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#2138046 - 07/13/17 09:02 PM Regulation E and Online Bill Payment Drafts
Compliance Geek Offline
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I have a question regarding Reg. E applicability when a claim is made that an Online Bill Payment Draft Check (Physical Check) was altered.

Scenario: Consumer authorizes Online Bill Pay, funds were transferred via EFT to a Bank GL account, a physical check was then drawn off the banks own GL account and the physical check was mailed to the stated recipient. The check is then intercepted (stolen) by a fraudster who alters and deposits/cashes the check and the true recipient never receives the money.

All of the info the customer input while scheduling the online bill pay was accurate, the bank transmitted that information as stated by the customer, so the bank and the customer did nothing wrong and made no errors in sending the bill payment. I understand that Reg. E Timing Requirements and Investigative Rules apply based on how the transactions was transmitted, my question is in regards to the outcome of the investigation and which party is liable.

In the scenario listed above, is the bank liable, from a Reg. E perspective, for the "physical" check being intercepted and altered? (Is the bank need to reimburse the customer in this scenario in accordance with Reg. E?)

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#2138047 - 07/13/17 09:30 PM Re: Regulation E and Online Bill Payment Drafts Compliance Geek
BrianC Online
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Welcome to BOL. Since the transaction was authorized and the customer was charged the correct amount, I would conclude that no Reg E error occurred and deny a Reg E claim.

However, what we have here is a breach of presentment warranty by the bank of first deposit and this claim should be handled under the Uniform Commercial Code of your state. You should request that your customer complete an affidavit of alteration which you then send as a without entry claim to the bank of first deposit requesting that they reimburse you for a breach of the presentment warranty that they made under UCC 4-408 that the check was not altered. The BOFD should reimburse you allowing you to reimburse your customer.
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#2138091 - 07/14/17 02:04 PM Re: Regulation E and Online Bill Payment Drafts BrianC
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That is what my gut feeling was, thank you for the input, I appreciate it!

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#2138137 - 07/14/17 03:37 PM Re: Regulation E and Online Bill Payment Drafts Compliance Geek
John Burnett Offline
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I would think that the bank itself completes the affidavit (the check isn't drawn on the customer's account, but on the bank's account). Otherwise, I agree with Brian.
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#2138461 - 07/17/17 07:19 PM Re: Regulation E and Online Bill Payment Drafts John Burnett
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Would you even need to open up a Reg. E claim in this scenario? (Customer knows up front that it is a alteration/forgery situation and reports that at the time of claim being made.)

I have spoken with 5 of my peers at other firms and we are split 50/50 on this.

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#2138624 - 07/18/17 07:19 PM Re: Regulation E and Online Bill Payment Drafts Compliance Geek
John Burnett Offline
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Well, it is an EFT. But it doesn't fit any of the 1005.11(a)(1) categories of errors. I do think, however, that the bank will have a contractual responsibility (part of the bill-pay agreement) to complete the payment correctly and possibly cover any costs the customer sustained (late payment fee, other penalties).
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#2200839 - 12/14/18 10:55 PM Re: Regulation E and Online Bill Payment Drafts Compliance Geek
complyorelse Offline
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We have an account takeover scenario where a person's online bill pay was taken over and several bill pay checks were cut to individuals. The bank became aware of the situation only when the person's account was overdrawn due to the bill pay transactions.

I'm trying to figure out if the bill pay checks are covered under Reg E. I am a bit confused by Official Interpretation 1005.3(b)(1)vi Definition where it seems there is a potential exclusion if it is identified that the payee will be paid with a check. At what point would the fact the payee would be paid with a check have to be disclosed - at signing up for bill pay or when creating the actual payment? The checks were also expedited so they would have been sent via FedEx. (A SAR is due.)

Since this is an account takeover scenario, maybe this potential carve out doesn't come into play anyway. Just hoping for some clarification.

Thank you.

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#2200851 - 12/17/18 02:06 PM Re: Regulation E and Online Bill Payment Drafts Compliance Geek
John Burnett Offline
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Are the bill pay checks drawn on the consumer's account or on a central account held by the bank or a vendor?

If drawn on the consumer's account, and the consumer was informed when signing up for bill-pay that all payments will be solely by check on the consumer's account, the payments will not be covered by Reg E. In that case, they will be covered by the UCC as unauthorized checks instead of being covered by Reg E.

So, if the payments were not authorized by your customer, it's really a matter of which pocket the bank will reimburse the customer from -- the EFT pocket or the paper check pocket.
Last edited by John Burnett; 12/17/18 02:16 PM.
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#2201375 - 12/21/18 10:11 PM Re: Regulation E and Online Bill Payment Drafts Compliance Geek
complyorelse Offline
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Sorry for the delayed response. The checks are actually drawn by a vendor.

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#2201722 - 12/28/18 09:36 PM Re: Regulation E and Online Bill Payment Drafts Compliance Geek
John Burnett Offline
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If they are drawn by a vendor on an account other than the customer's own account, the transfer of funds to the vendor and the check are matters for Reg E.
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