A customer claims that he did not authorize internet transactions that automatically were debited against his account. He called the company, and they said that the two charges in question were authorized using the customer's card number and a different name. The company said they would credit the customer's account for the amount of the charges, but would pursue and press felony charges against whoever authorized the charges. The customer told them not to credit his account. Customer insists that noone has access to his card or knows his card number. He filed a written error notice of unauthorized use of his debit card with the bank, and wants the bank to investigate it. What action is the bank required to take?

I would inform him that you are more than willing to return the charges as unauthorized and credit his account and then "the bank" will pursue felony charges against the perp. if idenitified during the investigation. Sounds like he wants his money but doesn't really want it investigated?? Let me guess, the charges are for a sex site??

This is a debit card, not a line of credit? That would be "Z" if it was a LOC.

First, something is fishy. Merchant: "We'll give you back your money now and go after whomever did this". Customer: "No, that's OK, I'll wait for my money from the bank because this can't be".

You have a claim and I'd go first to the merchant. Who placed the order, where did the shipment go, etc. I'd tell the customer YOU are going after whomever did this as vigorously as the merchant was going to, IF you determine it was unauthorized. I'd also tell them that they may get the refund faster if the merchant OK'd it already because you have to do your investigation first.

I'd also cancel that card.

Let's see. The customer had an easy fix in his reach and, when told the merchant would prosecute the offender if they could, the customer recanted and told the merchant not to reverse the charges. Then the customer comes to the bank and asks the bank to investigate.

Sounds suspicious to me. There are a hundred and one scams out there to steal card numbers, so the customer cannot say with a certainty that no one has his number. I suspect the customer may know who used the card, and doesn't want them to get into trouble. But he wants his dough back, or he would not have pulled the bank into the fray.

I think I would tell the customer just what the merchant allegedly said -- if we figure out who did this, we'll file charges. And then offer to take the information to process the customer's claim, if he still wants to give it.

Do we have to give them provisional credit?

You'd have to treat this claim like any other. There's every likelihood you'll have to refund the charge and pursue recovery from the merchant based on fraud. If the customer meets all the requirements for provisional credit, he gets it.

Let me ask another question. If a customer comes to us with a POS transaction and says they didn't do it, are we allowed to ask them if they have contacted the merchant? If they say "No" then can we request that they do that first telling them they could get their money faster? Or do we have to treat that as day 1 for Reg E purposes?

Perhaps both. Not a definitive answer, but once they approach you and explain the problem, I'd say your clock started.

You could explain to them what your process is and that they may be able to approach the merchant for a faster resolution. This would obviously have some variables such as who the merchant was and where they are. If I'd never heard of them and didn't want to contact them, I'd let the bank do the work. If my favorite gas station double billed me, I might go back to them.

Tell the customer that if they go to the merchant, to let you know. But I wouldn't advise them they had to go there first as that would appear to reduce their rights and remedies under "E".

We were told by an examiner that we could NOT tell the customer to go back to the merchant first under Reg E. Once they told us about the problem, it was our responsibility, not the merchant. Which is unfair to the bank I think, but, who said Reg E was fair to banks?

I would agree with that. You have to start your process. You could suggest it for the customer's benefit if they believe they may get their funds sooner, but it doesn't alter the bank's obligation to initiate and proceed with its investigation.

For some reason the theory of ratification comes to my mind. If the customer was offered full restitution by the merchant but waived it that is tantamount to ratifying (or authorizing after the fact) the charges to his account. Reg E is intended to make him whole, not ahead, and I would debate this one with an examiner if challenged.
Send him back to the merchant.

Sounds like you are back on the original question. If the customer denied a refund by the merchant and wanted their bank to handle it, I don't see where they would be ahead, nor where that is a way of authorizing the charge. "E" will still kick in, but it is most suspicious.