[Federal Register Volume 59, Number 44 (Monday, March 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4681]


[[Page Unknown]]

[Federal Register: March 7, 1994]


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Part II





Federal Reserve System





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12 CFR Part 205



Electronic Fund Transfer; Final Rule, Proposed Rule and Proposed 
Official Staff Interpretation
FEDERAL RESERVE SYSTEM

12 CFR Part 205

[Regulation E; Docket No. R-0829]

 

Electronic Fund Transfers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is publishing a final rule to amend Regulation E, 
pursuant to its authority under sections 904(c) and (d) of the 
Electronic Fund Transfer Act, to cover electronic benefit transfer 
(EBT) programs established by federal, state, or local government 
agencies. EBT programs involve the issuance of access cards and 
personal identification numbers to recipients of government benefits so 
that they can obtain their benefits through automated teller machines 
and point-of-sale terminals. The final rule applies Regulation E to EBT 
programs but sets forth certain limited modifications under authority 
granted to the Board by section 904(c) of the act. In particular, 
periodic account statements are not required if account balance 
information and written account histories are made available to benefit 
recipients by other specified means. This rulemaking directly affects 
government agencies that administer EBT programs and indirectly affects 
depository institutions and other private-sector entities.

DATES: Effective date: February 28, 1994. Compliance date. To provide 
adequate time to prepare for compliance, the Board has delayed 
mandatory compliance until March 1, 1997.

FOR FURTHER INFORMATION CONTACT: Jane Jensen Gell or Mary Jane Seebach, 
Staff Attorneys, or John C. Wood, Senior Attorney, Division of Consumer 
and Community Affairs, at (202) 452-2412 or (202) 452-3667. For the 
hearing impaired only, contact Dorothea Thompson, Telecommunications 
Device for the Deaf (TDD), at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

(1) Background

EFT Act and Regulation E

    Regulation E implements the Electronic Fund Transfer Act (EFTA). 
The act and regulation cover any electronic fund transfer initiated 
through an automated teller machine (ATM), point-of-sale (POS) 
terminal, automated clearinghouse, telephone bill-payment system, or 
home banking program and provide rules that govern these and other 
electronic transfers. The regulation sets rules for the issuance of ATM 
cards and other access devices; disclosure of terms and conditions of 
an EFT service; documentation of electronic fund transfers by means of 
terminal receipts and account statements; limitations on consumer 
liability for unauthorized transfers; procedures for error resolution; 
and certain rights related to preauthorized transfers.
    The EFTA is not limited to traditional financial institutions 
holding consumers' accounts. For EFT services made available by 
entities other than an account-holding financial institution, the act 
directs the Board to assure, by regulation, that the provisions of the 
act are made applicable. The regulation also applies to entities that 
issue access devices and enter into agreements with consumers to 
provide EFT services.

Government Programs Involving Electronic Delivery of Benefits

    The federal government, in conjunction with state and local 
agencies, is working to expand electronic delivery of government 
benefits both for direct federal benefit programs and for federally 
funded programs that are state administered. An electronic benefit 
transfer (EBT) system functions much like a private-sector EFT program. 
Benefit recipients receive plastic magnetic-stripe cards and personal 
identification numbers (PINs) and access benefits through electronic 
terminals. For cash benefits such as Aid to Families with Dependent 
Children (AFDC) or Supplemental Security Income (SSI), the programs may 
use existing private-sector ATM networks as well as POS terminals to 
disburse benefits. For food stamp purchases, the programs use POS 
terminals in grocery stores. In some cases the POS equipment is 
dedicated solely to the EBT program, while in others it also is used 
for private-sector transactions.
    For many state and local agencies, EBT may provide a way to 
increase operational efficiency, to reduce costs, and to improve 
service to benefit recipients. Federal legislation that took effect 
April 1, 1992, provided new impetus for the use of EBT, authorizing the 
states to use electronic delivery of food stamp benefits in place of 
paper coupons. States previously could seek approval to use EBT for 
food stamp benefits only on a demonstration basis. Currently, about 30 
states have EBT programs in different stages of operation or 
development.
    In November 1993, the Clinton administration established a Federal 
Electronic Benefits Task Force. The group's assigned task is to develop 
and implement a nationwide system for the electronic delivery of 
benefits from government programs, pursuant to a recommendation from 
the National Performance Review. In December, the EBT Task Force wrote 
to the Federal Reserve Board, expressing the federal agencies' 
commitment to providing consumer protection for EBT recipients, and 
noting at the same time the need for program integrity and 
accountability for public funds. The EBT Task Force asked that the 
Board provide a three-year delay in the effective date if the Board 
should ultimately decide to apply Regulation E to EBT programs. The EBT 
Task Force stated that this delay was necessary for implementing EBT in 
accordance with Regulation E; among other things, the agencies needed 
the time to collect and evaluate comparative loss data at EBT test 
sites, data that they could then use as the basis for seeking 
legislative authorization and funding to pay for replacing benefits 
lost due to unauthorized transfers.

(2) Discussion

Board Authority

    The Federal Reserve Board has a broad mandate under the EFTA to 
determine coverage when electronic services are offered by other than 
traditional financial institutions. Section 904(d) provides that in the 
event EFT services are made available to consumers by a person other 
than a financial institution holding a consumer's account, the Board 
shall ensure that the act's provisions are made applicable to such 
persons and services.
    The legislative history of the EFTA provides guidance on the 
Board's authority to determine if particular services should be covered 
by the act, based on whether transfers are initiated electronically, 
whether current laws provide adequate consumer safeguards, and whether 
coverage is necessary to achieve the act's basic objectives. A Senate 
Banking Committee report noted that the statutory delegation of 
authority to the Board enables the Board to examine new services on a 
case-by-case basis, thereby contributing substantially to the act's 
overall effectiveness. The Congress contemplated that, as no one could 
foresee EFT developments in the future, regulations would keep pace 
with new services and assure that the act's basic protections continue 
to apply. See S. Rep. No. 915; S. Rep No. 1273, 95th Cong., 2d Sess. 
25-26 (1978).
    In February 1993 the Board published a proposal to amend Regulation 
E to cover EBT programs, with certain modifications. 58 FR 8714, 
February 17, 1993. The Board believes that a number of factors support 
Regulation E coverage of EBT programs. EBT recipients use the same 
kinds of access devices and electronic terminals in conducting 
transactions as do consumers of EFT services in general. Indeed, in EBT 
systems that piggyback on existing EFT networks, the terminals used are 
one and the same. The transactions themselves, such as cash withdrawals 
and purchases, are also similar.
    To obtain benefits, recipients insert a magnetic-stripe card into a 
terminal that reads the encoded information, and enter a PIN to verify 
their identity. The terminal communicates with a database to ascertain 
that a recipient is eligible for benefits, that the card has not been 
reported lost or stolen, and that benefits are available in an amount 
sufficient to cover the requested transaction. In cash benefit 
programs, the recipient receives a cash disbursement; in the case of 
food stamp benefits, the recipient's allotment is charged and the 
merchant's account credited for the amount of the food purchase. From a 
recipient's viewpoint, an EBT system functions much the same as if the 
recipient had an ordinary checking account with direct deposits of 
government benefits and with ATM and POS service available to access 
the benefits.
    The Board believes that the strong similarity of EBT systems and 
other EFT services, the act's legislative history, and the language of 
the EFTA and Regulation E support coverage of EBT programs under the 
act and regulation. Therefore, the Board has determined that EBT 
programs must comply with the requirements of Regulation E as modified 
by this final rule, pursuant to its authority under 904(c) and (d) of 
the EFTA.
    The Board's action, amending the regulation, supersedes an 
interpretation in the Official Staff Commentary to Regulation E (12 CFR 
part 205, supp. II). The commentary stated that an electronic payment 
of government benefits was not a credit or debit to a ``consumer asset 
account'' because the account was established by a government agency 
rather than the consumer (the recipient). The Board has reexamined that 
interpretation, and has concluded that a sufficient basis does not 
exist for excluding these accounts from Regulation E's coverage.
    The act defines the term ``account'' to mean ``a demand deposit, 
savings deposit, or other asset account * * * as described in 
regulations of the Board, established primarily for personal, family, 
or household purposes * * *.'' Regulation E uses substantially the same 
wording, and refers to ``other consumer asset account.'' The reference 
to ``consumer'' asset accounts distinguishes them from business-purpose 
accounts, which are not subject to the regulation.
    The EFTA's coverage is not limited to traditional depository 
institutions, but may extend to any person (including a government 
agency) ``* * * who issues an access device and agrees with a consumer 
to provide electronic fund transfer services.'' In the case of EBT 
programs, the Board's action will affect primarily government agencies 
that administer EBT programs and issue EBT cards to benefit recipients 
for accessing benefits, or that arrange for such services to be 
provided. The revised rule will affect only indirectly most depository 
institutions and other private-sector entities.

Board's Proposal

    While the Board proposed general coverage of EBT under the EFTA, 
the proposal published in February 1993 modified certain documentation 
requirements, recognizing differences between EBT and EFT systems. A 
periodic statement would not be required if information about account 
balances and account histories were otherwise made available to 
consumers. In addition, modifications were proposed in the rules on the 
issuance of access devices, initial disclosures, and the notices on 
error resolution procedures, to tailor the requirements to EBT 
programs.
    The Board received approximately 175 comment letters on its 
proposal from a broad range of commenters. About 125 commenters--
including state and local agencies that provide benefits, federal 
agencies, financial institutions, and a bank trade association--opposed 
the Board's proposal. Many of them requested an exemption for EBT 
programs from the Regulation E liability and error resolution rules. 
They asserted that full application of Regulation E would increase the 
costs of delivering benefits to the point that offering EBT might not 
be economically feasible, because EBT programs may be only marginally 
cost-effective even without factoring in Regulation E compliance costs. 
They expressed the view that the expected advantages of EBT might not 
be realized if Regulation E were to apply, and that its application 
would hinder the introduction or expansion of EBT programs.
    In place of the Board's proposal, the majority of the commenters 
supported recommendations given to the Board in May 1992 by an 
interagency steering committee established within the federal 
government to coordinate EBT efforts among program agencies. Agencies 
represented on that group included the Treasury Department's Financial 
Management Service, the Agriculture Department's Food and Nutrition 
Service, the Health and Human Services Department's Social Security 
Administration and Administration for Children and Families, the Office 
of Management and Budget, and other federal agencies that have an 
interest in planning for EBT systems. The steering committee's proposal 
primarily differed from the Board's proposal in that benefit recipients 
would be liable for unauthorized transfers subject to certain 
conditions, and the error resolution requirements would not apply if an 
agency maintained ``efficient, fair, and timely procedures'' for 
resolving errors and disputes, including an appeals process.
    Anticipating public opposition to Regulation E coverage, the Board 
in the proposal indicated that commenters should offer explanations of 
why modifications in the regulatory requirements were needed, together 
with specifics such as data on costs. Approximately 35 commenters 
included estimates of the additional cost they believed would be 
imposed by Regulation E. In some cases the estimates were quite 
detailed. A few estimates were based on agency experience with the 
replacement of lost or stolen cards in EBT programs. Most of the cost 
estimates were based on loss and fraud experience under existing paper-
based benefit programs (such as mailed AFDC checks and mailed food 
coupons). Nationwide, one group estimated the projected costs due to 
Regulation E, in worst-case scenarios, to be between $164 million and 
$986 million annually.
    Many commenters suggested that private-sector financial 
institutions differ from government agencies in ways that relate to how 
compliance costs can be borne. For example, financial institutions can 
control their costs by selecting the customers to whom they are willing 
to offer EFT services, while program agencies must accept all who 
qualify for the benefit program. If a customer of a financial 
institution is suspected of engaging in fraud, the institution can 
terminate the account relationship. In a like situation, an agency 
could shift a recipient from EBT back to the paper-based system, but 
commenters believe it may not be feasible to operate dual systems.
    Similarly, commenters noted, private-sector institutions handle 
losses related to the Regulation E customer-liability limitations by 
spreading the losses over their entire customer base in the form of 
increased fees or reduced interest paid. Agencies cannot do so, and 
thus losses would have to be paid out of tax revenues, or, where 
permitted, by reducing benefits. If neither method is available, then 
the EBT program would be eliminated or cut back.
    Approximately 35 commenters supported the Board's proposal. This 
group included advocacy groups for benefit recipients, financial 
institutions, a bank trade association, and individuals. These 
commenters agreed with the premise that the same rules should apply to 
both EBT recipients and EFT users in the general public, and that both 
government and private-sector organizations offering EFT services 
should be subject to the same rules.
    Some commenters in this group called for even greater consumer 
protection for EBT recipients than would be provided by existing 
Regulation E. For example, one advocacy group argued that the 
regulation should prohibit mandatory EBT programs. Other commenters 
urged the Board to require disputed amounts to be provisionally 
credited to the consumer's account within one business day (instead of 
10 business days for ATM transactions, or 20 business days for POS 
transactions, as allowed by existing Regulation E). A coalition of 
consumer groups suggested that the limits on liability for unauthorized 
transactions are too high in the EBT context, and that, for example, 
the $50 liability that can be imposed even if a recipient promptly 
reports a lost or stolen debit card should be reduced or eliminated.

Final Action on Proposal

    After a review of the comments, further analysis, and a weighing of 
policy considerations, the Board has adopted a final rule pursuant to 
its authority under 904 (c) and (d) of the EFTA. The Board's action 
requires EBT programs to comply with the requirements of Regulation E 
as modified by this final rule. The Board continues to believe that all 
consumers using EFT services should receive substantially the same 
protection under the EFTA and Regulation E, absent a showing that 
compliance costs outweigh the need for consumer protections. The Board 
recognizes that benefit program agencies are concerned about the 
operational and cost impacts of coverage, specifically in the areas of 
liability for unauthorized transfers and error resolution, but believes 
that the cost data presented to support exemptions in these areas were 
not definitive.
    The Board has provided a delayed implementation date, making 
compliance optional until March 1, 1997, in keeping with a request 
received in December 1993 from the Federal EBT Task Force. As discussed 
above, the EBT Task Force, which represents all the major agencies with 
large individual benefit programs, asked for the three-year delay so 
that agencies could develop and implement a nationwide system for 
delivering multiple-program benefits in compliance with Regulation E.
    The Board's modified rules for EBT programs are limited to programs 
for disbursing welfare and similar government benefits. Some of the 
military services, as well as certain private-sector employers, have 
installed ATMs through which salary and other payments can be made in a 
manner similar to EBT systems. Such systems remain fully covered by 
Regulation E.
    In bringing EBT accounts within the scope of the EFTA's definition 
of ``account,'' the Board does not take a position about the legal 
status of the funds for any other purpose. For example, legal ownership 
of the funds in EBT accounts (by the recipient or a state, for 
instance) is not affected by this rulemaking.
    Some commenters asked for clarification on whether the Board viewed 
specialized types of programs, such as Medicaid, or programs using 
different technology (specifically, smart card programs) as covered by 
the EFTA and Regulation E. The Board believes that when a consumer can 
access funds in an account using electronic means, Regulation E is 
applicable. The Board believes that Medicaid programs do not involve an 
account within the meaning of Regulation E, given that benefits under 
these programs are not made available to the consumer in terms of a 
dollar amount available to be accessed by the consumer, as is the case 
in EBT programs such as AFDC, SSI, and food stamps.
    With regard to smart card systems, the Board has issued a proposal 
to review Regulation E, also published in today's Federal Register, 
that solicits comment on the question of coverage of smart card systems 
in general (both public and private sector). Any determination made on 
coverage of smart cards in the review could apply to EBT smart card 
programs.

(3) Explanation of New Sec. 205.15

Section 205.15--Electronic Fund Transfer of Government Benefits

    A new section is added to the regulation to specifically address 
the rules on the electronic fund transfer of government benefits. 
Agencies are generally required to comply with all applicable sections 
of the regulation. Section 205.15 contains the modified rules for EBT 
programs on the issuance of access devices, periodic statements, 
initial disclosures, liability for unauthorized use, and error 
resolution notices.
Paragraph (a)--Government Agency Subject to Regulation
Paragraph (a)(1)
    The act and regulation define coverage in terms of ``financial 
institution.'' Coverage applies to entities that provide EFT services 
to consumers whether these entities are banks, other depository 
institutions, or other types of organizations entirely. The substance 
of paragraph (a)(1), which defines when a government agency is a 
financial institution for purposes of the act and regulation, is 
unchanged from the proposal. Editorial changes have been made for 
clarity.
Paragraph (a)(2)
    The term ``account,'' which is defined generally in Sec. 205.2(b), 
is defined for purposes of Sec. 205.15 to mean an account established 
by a government agency for distributing benefits to a consumer 
electronically, such as through ATMs or POS terminals, whether or not 
the account is directly held by the agency or a bank or other 
depository institution. For example, an ``account'' under this section 
would include use of a database containing the consumer's name and 
record of benefit transfers that is accessed for verification purposes 
before a particular transaction is approved. For purposes of this 
section, government benefits include cash benefits such as AFDC and SSI 
and noncash benefits such as benefits under the food stamp program.
Paragraph (b)--Issuance of Access Devices
    Under Sec. 205.5, debit cards, PINs, and other access devices may 
not be issued except in response to a consumer's request or application 
for a device, or to replace a device previously accepted by the 
consumer. Financial institutions are permitted to issue unsolicited 
access devices in limited circumstances under Sec. 205.5(b). The 
general prohibition against unsolicited issuance is intended to protect 
a consumer against the issuance of an access device that could be used 
to access the consumer's funds without the consumer's knowledge and 
approval or without the consumer's being informed of the terms and 
conditions applicable to the device.
    The Board's final rule makes clear that in the case of EBT, an 
agency may issue an access device to a recipient without a specific 
request. A recipient of government benefits is deemed to have requested 
an access device by applying for benefits that the agency disburses or 
will disburse by means of EBT. The Board believes that it is unlikely 
that a government agency would issue an access device without the 
recipient's being made aware that the way to access benefits is by use 
of the device and that to safeguard benefits the device must be 
protected. Moreover, given that initial disclosures would be provided 
during training, the recipient will be informed of the account's terms 
and conditions.
    The Board does recognize, however, commenters' concerns about the 
need for agencies to verify the identity of the consumer receiving the 
device before it is activated. As in the case of the private sector, an 
issuing agency will have to verify the identity of the consumer by a 
reasonable means before a device is activated. Reasonable means include 
methods of identification such as a photograph or signature comparison.
    Some commenters expressed concern about the statutory prohibition 
against the compulsory use of EFT and its implications for EBT 
programs. Section 913 of the EFTA prohibits requiring a consumer to 
establish an account at a particular institution for receiving 
electronic fund transfers as a condition of employment or receipt of 
government benefits. This prohibition does not prevent an agency from 
requiring benefits to be delivered electronically.
    In EBT programs, agencies do not require recipients to open or 
maintain bank accounts at a particular institution for the electronic 
receipt of government benefits. This is the case even when an agency 
enters into an arrangement with a single financial institution that 
then serves as the agency's financial intermediary. Consequently, the 
Board believes that the prohibition against compulsory use is not an 
impediment to mandatory EBT programs. Nevertheless, pursuant to its 
authority under section 904(c) of the EFTA, the Board has determined 
that a government agency with a mandatory EBT program should ensure 
that recipients of cash benefits have access to other electronic 
options (for example, direct deposit of benefits to an existing bank 
account or to an account established by the recipient for that 
purpose).
Paragraph (c)--Alternative to Periodic Statement
    Regulation E requires financial institutions to provide periodic 
statements for an account to or from which EFTs can be made. Periodic 
statements are a central component of Regulation E's disclosure scheme. 
But as long as other means of obtaining account information are 
available to benefit recipients, the Board believes that periodic 
statements are not absolutely necessary for EBT programs due to the 
limited types of transactions involved, particularly given the expense 
of routinely mailing monthly statements to all recipients. Moreover, 
requiring periodic statements could impede the effort to eliminate 
paper and move toward a fully electronic system. Most commenters 
supported the Board's proposal to exempt government agencies from the 
requirement if the agency furnishes the consumer with other means of 
accessing account information.
    Under the proposal, agencies were to provide balance information by 
means of an electronic terminal, balance inquiry terminal, or a readily 
available telephone line, and to make available a written account 
history upon request. The final rule contains these alternatives with 
modifications that respond to the comments.
    To make balance information readily available, the proposal also 
would have required that the terminal receipt show the balance 
available to the consumer after the transfer. A number of commenters 
stated that this requirement would be difficult for some EBT systems to 
implement because existing ATM networks may not be capable of providing 
current account balances at all times. Commenters suggested that giving 
consumers access to balance information by other means (such as 
telephone or balance inquiry terminals) would achieve the same purpose. 
Accordingly, the final rule does not require that terminal receipts 
include the account balance as long as a consumer can access balance 
information by the other means set forth in paragraph (c) of this 
section.
    A number of commenters urged that agencies should not make 
telephone access the only method by which a recipient can obtain an 
account balance. Taking these comments into consideration, the Board 
has modified the final rule. The final rule requires, in addition to a 
telephone line, at least one alternative method (such as a balance 
inquiry terminal) for access to balance information.
    Commenters suggested that the telephone line be toll-free and 
available on a 24-hour basis. For EFT systems generally, the Board 
interprets a readily available telephone line to mean at least a local 
or toll-free line available during standard business hours. The Board 
believes that the same interpretation is appropriate for EBT systems, 
although an agency may of course choose to provide recipients with a 
24-hour line.
    Commenters requested that the Board provide certainty by clarifying 
how a consumer may request a written account history and the time 
period for compliance. The final rule clarifies that a request may be 
either written or oral, that the history should cover the 60 calendar 
days preceding the request date, and that the history should be 
provided promptly upon request. In addition, commenters asked for 
clarification about whether an agency could charge for written account 
histories or other disclosures required by the regulation. The Board 
believes that imposing fees in such instances would be contrary to 
public policy.
    The Board had solicited comment on whether more complex EBT systems 
developed in the future (for example, systems allowing third-party 
payments) may necessitate periodic statements or other documentation, 
and whether the Board should address this issue at present. Several 
commenters encouraged the Board not to address the issue at this time, 
but to delay a decision until performance under the final rule can be 
assessed. Accordingly, the Board has deferred taking a position at this 
time.
Paragraph (d)--Modified Requirements
Paragraph (d)(1)--Initial Disclosures
    Section 205.7 requires that written disclosures of the terms and 
conditions of an EFT service be given at or before the commencement of 
the service. Three disclosures have been modified for EBT programs. 
Under paragraph (d)(1)(i), government agencies must disclose the means 
by which the consumer may obtain account balance information, including 
the telephone number for that purpose. The disclosures will explain the 
ways in which balance information will be made available. (See model 
disclosure form A(12) below.) Under paragraph (d)(1)(ii), agencies must 
disclose that the consumer has the right to receive a written account 
history, upon request, and must provide a telephone number for 
obtaining the account history. This disclosure substitutes for the 
disclosure of a summary of the consumer's right to a periodic statement 
under Sec. 205.7(a)(6) of the regulation. Under paragraph (d)(1)(iii), 
agencies must provide an error resolution notice substantially similar 
to model disclosure form A(13) rather than the notice currently 
contained in Sec. 205.7(a)(10).
Paragraph (d)(2)--Annual Error Resolution Notice
    Section 205.8(a) of the regulation requires that financial 
institutions provide a notice in advance of certain adverse changes to 
terms that were disclosed in the initial disclosures. No modification 
has been made for EBT programs. Consequently, agencies will have to 
provide a notice for certain changes in terms, such as in transaction 
limitations. Other changes, such as a decrease in the amount of a 
consumer's benefits, continue to be governed only by the agencies' 
program rules.
    Section 205.8(b) of the regulation requires financial institutions 
to provide periodic error resolution notices to consumers, either 
annually or with each monthly account statement. In substitution for 
these notices, paragraph (d)(2) requires agencies to provide an error 
resolution notice substantially similar to model disclosure form A(13). 
The notice is to be provided annually.
Paragraph (d)(3)--Limitations on Liability
    Section 205.6 of the regulation limits a consumer's liability for 
unauthorized transfers. If the consumer notifies the account-holding 
institution within two business days after learning of the loss or 
theft of a debit card, the consumer's liability is limited to $50. If 
notification is not made until after two business days, liability can 
rise another $450 for transfers made after two business days, for a 
total of $500. If the consumer does not notify the institution until 
more than 60 days after a periodic statement is sent showing an 
unauthorized transfer, the consumer's liability is unlimited for 
unauthorized transfers occurring after the 60th day and before 
notification.
    The Board believes that the EFTA generally mandates the same degree 
of protection for benefit recipients as for the general public. The 
Board solicited comment on potential costs associated with implementing 
the liability rules for EBT programs and why such implementation would 
present a greater burden for government agencies than that experienced 
by financial institutions. Commenters submitted data on the expected 
cost impact of Regulation E on EBT programs, specifically on costs 
related to the limitations on consumer liability for unauthorized 
transfers and error resolution requirements; as discussed earlier, 
however, the Board believes the data are not definitive. Under the 
final rule, therefore, the limits on liability for unauthorized use, 
the error resolution requirements, and most other provisions of 
Regulation E would apply to EBT.
    The Board recognizes the concerns about the potential cost impact 
of coverage, especially in regard to unauthorized use because of the 
potential for abuse through fraudulent claims. The Board believes, 
however, that through the leadership of the Federal Electronic Benefits 
Task Force, which has the goal of developing a nationwide system for 
delivering government benefits electronically, it should be possible 
for the agencies to implement cost-effective procedures that will help 
minimize the risk of fraudulent claims and potential abuse of EBT 
systems.
    The Board notes in particular that Regulation E does not mandate an 
automatic replacement when a claim of lost or stolen funds is made. In 
the case of EBT as in the private sector, the agency would investigate 
the claim, consider the available evidence, and exercise judgment in 
making a determination about whether the transfer was unauthorized or 
was made by the recipient or by someone to whom the recipient gave 
access. The Board does not underestimate the difficulties that these 
investigations may pose for EBT program agencies. But the Board also 
believes that practical ways can be found, within the scope of 
Regulation E, that will enable EBT administrators to control potential 
losses.
    The operational procedures developed to minimize risk will need to 
address some aspects of EBT that are different from the commercial 
setting--such as the fact that program agencies, unlike private sector 
institutions, may not be able in cases of suspected fraud or abuse 
simply to terminate their relationship with the recipient. Some of the 
measures that federal agencies have inquired about, which may be 
compatible with the special requirements of EBT, relate to aspects of 
the relationship that are not addressed by Regulation E. Thus their 
implementation would not conflict with regulatory requirements. Some of 
these include putting recipients on restricted issuance systems--
requiring, for instance, that the recipient call in advance for 
authorization before each access to benefits, or restricting the sites 
at which the recipient could obtain benefits, or crediting the 
recipient's benefits in weekly increments rather than the full monthly 
amounts. Or the agency could appoint a representative payee, or place 
the recipient on a backup paper-based benefit payment system. Imposing 
these or other limitations may not be desirable from either an agency's 
or the recipients' perspective except in circumscribed situations. But 
if found to be cost-effective, such measures represent some possible 
approaches for dealing with recipients who show themselves to be 
irresponsible in their use of the EBT system.
    In regard to recurring claims for the replacement of benefits, EBT 
agencies may not establish a presumption that, because a recipient has 
filed a claim in the past, the recipient's assertion of a second claim 
of unauthorized withdrawals can be automatically rejected. On the other 
hand, depending on the circumstances, it would not be unreasonable for 
the agency, in making its determination about the validity of a claim, 
to give weight to the fact that a particular recipient within a certain 
period of time has previously filed a claim, or multiple claims, of 
stolen funds. The Board believes that these are just some of the areas 
in which the Federal EBT Task Force can be helpful in setting operating 
guidelines and procedures.
    Regulation E provides that a consumer may bear unlimited liability 
for failing to report within 60 days any unauthorized transfers that 
appear on a periodic statement. Because EBT recipients will not receive 
periodic statements, under the Board's proposal the 60 days would have 
run from the transmittal of a written account history provided upon the 
consumer's request. The final rule differs somewhat in that the 60-day 
period also can be triggered when the consumer obtains balance 
information via a terminal or telephone or on a terminal receipt.
Paragraph (d)(4)--Error Resolution
    Section 205.11 of Regulation E sets certain time limits within 
which a consumer must file a notice of an alleged error. Under the 
Board's proposal for EBT, government agencies were to comply with the 
error resolution procedures in Sec. 205.11 in response to an oral or 
written notice of error from the consumer received no later than 60 
days after the consumer obtained a terminal receipt or a written 
account history on which the alleged error was reflected. The final 
rule differs somewhat, in that error resolution procedures can be 
triggered by any information provided to the consumer under paragraph 
(c).

List of Subjects in 12 CFR Part 205

    Consumer protection, Electronic fund transfers, Federal Reserve 
System, Reporting and recordkeeping requirements.

    For the reasons set forth in the preamble, the Board amends 12 CFR 
part 205 as follows:

PART 205--ELECTRONIC FUND TRANSFERS (REGULATION E)

    1. The authority citation for part 205 is revised to read as 
follows:

    Authority: 15 U.S.C. 1693.

    2. Section 205.15 is added to read as follows:


Sec. 205.15  Electronic fund transfer of government benefits.

    (a) Government agency subject to regulation. (1) A government 
agency is deemed to be a financial institution for purposes of the act 
and regulation if directly or indirectly it issues an access device to 
a consumer for use in initiating an electronic fund transfer of 
government benefits from an account. The agency shall comply with all 
applicable requirements of the act and regulation, except as provided 
in this section.
    (2) For purposes of this section, the term account means an account 
established by a government agency for distributing government benefits 
to a consumer electronically, such as through automated teller machines 
or point-of-sale terminals.
    (b) Issuance of access devices. For purposes of this section, a 
consumer is deemed to request an access device when the consumer 
applies for government benefits that the agency disburses or will 
disburse by means of an electronic fund transfer. The agency shall 
verify the identity of the consumer receiving the device by reasonable 
means before the device is activated.
    (c) Alternative to periodic statement. A government agency need not 
furnish the periodic statement required by Sec. 205.9(b) if the agency 
makes available to the consumer:
    (1) The consumer's account balance, through a readily available 
telephone line and at a terminal (which may include providing balance 
information at a balance-inquiry terminal or providing it, routinely or 
upon request, on a terminal receipt at the time of an electronic fund 
transfer); and
    (2) A written history of the consumer's account transactions for at 
least 60 days preceding the date of a request by the consumer. The 
account history shall be provided promptly in response to an oral or 
written request.
    (d) Modified requirements. A government agency that does not 
furnish periodic statements, pursuant to paragraph (c) of this section, 
shall comply with the following requirements:
    (1) Initial disclosures. The agency shall modify the disclosures 
under Sec. 205.7(a) by providing:
    (i) Account balance information. The means by which the consumer 
may obtain information concerning the account balance, including a 
telephone number. This disclosure may be made by providing a notice 
substantially similar to the notice contained in section A(12) of 
appendix A of this part.
    (ii) Written account history. A summary of the consumer's right to 
receive a written account history upon request, in substitution for the 
periodic statement disclosure required by Sec. 205.7(a)(6), and a 
telephone number that can be used to request an account history. This 
disclosure may be made by providing a notice substantially similar to 
the notice contained in section A(12) of appendix A of this part.
    (iii) Error resolution notice. A notice concerning error resolution 
that is substantially similar to the notice contained in section A(13) 
of appendix A of this part, in substitution for the notice required by 
Sec. 205.7(a)(10).
    (2) Annual error resolution notice. The agency shall provide an 
annual notice concerning error resolution that is substantially similar 
to the notice contained in section A(13) of appendix A of this part, in 
substitution for the notice required by Sec. 205.8(b).
    (3) Limitations on liability. For purposes of Sec. 205.6(b) (2) and 
(3), in regard to a consumer's reporting within 60 days any 
unauthorized transfer that appears on a periodic statement, the 60-day 
period shall begin with the transmittal of a written account history or 
other account information provided to the consumer under paragraph (c) 
of this section.
    (4) Error resolution. The agency shall comply with the requirements 
of Sec. 205.11 in response to an oral or written notice of an error 
from the consumer that is received no later than 60 days after the 
consumer obtains the written account history or other account 
information, under paragraph (c) of this section, in which the error is 
first reflected.
    3. Appendix A to part 205 is revised by adding sections A(12) and 
A(13) to read as follows:

Appendix A to Part 205--Model Disclosure Clauses

* * * * *

Section A(12)--Disclosure by Government Agencies of Information About 
Obtaining Account Balances and Account Histories (Sec. 205.15(d)(1) (i) 
and (ii))

    You may obtain information about the amount of benefits you have 
remaining by calling [telephone number]. That information is also 
available [on the receipt you get when you make a transfer with your 
card at (an ATM)(a POS terminal)][when you make a balance inquiry at 
an ATM][when you make a balance inquiry at specified locations].
    You also have the right to receive a written summary of 
transactions for the 60 days preceding your request by calling 
[telephone number]. [Optional: Or you may request the summary by 
contacting your caseworker.]

Section A(13)--Disclosure of Error Resolution Procedures for Government 
Agencies That Do Not Provide Periodic Statements 
(Sec. 205.15(d)(1)(iii) and (d)(2))

    In Case of Errors or Questions About Your Electronic Transfers 
Telephone us at [telephone number] or Write us at [address] as soon 
as you can, if you think an error has occurred in your 
[EBT][agency's name for program] account. We must hear from you no 
later than 60 days after you learn of the error. You will need to 
tell us:
     Your name and [case] [file] number.
     Why you believe there is an error, and the dollar 
amount involved.
     Approximately when the error took place.
    If you tell us orally, we may require that you send us your 
complaint or question in writing within 10 business days. We will 
generally complete our investigation within 10 business days and 
correct any error promptly. In some cases, an investigation may take 
longer, but you will have the use of the funds in question after the 
10 business days. If we ask you to put your complaint or question in 
writing and we do not receive it within 10 business days, we may not 
credit your account during the investigation.
    For errors involving transactions at point-of-sale terminals in 
food stores, the periods referred to above are 20 business days 
instead of 10 business days.
    If we decide that there was no error, we will send you a written 
explanation within three business days after we finish our 
investigation. You may ask for copies of the documents that we used 
in our investigation.
    If you need more information about our error resolution 
procedures, call us at [telephone number][the telephone number shown 
above].

    By order of the Board of Governors of the Federal Reserve 
System, February 24, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-4681 Filed 3-2-94; 12:38 pm]
BILLING CODE 6210-01-P