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Proposed Regulation E Amendments: Something for Everyone -- Or Not?

by John Burnett, BOL Associate Editor

On September 13, 2004, the Federal Reserve Board released for public comment proposed amendments to Regulation E, which implements the Electronic Fund Transfer Act, and to the regulation's Official Staff Commentary (OSC). As noted in the press release accompanying the proposal, the proposed revisions to the regulation "would provide guidance regarding the rights, liabilities, and responsibilities of parties engaged in electronic check conversion transactions and would provide that payroll card accounts are 'accounts' covered by Regulation E."

The proposals, if adopted as presented, will make substantive changes in how merchants and others who engage in "check conversion" transactions notify consumers of that practice, and make check converters subject to the regulation.

The other major proposal is to make payroll card accounts subject to the regulation, thus clearing up a gray area for the providers of that service.

Proposed changes to the OSC would further explain issues relating to preauthorized EFTs from consumer accounts, electronic check conversions, error resolution, and other matters.


Remember that this is only a proposal, and none of the changes described below is guaranteed to become effective. However, you should become familiar with the proposal so that you can understand the Federal Reserve Board's thinking, and be equipped to comment on the proposal.

The Board's Press Release can be found at http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040913/default.htm.

The Federal Register notice (in pre-publication format) is at http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040913/attachment.pdf.

The actual Federal Register document is at http://a257.g.akamaitech.net/7/257/2422/06jun20041800/edocket.access.gpo.gov/2004/pdf/04-20939.pdf.

The Details

Electronic Check Conversion

 The Fed is putting its "blessing" on a new abbreviation for our banking lexicon. "ECK" has become the new shorthand designation for "electronic check conversion." An ECK is a one-time ACH transaction created from the information on a check. The MICR information, plus the dollar amount of the check and the merchant or payee information are parsed into an ACH format, using either an ARC (accounts receivable check) or POP (point of purchase) standard entry class. In the case of most POP transactions, the consumer's check is voided and handed back; for ARC transactions, the check is retained, but destroyed within 14 days.

ECK transactions were officially brought under Regulation E's coverage in March 2001, when the Fed created a "bright-line test" for regulatory coverage of the transactions. In essence, the Fed opined that because the checks used to create the ECKs never actually enter the payment stream, the transactions are originated electronically, not on paper (a similar reach into paper documents was made with the inclusion of all debit card purchase transactions, even those originated with old-fashioned "knuckle buster" draft embossers).

The Fed proposes to transplant its "bright-line" test of applicability to ECKs from the Commentary into the regulation (proposed new §205.3(b)(2)). It would add specific requirements that the person making the ECK (the merchant or biller, for example) obtain an authorization for the transfer (this is already required by automated clearinghouse rules), and expand current notice requirements to inform consumers that ECKs may clear more quickly than checks, and (in ARC scenarios) the consumer won't receive the check back from his or her financial institution.

Also added would be approval to apply a single authorization to all checks tendered in payment of a given invoice or bill, for those instances when a consumer sends multiple checks or makes multiple payments to pay a single bill; and a provision allowing a consumer to give a check converter (in this case, probably a biller) authority to either convert the consumer's check or process it as a check payment. On this issue, the Fed specifically asks for comments on whether such an option would be detrimental to consumers.

Proposed changes to §205.7 and the OSC would clarify that financial institutions must include a reference to ECKs in their initial disclosures. For banks that have not sent updated disclosures or change in terms notices by the time the proposal is finalized (assuming that it is), a grace period, tentatively set at six months, would be provided to make those changes. Model language for these disclosures is also proposed to be added to Appendix A of the regulation.

Payroll Cards

 The Fed revved up the "Wayback Machine" to provide the foundation for its second major proposal. It reached back to a 1994 Federal Register document (59 FR 10678) issued when the Fed brought EBT programs under the regulation, and to the Fed's May 2, 1996 proposal (61 FR 19696) to cover certain stored-value products under Regulation E.

Although Congress prevailed upon the Fed to drop the 1996 proposal, the increased popularity of payroll card accounts has convinced the Fed to pull them under the Regulation E umbrella. Proposed new subsection 205.2(b)(3) would include such products under the definition of "account" in the regulation. Proposed comment 2(b)-2 carves out an exception for cards issued solely for one-time salary-related payments (such as a bonus), or solely for non-salary-related payments like petty cash or per diem cards for expenses. However, if those types of payments are transferred electronically to a payroll card account, the transactions would be covered by the regulation even though they don't represent wages, salary or other compensation.

Issuing Access Devices

 Proposed comment 5(b)-5 to §205.5(b) would clarify that a financial institution may issue more than one access device during a renewal or substitution for a previously accepted access device. For example, a bank could replace an accepted ATM card with a new ATM card and separate debit card. However, the second card (the debit card in this case) would have to be sent as an unsolicited device, subject to the requirements of §205.5(b).

Other changes

 The Board proposes to withdraw its earlier interpretation (comment 10(b)-3 to §205.10(b)) that a recording of a telephone conversation with a consumer who agrees to recurring debits does not provide written authorization. This was done because under some circumstances such an electronic recording could constitute an "electronic record" and "electronic signature" under the E-Sign Act, thus satisfying Regulation E's requirement for a "signed or similarly authenticated" standard for recurring debits. Other new comments to §205.10(b) would clarify when merchants might be expected to distinguish between credit and debit card transactions (for purposes of the recurring debit authorization requirement applying to debit cards).

A new comment 10(c)-3 would be added to the OSC to clarify a financial institution's obligations relating to stop payments on recurring debits.

The Board also proposed to add a new comment 10(d)(2)-2 that will make the burden of compliance easier for banks that electronically remit interest on, for instance, CD accounts to their customers' accounts at other banks. There is currently a requirement for notifying the customers of varying amounts (as might be expected with different length months). Banks would have new flexibility to provide a range of varying amounts "up front."

The Board also proposes to clarify the relationship between Error Resolution in §205.11 and Consumer Liability for Unauthorized Transfers under §205.6 after the 60 day period spelled out in the regulation, and the bank's responsibilities under the "four walls" rule that applies under §205.11(c)(4).

Finally, the Board proposes a minor change in the requirement in §205.16 for disclosures at ATMs concerning imposition of fees on non-customers for EFTs or balance inquiries.

Checklist for Action

 Some of the proposed changes should be welcomed by financial institutions. Others may impose burdens for some institutions. The Federal Reserve Board's action is a proposal, and bankers should offer the Board comments to make the final rule as workable for all as possible. Here's the start of a checklist of actions banks should consider -
  • Review the Federal Reserve proposal carefully.
  • Determine which of the proposals will affect your institution and/or its customers, and whether the effect will be positive or negative.
  • Try to quantify in dollars or time the effect of the change.
  • Determine, if you can, an alternative way the same result might be obtained, at a lower cost in dollars or time.
  • Draft a response to the proposal based on your research. Comment particularly about the changes you believe should be made in the proposal, and why; but also comment on the portions of the proposal that you believe are appropriate.
  • Proof your draft before sending it. It's better to have a concise, balanced, comment letter with a minimum of errors in grammar, spelling, and punctuation.
  • If you feel comfortable doing so, share your comments with BOL. Email them to jburnett@bankersonline.com. We would like to know what the industry is thinking, and can help others with ideas for their comment letters. We will protect your identity and that of your bank.
  • Your comments are due by November 19, 2004. They should refer to Docket No. R-1210, and can be mailed to Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C. 20551.
  • Comments can also be send by email to regs.comments@federalreserve.gov.
  • To avoid delays in mail delivery that are rampant in the Washington area, you can also fax your comment letter to the Office of the Secretary at 202-452-3819 or 202-452-3102.
First published on BankersOnline.com 9/16/04


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