We have a customer with a questionable charge on a non-fraud situation. He was charged a very large amount at a hotel for damage to a mattress. We might have grounds to decline, but there is a chance that we could get a chargeback. Can we accept the dispute as a courtesy, but not provide provisional credit?

Short answer = yes, you can.

Thanks for the short answer! That is very helpful. Is there a little bit longer answer that can back that up with REG E requirements?

Here are my thoughts...

Assuming the charge was authorized (probably via agreement between the customer and the hotel as part of the room rental contract), then this does not fall under section 1005.11 of Regulation E (therefore provisional credit not required per Reg E), and is merely a merchant dispute which would follow the Visa/MasterCard (as applicable) chargeback process.

As noted, it doesn't sound like Reg E because damages will be allowed for in the room rental agreement. So Reg E is off the table. If you handle it as a Reg E claim, I would say no, follow the Reg and that means provisional credit when required. But again, I'd say Reg E will not apply.

V/MC rules will allow and encourage you to assist the customer in chargebacks and disputes with merchants where Reg E will not.