Update Proposed for Reg E Commentary

The Federal Reserve Board staff has proposed an update to the Regulation E Official Staff Commentary. This proposal contains several important changes that would modernize the Commentary to provide guidance for new types of electronic transactions.

Two primary themes to the proposal are how to treat transactions initiated with check activity or check information, and treatment of screen-scraping.

Much of the recent product development involves using a combination of check information to initiate a transfer. In addition, check return practices involve electronic transfers rather than the physical return or re-presentation of checks. The proposal would revise several of the definitions to provide clarification for which types of transactions should be covered by Regulation E.

The proposal would make changes to the commentary on the definition of access device to explain that a check used in a conversion program is not an access device. These are programs that allow a merchant to use a consumer's check as a "source document" to initiate an EFT. The transaction would be covered by Regulation E but the check would not be an access device.

The definitions of electronic terminal and electronic fund transfer would be clarified to explain that a POS terminal transaction is covered even if an access device is not used. Thus, when a check is used as a source document, the transfer would be subject to Regulation E. The Board is specifically seeking comment on this practice and the way in which merchants use information on checks to initiate EFTs. Other Commentary revisions would make the regulation consistent with NACHA rules on returned check debits, provide guidance on what constitutes a "written" plan, clarify timing rules for providing disclosures, and providing terminal location information for ATMs.

In preparing your comment letter, look beyond each item proposed and consider the overall rationale. The feasibility of managing compliance will depend on the internal consistency of these coverage definitions and how well they fit with the way you actually manage wire transfers. Look also at how the proposed changes would affect liability and consider whether liability is imposed on the party best equipped to prevent errors.

Screen Scraping
The other major area for renovation deals with screen-scraping, a term that has evolved to describe the practice of compiling information from a variety of accounts and sites to provide the consumer with a single site for information about their finances. The tricky part under Regulation E (there are plenty of privacy issues involved also) is that this process can involve three parties instead of two. The third-party screen-scraper can have an impact on transactions and information regarding transactions but is not necessarily part of the contract between the customer and the electronic transfer service provider.

In this part of the proposal, the Board is seeking information on screen-scraping techniques and related services. The Board will use this information in fashioning a rule.

The Board also invites comment on whether the aggregators of information are or are not financial institutions for purposes of Regulation E. If the aggregator has a consumer's security code and uses it to access the consumer's account, should this be an access device? Should the aggregator be treated as a financial institution under the regulation? If the aggregator is not a financial institution, the consumer would assume liability for transfers involving the third party.

Error Resolution
Never overlook the importance of resolving consumer's concerns - especially when they think an error has occurred. One of Regulation E's most important functions is to ensure that consumers have the ability to determine the accuracy and safety of their electronic transactions. Error correction requirements are thus a priority under this regulation. The proposal would clarify the time periods to be described in notices you give the customer. This is to make sure that the consumer understands the full extent of their rights - including the amount of time available to assert an error and expect resolution. Save your breath on these proposals - they are here to stay. Instead, save some time and begin implementing them now.

Electronic Signatures
The proposal also asks for comment on electronic signatures, but defers to the impact that the new digital signature act will have. This is also clearly an area for comment even though there is likely to be another round on this topic.

ACTION STEPS

Review your error correction procedures, with special attention to time periods and the level of follow-up.
Review notices for consumers who open accounts or authorize electronic transfers. Be sure they comply with the time periods in the regulation.
Write a comment letter on the proposed changes under FinMod to Regulation E.