If a customers monthly statement is returned for three consecutive months, the bank places an alert on the account, places the account in a safekeepng status and does not send out any further statements until a new address is obtained from the customer or the bank resonably located the customer's new address. Is this legal under Regulation E since a notice or statement is to be sent when an EFT is conducted?

How shoudl this situation be handled, if differently than stated above?

If you cannot deliver them - you cannot deliver them. There is no reason to continue to produce them once you lose contact with the customer.