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Reg E: Regulation E Update Proposed (3 Action Steps)

Regulation E is one of the older consumer protection regulations on the books. It dates back to the 70's. Except for a few issues, it has not seen significant change for decades. Meanwhile, technology developments have been coming at an ever increasing speed. Regulation E has been left looking a bit like an old maid.

For some time, the primary issue to Regulation E changes or interpretations was deciding whether or not a specific transaction was an electronic transfer within the meaning of the Electronic Funds Transfer Act. This debate involved new practices and new technology ranging from telephone cards to smart cards to benefits or payroll transfers.

In recent years, several practices have become commonplace and have triggered the attention of Regulation E pundits. Conversion of checks to an electronic transfer at point of sale now affects many consumers - and takes them by surprise. Payroll using some form of electronic transfer or "smart" cards has become popular for reasons of cost and security.

Without coverage by Regulation E, there are no clear consumer protections provided by federal law. The Federal Reserve has just issued a proposal to resolve these issues. The proposal would change the definitions to bring in coverage of payroll cards and transactions where the check is used as a source document to initiate an electronic transfer.

Under the proposal, Regulation E's definition of account would be revised to add specific language describing payroll accounts. Included in this new coverage would be any account on which the employer transfers or pays wages electronically using a card with value or a card that draws on an account.

The core characteristics of a payroll account include 1) it is assigned to an identifiable consumer; 2) it represents a stream of payments to the consumer, 3) it is replenished on a recurring basis, 4) it can be used in multiple locations for multiple purposes, and 5) utilizes an access device.

The account would be covered no matter who "owns" or holds the account. Thus, the account could be in the employer's name or held by a payroll processor. As long as the employee's card can draw on that account, the situation would be subject to Regulation E.

A key element would be that the compensation be paid on a recurring basis. An employer who distributed bonus cards at the end of the year on a one-time basis would not be covered. Similarly, cards used only for making a refund such as a refund of travel expenses would not be covered unless the card and account were used repeatedly.

This addition to the definition of account is significant because the Federal Reserve is now taking steps to modernize Regulation E. Doing so will, over time, limit the ways in which transactions can be designed to evade this or other regulations. The FRB has looked at the substance of the transaction and the importance of consumer protection. We can expect this approach to be seen more in the future.

The FRB also notes that more than one participant in a payroll card program may meet Regulation E's definition of financial institution. These parties may contract among themselves for compliance responsibilities such as notifications.

Electronic Fund Transfer
Back when the EFTA was first enacted, electronic fund transfers were fairly consistent and straightforward. Now, however, financial institutions, merchants and many others have designed ways to transfer money or receive payment faster.

Electronic debits based on checks is another burgeoning use of electronic transfers without clear coverage by Regulation E. Many of these merchant transactions have an immediate impact on the consumer's account without the consumer realizing this. In addition, some such transactions occur without clear consumer authorization.

The proposal would create a revised definition of electronic transfer that specifically includes transfers where a check, draft or similar paper instrument is used to initiate the transfer.

Consumer Authorization
An electronic transfer covered by Regulation E must be authorized by the consumer. This proposed revision to Regulation E would bring merchant electronic transactions under the scrutiny of Regulation E and require notices to consumers at the cash register. If the proposed rule is adopted, the merchant would have to obtain the consumer's authorization before implementing the transfer. This step is not likely to go down smoothly.

The FRB has concluded that consumers are not always receiving adequate notice when their checks are converted by merchants to an electronic transfer. With the 2001 update to the commentary, the FRB gave notice that it would consider whether consumers were getting adequate notice for electronic transactions. As a result of the insufficient notice to consumers, the FRB has concluded that all parties to the electronic check conversions should be subject to Regulation E.

By covering transactions that are initiated using information from the consumer's check, the transfer must be authorized by the consumer. All of the Regulation E notice and authorization requirements come into play and apply to merchants as well as to financial institutions. The merchant initiating the transfer would be responsible for providing the consumer notice at the time the merchant takes information to make the transfer.

The proposal also contains model forms for compliance. Comments are due to the Federal Reserve by November 19, 2004.


  • Comment. These proposals are designed to provide customers with more powers to control their accounts. The merchant requirements should make things easier for financial institutions.
  • Between Check 21 and Regulation E and Regulation Z rules, there is much confusion about credit, debit, and electronic transfer transactions. Gear up to educate your customers about the differences.
  • Brace yourself for questions from your merchant customers and be prepared to provide support to them.

Copyright © 2004 Compliance Action. Originally appeared in Compliance Action, Vol. 9, No. 10, 10/04

First published on 10/01/2004

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