[Federal Register Volume 63, Number 188 (Tuesday, September 29, 1998)]
[Rules and Regulations]
[Pages 52115-52118]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26012]


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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: Final rule; technical amendments.

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SUMMARY: The Board is publishing a final rule under Regulation E 
revising the time periods for investigating alleged errors involving 
point-of-sale and foreign-initiated transactions. The former rule 
extended the statutory time periods for these transactions to allow 
financial institutions a longer period to investigate before they must 
provisionally credit an account and a longer period to complete an 
investigation. The final rule requires financial institutions to 
provisionally credit an account within 10 business days (rather than 
20) and leaves in place the 90 calendar day period to complete the 
investigation of an alleged error.
    At the same time, the Board is extending the time periods to 
provisionally credit funds and investigate claims involving new 
accounts. The rule applies to claims made within 30 calendar days after 
an account is opened. The rule allows 20 business days for resolving an 
alleged error and up to 90 calendar days for completing the 
investigation.

DATES: This rule is effective September 24, 1998. Compliance is 
optional until April 1, 1999.

FOR FURTHER INFORMATION CONTACT: John C. Wood or Jane Jensen Gell, 
Senior Attorneys, 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. 1693-1693r, 
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;

[[Page 52116]]

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. Regulatory Revisions

Error Resolution--POS and Foreign 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 foreign-initiated and POS transactions, Regulation E provides 
longer time periods adopted in 1982 and 1984, respectively. The 
regulation allows 20 business days to resolve a claim of error (or to 
provisionally credit an account if additional time is needed to 
investigate), and up to 90 calendar days to complete the investigation. 
The longer time periods generally allow issuers to avoid provisionally 
crediting an account before the investigation is complete.
    In March 1998, the Board proposed to eliminate the extended time 
periods for investigating and resolving alleged errors in foreign-
initiated transactions and POS transactions (63 FR 14555, March 25, 
1998). The impetus for the proposal was the increased use of off-line 
debit cards that can be used without a personal identification number 
(PIN), often referred to as ``check cards.'' The cards are used by 
signing a sales slip (much like a credit card), and may increase the 
risk of unauthorized access to a consumer's asset account.
    In September 1997, a House Banking Subcommittee held a hearing on 
whether additional consumer protections are needed for off-line debit 
cards. At that hearing, the Board testified that it would reexamine its 
extended timing rules for resolving claims of errors for POS 
transactions. The Board noted that the importance of more prompt 
recrediting of consumers' funds pending investigation may outweigh any 
related compliance burden, especially in the case of an account that 
can be accessed without PIN protection. The Board noted that 
technological advances allow financial institutions to investigate 
claims of error more quickly than in the past, and thus the extended 
time periods may no longer be needed.
    The Board received 55 comments on the proposal to reduce the 
extended time periods for POS and foreign transactions, primarily from 
financial institutions and their trade associations. About 45 
commenters addressed the proposed reduction from 90 to 45 days in the 
time allowed for completing an investigation; the majority opposed the 
reduction. Those commenters stated that financial institutions still 
need the additional time to research claims, get information from the 
consumer, and obtain documentation such as receipts from the merchant. 
Commenters noted that institutions may need additional time to 
investigate foreign-initiated transactions because of differences in 
technological capabilities, business customs, and language barriers. 
Several commenters believed that reducing the time to complete the 
investigation from 90 to 45 days would result in losses where financial 
institutions provide final credit only to later discover that the claim 
was not valid.
    Many of those commenters did not object, however, to reducing the 
time period for providing provisional credit to 10 days. They 
recognized that in some situations it may be a hardship for a consumer 
to wait 20 business days before receiving credit for the amount of the 
alleged error. These commenters suggested that the Board consider 
reducing the time period for provisional crediting while retaining the 
extended time period for completing the investigation.
    In response to comments and upon further analysis, the Board is 
revising the time periods for claims involving POS and foreign-
initiated transactions to require institutions to provide provisional 
credit within 10, rather than 20 business days. The Board believes that 
the change will benefit consumers because they now will have access to 
their funds through provisional crediting sooner. The 90-day time 
period to complete the investigation remains unchanged. By leaving in 
place the 90-day time period, financial institutions will continue to 
have adequate time to complete the investigation and resolve the 
alleged error. Because POS and foreign transactions are more likely to 
involve occasional difficulty and delay in obtaining necessary 
information for the reasons discussed above, the Board believes that 
this extended time frame remains appropriate.
    To take advantage of the longer time period (90 days) for resolving 
claims involving POS and foreign-initiated transactions, a financial 
institution must have disclosed these longer time periods. Financial 
institutions may disclose the time periods by making appropriate 
alterations to the error resolution notice in appendix A.

Error Resolution--New Accounts

    In May 1996, the Board proposed to amend Regulation E to extend the 
error resolution time periods for new accounts, to address concerns of 
financial institutions (61 FR 19696, May 2, 1996). The problem arises 
when an individual opens an account with the intent to defraud. Such 
individuals may open an account, withdraw all or a large portion of the 
deposited funds through ATMs, and file a claim with the financial 
institution disputing the ATM transactions. Often the individual 
receives provisional credit because the financial institution is unable 
to conclude research of the claim (such as by obtaining photographic 
evidence from a nonproprietary ATM) within 10 business days of a claim. 
Once provisional credit is provided, the individual immediately 
withdraws those funds and abandons the account. Institutions believe 
that having more time to investigate errors involving new accounts 
would enable them to limit their losses and better control this type of 
fraud.
    The Board proposed to allow 20 business days (rather than 10) for 
investigating an error before an institution must provisionally credit, 
and up to 90 calendar days (rather than 45) for resolving the claim. 
The Board solicited comment on the proposed extensions of time and on 
whether consumer protections relating to error resolution would be 
adversely affected. The Board also proposed a definition of a new 
account, consistent with the definition in Regulation CC, which 
implements the Expedited Funds Availability Act. Under Regulation CC, 
an account is considered a new account during the first 30 calendar 
days after the account is established.
    Comments on the proposed rule, primarily from financial 
institutions and their trade associations, were generally favorable. 
But in light of the Board's commitment to reconsider the time periods 
applicable to POS and foreign-initiated transactions, the Board 
deferred final action on the new-account proposal.
    The majority of commenters supported the extension of time for 
resolving errors involving new accounts. They believed that the 
additional time

[[Page 52117]]

would not adversely affect consumers and would help financial 
institutions limit fraud.
    Several commenters expressed concern with the proposed time frame. 
Commenters suggested that the Board allow an institution up to 30 
business days to provide provisional credit so that financial 
institutions have enough time to obtain information from nonlocal 
banks. Some commenters urged the Board to revise the definition of a 
new account to apply to EFTs that occur 45 or up to 120 calendar days 
after the account is opened (instead of 30). These commenters believed 
that financial institutions need the longer time to establish the 
consumer's transaction pattern.
    Other commenters believed that the outside limit for resolving 
claims should be between 45 and 60 days rather than 90 days. They 
believed it should not take financial institutions 90 days to receive 
the information necessary to resolve a claim.
    Upon further analysis, the Board believes the time frames that were 
proposed are appropriate. Therefore, Regulation E is amended, pursuant 
to the Board's section 904(c) authority under the EFTA to provide for 
adjustments and exceptions in the regulation, to extend the time 
periods for resolving errors that involve new accounts. An institution 
must provisionally credit a new account if it takes longer than 20 
business days to resolve an error, and it has up to 90 calendar days to 
complete the investigation and resolve the claim.
    To provide consistency and ease regulatory compliance, the rule 
tracks the definition of ``new account'' in Regulation CC (12 CFR 
229.13(a)(2)). Thus, the rule applies to EFTs made during the first 30 
calendar days after the first deposit to the account is made. The rules 
in Regulation E also parallel the interpretations of ``new account'' in 
Regulation CC. For example, an account is not considered a new account 
if a customer had another account at the financial institution for at 
least 30 calendar days.
    The extended time periods apply to all EFTs that occur within this 
30-day time period, including those for POS or foreign transactions. 
Therefore, if an alleged error concerns a POS or foreign EFT to or from 
a new account, financial institutions may take up to 20 business days 
to resolve the claim (or to provisionally credit an account if 
additional time is needed to investigate), and up to 90 calendar days 
to complete the investigation. The Board believes these time periods 
strike the appropriate balance between the need for consumers to have 
access to their funds and the need of financial institutions to combat 
fraud.
    To use the longer time periods for resolving errors for new 
accounts, a financial institution must disclose these longer time 
periods. Financial institutions may disclose the time periods by making 
appropriate alterations to the error resolution notice in appendix A.

Technical Amendment to Error Resolution Notice

    In 1996, the Board amended the error resolution procedures 
(Sec. 205.11) to allow institutions three days to notify the consumer 
about the outcome of its investigation in all cases. Before that time, 
the three-day rule applied only if the institution found that an error 
had not occurred. The Board has revised the text of the model error 
resolution notice (Appendix A, paragraph A-3) to conform the notice to 
Sec. 205.11 as amended.

III. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C. 604), the Board has reviewed the final amendments to 
Regulation E. Two of the three requirements of a final regulatory 
flexibility analysis under this section are (1) a succinct statement of 
the need for and the objectives of the rule and (2) a summary of the 
issues raised by the public comments, the agency's assessment of the 
issues, and a statement of the changes made in the final rule in 
response to the comments. These two areas are discussed above.
    The third requirement of the analysis is a description of 
significant alternatives to the rule that would minimize the rule's 
economic impact on small entities and reasons why the alternatives were 
rejected. The final amendments will apply to all financial institutions 
subject to Regulation E, including small institutions. The amendments 
represent relatively minor changes to the existing regulation; in some 
cases, the amendments clarify rights and duties of covered institutions 
or reduce economic burden. Accordingly, the amendments should not have 
a negative economic impact on small institutions, and, therefore, there 
were no significant alternatives that would have further minimized the 
economic impact on those institutions.

IV. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the final rule under 
the authority delegated to the Board by the Office of Management and 
Budget. The Federal Reserve may not conduct or sponsor, and an 
organization is not required or respond to, this information collection 
unless it displays a currently valid OMB control number. The OMB 
control number is 7100-0200.
    The collection of information that is revised by this rulemaking is 
found in 12 CFR Part 205 and in Appendix A. This information is 
mandatory (15 U.S.C. 1693 et seq.) to evidence compliance with the 
requirements of the Regulation E, Electronic Funds Transfer (EFT). The 
information is used to ensure adequate disclosure of basic terms, costs 
and rights relating to EFT services provided to consumers. The 
respondents and recordkeepers are for-profit financial institutions, 
including small businesses. Institutions are also required to retain 
records for twenty-four months as evidence of compliance. No comments 
specifically addressing the burden estimate were received.
    The Board also extended the recordkeeping and disclosure 
requirements in connection with Regulation E for three years. It is 
estimated that there are 851 respondent/recordkeepers with an annual 
burden of 462,839 hours, as shown in the table below. The final rule 
will reduce the time periods allowed for investigating alleged errors 
involving point-of-sale (POS) and foreign-initiated transactions. The 
Board is also amending its rule to permit longer time periods to 
investigate claims involving new accounts. These changes are estimated 
to have no effect, on average, on reporting burden.

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                                                                                           Estimated   Estimated
                                                                  Number of    Estimated   response     annual
                                                                 respondents    annual       time       burden
                                                                               frequency   (minutes)     hours
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Initial Disclosure:
    Initial terms..............................................          851         250        2.50       8,865
    Change in terms............................................          851         340        1.00       4,822

[[Page 52118]]

Transaction disclosures:
    Terminal receipts..........................................          851      71,990        0.25     255,265
    Deposit verifications......................................          851         420        1.50       8,936
    Periodic disclosures.......................................          851      12,800        1.00     181,547
    Error resolution rules.....................................          851           8       30.00       3,404
                                                                ------------------------------------------------
        Total..................................................  ...........  ..........  ..........     462,839
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    Since the Federal Reserve does not collect any of the 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)(4), (6), and 
(8)). The disclosures and information about error allegations are 
confidential between the institutions and the consumer.
    The Board has a continuing interest in the public's opinions of 
Federal Reserve collections of information. At any time, comments 
regarding the burden estimate, or any other aspect of this collection 
of information, including suggestions for reducing the burden, may be 
sent to: Secretary, Board of Governors of the Federal Reserve System, 
20th and C Streets, N.W., Washington, DC 20551; and to the Office of 
Management and Budget, Paperwork Reduction Project (7100-0200), 
Washington, DC 20503.

List of Subjects in 12 CFR Part 205

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

Text of Final Rule

    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 amends 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.

    2. Section 205.11 is amended by revising paragraph (c)(3) as 
follows:


Sec. 205.11  Procedures for resolving errors.

* * * * *
    (c) * * *
    (3) Extension of time periods. The time periods in paragraphs 
(c)(1) and (c)(2) of this section are extended as follows:
    (i) The applicable time is 20 business days in place of 10 business 
days under paragraphs (c)(1) and (c)(2) of this section if the notice 
of error involves an electronic fund transfer to or from the account 
within 30 days after the first deposit to the account was made.
    (ii) The applicable time is 90 days in place of 45 days under 
paragraph (c)(2) of this section, for completing an investigation, if a 
notice of error involves an electronic fund transfer that:
    (A) Was not initiated within a state;
    (B) Resulted from a point-of-sale debit card transaction; or
    (C) Occurred within 30 days after the first deposit to the account 
was made.
* * * * *
    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) are 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 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 within three business days after 
completing our investigation. If we decide that there was no error, we 
will send you a written explanation.
    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, September 23, 1998.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 98-26012 Filed 9-28-98; 8:45 am]
BILLING CODE 6210-01-P