not understand the differences between
provide minimal additional benefit obtain payment. In other cases, a checks and ECK transactions or the
given that consumers will be given merchant or payee operating in multiple protections that apply to each, but did
notice that their checks will be states may choose to pilot ECK in some not otherwise express a view on the
converted at two different points during locations while processing the payments merits of permitting alternative
the ECK transaction, first through as checks in others. To address these authorization. This commenter thought
posted signage which consumers can and similar concerns, and to provide that focus group testing of the model
read prior to providing a check as flexibility, the Board proposed three clauses would be useful to determine
payment, and second on a receipt authorization approaches for ECK what information consumers
provided to the consumer, presumably transactions. understand.
after the check has been provided to the First, the Board proposed to allow a A few commenters opposed the
merchant. In addition, the periodic payee to obtain a consumer’s alternative authorization clause as
statement provided by the consumer’s authorization to use information from unclear and potentially confusing to
bank will typically reflect ECK his or her check to initiate an EFT or, consumers. According to one industry
transactions in a different manner than alternatively, to process the transaction commenter, confusion arising from an
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check transactions. as a check. See proposed Model Clause alternative authorization may cause
New comment 3(b)(2)–1 provides that A–6(a). The Board specifically solicited consumers to instruct their financial
a payee at POS does not violate the institutions to state that ECK
requirement to provide a copy of the 1 Pub. L. 108–100, 117 Stat. 1177 (codified at 12 transactions were unauthorized. This
check conversion notice to the U.S.C. 5001–5018). commenter therefore believed the rule

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should require the authorization notice consolidated in a single Model Clause notice may suffice. Coupon books were
to specify the circumstances when A–6(b) for simplicity and to facilitate the most frequently-cited examples.
conversion would not occur. According compliance by payees. Model Clause A– Lenders provide coupon books to
to another commenter, requiring payees 6(a) may be used in all instances, consumers typically for mortgages,
to specify the circumstances when a including when a payee will process a automobile loans, personal loans, and
check will be processed as a check is check as an EFT in all circumstances, other recurring loan payments.
consistent with the purpose of the when the transaction is processed as a According to some commenters, coupon
EFTA—for consumers to know their check for technical reasons, or because books do not present the same notice
rights, responsibilities, and liabilities a payee simply chooses to process the opportunities as POS and ARC
when they engage in EFT services. This transaction as a check. While the Board transactions because they are provided
commenter believed such disclosure believes that most payees will likely in advance and include coupons for
also enhances consumer understanding choose to use Model Clause A–6(a) in several payments. Some credit card
by making it clear that there are all cases, the Board is aware that some issuers suggested that it may be
different methods to collect checks and payees may want to provide more similarly appropriate to allow a
by providing greater certainty as to specific information concerning their consumer to contract with its card
which method is most likely to apply to ECK practices for business reasons, such issuer for regular ECK payments rather
a particular transaction. The commenter as for customer service and education, than requiring a notice to be sent on or
stated that given the efficiency of check as well as to reduce possible consumer with each periodic statement sent to the
conversion, there should be limited inquiries. Model Clause A–6(b) offers consumer. A few commenters stated
circumstances to disclose. Accordingly, that flexibility. Thus, for example, that recurring notice is appropriate only
the commenter requested that the Board payees may choose to use Model Clause for POS transactions. One commenter
delete Model Clause A–6(a) as an A–6(b) to disclose the circumstances stated that the consumer benefit of
option. under which they will not process a receiving a notice with each periodic
Some industry commenters supported check as an EFT, such as when it is statement is negligible compared to the
the approach illustrated in proposed impossible for technical or other ongoing cost to institutions.
Model Clause A–6(b) for when a payee processing reasons. Because a coupon book is designed so
converted all checks, as long as the use Model Clauses A–6(a) and (b) have that a consumer must detach a coupon
of the clause is optional. One also been revised to clarify their from the book and provide the coupon
commenter believed the clause application to transactions where a with each payment, the Board believes
unworkable absent additional consumer’s check is provided as that it is unnecessary to require that a
authorization to process the transaction payment. Some commenters expressed separate notice of check conversion be
as a check where the ECK will not clear concern that without this revision, printed on each coupon. New comment
for technical reasons. consumers might mistakenly believe the 3(b)(2)–3 provides that for coupon
A few industry commenters also notice applied to preauthorized books, a notice placed on a conspicuous
supported the specific authorization transfers—where a consumer provides a location of the coupon book that the
approach illustrated in Model Clause A– check and a signed authorization in consumer can retain is deemed to
6(c) as long as it is optional. Other advance to authorize future payments. constitute the provision of notice on
industry commenters did not believe the See § 205.10. each coupon that accompanies a check
clause would provide a significant Consistent with § 205.4(a)(1), notices provided as payment, for purposes of
benefit to consumers. Several provided to consumers regarding check obtaining a consumer’s authorization to
commenters believed a specific conversion must be clear and readily convert each check. The notice must be
disclosure would be highly detailed and understandable. For example, in ARC placed on a location of the coupon book
complex; if circumstances changed new transactions, notices in small print and that a consumer can retain—for
disclosures would be required. One buried in the middle of unrelated example, on the first page, or inside the
consumer group commenter was information would likely not meet the front cover. The Board believes this new
concerned that the burden of providing standard. Payees may also consider comment will facilitate compliance with
this notice could result in payees using headings preceding the notice to the requirements of the Act and
favoring substitute checks under Check call attention to the information regulation.
21 which they believed would provide presented. For POS transactions, signage Unlike coupon books which contain
fewer consumer protections. A few informing consumers about check several payment coupons and are sent
industry commenters thought the clause conversion should not be obscured by once near the beginning of the payment
should not be adopted. other information or signs that may also period, periodic statements for credit
A few industry commenters stated be located at POS. card accounts are typically sent on a
that all three model clauses should be Notice for each transfer. ECK monthly basis. Thus, the Board believes
retained for flexibility. Other transactions are one-time, and not that credit card issuers have the
commenters believed that all three preauthorized, transfers. Therefore, capability of providing a notice of check
clauses should be consolidated to under the final rule, a notice must be conversion with each statement without
address various payment options provided and an authorization must be an undue burden. In contrast, payees
available to payees. Several commenters obtained from the consumer for each that send coupon books may not
supported having one model notice to transfer. Section 205.3(b)(2)(ii) contains otherwise send monthly information;
avoid confusing consumers. Many the general rule that the person thus, requiring a separate monthly
commenters expressed concern about initiating an ECK transaction must notice could be costly for these payees.
the length of the notices. A few provide notice of check conversion to Accordingly, comment 3(b)(2)–3 in the
commenters requested additional the consumer before each transfer. final rule is limited to coupon books.
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guidance on the clear and conspicuous Some industry commenters stated that If a coupon book is issued before the
standard as it pertains to the notices. while it may be appropriate to require effective date of the final rule, and will
In the final rule, Model Clause A–6(a) notice for each transfer for most ECK cover a time period when notice
is retained as proposed, but proposed transactions, there are certain otherwise must be provided under the
Model Clauses A–6(b) and (c) have been circumstances where one advance final rule, payees may provide a one-

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1644 Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations

time notice to obtain the consumer’s provided in payment for the billing questions they receive from consumers
authorization to convert each check cycle or the invoice for which notice has about ECK transactions; thus, they
submitted with a coupon. For example, been provided, whether the check(s) is believed that the additional information
a payee may provide a separate mailing received from the consumer or someone would help avoid consumer confusion
informing the consumer that by mailing else for that account. The notice applies and enhance consumer understanding
a check with each payment coupon to all checks submitted as payment until of ECK transactions. A federal
included in the book, the consumer the provision of notice on or with the enforcement agency similarly noted that
authorizes the payee to convert each next invoice or statement. Thus, if a consumers may be more willing to
check provided as payment to an EFT. merchant or other payee receives a engage in ECK transactions if they better
Without such relief, payees would have check as payment from the consumer understand them. In particular, the
to re-issue coupon books at considerable listed on the billing account after agency stated that the disclosure
expense in order to comply with the providing notice that the check will be regarding the quick debiting of deposit
new rule. processed as a one-time EFT, the accounts through ECK transactions
The final rule also clarifies that the authorization from that consumer could help consumers avoid the
notice regarding a payee’s intent to constitutes authorization to convert all possibility of overdrafts for insufficient
collect a service fee for insufficient or other checks provided for a single funds.
uncollected funds via an EFT and the invoice or statement. Some industry commenters requested
notice providing additional information Other required notices for ECK that the Board revise the requirement to
about the nature of ECK transactions transactions may also be similarly state instead that the transaction will be
(further discussed below) must also be imputed to any other consumer who reported on the consumer’s periodic
provided for each transfer. However, the may provide a check for the same billing account statement. One industry
special exception regarding coupon cycle or invoice if such notices are commenter stated that much of the
books would also apply to notices provided to the consumer listed on the consumer education responsibility for
regarding the electronic collection of billing account. Thus, for example, a ECK transactions should be borne by the
service fees for insufficient or notice to the consumer on the billing consumer’s financial institution. A few
uncollected funds and the nature of ECK account informing the consumer that a industry commenters were concerned
transactions. service fee for insufficient or about the length of the disclosures,
Imputed notice. Proposed uncollected funds will be debited via an particularly in combination with the
§ 205.3(b)(2)(ii) provided that obtaining EFT from the consumer’s account authorization disclosure, and expressed
authorization from the consumer constitutes notice to obtain concern that consumers may be
holding the account for which a check authorization for electronically discouraged from reading them. One
may be converted constitutes collecting the fee to any other consumer industry commenter stated that the
authorization for all checks provided for who may provide a check for the same disclosures may not be feasible as an
a single payment or invoice for that billing cycle or invoice. ongoing requirement. Another industry
account. Proposed comment 3(b)(2)–4 Additional ECK disclosures. commenter expressed concern about the
stated that notice of check conversion to Consistent with the EFTA’s purpose to cost of reprogramming terminals. One
the person holding the account for enable consumers to understand their industry commenter thought the Board
which a check may be converted may be rights, liabilities, and responsibilities should require financial institutions to
imputed to anyone who writes a check concerning EFT services, and given the include the disclosures in their account
as payment for the particular invoice or unique characteristics of ECK agreements or on each periodic
bill. In the final rule, comment 3(b)(2)– transactions, the Board believes it is statement that includes an ECK
4 is adopted with certain revisions for appropriate to provide consumers with transaction.
clarity. The guidance in proposed additional information to help them A number of industry commenters
§ 205.3(b)(2)(ii) is also moved to understand the nature and potential opposed the proposed disclosure that
comment 3(b)(2)–4, with some revisions consequences of an ECK transaction. states when a consumer’s check is used
for clarity. Proposed § 205.3(b)(2)(iii) thus required for an ECK transaction, the transaction
All commenters who addressed the a person that initiates an ECK may clear quickly. Many of these
issue of imputed notice supported the transaction to provide a notice to the commenters stated that in the majority
proposal. One commenter noted that the consumer that when a check is used to of cases an EFT and a check will clear
rule is consistent with current industry initiate an electronic fund transfer, in roughly the same period of time.
practice. Another commenter stated that funds may be debited from the Other commenters stated that under
complying with a different rule would consumer’s account quickly, and, as Check 21, checks may clear as fast or
be unduly burdensome, if not applicable, that the consumer’s check faster than EFTs, and expressed concern
impossible. A few commenters will not be returned by the financial that the disclosure may mislead
supported the proposal, but stated that institution holding the consumer’s consumers. A few commenters stated it
alternative authorization would also be account. Under the proposal, this might be impossible to explain the
necessary to accommodate payees who information would be provided at the meaning of ‘‘quickly’’ in different
may choose not to process multiple same time a notice is provided to obtain circumstances.
transactions all as EFTs. A few authorization for the underlying ECK Many industry commenters also
commenters also suggested that the transaction. Section 205.3(b)(2)(iii) is opposed the proposed disclosure that
authorization of the person holding the adopted as proposed, with some the consumer’s check will not be
billing account should apply to all revisions to address commenter returned by the consumer’s financial
checks received prior to the next bill, concerns. Proposed comment 3(b)(2)–3 institution. The majority of these
not just to checks related to the is re-designated as comment 3(b)(2)–5, commenters stated the disclosure would
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particular invoice. and provides additional guidance to be misleading, particularly to

In the final rule, comment 3(b)(2)–4 facilitate compliance. consumers whose checks currently are
provides that notice to the consumer Consumer group commenters stated not returned by their financial
listed on the billing account constitutes that the additional information institutions under the terms of their
sufficient notice to convert all checks answered many of the common account agreements. A few commenters

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asserted the disclosure might become Section 205.3(b)(2)(iii) also retains the information or signs that may also be
less significant to consumers in light of requirement to notify consumers that located at POS.
Check 21. One commenter believed that they will not receive their checks back As stated above, with ECK
consumers may confuse the disclosure from their financial institution if their transactions, consumers’ checks are
with similar statements from their checks are converted. The disclosure being used differently than in the past,
financial institution about check addresses complaints received by the and consumers may not be aware that
handling under Regulation CC, as Board from consumers expressing the conversion of their checks to EFTs
amended to implement Check 21. confusion about not receiving their may impact the collection time for the
As the payment system evolves, checks back in ECK transactions. In payment, or that they will not receive
consumers’ checks are being used particular, some consumers may rely on their checks (or images of their checks)
differently than in the past, and the checks they receive back with their back with their statements as has been
consumer rights with respect to EFT periodic statements for account the case for check transactions in the
transfers are different than those for reconciliation and recordkeeping past. Thus, the Board believes that these
check transactions. Given the unique purposes. Comment 3(b)(2)–5 clarifies additional disclosures are appropriate at
characteristics of ECK transactions, the that the statement that a check will not present. Moreover, many payees are
Board believes it would be beneficial to be returned by the consumer’s financial already providing similar disclosures to
provide additional information to institution is not required at POS, if, as reduce possible consumer inquiries.
consumers to help them better is typically currently the case, the Nevertheless, the Board expects that
understand the nature of these merchant returns the check to a over time, consumers will become more
transactions. The additional information consumer. familiar with ECK transactions, thereby
highlights and may draw consumers’ To provide flexibility and address the reducing the need for the additional
attention to some of the key differences concerns about the length of ECK information. Thus, the final rule
in the way payments are handled under disclosures, payees at POS may provide provides a sunset date of three years
the ECK process, and possibly reduce the notice in § 205.3(b)(2)(iii) on posted from the mandatory compliance date of
consumer confusion about ECK signage, and need not also provide the January 1, 2007 for the final rule, after
transactions. Moreover, the Board notes notice on the receipt provided to the which time payees will no longer be
that some payees, particularly in the consumer at the time of the transaction. required to provide the notice set forth
ARC environment, are currently However, payees in ARC transactions in § 205.3(b)(2)(iii).
Transactions initiated by mistake.
providing this information to their must provide the notice with the general
The supplementary information to the
customers to help reduce consumer notice to obtain consumer authorization
proposed rule clarified that where a
inquiries and complaints. Requiring this for the ECK transaction. The Board merchant or other payee initiates an
notice could facilitate consumer expects that ARC payees will likely EFT in error, the transaction would not
understanding by ensuring that all provide the combined notice on a be covered by Regulation E where the
consumers who engage in ECK billing statement or invoice. As transaction does not meet the definition
transactions receive this information. provided in § 205.3(b)(2)(iv), model of an EFT. Few commenters addressed
Accordingly, the Board is exercising its clauses are provided in Appendix A–6 the statement, but one requested
authority under Sections 904(c) and to help payees comply with the clarification because the inability to
904(d)(1) of the EFTA and adopting the additional disclosure requirements. process an item is not necessarily the
proposed notice in the final rule, with Model Clause A–6(c) sets forth two result of an ‘‘error.’’ The Board agrees
certain modifications to address different formulations for the statement that the word ‘‘error’’ has a particular
commenters’ concerns. regarding when funds may be debited meaning in the EFTA, Regulation E and
The Board recognizes that a check from a consumer’s account, depending other rules, and that in some cases a
may be processed as fast or faster than on where the payment is made. If the transaction may not be able to be
an ECK transaction in some instances payment is made at POS, the statement processed as an EFT for other reasons.
based on current industry practices and refers to the possibility that funds may Accordingly, the Board believes that the
potential changes in check processing be debited from the consumer’s account statement applies to transactions where
facilitated by the Check 21 Act. as soon as the same day the consumer a payee mistakenly initiates an ECK
Nevertheless, the Board believes it is makes the payment. For ARC transaction, such as when the payee
important to draw a consumer’s transactions, the statement refers to the attempts to convert a money order. Such
attention to the fact that an ECK date that the payee receives the a transaction is not subject to the
transaction ‘‘may’’ clear quickly. The payment. coverage of the EFTA and Regulation E,
purpose of the notice is to emphasize to Consistent with § 205.4(a)(1), and as even if initiated as an ECK transaction.
consumers the importance of having stated above in the context of the notice
sufficient funds in their accounts at the to obtain consumer authorization for an Collection of Service Fees Via Electronic
time of the transaction, since many ECK transaction, the notice provided Fund Transfer
consumers may still believe that use of under § 205.3(b)(2)(iii) to consumers In the proposal, comment 3(b)–3 was
a check will result in a significant time about the nature of ECK transactions added to clarify that an EFT from a
lag between the time the consumer must be clear and readily consumer’s account to collect a service
provides a check as payment and when understandable. For example, notices in fee due to insufficient funds is covered
funds are in fact debited from the small print and buried in the middle of by Regulation E, and must be authorized
consumer’s account. To address unrelated information would likely not by the consumer. Under the proposal,
commenter concerns about potential meet the standard. Payees may also the provision of notice to the consumer,
comparisons with check processing, the consider using headings preceding the coupled with the consumer’s decision to
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notice in § 205.3(b)(2)(iii) has been notice to call attention to the proceed with the transaction, would
revised to state that funds may be information presented. If payees elect to constitute authorization for the debit.
debited from consumers’ accounts as provide the information under This provision has been adopted in the
soon as the same day payment is § 205.3(b)(2)(iii) separately on a sign, the regulation in new § 205.3(b)(3), which
received. notice should not be obscured by other also requires payees to notify consumers

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about the specific amount of the fee in commenter asserted that providing consumer’s deposit or checking account
order to obtain the consumer’s notice at POS would not sufficiently and also acts as a payee, such as in
authorization for the transaction. inform the consumer of the possibility connection with a loan or credit card
Consistent with the authorization that a service fee could be debited account, it would be required to obtain
requirement at POS for ECK electronically from the consumer’s the consumer’s authorization in order to
transactions, the final rule requires that account. A few commenters opposed the collect a service fee for insufficient or
where a service fee for insufficient or comment as inconsistent with the uncollected funds in connection with
uncollected funds in connection with a NACHA rule, which requires written, the underlying transaction, but not to
POS transfer may be collected via an signed authorization for collection of collect any separate service fee that may
EFT, the notice must be posted in a service fees via an EFT. A couple of be assessed against the deposit or
prominent and conspicuous location, commenters believed it important to checking account for returning the
and a copy of the notice must be require signed authorization so a check or EFT unpaid.)
provided to the consumer. Comment consumer will know and understand the
3(b)(3)–1 clarifies that the requirement fee imposed. One commenter expressed Second, because a check or EFT may
to obtain the consumer’s authorization the concern that some payees believe be returned for reasons other than
does not apply to fees imposed against the current Regulation E notice equals insufficient funds in the consumer’s
the consumer’s account by the authorization comment grants a account, § 205.3(b)(3) states that the rule
consumer’s account-holding institution substantive right to collect a service fee, applies where an EFT or check is
for paying overdrafts or returning a notwithstanding other federal or state returned for ‘‘insufficient or
check or EFT unpaid. law requirements that might apply. uncollected’’ funds.
The majority of commenters generally Proposed comment 3(b)–3 has been Third, consistent with the
agreed that EFTs initiated to collect moved to the regulation as new authorization requirements for the ECK
service fees for insufficient funds § 205.3(b)(3) in the final rule. In general, transaction, the Board is exercising its
should be covered by Regulation E. A § 205.3(b)(3) provides that a consumer authority under Sections 904(c) and
few industry commenters stated authorizes the electronic collection of a 904(d)(1) of the EFTA to require payees
coverage was appropriate as long as a fee for a check or EFT returned due to at POS to provide notice of their intent
merchant or other payee could obtain insufficient funds when the consumer to collect service fees for insufficient or
authorization of the service fee when it receives notice of a payee’s intent to uncollected funds via EFT, and to
provides notice to the consumer that the collect the fee via an EFT, and the disclose the amount of the fee, on
fee will be debited electronically from consumer goes forward with the signage posted in a prominent and
the consumer’s account, and the transaction. The final rule also requires conspicuous location at POS. A copy of
consumer decides to proceed with the payees to include the specific amount of the notice must also be provided to the
transaction. Other industry commenters the fee imposed in the notice provided consumer at the time of the transaction,
generally supported the notice to consumers to ensure that consumers such as on the sales receipt. Payees in
requirement, but believed the Board are informed of the amount of the fee ARC transactions will typically provide
should also require signed they may be charged in the event they written notice on a billing statement or
authorization. Several industry have insufficient funds in their account. invoice. Model Clause A–6 contains
commenters requested clarification that Section 205.3(b)(3) requires payees to model language that payees may use to
additional authorization requirements obtain a consumer’s authorization for obtain a consumer’s authorization for
may be established by payment system the debit regardless of whether the the collection of the service fee for
rules. A few commenters requested underlying transaction is an EFT or is a insufficient or uncollected funds via an
clarification that the proposed rule did check transaction, as long as the payee EFT.
not intend to address ‘‘NSF’’ fees intends to collect a service fee for
assessed by a consumer’s financial insufficient funds via an EFT to the The final rule does not require payees
institution for returning a check unpaid. consumer’s account. See also comment to obtain a consumer’s signature to
Some industry commenters requested 3(c)(1)–1. authorize the collection of service fees
revising the comment to clarify that a In addition, section 205.3(b)(3) has for insufficient or uncollected funds via
check might be returned for reasons been further revised to address some an EFT. Particularly at POS, the Board
other than ‘‘insufficient’’ funds. commenters’ concerns. First, the believes the added benefit of a signature
Consumer group commenters opposed provision was not intended to address would be minimal in light of the
the proposed comment. These fees assessed on a consumer’s account requirements to provide notice of the
commenters stated that notice and the by the consumer’s financial institution intent to collect the service fee via an
consumer writing a check alone should for the return of a check or EFT unpaid EFT both on posted signage, and on a
not be sufficient to authorize the (commonly known as ‘‘NSF fees’’), but receipt provided to the consumer at the
debiting of service fees, noting that rather, to address service charges time of the transaction. The Board
while a consumer may reasonably assessed by a payee because the further notes that § 205.3(b)(3) addresses
anticipate a withdrawal from his or her consumer’s check or EFT was returned only the requirement that a payee obtain
account for the face amount of the unpaid. Accordingly, references to a consumer’s authorization for a service
check, the consumer would not expect ‘‘NSF fees’’ in the proposed comment fee for insufficient or uncollected funds
an additional debit for the fee, absent have been deleted and replaced with the payee intends to collect via EFT.
additional prior, written authorization. ‘‘service fee(s)’’ in the final rule. New The final rule does not, however,
Consumer groups also stated that a comment 3(b)(3)–1 further provides that address whether a payee has a
written, signed authorization the authorization requirement does not substantive right to collect the service
requirement would encourage apply to fees imposed against the fee—that is a matter of state or other
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consumers to exercise more care in consumer’s transaction account by the law. The Board notes that other federal
determining their actual balances before consumer’s account-holding institution or state laws, such as the Fair Debt
making a payment. for paying overdrafts or returning a Collection Practices Act, as well as
Some industry commenters also check or EFT unpaid. (However, where payment system rules, may impose
opposed the proposed comment. One a financial institution holds the additional requirements.

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Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations 1647

3(c) Exclusions From Coverage the consumer. Another commenter in connection with the issuance of a
When payees re-present checks agreed that an additional access device replacement or substitute device or
electronically, they may also seek to should be issued in unvalidated form, otherwise, the other provisions of
debit a service fee for insufficient funds but suggested that new initial § 205.5(b), including the requirement to
via EFT from the consumer’s account. Regulation E disclosures should not be provide new initial disclosures, also
Although the electronic re-presentment required to accompany the additional apply. (See, however, comment 2(a)–2,
of the returned check (RCK) is not device. (One of the requirements for providing that the term ‘‘access device’’
covered by Regulation E because the issuing an unsolicited access device does not include a check used as a
transaction was originated by check, the under § 205.5(b) is to provide the initial source of information to initiate an
disclosures required by § 205.7 that will EFT.)
separate electronic debit of the service
apply to the device. See § 205.5(b)(3).) With respect to the suggestion to
fee is covered by the regulation.
One commenter suggested that the expand the proposed comment to
Proposed comment 3(c)(1)–1 clarified
proposed commentary changes be provide financial institutions with
that a consumer authorizes the debit of
expanded to provide financial flexibility to replace access devices with
the service fee when the consumer goes
institutions flexibility to replace access limited functions with devices having
forward with the transaction after
devices having limited functions with additional functions, comment 5(a)(2)–1
receiving notice that the fee will be
devices having additional functions. For already addresses the issue; institutions
collected electronically. No commenters
example, cards usable only at ATMs are permitted to expand functions upon
opposed the clarification. Comment
could, under this approach, be replaced replacement or substitution of access
3(c)(1)–1 is revised, consistent with with cards usable at POS as well.
§ 205.3(b)(3), to add a reference to devices. When the proposed revisions to
A few commenters suggested the comment 5(a)(2)–1 were issued, existing
‘‘uncollected’’ funds and to provide that Board clarify that when an additional
authorization at POS for the electronic commentary language on this point was
access device is issued at the time of not included for the sake of brevity. To
debit of the service fee from the replacement or substitution, both the
consumer’s account in connection with clarify this matter, the language in
additional device and the device that question is set forth in full in the text
a re-presented check requires notice replaces the accepted access device may
posted on signage, with a copy of the of the final commentary revisions. Also,
be issued in unvalidated form and a the language is modified slightly to
notice provided to the consumer. single validation procedure may be used make clear that either the access device
Section 205.5 Issuance of Access to validate both devices. Under such a replacing the existing device, or the
Devices procedure, the consumer would not additional access device (or both), may
have the option to validate only the provide expanded functions compared
Section 911 of the EFTA, which is device replacing the existing device and
implemented by § 205.5 of Regulation E, to the existing device.
refuse to validate the additional device; Regarding validation procedures, an
generally prohibits financial institutions the consumer would have to choose to
from issuing debit cards or other access institution may require a consumer to
validate both devices or neither device. choose to either validate all access
devices except (1) in response to The revisions to the commentary
requests or applications or (2) as devices provided by an issuer, including
regarding the issuance of additional the replacement and any additional
renewals or substitutes for previously access devices are adopted as proposed,
accepted access devices. Comment devices, or validate none of the issued
with a few clarifying changes as devices. Also, although an institution is
5(a)(2)–1 generally provides that a described below. Unlike credit cards, a
financial institution may not issue more permitted to issue a validated access
consumer’s own funds are at risk of loss device to replace an existing accepted
than one access device as a renewal of in the event of unauthorized use of a
or substitute for an accepted device (the access device, the institution may
debit card or other access device. The choose instead to issue the replacement
‘‘one-for-one rule’’). Section 205.5(b) potential for unauthorized use may
provides, among other things, that any device in a form that requires
increase if validated cards are validation. Furthermore, an institution
access device issued on an unsolicited intercepted in the mail and consumers
basis must not be validated at the time may choose to link the validation of one
are unaware that they may be receiving
of issuance. Under the proposal, access device with the validation of
multiple cards as replacements for an
comment 5(b)–5 clarified that a another one. Accordingly, comment
existing access device. The validation
financial institution may issue more 5(b)–5 is revised to include a
requirement of § 205.5(b) limits the risk
than one access device in connection clarification on this issue. The comment
of monetary losses from the theft of
with the renewal or substitution of a also notes that an institution using such
debit cards sent through the mail.
previously accepted access device, a validation procedure should disclose
Although there would be no increase in
provided it complied with the to the consumer in a clear and readily
a consumer’s liability where multiple
conditions set forth in § 205.5(b) for the understandable manner that the single
access devices are issued, asserting a
additional unsolicited devices. The validation will validate both access
claim of unauthorized use can be
proposal retained the general one-for- inconvenient and time-consuming, and, devices, to ensure that the consumer
one rule in comment 5(a)(2)–1; however, at least temporarily, the consumer may will not, for example, improperly
a cross-reference to proposed comment be deprived of needed funds. Therefore, discard the additional, now validated,
5(b)–5 was added. The revisions are the Board believes the benefits afforded device.
being adopted substantially as by the one-for-one rule and the Section 205.7 Initial Disclosures
proposed, with some modifications to validation requirements of § 205.5(b) are
address commenters’ concerns. critical in the context of debit cards, and 7(a) Timing of Disclosures
Most commenters addressing this outweigh any benefits of providing Electronic check conversion
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issue supported the proposal. One greater flexibility to issue access transactions are a new type of EFT
commenter asserted that since liability devices. In addition to the validation requiring new disclosures. See
for unauthorized use is on a per-account requirement in § 205.5(b), the Board discussion below under § 205.7(c). The
(not per-device) basis, issuing additional notes that where additional access Board proposed to revise comment 7(a)–
devices would not impose added risk on devices are issued unsolicited, whether 1 to provide that an institution may

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1648 Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations

choose to provide disclosures about to reflect the fact that ECK transactions differentiate such transactions from ECK
ECK transactions early, i.e., prior to the are a new type of transfer that may be transactions. For example, while the
first ECK transaction involving the made to or from the consumer’s current model disclosures describe the
consumer’s account. Commenters account. One commenter stated that 60-day time frame for consumers to
supported the proposed revision. One ECK transactions should not be treated exercise their error resolution rights
trade association representing credit as a new type of transfer because the with respect to EFTs, including ECK
unions observed that early notification consumer intended to pay by check, transactions, shorter time periods for
is a cost-effective way of enabling rather than by EFT. The Board notes, asserting errors may apply to checks
institutions to establish a single means however, that if a merchant or other processed by means other than check
of notifying and educating consumers payee provides proper notice about the conversion. While institutions may
about their rights concerning electronic transaction (see § 205.3(b)(2)), a choose to provide consumers with
fund transfers. Comment 7(a)–1 is consumer, by providing the check as additional information regarding their
adopted as proposed, with a minor payment, authorizes the use of the rights when a check is processed by
revision. See also comment 7(a)–2 check as a source of information to other means, the model disclosures are
(permitting an institution that has not initiate a one-time EFT from the solely intended to address consumers’
received advance notice of a third party consumer’s account. Comment 7(c)–1 is rights under the EFTA when the
transfer to provide required disclosures thus adopted as proposed. transaction involves an EFT to the
as soon as reasonably possible after the To assist institutions in implementing consumer’s account. Other error
first transfer). the new disclosure requirements, the resolution rights which may exist under
Board also proposed model initial other laws, including state check law,
7(b) Content of Disclosures disclosure language to reflect that one- are outside the scope of this rulemaking.
The Board proposed to clarify that time EFTs are a new type of transfer that Consumer groups further suggested that
financial institutions must list ECK may be made from a consumer’s account the error resolution notice should state
transactions among the types of using information from the consumer’s more clearly that an institution ‘‘must’’
transfers that a consumer can make. See check, and to further instruct consumers correct any error within 10 business
proposed comment 7(b)(4)–4. As further to notify account-holding institutions days, rather than use the current
discussed below under § 205.7(c), the when an unauthorized EFT has language that an institution ‘‘will
Board adopts comment 7(b)(4)–4 as occurred using information from their correct any error promptly.’’ However,
proposed. check. Commenters supporting the new under certain circumstances, including
7(c) Addition of Electronic Fund model language stated that the proposed where an institution provides a
Transfer Services language was clear, concise, and provisional credit to the consumer’s
helpful. A few commenters requested account or where the error involves a
Former comment 7(a)–4 stated that if sufficient time for institutions to make new account, an institution may extend
an EFT service is added to a consumer’s the new disclosures. their investigation period to up to 90
account and is subject to terms and A few industry commenters stated days. Therefore, the Board believes the
conditions different from those that certain of the disclosures were current language is more accurate.
described in the initial disclosures, unnecessary. Two commenters observed Consumer groups also urged the
disclosures for the new service are that referring specifically to ECK Board to subject the model notices to a
required. Under the final rule, as transactions in the initial disclosures complete review for readability and
proposed, this interpretation is moved regarding error resolution might mislead understandability. For instance,
to § 205.7(c) of the regulation for consumers to believe that they only had consumer groups observed that the term
consistency with other regulations. See, error resolution rights when their check ‘‘code’’ may not be as well understood
e.g., § 226.9(b)(2) of Regulation Z. New is converted to an EFT. Another as ‘‘PIN’’ or even ‘‘access code.’’ Based
comment 7(c)–1 is adopted as proposed commenter, however, believed that on the Flesch-Kincaid scale, the model
to provide that ECK transactions are a including information about ECK initial disclosures in the final rule score
new type of transfer requiring new transactions in the liability provisions at a 9.9 grade level, with a Flesch
disclosures to the consumer, to the was appropriate, but this commenter reading ease score of 60.3 on a 100.0
extent applicable. The model clauses for objected to listing ECK transactions as a scale, indicating a high level of
initial disclosures are revised to provide new type of transfer since the consumer readability. The Board agrees that in
guidance to institutions regarding their intended to pay by check, and not by general consumer disclosures benefit
disclosure obligations to consumers EFT, and therefore ECK transactions from consumer testing, and anticipates
about ECK transactions. See Appendix should not be considered to be EFTs. that testing of this and other notices
A, Model Clauses in A–2. The Board notes that the model could be made part of a future
The Board proposed comment 7(c)–1 language informs consumers that, in comprehensive review of the regulation.
to address industry uncertainty about addition to notifying their bank when One trade association and a company
the extent of an account-holding their card or code has been lost or that provides compliance forms for
institution’s disclosure obligations to stolen, or when money has been institutions expressed their concerns
new and existing consumers regarding transferred from their account without about the scope of the proposed
ECK transactions. As stated in the their permission, they may also contact disclosures, stating that the Board’s
proposal, new disclosures about ECK their institution if an unauthorized model disclosures were not broad
transactions are necessary because a transfer has been made using the enough to address other types of third-
consumer’s check can be used information from their check. party initiated EFTs which may be
differently than in the past, that is, Consumer groups commented that the initiated using account information
information from the check can be used new model disclosure language was from a check, in particular those
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to initiate EFTs. Industry comments helpful, but urged the Board to also initiated via a telephone or the Internet.
generally favored including information include other practical information As noted previously in the discussion of
about ECK transactions in initial about the nature of ECK transactions, § 205.3(b), while telephone and Internet
disclosures, and many noted that they and to include information about transactions are covered by Regulation
already have adjusted their disclosures consumers’ rights under check law to E, the proposed rule was intended to

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Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations 1649

address ECK transactions only; other reflecting ECK transactions until the automated clearing house organizations,
types of EFTs are not addressed by these mandatory compliance date. and a federal government agency,
provisions in the final rule. supported the proposal but with
Section 205.10 Preauthorized
A few industry commenters asserted modifications or conditions. A few
that since most banks have considered commenters recommended that
electronically converted checks to be 10(b) Written Authorization for merchants be permitted to obtain
EFTs since adoption of the 2001 Preauthorized Transfers From authorization for recurring debits by
commentary, and have already amended Consumer’s Account telephone, without recording, followed
their initial disclosures to include ECK Under § 205.10(b), preauthorized by written confirmation, if the consumer
transactions, institutions should not be EFTs from a consumer’s account may be was given the option to cancel the
required to amend their disclosures transaction. Because of concerns about
authorized only by a writing signed or
again to include additional detail that is deceptive telemarketing, other
similarly authenticated by the
only applicable to ECK transactions. commenters suggested that the use of
consumer. Under existing comment
These institutions also stated that the telephone authorization be limited to
10(b)–3, a merchant or other payee
cost of reprinting and mailing the situations where (1) the consumer and
could not obtain authorization by tape
revised disclosures would far exceed the merchant have a preexisting
recording a telephone conversation with
any consumer benefit of receiving a relationship, or (2) the consumer
a consumer who agrees to recurring
notice that explains a process that initiates the telephone call.
debits. Comment 10(b)–3 was adopted Several industry commenters urged
financial institutions have already been prior to the enactment of the E-Sign Act.
following. Two commenters asked the the Board to remove uncertainty by
The final rule withdraws the explicitly stating that a recorded
Board to clarify that the introduction of interpretation in comment 10(b)–3
ECK services would not require change- telephone conversation complies with
would be withdrawn in light of the E- the E-Sign Act and, therefore,
in-terms notices to existing consumers, Sign Act, as proposed.
because none of the terms of the Regulation E, to facilitate telephone
The E-Sign Act provides, in general, authorizations of recurring debits. A few
underlying account agreement are that electronic records and electronic
affected by the new type of transfer. such commenters argued that merely
signatures satisfy legal requirements for withdrawing a portion of comment
Under the final rule, for customers traditional written records and 10(b)–3 as proposed would cause
opening accounts after the mandatory signatures. Some have suggested that, further confusion and, absent additional
compliance date of January 1, 2007, given the E-Sign Act’s broad definitions guidance, would lead merchants to
institutions must include in initial of ‘‘electronic record’’ and ‘‘electronic adopt differing practices. One
disclosures that ECK transactions are signature,’’ a tape-recorded commenter, a federal enforcement
among the types of transfers that a authorization, or certain types of tape- agency, recommended that the Board
consumer can make. Where institutions recorded authorizations, for state affirmatively that if a payee relies
have already amended their disclosures preauthorized debits might be deemed upon the E-Sign Act in connection with
to notify their consumers that ECK to satisfy the Regulation E signed or obtaining the consumer’s authorization,
transactions may be made from their similarly authenticated written it must also fully comply with the E-
account, they would not be required to authorization requirements. The Board Sign Act with respect to other
make new disclosures about such proposed to withdraw the guidance provisions of the EFTA and Regulation
transactions to those consumers. New regarding tape recordings because of E- E, including the requirement to provide
disclosures to existing customers would Sign Act considerations, but did not a clear and conspicuous copy of the full
be required to be provided after the propose to amend comment 10(b)–3 to authorization to the consumer. In
mandatory compliance date, however, if address how the E-Sign Act should be contrast, a law firm representing
an institution has not disclosed to those interpreted with regard to tape retailers asserted that further
consumers that ECK transactions may be recordings of telephone conversations. clarifications regarding the E-Sign Act
made, even if other terms of the Many commenters, including several in the recurring debit context are
underlying account agreement would financial institutions and financial trade unnecessary and may cause confusion
equally apply to the new type of associations, as well as a retailer trade in other instances when such
transfer. See comment 7(c)–1. association, supported the proposed clarifications are not provided.
The Board specifically solicited withdrawal. These commenters stated A few industry commenters opposed
comment on whether six months that without the proposed change, the proposed withdrawal of the
following adoption of the final rule consumers who do not have, or do not guidance due to the potential abuses
would provide sufficient time for want to use, credit cards would not be and increased unauthorized transfers
financial institutions to revise their able to use the telephone to purchase that could result. One such commenter
disclosures to comply with the rule. The goods or services involving recurring contended that tape recordings do not
vast majority of industry commenters debits to their deposit accounts. One provide clear evidence of a consumer’s
urged the Board to extend the time for commenter noted that many less authorization, which may be important
compliance to one year. The final rule affluent consumers do not own in the event of a dispute. This
reflects commenters’ suggestions; computers, so such consumers would be commenter also asserted that banks
institutions will have until the unable to electronically authorize receive many complaints from
mandatory compliance date of January recurring payments unless the proposal consumers alleging that the consumer
1, 2007 to revise their initial disclosures is adopted. Another commenter noted only authorized a one-time electronic
to reflect ECK transactions, and to that if the proposal is not adopted, debit, but that recurring debits are being
provide new disclosures to existing merchants may tend to use alternatives processed.
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customers if necessary. The Board such as demand drafts, which offer less The final rule withdraws the existing
anticipates that institutions will have consumer protection than debit cards. guidance regarding whether a tape
depleted their existing stocks of initial Other commenters, including recording may satisfy the requirement to
disclosures by that time. Institutions are financial institutions and financial trade obtain a consumer’s written
not required to provide new disclosures associations, retailer trade associations, authorization for recurring debits as

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1650 Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations

proposed. The final rule does not proposed revision also stated that asking used was a debit card, the merchant
interpret Regulation E to treat recorded the consumer to specify whether the must obtain a written and signed (or
telephone authorizations as written card to be used for the authorization is similarly authenticated) authorization or
authorizations; however, the Board a debit card or a credit card, using those cease debiting the consumer’s account.
believes that the E-Sign Act’s provisions terms, is a reasonable procedure. The Board adopts the revisions to
regarding written documents are The Board also proposed to add an comment 10(b)–7 as proposed, with
applicable to the EFTA and Regulation example of a payee learning, after the minor revisions. As stated in the
E. As a result, if, under the E-Sign Act, transaction occurred, that the card used proposal, it may have been reasonable
a tape-recorded authorization, or certain was a debit card as a result of the in the past, when relatively few debit
types of tape-recorded authorizations, consumer bringing the matter to the cards were in use compared to credit
constitute a written and signed (or payee’s attention. For example, the cards, for payees to use procedures that
similarly authenticated) authorization, consumer may call the merchant to did not involve asking questions about
then the authorization would satisfy the assert a complaint about use of a debit the type of card being used. Today,
Regulation E requirements. card. however, given the growth of debit card
In addition to complying with the E- Most industry commenters supported usage, the Board believes that
Sign Act,2 payees will need to ensure the proposal as written, and a few reasonable procedures should include
that they comply with the requirements suggested modifications. No interaction with the consumer
of § 205.10(b) of Regulation E. commenters opposed the proposal. One specifically designed to elicit
Specifically, the authorization must be trade association representing retailers information about whether a debit card
readily identifiable as such to the suggested that comment 10(b)–7 not is involved. Accordingly, the final rule
consumer, and the terms of the provide the example of asking the retains the safe harbor example of a
preauthorized debits must be clear and consumer whether the card being used reasonable procedure of asking the
readily understandable to the consumer. is a debit card or a credit card as the safe consumer to specify whether the card to
See comment 10(b)–6. Payees must also harbor for compliance. Another trade be used for the authorization is a debit
provide the consumer a copy of the association requested that the comment (or check) card or a credit card. The
authorization. With respect to not state that a reasonable procedure final comment includes a reference to
additional suggestions from commenters would require use of the term ‘‘debit ‘‘check cards’’ to reflect current
to permit authorization by telephone card.’’ This commenter also terminology. To illustrate the safe
without recording but with written recommended that the Board indicate in harbor, assume that a consumer makes
confirmation, or to limit the use of the comment that confirmation of the a purchase which will result in a series
telephone authorizations to specific type of card being used is not necessary of recurring payments. After the
circumstances, such changes would when the authorization is given in merchant inquires about the payment
require amendments to the EFTA or writing, including on-line. In contrast to method, the consumer indicates that
Regulation E rather than the staff the comments from the retailer trade they intend to use ‘‘Bank X’’ card,
commentary, and thus the Board has associations, a federal enforcement without stating whether the card is a
decided not to consider these agency urged the Board to require debit card or a credit card. In order to
suggestions at this time. payees to ask whether the consumer is fall under the safe harbor, the merchant
Comment 10(b)–7 addresses using a debit or credit card, in lieu of should then ask the consumer whether
authorizations for recurring payments creating a safe harbor for that procedure. the card is a debit (or check) card or a
obtained by telephone or on-line, and However, one law firm representing credit card.
states that the payee’s failure to obtain retailers opposed this suggestion The final rule does not impose an
written authorization is not a violation contending that such a requirement express requirement of inquiring
if the failure was not intentional and would be unduly restrictive because whether a card provided is a debit card
resulted from a bona fide error, merchants might have procedures that or a credit card, because the
notwithstanding the maintenance of would not include asking whether the determination of whether a procedure is
procedures reasonably adapted to avoid card is a debit or credit card. reasonably adapted to avoid the error of
any such error. For example, an error The federal enforcement agency also failing to obtain a consumer’s written
might occur where the consumer suggested that the Board clarify that, in authorization for recurring debits may
indicates that a credit card (for which some cases, merchants should consider vary with the circumstances. Similarly,
no written authorization would be additional information as part of although it may be reasonable in some
required) is being used for the reasonable procedures to avoid error. cases for a merchant to revise their
authorization, when in fact the card is Such information might include, for authorization procedures to avoid error
a debit card. example, repeated consumer complaints based on additional information about
Concerns were expressed by retail and about unauthorized debits. This potential authorization problems, such
other industry groups about what commenter suggested that the as repeated consumer complaints about
procedures would be deemed commentary provide that if a merchant unauthorized debits, the Board believes
reasonably adapted to avoid error where becomes aware of repeated it is unnecessary to add a specific
a telemarketer seeks to obtain a authorization problems, it should provision to the commentary that would
consumer’s authorization for recurring examine and possibly change its require revised procedures in those
payments for goods or services, such as procedures. A law firm, however, limited instances.
newspaper subscriptions, using the argued that such a requirement would The Board also does not believe that
consumer’s credit or debit card. The be unnecessary because merchants it is necessary to incorporate in the final
Board proposed to revise comment would have insufficient guidance as to rule a requirement that a merchant
10(b)–7 to state that procedures what other information they should should promptly notify the consumer
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reasonably adapted to avoid error will consider and under what circumstances. when it chooses to cease debiting the
vary with the circumstances. The One consumer group stated that the consumer’s account upon learning that
final rule should require that where the the card used was a debit card. The
2 See, e.g., section 106(5) of the E-Sign Act merchant learns only later, after the Board believes that a merchant, due to
(definition of ‘‘electronic signature’’). telephone authorization, that the card its own interest, will likely contact the

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Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations 1651

consumer to arrange for some other Most commenters addressing this make arrangements such that no further
means of payment. issue supported the proposal. One debits originated by that payee are made
A few industry commenters also commenter observed that in the case of to the consumer’s account. However, the
addressed the Board’s discussion in the debit card transactions, the interception Board notes that under comment 10(c)–
proposal regarding whether merchants of transactions at the network level may 2, institutions may require the consumer
should be required to verify card be more effective than blocking to provide a copy of a written notice
numbers presented by consumers transactions at the level of the account- sent to the payee, revoking authority for
against lists of credit and debit card holding institution. Some commenters the payee to originate debits to the
Bank Identification Numbers, requested clarification on various consumer’s account. If the consumer
commonly referred to as ‘‘BIN tables,’’ points. A few industry commenters does not provide the copy within 14
as a reasonable procedure to avoid error. asked that the Board clarify that days, the institution is not required to
See In re Visa Check/Mastermoney comment 10(c)–3 does not apply to continue stopping payments to the
Antitrust Litigation, No. CV–96–5238 recurring debits processed through payee.
(E.D.N.Y. 2003) (requiring Visa and batch systems, such as the ACH As stated above, the proposal was
MasterCard to make BIN tables available network. Consumer groups were intended to address problems in
to merchants as part of a litigation concerned that the proposal might stopping recurring debits that take place
settlement). These commenters agreed imply that even if a consumer revokes over debit card networks, where the
with the Board’s observation that to the authority for all future recurring debits account-holding institution may not be
extent that BIN tables are not available by a payee, the financial institution may able to timely block a debit from being
to merchants in an on-line, real-time comply by stopping a single payment; posted to the consumer’s account.
form, it would be burdensome for these commenters believed that the Nevertheless, although comment 10(c)–
merchants to verify card numbers obligation should be to cancel the debits 3 primarily focuses on debits over debit
presented by consumers against the BIN permanently. card networks and other ‘‘real-time’’
tables. Moreover, the Board understands A number of commenters suggested systems, the comment is not limited to
that Visa and MasterCard debit cards that the Board adopt other revisions to such systems and any institution that
issued after January 1, 2005, display the the existing commentary under does not have the capability to block a
word ‘‘debit’’ on the front of the card. § 205.10(c). Several industry preauthorized debit from being posted
Accordingly, the final rule does not commenters asserted that the EFTA and to the consumer’s account may instead
require merchants to obtain or consult Regulation E only require a financial use a third party to block the debit, so
BIN tables to maintain procedures institution to stop a single long as the consumer’s account is not
reasonably adapted to avoid error. preauthorized debit, and do not require debited for the payment.
Similarly, merchants are not required to the institution to take action to respond
10(d) Notice of Transfers Varying in
check card numbers already on file to a consumer’s revocation of authority
against BIN tables. for all future debits from a particular
payee, as stated in comment 10(c)–2. When a preauthorized EFT from a
10(c) Consumer’s Right To Stop consumer’s account will vary in amount
The commenters suggested that the
Payment from the previous transfer, or from the
comment be removed or modified
Proposed comment 10(c)–3 stated that accordingly. In addition, some preauthorized amount, § 205.10(d)
an institution need not have the commenters suggested revising requires the designated payee or the
capability to block preauthorized debits, comment 10(c)–1 to state that a stop consumer’s financial institution to send
for example, where a preauthorized payment order need not be maintained written notice of the amount and date of
debit is made through a debit card by the consumer’s financial institution the transfer at least 10 days before the
system, and may instead use a third for more than six months, maintaining scheduled date of the transfer.
party to block the transfer(s), as long as that such a revision would make the Paragraph 10(d)(2) permits the payee or
such payments are in fact stopped. The comment consistent with Uniform the institution to give the consumer the
proposal revised comment 10(c)–2 to Commercial Code (UCC) provisions option of receiving notice only when a
cross-reference the new proposed relating to stop payment orders on transfer falls outside a specified range of
comment. Comment 10(c)–2 is adopted checks and with industry practice. amounts or only when a transfer differs
as proposed, and comment 10(c)–3 is Comment 10(c)–3 is adopted as from the most recent transfer by more
adopted with revisions for clarity. proposed. The comment permits an than an agreed-upon amount. Under the
In the proposal, comment 10(c)–3 was institution, upon receiving a consumer’s proposal, comment 10(d)(2)–2 would, in
added to address procedures for stop payment order, to use a third party limited circumstances, relieve financial
stopping recurring debits where the to block a preauthorized transfer if the institutions of giving the consumer the
account-holding institution is unable to institution does not have the capability option of receiving notice each time a
block a payment from being posted to to block the preauthorized debit from transfer varies from the previous
the consumer’s account because, for being posted to the consumer’s account, transfer. The final rule adopts proposed
example, the posting occurs soon after as long as the payment is in fact comment 10(d)(2)–2, with some
the transaction has been approved, such stopped, i.e., the consumer’s account is revisions for consistency with the
as where the transaction takes place not debited for the payment. Comment regulation.
over a debit card network. In these 10(c)–2 is also revised as proposed. The Some financial institutions have
cases, the institution may not have Board did not intend to imply that an suggested that while the notice
sufficient time to identify payments institution’s obligation to honor a stop- requirement is appropriate where
against which stop-payment orders have payment request is limited to a single consumer funds are transferred to a
been entered. The proposed comment preauthorized debit. If a consumer third party, it should not apply when
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provided an alternative procedure for revokes authority for all further the transfer is between accounts, as
how the account-holding institution can payments from a particular payee, the defined under Regulation E, that are
comply with the stop payment institution (through its own procedures owned by the same consumer, even
requirements of Regulation E in these or by using those of a third party, as when the accounts are held at different
circumstances. provided in new comment 10(c)–3 must financial institutions. These institutions

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1652 Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations

assert that the advance notice provision, or to strictly limit the Section 205.11 Procedures for
requirement is particularly burdensome exception to transfers of interest earned Resolving Errors
for institutions that offer certificate of in one account to another account held 11(b) Notice of Error From Consumer
deposit (CD) products that allow in the same name.
customers to set up preauthorized The Board proposed to clarify in
The final rule adopts comment comment 11(b)–7 that an institution
transfers of interest from the CD account
10(d)(2)–2 as proposed, with minor need not comply with the procedures
to another account of the consumer held
at a different institution. For such revisions for clarity. Given the express and time limits in § 205.11 for
products, monthly interest payments language in Section 907(b) of the EFTA, investigating a consumer’s assertion of
might vary solely because of the it is not appropriate to remove the an error when the consumer provides a
different number of days in each month, notice requirement entirely. notice of error after the time period
yet such variance would require the Nevertheless, the Board believes that specified in § 205.11(b). Where the error
institution to send the consumer requiring a notice for each varying involves an unauthorized EFT, however,
advance notice in each instance before transfer where the transfer is between liability for the unauthorized transfer
transferring the funds. The proposed accounts owned by the same consumer may not be imposed on the consumer
comment would give financial provides little benefit to the consumer unless the institution satisfies the
institutions flexibility to provide notice while imposing unnecessary costs on requirements of § 205.6. Comment
only when a preauthorized transfer falls the financial institution making the 11(b)–7 is adopted generally as
outside a specified range where funds transfer. Because this exception is proposed, with some revisions to
are transferred and credited to an limited to transfers of consumer funds address commenters’ concerns.
account of the consumer held at a Commenters on the issue uniformly
between accounts held by the same
different financial institution. supported the proposed comment,
consumer at different institutions, the
(Preauthorized transfers between although some industry commenters
Board believes the risk of loss from asked the Board to provide certain
accounts of the same consumer held at identity theft is minimal. In addition,
the same institution qualify for the additional clarifications. A few
because the transfers must be between commenters believed that it was unclear
intra-institutional exclusion from
consumer accounts held at different which provisions of § 205.6 were
coverage in § 205.3(c)(5).) Also, the
proposal provided that the range must financial institutions, the exception applicable where the asserted error
be an acceptable range that could be would not be applicable to transfers to involves an unauthorized transaction.
anticipated by the consumer, and the repay loans, including payday loans, For example, one commenter stated that
institution would have to notify the which are not accounts under the generic reference to § 205.6 is
consumer of the range. Regulation E. The Board is not aware of confusing in light of the limitation on
Commenters generally supported the any other circumstances that pose liability in § 205.6(b)(1) when the
proposed comment. Some industry additional risks to a consumer’s account consumer provides timely notice. The
commenters believed that the new if this comment is adopted, and thus final rule retains the general reference
comment could eliminate the need for believes it is unnecessary to limit the because the requirements for the
unnecessary notices without detriment exception to accounts solely involving consumer to provide timely notice is
to consumers, while providing cost transfers of CD interest. different under § 205.6 than under
savings for those institutions that offer § 205.11. Under § 205.11, the consumer
For consistency with § 205.10(d)(2), must provide notice 60 days after the
consumers the option of transferring
the final comment is revised to provide financial institution sends the periodic
funds to an account at another
institution on a preauthorized basis. that a financial institution may elect to statement on which the alleged error is
One industry commenter requested that provide notice only when a reflected. In contrast, under § 205.6, the
the Board provide examples of preauthorized transfer falls outside a consumer must provide notice two
acceptable ranges of balances and specified range, or differs from a business days after learning of the loss
provide optional model language. specified amount from the most recent or theft of an access device. Moreover,
Another industry commenter urged the transfer, without providing the the consequences to the consumer for
Board to go further and exclude CD consumer the option of receiving notice failing to provide timely notice differ
interest via ACH transfers from the of all varying transfers, if the funds are under §§ 205.6 and 205.11. For example,
scope of § 205.10(d) altogether, since CD transferred and credited to an account of a consumer may not find out about the
accounts are not transaction accounts, the consumer held at another financial loss or theft of an access device until
and because transfers involve accrued institution. The range or amount of more than 60 days after a periodic
interest only. variance must be reasonably anticipated statement is sent.3 In such case, the
In contrast, one ACH trade association by the consumer, and the institution consumer’s liability could still be
suggested that it may not be appropriate must notify the consumer of the range capped at $50 or less as provided under
to allow institutions to avoid providing or amount at the time the institution § 205.6(b)(1), so long as the consumer
notices with each varying transfer notifies his or her financial institution
obtains the consumer’s authorization for
without first obtaining consumer within two business days after learning
the preauthorized transfers. Comment
consent given that identity theft is an of the loss or theft of the access device,
10(d)(2)–2 includes an example of an notwithstanding the fact that the
increasingly prevalent problem. This
acceptable range where the procedures and time frames in § 205.11
commenter noted that the NACHA rules
already allow for ranges, and few preauthorized transfers are for transfers would not apply.
companies take advantage of that of interest for a fixed-rate CD account. Industry commenters also suggested
opportunity. Consumer groups believed In this case, an institution could provide that the Board conform the 60-day time
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that the proposed commentary a range based on transfers of interest for

provision could facilitate transfers out months containing 28 days and for 3 Comment 6(b)(1)–2 states that the fact that a

months containing 31 days. consumer has received a periodic statement that

of a consumer’s account to repay payday reflects unauthorized transfers cannot be deemed to
loans, and urged the Board either to represent conclusive evidence that the consumer
withdraw the proposed commentary had such knowledge.

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Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations 1653

frame for providing notices of error in to resolving the consumer’s particular would require a review of information
§ 205.11 to time frames provided under claim. As explained in the relating to other accounts and
other laws or payment system rules. supplementary information to the transactions stored in various locations.
Several commenters urged the Board to proposal, because the number and Similarly, a few commenters noted that
conform the time frame for reporting an variety of ACH payments has expanded a bank employee conducting an
error in § 205.11(b)(1) from 60 days after significantly since the ‘‘four walls’’ rule investigation might not be aware of all
the date of availability of the periodic was first adopted in 1980, an of these relationships or may lack a
statement to 60 days after the settlement institution’s review of additional practical ability to obtain all
date of the transaction consistent with information beyond the payment information about the bank’s dealings
the NACHA rules. The 60-day time instructions may be necessary to with that customer. These commenters
frame for providing a notice of error in provide consumers with a meaningful argued that a reasonable interpretation
connection with an EFT after a periodic investigation of an allegedly erroneous of the ‘‘four walls’’ rule must limit the
statement is sent, however, is a statutory or unauthorized payment. Comment bank’s duty to inquire not just about
requirement under Section 908(a) of the 11(c)(4)–5 is adopted as proposed, with information within the institution’s own
EFTA. Some commenters believed that some modifications to address records relevant to resolving the
the Board should adopt a time commenter concerns. consumer’s particular claim, but to
limitation for asserting a claim of an Some commenters favored the information that is reasonably available
unauthorized EFT of one year from the proposed comment, including consumer to the bank employee investigating the
date of availability of the periodic groups, a federal enforcement agency, consumer’s claim.
statement, consistent with time frames and a few industry commenters. These Several ACH associations asserted
established by Check 21 and § 4–408 of commenters generally agreed with the that the proposal could further confuse
the UCC. The EFTA does not contain a Board’s stated rationale for the proposed what is already a troublesome section of
time limitation for asserting a claim of comment. For example, several credit the Commentary for their members.
unauthorized EFTs, and the Board did union commenters stated that it is These and other commenters generally
not propose such a limitation. reasonable to expect financial believed that institutions would be
Accordingly, the Board declines to institutions to exhaust their review of unlikely to have readily available
adopt the suggested changes. internal records when responding to information in their records beyond the
Finally, one banking trade association alleged errors regarding consumers’ payment instructions that would assist
recommended that the Board recognize Regulation E transactions. Consumer in the review of the particular
the exception in § 205.6(b)(4) for groups urged the Board to revise the transaction, noting, for example, that the
extending the time frames for reporting comment to state that an institution’s consumer’s authorization for the
an unauthorized transaction if the reviews should consider records that transaction would be in the possession
consumer’s delay in notification is due could be helpful to resolving a of the originator-payee, not the
to extenuating circumstances. The consumer’s claim(s), not just those consumer’s institution. These
Board agrees that where a consumer is records that are dispositive. One
commenters stated that searching for,
unable to provide timely notice for an industry commenter generally agreed
and obtaining, such additional
unauthorized EFT due to extenuating with the proposal in light of both the
information would be time-consuming
circumstances, such as extended travel increased variety of EFT transaction
and costly. They added that since
or a hospitalization, an institution must types and its belief that information
authorization is between the consumer
extend the time frames provided in relevant to an assertion of error could
and the originator of the transaction, the
§ 205.6(b) for reporting the unauthorized likely to be outside the payment
proposed comment could
transaction. instructions but within the institution’s
inappropriately place the consumer’s
‘‘four walls’’ and records.
11(c) Time Limits and Extent of Most industry commenters opposed institution in the position of deciding
Investigation the proposed comment. Many industry the legitimacy of the authorization. In
Section 205.11(c)(4) permits an commenters raised concerns about their view, this issue should be resolved
institution to limit the investigation of ambiguity as to the scope of the required between the merchant or other payee
an alleged error to ‘‘a review of its own investigation, the potential burden on and the consumer—not by the
records’’ where the allegation pertains institutions, and the low likelihood of consumer’s financial institution.
to a transfer to or from a third party with yielding additional, helpful information. Many industry commenters, including
whom the institution has no agreement Several commenters asserted that it ACH associations, noted that the
for the type of EFT involved. This is would unnecessarily require institutions NACHA rules already ensure a remedy
commonly referred to as the ‘‘four to look beyond their own records and under which the consumer is already
walls’’ rule. Comment 11(c)(4)–4 could potentially require that they seek made whole in a timely manner.4 One
provides that a financial institution does to obtain information from additional industry commenter, however, argued
not have an agreement with a third parties to the transaction when payment that the NACHA rules were insufficient
party solely because it participates in instructions could resolve the claim of because of the shorter time period for
transactions that occur under the federal error. reversing transactions (chargebacks),
recurring payments programs, or that Many industry commenters were also urging instead that the Board withdraw
are cleared through an ACH or similar concerned that the proposed comment the proposed comment and encourage
arrangement for the clearing and might require that an institution look for NACHA to amend its rules to conform
settlement of fund transfers generally, or any and all potentially relevant its chargeback period to the period set
because it agrees to be bound by the records—even in cases where a forth under § 205.11 for reporting
rules of such an arrangement. Proposed consumer may have many different
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comment 11(c)(4)–5 provided that an relationships with the institution 4 Under the NACHA rules, if the consumer

institution’s ‘‘own records’’ may not be (deposit, credit, investment). One executes a written statement under penalty of
perjury within the prescribed time frame of 60 days
limited to the payment instructions commenter stated that it would be from the date of the transaction, the financial
where additional information is impractical for a large bank to comply institution will promptly re-credit the consumer’s
available within the institution relevant with the proposed comment, since it account and return the transaction to the payee.

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1654 Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations

alleged errors.5 This commenter provider and account holding ACH and ECK transactions, for example,
asserted that this change would institution. the Board believes that an institution’s
properly place the burden of assuring As stated in the proposal, the ‘‘four review of its ‘‘own records’’ should not
proper authorization of transactions on walls’’ rule was adopted when most be confined to a mere confirmation of
the originating merchant and financial third party transfers involved the payment instructions when other
institution—the two parties best preauthorized credits to a consumer’s information within the institution’s
positioned to monitor and ensure account to pay salary or other ‘‘four walls’’ could also be reviewed.
compliance with this requirement. This compensation, or preauthorized debits
commenter maintained that the from a consumer’s account to pay a Any investigation conducted under
automatic right to charge back under the utility company or other payee. In the the four walls rule must be reasonable.
NACHA rules works well for most ACH absence of an agreement between the Because the nature of a consumer’s
disputes and that extending the time financial institution and the third party, allegation of error can vary, the scope of
period for permitting charge backs it was deemed reasonable to permit an an investigation may vary. In each case,
would not impose significant additional institution to limit its investigation to an institution should use relevant
costs on merchants or its financial the institution’s own records. See 45 FR information available within its own
institution. 8248 (Feb. 6, 1980). Historically, alleged records for purposes of determining
Many industry commenters errors often pertained to the amount of whether an error occurred. Given the
recommended that the regulation the transfer. Consequently, an potential size and complexity of
require a ‘‘reasonable’’ investigation and institution would likely have very institutions and their many different
to provide examples of appropriate limited information—such as the ACH relationships with a single consumer,
steps to be taken to minimize the payment instructions—for purposes of however, it may be impractical and
compliance burden similar to existing conducting its investigation. The ‘‘four burdensome for an institution to look
guidance under Regulation Z. See, e.g., walls’’ approach thus sought to strike a throughout its entire operation for
§ 226.12(b)–3. In their view, a balance between an institution’s
potentially relevant records. The final
reasonable investigation might, for investigatory burden relative to the
rule clarifies that the information
example, consist of an examination of types of errors commonly asserted and
the institution’s practical ability to reviewed should pertain to the account
the institution’s records for the account for which the assertion of error is made
in question, but not all accounts held by procure relevant information in light of
its lack of an agreement with the third and cover a reasonable period of time.
the particular consumer at the financial The revised comment also provides
institution. These commenters believed party.
In the twenty-five years since the examples of information that an
that a ‘‘reasonable investigation’’ institution might review. These
‘‘four walls’’ analysis was adopted, the
standard would enable institutions to
increasing use of ACH as a means to examples are not set forth as an
take measures appropriate to the nature
effectuate a wide variety of third-party exclusive list.
of the error and the size of the
transfers (and preauthorized transfers) Institutions have flexibility to
has expanded significantly, and, as a determine what information is relevant
A few commenters, including
result, the types of errors that may occur to a meaningful investigation of the
consumer groups, asked the Board to
is far greater than those originally
clarify an institution’s error resolution error in question. To the extent that an
contemplated. For example, the ACH
responsibilities under the ‘‘four walls’’ account-holding institution has
network today is used to process ECK
rule when it has outsourced relevant outsourced relevant aspects of its
transactions. Similarly, a merchant may
aspects of its operations, such as use the ACH network in an on-line or operations, the investigation should
payment processing or the investigation telephone transaction to initiate an EFT include a review of service provider
of disputes. These commenters believe from a consumer’s account using the records if such records could help to
that in such cases an institution’s consumer’s checking account number. resolve the consumer’s claim. Under the
records should include a review of In these cases, consumers may ‘‘four walls’’ rule, the institution need
information that is within the encounter errors concerning not, however, include a review of
institution’s possession or control and authorizations and the types of records that are not within its
not merely within the institution’s transfers, in addition to errors regarding possession or control—such as the
physical offices. Another commenter the amounts of the resulting ACH consumer’s authorization for the
inquired how the proposed error debits. The risk that a consumer’s check transaction if such authorization is in
resolution process would work where or checking account number could be the possession of a third-party payee.
an EFT service provider (rather than an used in a fraudulent manner to make an Additional requirements may be
account holding institution) is ACH transfer from the consumer’s established by payment system or other
providing the EFT service. This account was not a concern when the rules, however.
commenter asserted that currently, ‘‘four walls’’ analysis was adopted,
account holding institutions have The proposal also solicited comment
since the typical ACH transfer then
limited error-resolution obligations with involved a preauthorized transfer to or as to whether there are circumstances in
respect to errors resulting from a third- from a known party. which the ‘‘four walls’’ rule should not
party service provider, and that the Today, when a consumer believes that apply. Industry commenters generally
proposed commentary language should a transaction is unauthorized, stated that they were unaware of such
clarify whether there is any intended information such as the location of the circumstances at this time, and that
change in the error resolution payee, the particular number of the there is typically no need to require
responsibilities between the service check (to determine if it is notably out banks to conduct investigations outside
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of order), or prior consumer account of their own records. The Board will
5 Section 205.11(b) of Regulation E generally
transactions with the same payee, that continue to monitor institutions’ error
requires a financial institution to investigate a claim resolution practices to assess the
of error that is received no later than 60 days after
could be relevant to the investigation
the institution sends the periodic statement on would more likely be within the continued viability of the ‘‘four walls’’
which the alleged error is first reflected. institution’s own records. Thus, for approach to error investigation.

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Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations 1655

Section 205.16 Disclosures at relationship with the ATM operator practice into law.’’ 6 One banking trade
Automated Teller Machines with respect to surcharges, and holders association noted that prior to the
Section 205.16 requires an ATM of cards issued under governmental enactment of the Gramm-Leach-Bliley
operator that imposes a fee on a electronic benefit transfer (EBT) Act, the operating rules for one of the
consumer for initiating an EFT or a programs. (While many financial country’s largest ATM networks
balance inquiry to provide notice to the institutions do not impose ATM required ATM operators imposing a
consumer that a fee will be imposed for surcharges on their own cardholders, surcharge for use of their ATMs to post
providing the EFT service or for a they are not ATM operators with respect conspicuous notice on the ATM that the
balance inquiry and to disclose the to those cardholders for purposes of operator ‘‘may’’ charge a fee for cash
amount of the fee. An ATM operator is § 205.16 because the institutions hold withdrawals. The trade association
any person who operates an ATM at the cardholders’ accounts.) More further noted that this practice of
which consumers initiate an EFT or a recently, many banks voluntarily disclosing that a fee ‘‘may’’ be imposed
balance inquiry, and that does not hold waived surcharges for consumers from on signage followed by a more
the account to or from which the areas affected by Hurricane Katrina. transaction-specific on-screen
transfer is made, or about which an Also, an ATM operator might charge a disclosure was, and continues to be, the
inquiry is made. Notice of the fee for cash withdrawals, but not for common practice of some of the other
imposition of the fee must be provided balance inquiries. Accordingly, the larger ATM networks in the United
in a prominent and conspicuous Board recognized in its two proposals States.
location on or at the ATM. The operator that a disclosure on the ATM that a fee Several industry commenters
must also provide notice that the fee ‘‘will’’ be imposed in all instances could specifically addressed the Board’s
will be charged and the amount of the be overly broad with respect to decision to amend the regulation in the
fee either on the screen of the ATM or consumers who would not be assessed August 2005 proposal, instead of
by providing it on paper, before the a fee for usage of the ATM. revising the commentary as originally
consumer is committed to paying a fee. Industry commenters strongly proposed. One banking trade association
In the September 2004 proposal, the supported the August 2005 proposal, stated that amending both the regulation
Board proposed to revise comment stating that it would give ATM operators and the commentary would facilitate
205.16(b)(1)–1 to clarify that ATM the flexibility to more accurately industry understanding and
operators can disclose on the ATM disclose their surcharging practices, and compliance. Two other commenters,
signage that a fee may be imposed or thereby reduce consumer confusion. representing credit unions, observed
specify the type of EFTs or consumers Several industry commenters asserted that the proposal to amend only the
for which a fee is imposed, if there are that a ‘‘will’’ disclosure could cause commentary was arguably inconsistent
circumstances in which an ATM consumers who would not be charged a with § 205.16’s current language, and
surcharge will not be charged for a fee by the particular ATM to go to a therefore the Board’s new proposal was
particular transaction. (69 FR at 56005.) different ATM, which could appropriate. A few industry commenters
After consideration of the comments inconvenience the consumer, as well as asked the Board to clarify that the
received, the Board withdrew the possibly result in a fee surcharge at the revisions do not represent a change in
proposed commentary revisions and second ATM that could have been the ATM disclosure scheme, but merely
instead proposed to amend § 205.16(b) avoided with a more accurate a restatement and clarification of the
to clarify that ATM operators may disclosure. Another industry commenter requirements of existing law.
disclose on ATM signage that a fee will noted that most consumers will be Although agreeing that the EFTA
be imposed or, in the alternative, that a unaware that the ATM signage permits signage at the ATM machine
fee may be imposed on consumers disclosure is only required for indicating that the fee is not charged in
initiating an EFT or for a balance consumers who do not hold accounts every instance, consumer groups
inquiry if there are circumstances under with the ATM operator, and that the use believed that the revised proposal did
which some consumers would not be of ‘‘may’’ could easily be understood by not sufficiently implement the statute
charged for such services. (70 FR 49891 ATM users as accommodating the ATM because it did not ensure that
(Aug. 25, 2005).) The proposed operator’s cardholders. consumers who ‘‘will’’ be charged a fee
commentary was revised to clarify that would be adequately notified of that
ATM operators that impose an ATM Industry commenters also agreed with
fact. Consumer groups believed that the
surcharge in all cases must provide the Board’s observation in the August
circumstances in which fees will not be
notice on the ATM signage that a fee 2005 proposal’s supplementary
charged generally are limited. Therefore,
will be imposed. The revisions are information that the signage disclosure
consumer groups proposed an
adopted largely as proposed, with is intended to allow consumers to
alternative approach that would require
certain revisions for clarity. identify ATMs that generally charge a
ATM operators to generally disclose that
Several large institutions have asked fee for use, while the on-screen
a fee ‘‘will’’ be imposed along with a list
whether it is permissible under § 205.16 disclosure made after the consumer has
of exceptions when a fee would not be
to provide notice on the ATM that a fee entered his or her card into the machine
imposed. Consumer groups believed
‘‘may be’’ charged for providing EFT but before the consumer is committed to
that the revised disclosure would more
services because many ATM operators, the transaction provides a more specific
adequately apprise consumers of the
particularly those owned or operated by disclosure regarding whether a fee will
fact that a fee will be imposed while
banks, apply ATM surcharges to some be incurred in that particular
still allowing ATM operators the
categories of their ATM users, but not transaction. To support their view that
flexibility to make more accurate
others. For example, an ATM operator the proposal is consistent with Sections
disclosures regarding their surcharging
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might not charge a fee to holders of 904(d)(3)(A) and (B) of the EFTA,
cards issued by foreign financial industry commenters cited a press
institutions, cardholders of banks that release issued by the original act’s 6 Banking Committee OKs Roukema ATM Fee
are part of a surcharge-free network or sponsor, Rep. Marge Roukema, which Disclosure (March 10, 1999), http://
that have entered into a contractual stated that the act ‘‘simply puts existing

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Industry commenters, however, noted provide a general disclosure that a fee EFTs have been made without the
that a rule requiring a ‘‘will’’ disclosure ‘‘will’’ be imposed, while also consumer’s permission using
along with a list of the circumstances specifying the circumstances under information from their checks. The
under which a fee would not be which a fee will not be imposed, would discussion on the applicable liability
disclosed would likely result in lengthy impose significant costs on ATM limits remains generally unchanged,
and complicated signs that consumers operators without corresponding benefit however, because the first two tiers of
are unlikely to read. Moreover, industry to consumers. Commenters indicated at liability do not apply to unauthorized
commenters also believed that the least ten different circumstances in transfers made without an access device
expense of replacing signs each time a which a waiver may apply for a given (for example, those made using
surcharge policy is changed could have ATM transaction, including surcharge- information from a check to initiate a
the unintended effect of discouraging free networks, other contractual one-time ACH debit). See comments
ATM operators from waiving fees to relationships, cards issued by foreign 2(a)–2, 6(b)(3)–2.
accommodate consumers in special financial institutions, cards delivering Model clause (d) also is revised to list
circumstances, such as in response to a governmental benefits, corporate as a new type of transfer a one-time
natural disaster. affiliations with the ATM operator, and electronic fund transfer made from a
A consumer rights attorney who in response to special circumstances, consumer account using information
opposed the Board’s September 2004 such as to provide disaster relief. Thus, from the consumer’s check. See
proposal on this issue reiterated his consumers could be confused or comment 7(b)(4)–4.
view that the current rule and discouraged by signage containing
commentary more correctly implements potentially lengthy disclosures listing A–3—Model Forms for Error-Resolution
the statute’s intent, and cited his prior the many circumstances under which a Notice
comments. This attorney urged the fee would not be imposed. Such a rule Paragraph (b) of Model Form A–3 is
Board to withdraw the current proposal. could also require ATM operators to included after its inadvertent deletion
The August 2005 revisions are modify all of their signs each time they following publication of the March 2001
adopted as proposed under the Board’s revised their surcharge practices, at
authority under Section 904(d) of the interim final rule establishing uniform
considerable cost. Industry commenters standards for the electronic delivery of
EFTA. Amending both the rule and the estimated the cost of a systemwide
commentary addresses any potential disclosures required by the EFTA and
change in ATM signage anywhere Regulation E. 66 FR 17786 (April 4,
inconsistencies between the current between $200,000 for an institution
language of § 205.16 and the earlier 2001). No changes are intended by the
with approximately 6,000 ATMs to over re-inclusion of paragraph (b). Paragraph
proposed commentary, thereby $1 million for an institution with over
facilitating industry compliance. (a) is reprinted for convenience.
16,500 ATMs. Moreover, the time
However, while the Board is amending A–6—Model Clauses for Authorizing
necessary for changing all of the signs
the regulation to address this issue, this One-Time Electronic Fund Transfer
would render at least some of the signs
amendment does not represent a change Using Information From a Check
inaccurate for a period of time.
in the Board’s interpretation of the Accordingly, for the reasons (§ 205.3(b)(2))
rule’s requirements. discussed above, § 205.16(b) is revised
The final rule clarifies the two-part Model Form A–6 is added to provide
to explicitly clarify that ATM operators model clauses for the authorization
disclosure scheme established in
may disclose on ATM signage that a fee requirements of § 205.3(b)(2) for a
Section 904(d)(3)(B) of the EFTA. The
will be imposed or, in the alternative, person that initiates an EFT using
first disclosure, on ATM signage posted
that a fee may be imposed on consumers information from a consumer’s check.
on or at the ATM, allows consumers to
initiating an EFT or for a balance Consistent with comment 2 for
identify quickly ATMs that generally
charge a fee for use. This disclosure is inquiry if there are circumstances under Appendix A, the use of appropriate
not intended to provide a complete which some consumers would not be clauses in making disclosures will
disclosure of the fees associated with charged for such services. The flexibility provide protection from liability under
the particular type of transaction the provided in the final rule allows ATM Sections 915 and 916 of the EFTA
consumer seeks to conduct. Until a operators that currently disclose that a provided the clauses accurately reflect
consumer uses his or her card at an fee ‘‘will’’ be charged to continue to use the institution’s EFT services. See also
ATM, the ATM operator does not know existing signs even if a fee is not § 205.3(b)(2)(iv). Model Clause A–6(a),
whether a surcharge will be imposed for charged in all cases. Comment 16(b)(1)– which permits payees to obtain a
that particular consumer. Rather, it is 1 is revised for consistency with the consumer’s authorization to use
the second, more specific disclosure, final rule, and to clarify that ATM information from his or her check to
made either on the ATM screen or on operators that impose an ATM initiate an EFT or to process the
an ATM receipt, that informs the surcharge in all cases must provide transaction as a check, is adopted
consumer before he or she is committed notice on the ATM signage that a fee generally as proposed. Model Clause A–
to the transaction whether, in fact, a fee ‘‘will’’ be charged. 6(a) may be used in all instances. Model
will be imposed for the transaction and Appendix A—Model Disclosure Clauses Clause A–6(b) is also adopted to
the amount of the fee. Thus, consumers and Forms accommodate those payees who may
who are charged a fee would not be want to provide more specific
adversely affected by a general notice A–2—Model Clauses for Initial information concerning their ECK
that a fee ‘‘may’’ be imposed because Disclosures practices for business reasons, and
they will have the opportunity to Model clauses for initial disclosures consolidates proposed Model Clauses
terminate the transaction after receiving contained in Appendix A (Form A–2) A–6(b) and (c). The additional
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the on-screen notice or receipt are revised to provide disclosures about information about when funds may be
containing the transaction-specific ECK transactions. In particular, model debited from the consumer’s account
disclosure. clauses (a) and (b) are revised to instruct and the non-return of checks is
The Board further believes that an consumers to notify their account provided in Model Clause A–6(c) of the
alternative rule requiring institutions to holding institution when unauthorized final rule.

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Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations 1657

V. Final Regulatory Flexibility Analysis holding a consumer’s account, the similarly authenticated by the
The Board prepared an initial Board shall by regulation assure that the consumer. The Board further
regulatory flexibility analysis as disclosures, protections, understands that many payees provide
required by the Regulatory Flexibility responsibilities, and remedies created notice on receipts at POS. Similarly,
Act (RFA) (5 U.S.C. 601 et seq.) in by [the EFTA] are made applicable to payees are generally providing written
connection with the September 2004 such persons and services.’’ 15 U.S.C. notices in ARC transactions because
proposal. The Board received no 1693b(d). The Board believes that the payment system rules require written
comments on its initial regulatory revisions to Regulation E discussed notices to be provided to consumers.
flexibility analysis. above are within Congress’ broad grant Under the amendments to Regulation
Under Section 605(b) of the RFA, 5 of authority to the Board to adopt E, payees must review the notices that
U.S.C. 605(b), the regulatory flexibility provisions that carry out the purposes of they presently provide in accordance
analysis otherwise required under the statute. with payment system rules, and may be
2. Issues raised by comments in required to revise these notices in some
Section 604 of the RFA is not required
response to the initial regulatory cases to ensure compliance with the
if an agency certifies, along with a
flexibility analysis. In accordance with amendments to Regulation E. The Board
statement providing the factual basis for
Section 3(a) of the RFA, the Board believes that these amendments will not
such certification, that the rule will not conducted an initial regulatory
have a significant economic impact on have a significant economic impact on
flexibility analysis in connection with small entities because payees are
a substantial number of small entities. the proposed rule. The Board did not
Based on its analysis and for the reasons generally providing notices regarding
receive any comments on its initial ECK and the collection of service fees
stated below, the Board certifies that regulatory flexibility analysis.
this final rule will not have a significant for insufficient funds electronically in
3. Small entities affected by the final accordance with payment system rules.
economic impact on a substantial rule. Merchants or other payees that
number of small entities. Furthermore, the Board believes that
initiate one-time EFTs from a obtaining consumer authorization for
1. Statement of the need for, and consumer’s account using information
objectives of, the final rule. The Board ECK transactions via signage at the POS
from the consumer’s check are required
is revising Regulation E to require a is less costly than obtaining
under the regulation to obtain the
person initiating an EFT using authorization via signed receipts.
consumer’s authorization for the
information from a consumer’s check to transfers. For POS and ARC Payees will have to revise their
obtain the consumer’s authorization. transactions, payees must provide a notices to inform consumers in ECK
Generally, authorization would be notice that a check will or may be transactions that funds may be debited
obtained by the payee providing a converted. For ARC transactions, notice from their account soon after payment is
notice that a check will or may be will likely be provided on a billing received and, if applicable, that
converted, and the consumer providing statement or invoice. At POS, notice consumers’ checks will not be returned
a check as payment. The requirement also must be provided on posted by their financial institutions. At POS,
would enable the Board to promote signage, and a copy of the notice must this additional information may be
consistency in the notice provided to be given to the consumer at the time of provided separately from the general
consumers by merchants and other the transaction. Payees in ECK authorization notice. The Board
payees. transactions must also provide notice understands that many payees in ARC
Additional guidance is provided in that funds may be debited from a transactions are already providing
the staff commentary about a financial consumer’s account as soon as the same notice to consumers regarding when
institution’s error resolution obligations day payment is made or received and funds may be debited from a consumer’s
for certain transactions, and to clarify that the consumer’s check will not be account when consumers’ checks are
financial institution and merchant returned by the consumer’s financial converted, and stating that consumers’
responsibilites for preauthorized institution. In addition, before a payee checks will not be returned by their
transfers from consumer accounts. may collect a service fee for insufficient financial institutions. For those payees
The EFTA was enacted to provide a or uncollected funds via EFT from a that are not already providing some
basic framework establishing the rights, consumer’s account, the payee must form of notice at POS or for ARC
liabilities, and responsibilities of provide a notice that such a fee may be transactions, the final rule provides
participants in electronic fund transfer collected by use of an EFT and disclose model language to facilitate compliance.
systems. The primary objective of the the amount of the fee. Account-holding Thus, the Board does not believe that
EFTA is the provision of individual institutions are required under the the requirement to provide notice about
consumer rights. 15 U.S.C. 1693. The regulation to disclose to their consumers the nature of ECK transactions will have
EFTA authorizes the Board to prescribe that electronic check conversion a significant economic impact on small
regulations to carry out the purpose and transactions are a new type of transfer entities.
provisions of the statute. 15 U.S.C. that can be made from a consumer’s Small financial institutions may need
1693b(a). The EFTA expressly states account. to review their initial disclosures, and
that the Board’s regulations may contain Merchants and other payees that perhaps revise them to reflect that
‘‘such classifications, differentiations, or engage in check conversion transactions electronic check conversion transactions
other provisions, * * * as, in the must obtain consumers’ authorizations are a new type of transfer that can be
judgment of the Board, are necessary or for electronic check conversion made from a consumer’s account. This
proper to effectuate the purposes of [the transactions and for the collection of disclosure is also ‘‘generic’’ and will not
EFTA], to prevent circumvention or fees debited via an EFT if a payment is vary among consumers. Model language
evasion [of the act], or to facilitate returned unpaid, and generally do so via is provided in the rule to facilitate
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compliance [with the EFTA].’’ 15 U.S.C. signage and on a transaction receipt at compliance. Thus, the Board believes
1693b(c). The EFTA also states that ‘‘[i]f the POS. In particular, payment system this requirement also should not have a
electronic fund transfer services are rules require that authorization for one- significant economic impact on small
made available to consumers by a time debits to a consumer’s account entities. The Board also understands
person other than a financial institution must be in writing and signed or that many institutions have already

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1658 Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations

revised their periodic statements to and payees will be required to obtain a an EFT to the consumer’s account. The
reflect that checks may be converted. consumer’s authorization for the notice must also disclose the amount of
4. Other federal rules. The Board electronic transfer under § 205.3(b)(2). the service fee. Finally, merchants and
believes no federal rules duplicate, The following estimates represent an payees that engage in ECK transactions
overlap, or conflict with the final average across all respondents and must provide a notice to consumers that
revisions to Regulation E. reflect variations among institutions when a check is used to initiate an EFT,
5. Significant alternatives to the based on their size, complexity, and funds may be debited from a consumer’s
proposed revisions. The Board solicited practices. The other federal agencies are account as soon as the same day
comment about potential ways to reduce responsible for estimating and reporting payment is made or received and
regulatory burden. Several commenters to OMB the total paperwork burden for consumers’ checks will not be returned
urged the Board not to require written, the institutions for which they have by their financial institution.
signed authorization for checks administrative enforcement authority. The Federal Reserve estimates that of
converted at POS. In light of the They may, but are not required to, use the 1,289 respondents regulated by the
potential impact on entities and limited the Federal Reserve’s burden estimate Federal Reserve that are required to
additional consumer benefit, the final methodology. comply with Regulation E,
rule does not require a payee to obtain The first disclosure requirement, approximately 10 originate ECK
a consumer’s signature to convert a described in § 205.7, is the initial transactions. The Federal Reserve
check. In the final rule, the Board is also disclosure that a financial institution estimates that it will take each
providing a sunset period of three years must provide to their accountholders respondent, on average, 8 hours (1
for the additional ECK disclosures about reflecting that ECK transactions are a business day) to reprogram and update
when funds may be debited from the new type of transfer that can be made their systems to include the new notice
consumer’s account and the non-return from a consumer’s account. The Federal requirement relating to ECK
of checks. The Board anticipates that Reserve estimates that each of the transactions; therefore, the Federal
increased consumer familiarity with institutions, for which it has Reserve estimates that the total annual
ECK transactions over time will make administrative enforcement authority burden is 80 hours. The final revisions
unnecessary the provision of this (collectively referred to in the following to Regulation E provide institutions
additional information. paragraphs as ‘‘respondents regulated by with model clauses (provided in
the Federal Reserve’’) will be required to Appendix A) for the new disclosure
VI. Paperwork Reduction Act
provide a revised initial disclosure to requirements. Using the Federal
In accordance with the Paperwork their accountholders. Currently, all Reserve’s methodology, the total annual
Reduction Act (PRA) of 1995 (44 U.S.C. respondents regulated by the Federal burden for all other merchants and
3506; 5 CFR part 1320 Appendix A.1), Reserve are required to provide a payees engaging in ECK transactions is
the Board reviewed the rule under the disclosure of basic terms, costs, and 639,920 hours.
authority delegated to the Board by the rights relating to EFT services under A third disclosure requirement
Office of Management and Budget Regulation E. For purposes of this PRA applies to ATM operators who are
(OMB). The final rule contains analysis, the Federal Reserve estimates required to provide notice to consumers
requirements subject to the PRA. The that it will take financial institutions, on of an ATM surcharge. Under this final
collection of information that is average, 8 hours (one business day) to rule, ATM operators will be permitted
required by this rule is found in 12 CFR reprogram and update systems to to disclose on signage posted at the
205.2(b)(3), 205.3(b)(2) and 205.7. The include the new notice requirement ATM that a surcharge ‘‘may’’ be
Federal Reserve may not conduct or relating to ECK transactions; therefore, imposed if there are circumstances
sponsor, and an organization is not the Federal Reserve estimates that the under which a surcharge is not
required to respond to, this information total annual burden for all financial imposed. All financial institutions, of
collection unless the information institutions for this requirement will be which there are approximately 19,300,
collection displays a currently valid 154,400 hours. With respect to the 1,289 potentially are subject to this
OMB control number. The OMB control Federal-Reserve-regulated institutions requirement to the extent they are ATM
number is 7100–0200. This information which must comply with Regulation E, operators under the rule. The extent to
is required to provide benefits for it is estimated that the total annual which this collection of information
consumers and is mandatory (15 U.S.C. burden for this requirement will be affects a particular financial institution
1693 et seq.). The respondents/ 10,312 hours. The final revisions to depends on the number of ATMs an
recordkeepers are for-profit financial Regulation E provide institutions with institution operates, and on whether the
institutions, including small businesses. model clauses for the initial disclosure institution elects to revise its ATM
Institutions are required to retain requirement for ECK transactions signage disclosures. For purposes of this
records for 24 months. (provided in Appendix A) that they may PRA analysis, the Federal Reserve
All financial institutions subject to use to comply with the notice estimates that it will take financial
Regulation E, of which there are requirement. institutions, on average, 8 hours (one
approximately 19,300, are considered The second disclosure requirement, business day) to revise and update ATM
respondents for the purposes of the PRA described in § 205.3(b)(2), is required signage; therefore the Federal Reserve
and may be required to provide notice when persons, such as merchants and estimates that the total annual burden
to accountholders that electronic check other payees, engage in ECK for all depository institutions for this
conversion (ECK) transactions are a new transactions. Under the final rule, requirement will be 154,400 hours. With
type of transfer that may be made from merchants and payees are generally respect to the 1,289 Federal Reserve-
a consumer’s account under § 205.7. In required to provide written notice to regulated institutions which must
addition, all persons, such as merchants obtain a consumer’s authorization for comply with Regulation E, it is
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and other payees, that engage in ECK the one-time EFT. Merchants and estimated that the total annual burden
transactions, of which there are payees will also be required to provide for this requirement will be 10,312
approximately 80,000, potentially are a written notice to obtain a consumer’s hours.
affected by this collection of authorization to collect any service fees The Federal Reserve’s current annual
information, because these merchants for insufficient or uncollected funds via burden for Regulation E disclosures is

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Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations 1659

estimated to be 63,047 hours. The final (iii) Direct deposits or withdrawals of pay a fee for the return of an electronic
rule will increase the total burden under funds; fund transfer or a check unpaid due to
Regulation E for all Federal Reserve- (iv) Transfers initiated by telephone; insufficient or uncollected funds in the
regulated institutions by 20,704 hours, and consumer’s account, when the
from 63,047 to 83,751 hours. (This (v) Transfers resulting from debit card consumer receives a notice stating that
burden estimate does not include the transactions, whether or not initiated the fee will be collected by an electronic
burden associated with the new through an electronic terminal. fund transfer from the consumer’s
disclosure requirements in connection (2) Electronic fund transfer using account, along with a disclosure of the
with payroll card accounts as information from a check. (i) This part amount of the fee, and the consumer
announced in a separate interim final applies where a check, draft, or similar goes forward with the transaction. If the
rule (Docket No. R–1247).) Using the paper instrument is used as a source of service fee for insufficient or
methodology explained above, the final information to initiate a one-time uncollected funds may be collected in
rule would increase total burden under electronic fund transfer from a connection with a point-of-sale transfer,
Regulation E for all other financial consumer’s account. The consumer the notice must be posted in a
institutions by approximately 928,096 must authorize the transfer. prominent and conspicuous location,
hours. (ii) The person that initiates an and a copy of the notice must be
Because the records would be electronic fund transfer using the provided to the consumer at the time of
maintained by the institutions and the consumer’s check as a source of the transaction.
notices are not provided to the Federal information for the transfer shall
provide a notice that the transaction * * * * *
Reserve, no issue of confidentiality
will or may be processed as an EFT, and ■ 4. Section 205.7 is amended by adding
arises under the Freedom of Information
obtain a consumer’s authorization for a new paragraph (c) as follows:
each transfer. A consumer authorizes a
List of Subjects in 12 CFR Part 205 § 205.7 Initial disclosures.
one-time electronic fund transfer (in
providing a check to a merchant or other * * * * *
Consumer protection, Electronic fund
payee for the MICR encoding, that is, (c) Addition of electronic fund
transfers, Federal Reserve System,
the routing number of the financial transfer services. If an electronic fund
Reporting and recordkeeping
institution, the consumer’s account transfer service is added to a consumer’s
number and the serial number) when account and is subject to terms and
■ For the reasons set forth in the the consumer receives notice and goes conditions different from those
preamble, the Board amends 12 CFR forward with the transaction. For point- described in the initial disclosures,
part 205 and the Official Staff of-sale transfers, the notice must be disclosures for the new service are
Commentary, as follows: posted in a prominent and conspicuous required.
location, and a copy of the notice must ■ 5. Section 205.16 is amended by
PART 205—ELECTRONIC FUND be provided to the consumer at the time
TRANSFERS (REGULATION E) revising paragraph (c) as follows:
of the transaction.
■ 1. The authority citation for part 205 (iii) The person that initiates an § 205.16 Disclosures at automated teller
electronic fund transfer using the machines.
continues to read as follows:
consumer’s check as a source of * * * * *
Authority: 15 U.S.C. 1693b. information for the transfer shall also (c) Notice requirement. To meet the
■ 2.–3. Section 205.3 is amended by provide a notice to the consumer at the requirements of paragraph (b) of this
revising paragraph (a), redesignating same time it provides the notice section, an automated teller machine
paragraph (b) as paragraph (b)(1), required under paragraph (b)(2)(ii) that operator must comply with the
revising paragraph (b)(1), and adding when a check is used to initiate an following:
new paragraphs (b)(2) and (b)(3) to read electronic fund transfer, funds may be (1) On the machine. Post in a
as follows: debited from the consumer’s account as prominent and conspicuous location on
soon as the same day payment is or at the automated teller machine a
§ 205.3 Coverage. received, and, as applicable, that the notice that:
(a) General. This part applies to any consumer’s check will not be returned (i) A fee will be imposed for providing
electronic fund transfer that authorizes by the financial institution holding the electronic fund transfer services or for a
a financial institution to debit or credit consumer’s account. For point-of-sale balance inquiry; or
a consumer’s account. Generally, this transfers, the person initiating the (ii) A fee may be imposed for
part applies to financial institutions. For transfer may post the notice required in providing electronic fund transfer
purposes of §§ 205.3(b)(2), 205.10(b), this paragraph (b)(2)(iii) in a prominent services or for a balance inquiry, but the
(d), and (e) and 205.13, this part applies and conspicuous location and need not notice in this paragraph (c)(1)(ii) may be
to any person. include this notice on the copy of the substituted for the notice in paragraph
(b) Electronic fund transfer—(1) notice given to the consumer under (c)(1)(i) only if there are circumstances
Definition. The term electronic fund paragraph (b)(2)(ii). The requirements in under which a fee will not be imposed
transfer means any transfer of funds that this paragraph (b)(2)(iii) shall remain in for such services; and
is initiated through an electronic effect until December 31, 2009. (2) Screen or paper notice. Provide
terminal, telephone, computer, or (iv) A person may provide notices that
the notice required by paragraphs (b)(1)
magnetic tape for the purpose of are substantially similar to those set
and (b)(2) of this section either by
ordering, instructing, or authorizing a forth in Appendix A–6 to comply with
showing it on the screen of the
financial institution to debit or credit a the requirements of this paragraph
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automated teller machine or by

consumer’s account. The term includes, (b)(2).
providing it on paper, before the
but is not limited to— (3) Collection of service fees via
consumer is committed to paying a fee.
(i) Point-of-sale transfers; electronic fund transfer. A consumer
(ii) Automated teller machine authorizes a one-time electronic fund * * * * *
transfers; transfer from the consumer’s account to ■ 6. In Appendix A to Part 205,

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1660 Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations

■ a. In A–2 Model Clauses for Initial (d) Transfer types and limitations sent the FIRST statement on which the
Disclosures (§ 205.7(b)), paragraphs (a), (§ 205.7(b)(4))—(1) Account access. You problem or error appeared.
(b) and (d) are revised; may use your [card][code] to: (1) Tell us your name and account
■ b. In A–3 Model Forms for Error (i) Withdraw cash from your number (if any).
Resolution Notice (§§ 205.7(b)(10) and [checking] [or] [savings] account. (2) Describe the error or the transfer
205.8(b)), paragraph (a) is republished, (ii) Make deposits to your [checking] you are unsure about, and explain as
and paragraph (b) is added; [or] [savings] account. clearly as you can why you believe it is
■ c. Section A–6 Model Clauses for (iii) Transfer funds between your an error or why you need more
Authorizing One-Time Electronic Fund checking and savings accounts information.
Transfer Using Information From a whenever you request. (3) Tell us the dollar amount of the
Check (§ 205.3(b)(2)) is added. (iv) Pay for purchases at places that suspected error.
have agreed to accept the [card] [code]. If you tell us orally, we may require
Appendix A to Part 205—Model (v) Pay bills directly [by telephone] that you send us your complaint or
Disclosure Clauses and Forms from your [checking] [or] [savings] question in writing within 10 business
* * * * * account in the amounts and on the days days.
you request. We will determine whether an error
A–2 Model Clauses for Initial Some of these services may not be occurred within 10 business days after
Disclosures (§ 205.7(b)) available at all terminals. we hear from you and will correct any
(a) Consumer Liability (§ 205.7(b)(1)). (2) Electronic check conversion. You error promptly. If we need more time,
(Tell us AT ONCE if you believe your may authorize a merchant or other however, we may take up to 45 days to
[card] [code] has been lost or stolen, or payee to make a one-time electronic investigate your complaint or question.
if you believe that an electronic fund payment from your checking account If we decide to do this, we will credit
transfer has been made without your using information from your check to: your account within 10 business days
permission using information from your (i) Pay for purchases. for the amount you think is in error, so
check. Telephoning is the best way of (ii) Pay bills. that you will have the use of the money
keeping your possible losses down. You (3) Limitations on frequency of during the time it takes us to complete
could lose all the money in your transfers—(i) You may make only [insert our investigation. If we ask you to put
account (plus your maximum overdraft number, e.g., 3] cash withdrawals from your complaint or question in writing
line of credit). If you tell us within 2 our terminals each [insert time period, and we do not receive it within 10
business days after you learn of the loss e.g., week]. business days, we may not credit your
or theft of your [card] [code], you can (ii) You can use your telephone bill- account.
lose no more than $50 if someone used payment service to pay [insert number] For errors involving new accounts,
your [card][code] without your bills each [insert time period] point-of-sale, or foreign-initiated
permission.) [telephone call]. transactions, we may take up to 90 days
(iii) You can use our point-of-sale to investigate your complaint or
If you do NOT tell us within 2
transfer service for [insert number] question. For new accounts, we may
business days after you learn of the loss
transactions each [insert time period]. take up to 20 business days to credit
or theft of your [card] [code], and we
(iv) For security reasons, there are your account for the amount you think
can prove we could have stopped
limits on the number of transfers you is in error.
someone from using your [card] [code]
can make using our [terminals] We will tell you the results within
without your permission if you had told
[telephone bill-payment service] [point- three business days after completing our
us, you could lose as much as $500.
of-sale transfer service]. investigation. If we decide that there
Also, if your statement shows (4) Limitations on dollar amounts of was no error, we will send you a written
transfers that you did not make, transfers—(i) You may withdraw up to explanation. You may ask for copies of
including those made by card, code or [insert dollar amount] from our the documents that we used in our
other means, tell us at once. If you do terminals each [insert time period] time investigation.
not tell us within 60 days after the you use the [card] [code]. (b) Error resolution notice on periodic
statement was mailed to you, you may (ii) You may buy up to [insert dollar statements (§ 205.8(b)).
not get back any money you lost after amount] worth of goods or services each In Case of Errors or Questions About
the 60 days if we can prove that we [insert time period] time you use the Your Electronic Transfers Telephone us
could have stopped someone from [card] [code] in our point-of-sale transfer at [insert telephone number] or Write us
taking the money if you had told us in service. at [insert address] as soon as you can,
time. If a good reason (such as a long
* * * * * if you think your statement or receipt is
trip or a hospital stay) kept you from
wrong or if you need more information
telling us, we will extend the time A–3 Model Forms for Error Resolution about a transfer on the statement or
periods. Notice (§§ 205.7(b)(10) and 205.8(b)) receipt. We must hear from you no later
(b) Contact in event of unauthorized (a) Initial and annual error resolution than 60 days after we sent you the
transfer (§ 205.7(b)(2)). If you believe notice (§§ 205.7(b)(10) and 205.8(b)). FIRST statement on which the error or
your [card] [code] has been lost or In Case of Errors or Questions About problem appeared.
stolen, call: [Telephone number] or Your Electronic Transfers Telephone us (1) Tell us your name and account
write: [Name of person or office to be at [insert telephone number], or Write number (if any).
notified] [Address] us at [insert address] [or E-mail us at (2) Describe the error or the transfer
You should also call the number or [insert electronic mail address]] as soon you are unsure about, and explain as
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write to the address listed above if you as you can, if you think your statement clearly as you can why you believe it is
believe a transfer has been made using or receipt is wrong or if you need more an error or why you need more
the information from your check information about a transfer listed on information.
without your permission. the statement or receipt. We must hear (3) Tell us the dollar amount of the
* * * * * from you no later than 60 days after we suspected error.

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Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations 1661

We will investigate your complaint ■ c. Under Section 205.3—Coverage, ■ q. Under Section 205.16—Disclosures
and will correct any error promptly. If under 3(b) Electronic Fund Transfer, at Automated Teller Machines, under
we take more than 10 business days to under Paragraph 3(b)(1)—Definition, 16(b) General, under Paragraph 16(b)(1),
do this, we will credit your account for paragraph 2.iv. is added; paragraph 1. is revised.
the amount you think is in error, so that ■ d. Under Section 205.3—Coverage, The revisions and additions read as
you will have the use of the money under 3(b) Electronic Fund Transfer, a follows:
during the time it takes us to complete new heading ‘‘Paragraph 3(b)(2)— Supplement I to Part 205—Official Staff
our investigation. Electronic Fund Transfer Using Interpretations
* * * * * Information From a Check’’ is added,
and paragraphs 1. through 5. are added; * * * * *
A–6 Model Clauses for Authorizing
■ e. Under Section 205.3—Coverage, Section 205.2—Definitions
One-Time Electronic Fund Transfers
under 3(b) Electronic Fund Transfer, a
Using Information From a Check 2(a) Access Device
new heading ‘‘Paragraph 3(b)(3)—
(§ 205.3(b)(2))
Collection of Service Fees via Electronic * * * * *
(a)—Notice About Electronic Check Fund Transfer’’ is added, and paragraph 2. Checks used to capture
Conversion 1. is added; information. The term ‘‘access device’’
When you provide a check as ■ f. Under Section 205.3—Coverage, does not include a check or draft used
payment, you authorize us either to use under 3(c) Exclusions from coverage, to capture the MICR (Magnetic Ink
information from your check to make a under heading Paragraph 3(c)(1)— Character Recognition) encoding to
one-time electronic fund transfer from Checks, paragraphs 1. and 2. are revised; initiate a one-time ACH debit. For
your account or to process the payment ■ g. Under Section 205.5—Issuance of example, if a consumer authorizes a
as a check transaction. Access Devices, under 5(a) Solicited one-time ACH debit from the
[You authorize us to collect a fee of Issuance, under Paragraph 5(a)(2), consumer’s account using a blank,
$l through an electronic fund transfer paragraph 1. is revised; partially completed, or fully completed
from your account if your payment is ■ h. Under Section 205.5—Issuance of and signed check for the merchant to
returned unpaid.] Access Devices, under 5(b) Unsolicited capture the routing, account, and serial
Issuance, paragraph 5. is added; numbers to initiate the debit, the check
(b)—Alternative Notice About Electronic is not an access device. (Although the
■ i. Under Section 205.7—Initial
Check Conversion (Optional) check is not an access device under
Disclosures, under 7(a) Timing of
When you provide a check as Disclosures, paragraph 1. is revised, Regulation E, the transaction is
payment, you authorize us to use paragraph 4. is removed, and paragraphs nonetheless covered by the regulation.
information from your check to make a 5. and 6. are redesignated as paragraphs See comment 3(b)(1)–1.v.)
one-time electronic fund transfer from 4. and 5.; * * * * *
your account. In certain circumstances, ■ j. Under Section 205.7—Initial
such as for technical or processing Disclosures, under 7(b) Content of Section 205.3—Coverage
reasons, we may process your payment Disclosures, under Paragraph 7(b)(4)— * * * * *
as a check transaction. Types of Transfers; Limitations,
[Specify other circumstances (at 3(b) Electronic Fund Transfer
paragraph 4. is added;
payee’s option).] ■ k. Under Section 205.7—Initial Paragraph 3(b)(1)—Definition
[You authorize us to collect a fee of Disclosures, a new heading ‘‘7(c)
$l through an electronic fund transfer * * * * *
Addition of Electronic Fund Transfer 2. Fund transfers not covered.
from your account if your payment is Services’’ is added, and paragraph 1. is
returned unpaid.] * * * * *
added; iv. Transactions arising from the
(c)—Notice For Providing Additional ■ l. Under Section 205.10— electronic collection, presentment, or
Information About Electronic Check Preauthorized Transfers, under 10(b) return of checks through the check
Conversion Written Authorization for Preauthorized collection system, such as through
When we use information from your Transfers from Consumer’s Account, transmission of electronic check images.
check to make an electronic fund paragraphs 3. and 7. are revised;
■ m. Under Section 205.10— Paragraph 3(b)(2)—Electronic Fund
transfer, funds may be withdrawn from
Preauthorized Transfers, under 10(c) Transfer Using Information From a
your account as soon as the same day
Consumer’s Right to Stop Payment, Check
[you make] [we receive] your payment[,
and you will not receive your check paragraph 2. is revised, and paragraph 3. 1. Notice at POS not furnished due to
back from your financial institution]. is added; inadvertent error. If the copy of the
■ n. Under Section 205.10— notice under section 205.3(b)(2)(ii) for
Supplement I to Part 205—Disclosures Preauthorized Transfers, under 10(d) ECK transactions is not provided to the
on Automated Teller Machines Notice of Transfers Varying in Amount, consumer at POS because of a bona fide
■ 7. In Supplement I to Part 205, the under Paragraph 10(d)(2)—Range, unintentional error, such as when a
following amendments are made: paragraph 2. is added; terminal printing mechanism jams, no
■ a. Under Section 205.2—Definitions, ■ o. Under Section 205.11—Procedures violation results if the payee maintains
under 2(a) Access Device, paragraph 2. for Resolving Errors, under 11(b) Notice procedures reasonably adapted to avoid
is revised; of Error from Consumer, under such occurrences.
■ b. Under Section 205.30—Coverage, Paragraph 11(b)(1)—Timing; Contents, 2. Authorization to process a
under 3(b) Electronic Fund Transfer, a paragraph 7. is added; transaction as an EFT or as a check. In
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new heading ‘‘Paragraph 3(b)(1)— ■ p. Under Section 205.11—Procedures order to process a transaction as an EFT
Definition’’ is added, paragraphs 1. and for Resolving Errors, under 11(c) Time or alternatively as a check, the payee
2. are redesignated as paragraphs Limits and Extent of Investigation, must obtain the consumer’s
3(b)(1)1 and 3(b)(1)2, and paragraph 3. under Paragraph 11(c)(4)—Investigation, authorization to do so. A payee may, at
is removed; paragraph 5. is added; and its option, specify the circumstances

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1662 Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations

under which a check may not be processed as a one-time EFT, the PIN may replace a card and PIN
converted to an EFT. (See model clauses authorization from that consumer previously issued. A financial
in Appendix A–6.) constitutes authorization to convert any institution may provide additional
3. Notice for each transfer. Generally, other checks provided for that invoice devices at the time it issues the renewal
a notice to authorize an electronic check or statement. Other notices required or substitute access device, however,
conversion transaction must be under this paragraph (b)(2) (for example, provided the institution complies with
provided for each transaction. For to collect a service fee for insufficient or § 205.5(b). (See comment 5(b)–5.) If the
example, a consumer must receive a uncollected funds via an EFT) provided replacement device or the additional
notice that the transaction will be to the consumer listed on the billing device permits either fewer or
processed as an EFT for each transaction account also constitutes notice to any additional types of electronic fund
at POS or each time a consumer mails other consumer who may provide a transfer services, a change-in-terms
a check in an accounts receivable (ARC) check for the billing cycle or invoice. notice or new disclosures are required.
transaction to pay a bill, such as a utility 5. Additional disclosures about ECK * * * * *
bill, if the payee intends to convert a transactions at POS. When a payee
check received as payment. Similarly, initiates an EFT at POS using 5(b) Unsolicited Issuance
the consumer must receive notice if the information from the consumer’s check, * * * * *
payee intends to collect a service fee for and returns the check to the consumer
insufficient or uncollected funds via an 5. Additional access devices in a
at POS, the payee need not provide a renewal or substitution. A financial
EFT for each transaction whether at POS notice to the consumer that the check
or if the consumer mails a check to pay institution may issue more than one
will not be returned by the consumer’s access device in connection with the
a bill. The notice about when funds may financial institution.
be debited from a consumer’s account renewal or substitution of a previously
and the non-return of consumer checks Paragraph 3(b)(3)—Collection of Service issued accepted access device, provided
by the consumer’s financial institution Fees via Electronic Fund Transfer that any additional access device
must also be provided for each (beyond the device replacing the
1. Fees imposed by account-holding accepted access device) is not validated
transaction. However, if in an ARC institution. The requirement to obtain a
transaction, a payee provides a coupon at the time it is issued, and the
consumer’s authorization at POS to institution complies with the other
book to a consumer, for example, for collect a fee via EFT for the return of an
mortgage loan payments, and the requirements of § 205.5(b). The
EFT or check unpaid due to insufficient institution may, if it chooses, set up the
payment dates and amounts are set out or uncollected funds in the consumer’s
in the coupon book, the payee may validation procedure such that both the
account does not apply to fees assessed device replacing the previously issued
provide a single notice on the coupon against the consumer’s account by the
book stating all of the required device and the additional device are not
consumer’s account-holding institution validated at the time they are issued,
disclosures under paragraph (b)(2) of for the return of an EFT or a check
this section in order to obtain and validation will apply to both
unpaid or for paying overdrafts. devices. If the institution sets up the
authorization for each conversion of a
check and any debits via EFT to the 3(c) Exclusions From Coverage validation procedure in this way, the
consumer’s account to collect any institution should provide a clear and
Paragraph 3(c)(1)—Checks readily understandable disclosure to the
service fees imposed by the payee for
insufficient or uncollected funds in the 1. Re-presented checks. The electronic consumer that both devices are
consumer’s account. The notice must be re-presentment of a returned check is unvalidated and that validation will
placed on a conspicuous location of the not covered by Regulation E because the apply to both devices.
coupon book that a consumer can transaction originated by check. * * * * *
retain—for example, on the first page, or Regulation E does apply, however, to
inside the front cover. any fee debited via an EFT from a Section 205.7—Initial Disclosures
4. Multiple payments/multiple consumer’s account by the payee 7(a) Timing of Disclosures
consumers. If a merchant or other payee because the check was returned for
will use information from a consumer’s insufficient or uncollected funds. The 1. Early disclosures. Disclosures given
check to initiate an EFT from the person debiting the fee electronically by a financial institution earlier than the
consumer’s account, notice to a must obtain the consumer’s regulation requires (for example, when
consumer listed on the billing account authorization. the consumer opens a checking account)
that a check provided as payment 2. Check used to capture information need not be repeated when the
during a single billing cycle or after for a one-time EFT. See comment consumer later enters into an agreement
receiving an invoice or statement will be 3(b)(1)–1.v. with a third party to initiate
processed as a one-time EFT or as a * * * * * preauthorized transfers to or from the
check transaction constitutes notice for consumer’s account, unless the terms
all checks provided in payment for the Section 205.5—Issuance of Access and conditions differ from those that the
billing cycle or the invoice for which Devices institution previously disclosed. This
notice has been provided, whether the * * * * * interpretation also applies to any notice
check(s) is submitted by the consumer provided about one-time EFTs from a
or someone else. The notice applies to 5(a) Solicited Issuance consumer’s account initiated using
all checks provided in payment for the * * * * * information from the consumer’s check.
billing cycle or invoice until the On the other hand, if an agreement for
provision of notice on or with the next Paragraph 5(a)(2) EFT services to be provided by an
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invoice or statement. Thus, if a 1. One-for-one rule. In issuing a account-holding institution is directly

merchant or other payee receives a renewal or substitute access device, between the consumer and the account-
check as payment for the consumer only one renewal or substitute device holding institution, disclosures must be
listed on the billing account after may replace a previously issued device. given in close proximity to the event
providing notice that the check will be For example, only one new card and requiring disclosure, for example, when

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Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations 1663

the consumer contracts for a new a credit card (or that the card is not a transferred and credited to an account of
service. debit or check card), the payee may rely the consumer held at another financial
* * * * * on the consumer’s statement without institution. The specified range or
seeking further information about the amount, however, must be one that
7(b) Content of Disclosures type of card. If the payee believes, at the reasonably could be anticipated by the
* * * * * time of the authorization, that a credit consumer, and the institution must
card is involved, and later finds that the notify the consumer of the range or
Paragraph 7(b)(4)—Types of Transfers; card used is a debit card (for example, amount at the time the consumer
Limitations because the consumer later brings the provides authorization for the
* * * * * matter to the payee’s attention), the preauthorized transfers. For example, if
4. One-time EFTs initiated using payee must obtain a written and signed the transfer is for payment of interest for
information from a check. Financial or (where appropriate) a similarly a fixed-rate certificate of deposit
institutions must disclose the fact that authenticated authorization as soon as account, an appropriate range might be
one-time EFTs initiated using reasonably possible, or cease debiting based on a month containing 28 days
information from a consumer’s check the consumer’s account. and a month containing 31 days.
are among the types of transfers that a 10(c) Consumer’s Right to Stop Payment * * * * *
consumer can make. (See Appendix A–
2.) * * * * * Section 205.11—Procedures for
2. Revocation of authorization. Once Resolving Errors
* * * * *
a financial institution has been notified
* * * * *
7(c) Addition of Electronic Fund that the consumer’s authorization is no
Transfer Services longer valid, it must block all future 11(b) Notice of Error from Consumer
1. Addition of electronic check payments for the particular debit
Paragraph 11(b)(1)—Timing; Contents
conversion services. One-time EFTs transmitted by the designated payee-
originator. (However, see comment * * * * *
initiated using information from a
consumer’s check are a new type of 10(c)–3.) The institution may not wait 7. Effect of late notice. An institution
transfer requiring new disclosures, as for the payee-originator to terminate the is not required to comply with the
applicable. (See Appendix A–2.) automatic debits. The institution may requirements of this section for any
confirm that the consumer has informed notice of error from the consumer that
* * * * * the payee-originator of the revocation is received by the institution later than
Section 205.10—Preauthorized (for example, by requiring a copy of the 60 days from the date on which the
Transfers consumer’s revocation as written periodic statement first reflecting the
confirmation to be provided within 14 error is sent. Where the consumer’s
* * * * *
days of an oral notification). If the assertion of error involves an
10(b) Written Authorization for institution does not receive the required unauthorized EFT, however, the
Preauthorized Transfers from written confirmation within the 14-day institution must comply with § 205.6
Consumer’s Account period, it may honor subsequent debits before it may impose any liability on the
* * * * * to the account. consumer.
3. Alternative procedure for * * * * *
3. Written authorization for
processing a stop-payment request. If an
preauthorized transfers. The 11(c) Time Limits and Extent of
institution does not have the capability
requirement that preauthorized EFTs be Investigation
to block a preauthorized debit from
authorized by the consumer ‘‘only by a
being posted to the consumer’s * * * * *
writing’’ cannot be met by a payee’s
account—as in the case of a
signing a written authorization on the Paragraph 11(c)(4)—Investigation
preauthorized debit made through a
consumer’s behalf with only an oral
debit card network or other system, for * * * * *
authorization from the consumer.
example—the institution may instead 5. No EFT agreement. When there is
* * * * * comply with the stop-payment
7. Bona fide error. Consumers no agreement between the institution
requirements by using a third party to and the third party for the type of EFT
sometimes authorize third-party payees, block the transfer(s), as long as the
by telephone or on-line, to submit involved, the financial institution must
consumer’s account is not debited for review any relevant information within
recurring charges against a credit card the payment.
account. If the consumer indicates use the institution’s own records for the
of a credit card account when in fact a 10(d) Notice of Transfers Varying in particular account to resolve the
debit card is being used, the payee does Amount consumer’s claim. The extent of the
not violate the requirement to obtain a investigation required may vary
* * * * * depending on the facts and
written authorization if the failure to
obtain written authorization was not Paragraph 10(d)(2)—Range circumstances. However, a financial
intentional and resulted from a bona * * * * * institution may not limit its
fide error, and if the payee maintains 2. Transfers to an account of the investigation solely to the payment
procedures reasonably adapted to avoid consumer held at another institution. A instructions where additional
any such error. Procedures reasonably financial institution need not provide a information within its own records
adapted to avoid error will depend upon consumer the option of receiving notice pertaining to the particular account in
the circumstances. Generally, requesting with each varying transfer, and may question could help to resolve a
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the consumer to specify whether the instead provide notice only when a consumer’s claim.
card to be used for the authorization is debit to an account of the consumer falls Information that may be reviewed as
a debit (or check) card or a credit card outside a specified range or differs by part of an investigation might include:
is a reasonable procedure. Where the more than a specified amount from the i. The ACH transaction records for the
consumer has indicated that the card is most recent transfer, if the funds are transfer;

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1664 Federal Register / Vol. 71, No. 6 / Tuesday, January 10, 2006 / Rules and Regulations

ii. The transaction history of the vi. Any other information appropriate special contractual relationship with the
particular account for a reasonable to resolve the claim. ATM operator regarding surcharges)—
period of time immediately preceding * * * * * may provide a notice on or at the ATM
the allegation of error; that a fee will be imposed or a notice
iii. Whether the check number of the Section 205.16—Disclosures on that a fee may be imposed for providing
transaction in question is notably out-of- Automated Teller Machines EFT services or may specify the type of
sequence; EFT for which a fee is imposed. If,
iv. The location of either the 16(b) General
however, a fee will be imposed in all
transaction or the payee in question Paragraph 16(b)(1) instances, the notice must state that a
relative to the consumer’s place of
residence and habitual transaction area; 1. Specific notices. An ATM operator fee will be imposed.
v. Information relative to the account that imposes a fee for a specific type of By order of the Board of Governors of the
in question within the control of the transaction—such as for a cash Federal Reserve System, December 30, 2005.
institution’s third-party service withdrawal, but not for a balance Jennifer J. Johnson,
providers if the financial institution inquiry, or for some cash withdrawals, Secretary of the Board.
reasonably believes that it may have but not for others (such as where the
[FR Doc. 06–145 Filed 1–9–06; 8:45 am]
records or other information that could card was issued by a foreign bank or by
be dispositive; or a card issuer that has entered into a
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