[Federal Register Volume 63, Number 57 (Wednesday, March 25, 1998)]
[Proposed Rules]
[Pages 14555-14558]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6993]


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FEDERAL RESERVE SYSTEM

12 CFR Part 205

[Regulation E; Docket No. R-1007]


Electronic Fund Transfers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule; technical amendments.

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SUMMARY: The Board is publishing for comment a proposed rule to 
eliminate the extended time periods in Regulation E for investigating 
claims involving point-of-sale (POS) debit card and foreign-initiated 
transactions. Regulation E implements the Electronic Fund Transfer Act. 
Financial institutions generally have up to 10 business days to 
provisionally credit an account and up to 45 calendar days to complete 
an investigation of an alleged error. For POS and foreign transactions, 
financial institutions have up to 20 business days under the regulation 
to

[[Page 14556]]

provisionally credit an account and up to 90 calendar days to complete 
the investigation of an alleged error. The Board believes that 
technological improvements in payment systems should permit consumer 
claims of error to be investigated more quickly than in the past, and 
proposes to amend the regulation accordingly. The proposed rule also 
contains a technical amendment to a model form to harmonize it with the 
regulation.

DATES: Comments must be received on or before May 15, 1998.

ADDRESSES: Comments should refer to Docket No. R-1007, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551. Comments also may be delivered to Room B-2222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the 
guard station in the Eccles Building Courtyard on 20th Street, N.W. 
(between Constitution Avenue and C Street) at any time. Except as 
provided in the Board's Rules Regarding Availability of Information (12 
CFR 261.12), comments will be available for inspection and copying by 
members of the public in the Freedom of Information Office, Room MP-500 
of the Martin Building, between 9:00 a.m. and 5:00 p.m. weekdays.

FOR FURTHER INFORMATION CONTACT: Obrea O. Poindexter, Staff Attorney, 
or John C. Wood, Senior Attorney, Division of Consumer and Community 
Affairs, Board of Governors of the Federal Reserve System, at (202) 
452-2412 or (202) 452-3667. For users of Telecommunications Device for 
the Deaf (TDD) only, contact Diane Jenkins at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

    The Electronic Fund Transfer Act (EFTA), 15 U.S.C. 1693 et seq., 
enacted in 1978, provides a basic framework establishing the rights, 
liabilities, and responsibilities of participants in electronic fund 
transfer (EFT) systems. The Board's Regulation E (12 CFR Part 205) 
implements the act. Types of transfers covered by the act and 
regulation include transfers initiated through an automated teller 
machine (ATM), point-of-sale (POS) terminal, automated clearinghouse, 
telephone bill-payment system, or home banking program. The rules 
prescribe restrictions on the unsolicited issuance of ATM cards and 
other access devices; disclosure of terms and conditions of an EFT 
service; documentation of EFTs by means of terminal receipts and 
periodic account statements; limitations on consumer liability for 
unauthorized transfers; procedures for error resolution; and certain 
rights related to preauthorized EFTs.

II. Proposed Regulatory Revisions

Error Resolution--POS Transactions

    The EFTA requires a financial institution to investigate and 
resolve a consumer's claim of error--for an unauthorized EFT, for 
example--within specified time limits. Within 10 business days after 
receiving notice of an alleged error an institution must either resolve 
the claim or provisionally credit the consumer's account while 
continuing to investigate. In the latter case, the institution must 
resolve the claim no later than 45 calendar days after receiving 
notice.
    For POS and foreign transactions, Regulation E provides longer time 
periods; it allows 20 business days to resolve a claim of an error (or 
to provisionally credit an account if the investigation takes longer), 
and 90 calendar days to complete the investigation. The rule allows 
issuers to avoid having to provisionally credit an account before the 
investigation is complete. The longer periods were adopted by the Board 
in 1982 for foreign transactions; and were adopted in 1984 for POS 
transactions, along with amendments to Regulation E to cover paper-
based debit card transactions. Initially, the Board proposed to have 
the longer time periods for resolving claims of error apply only to 
paper-based debit card transactions (at merchant locations) that did 
not involve electronic terminals. After public comment, the Board 
adopted a final rule that applied the extended time frames to all POS 
transactions. The adoption of a uniform rule avoided the complexity of 
having the timing rules depend on how the particular EFT was initiated, 
which would have been confusing to consumers and burdensome to 
institutions. Moreover, at that time only a small portion of the POS 
debit card transactions involved electronic terminals.
    The use of electronic terminals for all types of POS debit card 
transactions is now commonplace. Debit card transactions using personal 
identification numbers (PINs) at grocery stores and other merchant 
locations (referred to as PIN-protected) have been the most common type 
of debit card transaction in the United States. In the past few years, 
however, there has been an increase in the use at POS terminals of 
debit cards that can be used without a PIN (commonly referred to as 
check cards). Besides making them available upon request, many 
institutions have automatically replaced their customers' existing PIN-
protected cards with cards that can be used with a PIN or without a PIN 
depending on where the transaction takes place.
    This development has raised concerns about the potentially greater 
consumer exposure to losses in the absence of PIN protection. On 
September 24, 1997, the Subcommittee on Financial Institutions and 
Consumer Credit of the House Committee on Banking and Financial 
Services held a hearing on two bills to amend the EFTA in connection 
with the use of check cards. The bills would limit consumer liability 
for check cards, restrict unsolicited issuance of the cards in 
substitution for PIN-protected cards, add disclosures, and require 
institutions to provisionally recredit accounts sooner while 
investigating claims of unauthorized use or other errors.
    With regard to the investigation of claims of error, legislation 
was introduced that would require institutions to recredit a consumer's 
account within three business days of notice of the claim of error. An 
industry representative of a card association testified that standards 
were voluntarily being adopted to require member institutions to 
provisionally credit accounts involving the use of a check card within 
five business days.
    The Board believes that technical improvements in the payment 
system should permit consumer claims involving POS transactions to be 
investigated more quickly for transactions at POS; the same may be true 
for foreign transactions as well. Testimony at the September 1997 
congressional hearing supports that conclusion. The Board believes 
that, especially in the context of accounts that can be accessed 
without PIN protection (potentially increasing consumer exposure to 
losses), the importance of more prompt recrediting of consumers' funds 
pending investigation may outweigh the compliance burden, if any, 
associated with this change. Therefore, the Board proposes to eliminate 
the extended time periods for POS and foreign transactions. The Board 
solicits specific comment on whether removal of the special rule would 
impose an undue burden.

Error Resolution--New Accounts

    In the course of the Board's review of Regulation E, financial 
institutions suggested a change in the error resolution requirements 
when a new account is involved. The problem arises when individuals 
open an account with

[[Page 14557]]

the intent to defraud. Such individuals may open an account, 
immediately withdraw all or a large portion of the funds through ARMS, 
and file a claim with the financial institution disputing the ATM 
transactions. Often they receive provisional credit because of the 
financial institution's inability to research the claim (such as by 
obtaining photographic evidence from a nonproprietary ATM) within ten 
business days of a claim. At that point, the individual immediately 
withdraws the funds that were provisionally credited and abandons the 
account. Institutions believed that having more time to investigate 
errors involving new accounts would enable them to limit their losses 
and control this type of fraud.
    The Board proposed in May 1996 to amend Regulation E, pursuant to 
its section 904(c) authority to provide for adjustments and exceptions 
in the regulation, to extend the error-resolution time periods for new 
accounts. The proposal would have allowed 20 business days for 
resolving an error before an institution is required to provisionally 
credit, and an outside limit of 90 calendar days for resolving the 
claim. The Board solicited comment on the extensions of time, on the 
30-day definition for new accounts, and on whether consumer protections 
relating to error resolution would be adversely affected.
    Comments on the proposed rule, from financial institutions and 
trade associations, were generally favorable. However, in light of the 
proposed rule to reduce the time for resolving errors involving POS and 
foreign transactions, the Board is deferring final action until action 
is taken on the POS and foreign transaction proposal.

Technical Amendment to Error Resolution Notice

    Regulation E requires financial institutions to investigate and 
resolve errors alleged by consumers, either within 10 business days 
after receiving the consumer's notice of error or within 45 calendar 
days after receiving the notice, provided the institution provisionally 
credits the consumer's account within 10 business days. Upon completion 
of the investigation, the institution must notify the consumer of its 
findings. Prior to the 1996 revision of Regulation E, the institution 
had an additional three days to notify the consumer only if the 
institution found that an error did not occur and was operating under 
the 45-day rule. If the institution found that an error did occur, the 
institution was required to notify the consumer no later than the tenth 
business day or the 45th calendar day, as applicable.
    In the 1996 revision, the Board amended the error resolution 
procedures (Sec. 205.11) to allow institutions the three additional 
days to notify the consumer in all cases. However, the model error 
resolution notice (Appendix A, paragraph A-3) was not revised at that 
time to conform to the amendment to Sec. 205.11. The text of the model 
notice is being amended to conform it to Sec. 205.11 as amended.

III. Form of Comment Letters

    Comment letters should refer to Docket No. R-1007. The Board 
requests that, when possible, comments be prepared using a standard 
typeface with a type size of 10 or 12 characters per inch. This will 
enable the Board to convert the text into machine-readable form through 
electronic scanning, and will facilitate automated retrieval of 
comments for review. Comments may also be submitted on computer 
diskettes, using either the 3.5'' or 5.25'' size, in any DOS-compatible 
format. Comments on computer diskettes must be accompanied by a paper 
version.

IV. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act, 
the Board's office of the Secretary has reviewed the proposed 
amendments to Regulation E. The Board believes that the proposal to 
shorten the time period for investigating errors alleged in point-of-
sale debit card transactions will provide increased consumer protection 
without any increase in regulatory burden. The current exception to the 
statutory requirement of 10 business days for such investigations was 
implemented at a time when paper-based transactions were more common. 
The Board believes that such transactions are uncommon today, beyond 
the initial deposit of transaction information when depository 
institutions and third-party processors convert any paper-based 
information to electronic form. The Board specifically solicits comment 
on extent of any difficulty that this change might warrant.

V. Paperwork Reduction Act

    In accordance with section 3506 of the Paperwork Reduction Act of 
1995 (44 U.S.C. Ch. 35; 5 CFR part 1320 Appendix A.1), the Board 
reviewed the interim rule under the authority delegated to the Board by 
the Office of Management and Budget.
    The Federal Reserve has no data with which to estimate the burden 
the proposed revised requirements would impose on state member banks. 
Issuers would be able to use electronic communication to provide 
disclosures and other information required by this regulation rather 
than having to print and mail the information in paper form. The use of 
electronic communication may reduce the paperwork burden of financial 
institutions or merely may reduce the dollar cost.
    The Federal Reserve requests comments from issuers, especially 
state member banks, that will help to estimate the number and burden of 
the various disclosures that would be made in the first year this 
interim regulation is effective. Comments are invited on: (a) Whether 
the proposed revised collection of information is necessary for the 
proper performance of the Federal Reserve's functions; including 
whether the information has practical utility; (b) the accuracy of the 
Federal Reserve's estimate of the burden of the proposed revised 
information collection, including the cost of compliance; (c) ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (d) ways to minimize the burden of information 
collection on respondents, including through the use of automated 
collection techniques or other forms of information technology. 
Comments on the collection of information should be sent to the Office 
of Management and Budget, Paperwork Reduction Project (7100-0200), 
Washington, DC 20503, with copies of such comments sent to Mary M. 
McLaughlin, Chief, Financial Reports Section, Division of Research and 
Statistics, Mail Stop 97, Board of Governors of the Federal Reserve 
System, Washington, DC 20551.
    The collection of information requirements in this interim 
regulation are found throughout 12 CFR Part 205 and in Appendix A. This 
information is mandatory (15 U.S.C. 1693 et seq.) to ensure adequate 
disclosure of basic terms, costs, and rights relating to electronic 
fund transfer (EFT) services provided to consumers. The respondents/
recordkeepers are for-profit financial institutions, including small 
businesses. Institutions are also required to retain records for 24 
months as evidence of compliance.
    The Board also proposes to extend the Recordkeeping and Disclosure 
Requirements in Connection with Regulation E (OMB No. 7100-0200) for 
three years. The current estimated total annual burden for this 
information collection is 462,839 hours, as shown in the table below. 
These amounts reflect the burden estimate of the Federal Reserve System 
for the 851 state member banks estimated to be covered by Regulation E. 
This regulation applies

[[Page 14558]]

to all types of issuers, not just state member banks. However, under 
Paperwork Reduction Act regulations, the Federal Reserve accounts for 
the burden of the paperwork associated with the regulation only for 
state member banks. Other agencies account for the paperwork burden for 
the institutions they supervise.

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                                                                                                      Estimated 
                                           Number of    Estimated                                       annual  
                                          respondents     annual        Estimated response time         burden  
                                                        frequency                                       hours   
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Initial Disclosures:                                                                                            
    Initial terms.......................          851          250  2.50 minutes...................        8,865
    Change in terms.....................          851          340  1.00 minute....................        4,822
Transaction disclosures:                                                                                        
    Terminal receipts...................          851       71,990  0.25 minute....................      255,265
    Deposit verifications...............          851          420  1.50 minutes...................        8,936
Periodic disclosures....................          851       12,800  1.00 minute....................      181,547
Error resolution rules..................          851            8  30.00 minutes..................        3,404
                                                                                                    ------------
    Total...............................  ...........  ...........  ...............................      462,839
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    Since the Federal Reserve does not collect any information, no 
issue of confidentiality normally arises. However, the information may 
be protected from disclosure under the exemptions (b)(4), (6), and (8) 
of the Freedom of Information Act (5 U.S.C. 522(b)). The disclosures 
and information about error allegations are confidential between the 
institution and the consumer. An agency may not conduct or sponsor, and 
an organization is not required to respond to, an information 
collection unless it displays a currently valid OMB control number. The 
OMB control number for the Recordkeeping and Disclosure Requirements in 
Connection with Regulation E is 7100-0200.

List of Subjects in 12 CFR Part 205

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

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
changes to Regulation E. New language is shown inside bold-faced 
arrows, while language that would be removed is set off with brackets.
    Pursuant to the authority granted in sections 904 (a) and (c) of 
the Electronic Fund Transfer Act, 15 U.S.C. 1693b (a) and (c), and for 
the reasons set forth in the preamble, the Board proposes to amend 
Regulation E, 12 CFR part 205, as set forth below:

PART 205--ELECTRONIC FUND TRANSFERS (REGULATION E)

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

    Authority: 15 U.S.C. 1693-1693r.

Sec. 205.11  [Amended]

    2. Section 205.11 would be amended by removing paragraph (c)(3) and 
redesignating paragraph (c)(4) as paragraph (c)(3).
    3. In Appendix A to Part 205, in A-3 MODEL FORMS FOR ERROR 
RESOLUTION NOTICE (Secs. 205.7(b)(10) and 205.8(b)), the undesignated 
second and third paragraphs following paragraph (a)(3) would be revised 
to read as follows:

Appendix A to Part 205--Model Disclosure Clauses and Forms

* * * * *

A-3--MODEL FORMS FOR ERROR RESOLUTION NOTICE (Secs. 205.7(b)(10) AND 
205.8(b))

    (a) Initial and annual error resolution notice 
(Secs. 205.7(b)(10) and 205.8(b))
* * * * *
    We will determine whether an error occurred 
[tell you the results of our investigation] within 10 business days 
after we hear from you and will correct any error promptly. If we need 
more time, however, we may take up to 45 days to investigate your 
complaint or question. If we decide to do this, we will credit your 
account within 10 business days for the amount you think is in error, 
so that you will have the use of the money during the time it takes us 
to complete our investigation. 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.
    We will tell you the results of our investigation within 
three business days after completing it. If we decide that 
there was no error, this will include [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.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, March 12, 1998.
William W. Wiles,
Secretary of the Board.
[FR Doc. 98-6993 Filed 3-24-98; 8:45 am]
BILLING CODE 6210-01-P