[Federal Register Volume 71, Number 6 (Tuesday, January 10, 2006)]
[Rules and Regulations]
[Pages 1638-1664]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-145]



[[Page 1637]]

-----------------------------------------------------------------------

Part III





Federal Reserve System





-----------------------------------------------------------------------



12 CFR Part 205



Electronic Fund Transfers; Final Rule

  Federal Register / Vol. 71 , No. 6 / Tuesday, January 10, 2006 / 
Rules and Regulations  

[[Page 1638]]


-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

12 CFR Part 205

[Regulation E; Docket Nos. R-1210 and R-1234]


Electronic Fund Transfers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule; official staff interpretation.

-----------------------------------------------------------------------

SUMMARY: The Board is amending Regulation E, which implements the 
Electronic Fund Transfer Act, and the official staff commentary to the 
regulation codified in Supplement I to Part 205. The commentary 
interprets the requirements of Regulation E to facilitate compliance 
primarily by financial institutions that offer electronic fund transfer 
services to consumers.
    The revisions address the regulation's coverage of electronic check 
conversion services. Under the final rule, merchants and other payees 
that initiate electronic check conversion transactions must obtain a 
consumer's authorization for each transaction. In addition, commentary 
revisions address preauthorized transfers, error resolution, and other 
matters.

DATES: The final rule is effective February 9, 2006. The mandatory 
compliance date is January 1, 2007.

FOR FURTHER INFORMATION CONTACT: Ky Tran-Trong, Senior Attorney, or 
Daniel G. Lonergan, David A. Stein or John C. Wood, Counsels, Division 
of Consumer and Community Affairs, Board of Governors of the Federal 
Reserve System, Washington, DC 20551, at (202) 452-2412 or (202) 452-
3667. For users of Telecommunications Device for the Deaf (TDD) only, 
contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Statutory Background

    The Electronic Fund Transfer Act (EFTA or Act) (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 EFTA is implemented by the Board's 
Regulation E (12 CFR part 205). Examples of 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 (ACH), telephone bill-payment plan, or remote banking 
service. The Act and regulation require disclosure of terms and 
conditions of an EFT service; documentation of EFTs by means of 
terminal receipts and periodic account activity statements; limitations 
on consumer liability for unauthorized transfers; procedures for error 
resolution; and certain rights related to preauthorized EFTs. Further, 
the Act and regulation also prescribe restrictions on the unsolicited 
issuance of ATM cards and other access devices.
    The official staff commentary (12 CFR part 205 (Supp. I)) is 
designed to facilitate compliance and provide protection from liability 
under Sections 915 and 916 of the EFTA for financial institutions and 
persons subject to the Act. 15 U.S.C. 1693m(d)(1). The commentary is 
updated periodically to address significant questions that arise.

II. Background and Overview of Comments Received

    On September 17, 2004, the Board published a notice of proposed 
rulemaking in the Federal Register (69 FR 55996) (September 2004 
proposal) to provide guidance regarding the rights, liabilities, and 
responsibilities of parties engaged in electronic check conversion 
(ECK) transactions and to provide rules governing the coverage under 
Regulation E of payroll card accounts. In addition, proposed commentary 
revisions provided guidance on preauthorized electronic transfers from 
a consumer's account, error resolution procedures, ATM disclosures, and 
other matters.
    The Board received nearly 120 comment letters on the September 2004 
proposal. Comments were received from a variety of industry commenters, 
including banks, thrifts, credit unions, payment card companies, 
payment processing companies, and industry trade associations. Comments 
were also received from consumer groups, the Department of the 
Treasury, the Federal Trade Commission and individual consumers. The 
following is a summary of significant proposed revisions to the 
regulation and the staff commentary, and the comments received.

Electronic Check Conversion

    The EFTA expressly provides that transactions originated by check, 
draft, or similar paper instrument are not governed by the Act. In an 
ECK transaction, a consumer provides a check to a payee and information 
from the check is used to initiate a one-time EFT from the consumer's 
account. Specifically, the payee electronically scans and captures the 
MICR-encoding on the check for the routing, account, and serial 
numbers, and enters the amount to be debited from the consumer's asset 
account.
    Under the staff commentary, electronic check conversion 
transactions are covered by the EFTA and Regulation E if the consumer 
authorizes the transaction as an EFT. Under existing commentary 
provisions, a consumer authorizes an EFT if the consumer receives 
notice that the transaction will be processed as an EFT and the 
consumer completes the transaction. See comment 3(b)-3. This standard 
applies whether the check conversion occurs at a point-of-sale (where a 
person goes to a merchant's physical location to obtain goods or 
services) or in an accounts receivable conversion (ARC) transaction 
where the consumer mails a fully completed and signed check to the 
payee that is converted to an EFT. Although merchants and other payees 
are in the best position to provide notice to a consumer for the 
purpose of obtaining the consumer's authorization for an ECK 
transaction, they are not currently covered by the commentary provision 
in Regulation E addressing ECK transactions.
    Over the past few years, several issues have arisen relating to ECK 
transactions in general, and ARC transactions in particular. Concerns 
have been raised about the uniformity and adequacy of some of the 
notices provided to consumers about ECK transactions. Some in the 
industry would like the flexibility to obtain a consumer's 
authorization to process a transaction either as an EFT or as a check. 
Board staff also has received inquiries from financial institutions and 
other industry participants concerning their obligations under 
Regulation E in connection with ECK services.
    The Board proposed to revise the regulation to require merchants 
and other payees that use information from a check to initiate a one-
time EFT from a consumer's account to provide notice to the consumer 
and obtain the consumer's authorization for each EFT. The Board 
specifically solicited comment on whether payees should be required to 
obtain a consumer's written, signed authorization when the transaction 
occurs at POS. To help consumers understand the nature of an ECK 
transaction, the Board also proposed to require payees in ECK 
transactions to disclose to consumers that when a check is converted, 
funds may be withdrawn from their accounts quickly, and that the check 
will not be returned by the consumer's financial institution.
    Industry commenters supported many of the proposed revisions 
addressing ECK transactions, including coverage

[[Page 1639]]

under Regulation E of merchants and other payees for the limited 
purpose of providing notice to obtain consumer authorization for ECK 
transactions. Some industry commenters, however, raised concerns about 
requiring the authorization to be written and signed for POS 
transactions. They also raised concerns about providing consumers with 
disclosures explaining that funds may be withdrawn from the account 
quickly and that checks will not be returned to the consumer. 
Commenters asserted, for example, that a written, signed authorization 
requirement could stifle industry innovation, and that the additional 
information about ECK transactions would result in overly lengthy 
disclosures.
    Consumer groups also supported many of the proposed revisions 
addressing ECK transactions, including merchant coverage and the 
additional disclosure requirements. Consumer groups stated, however, 
that the Board should require a consumer's written, signed 
authorization for other debits that may occur in connection with the 
underlying ECK transaction, such as for debits to collect service fees 
when consumers have insufficient funds in their account to cover the 
underlying transaction, since consumers are unlikely to expect the 
additional debits to their accounts.

Error Resolution

    Section 205.11(c)(4) provides that a financial institution may 
satisfy its obligation to investigate an alleged error by reviewing its 
own records if the alleged error concerns a transfer to or from a third 
party and there is no agreement between the institution and the third 
party for the type of EFT involved. This rule is commonly referred to 
as the ``four walls'' rule. The Board proposed to revise the staff 
commentary to clarify that an institution would not satisfy its error 
resolution obligations solely by reviewing the payment instructions if, 
for example, there is additional information within the institution's 
own records that would assist in resolving the alleged error.
    Many industry commenters opposed the Board's proposed commentary 
revisions, expressing concern about the potential scope of information 
that might need to be reviewed under the proposed revisions to the four 
walls standard. Consumer groups favored the proposed comment, and urged 
the Board to revise the comment to state that an institution's review 
should consider records that could be helpful to resolving the 
consumer's claim, not just those records that were dispositive.

Preauthorized Transfers

    Section 205.10(b) requires that recurring electronic debits from a 
consumer's account be authorized ``only by a writing signed or 
similarly authenticated by the consumer.'' Existing commentary provides 
that a tape recording of a telephone conversation with a consumer who 
agrees to preauthorized debits does not constitute written 
authorization under Sec.  205.10(b). The Board proposed to withdraw the 
existing commentary to address industry concerns that the guidance may 
conflict with the Electronic Signatures in Global and National Commerce 
Act (E-Sign Act), 15 U.S.C. 7001 et seq. Many industry commenters, in 
particular those representing retailers, supported the proposed 
withdrawal, with some of these commenters asking the Board to 
explicitly state that a recorded conversation complies with the E-Sign 
Act. Other commenters, however, opposed the withdrawal of the guidance 
due to concern about potential abuses and the possible increase in 
unauthorized transfers that could result. Consumer groups did not 
comment on the proposed withdrawal.

ATM Disclosures

    Section 205.16 provides that an ATM operator that imposes a fee 
(``surcharge'') on a consumer for initiating an EFT or balance inquiry 
must post a sign at ATMs that a fee will be imposed for providing EFT 
services or for balance inquiries. The September 2004 proposal included 
proposed commentary revisions to provide ATM operators flexibility when 
disclosing these surcharges. In particular, the proposal clarified that 
ATM operators could disclose on ATM signage that a surcharge ``may'' be 
imposed if there are circumstances where the operator would not impose 
such a fee for use of its ATM. (Before a surcharge may be imposed by an 
ATM operator, the operator must provide a separate on-screen notice or 
a receipt informing the consumer that a fee will be charged and the 
amount of the fee, and the consumer must elect to continue the 
transaction.) In August 2005, the Board withdrew the proposed 
commentary revisions and issued a new proposal to incorporate this 
clarification into both the regulation and the commentary. See 70 FR 
49891 (Aug. 25, 2005) (August 2005 proposal). The Board received 
approximately 25 comments on the August 2005 proposal from a variety of 
industry commenters, including banks, credit unions and trade 
associations. Industry commenters strongly supported the revised 
proposal stating that it would provide institutions with flexibility to 
provide more accurate disclosures and reduce consumer confusion. 
Consumer groups and one consumer rights advocate, however, asserted 
that the revised proposal would not ensure that consumers who are 
charged a fee will receive adequate notice on ATM signage.

Payroll Cards

    The September 2004 proposal also included rules governing the 
coverage under Regulation E of payroll card accounts that are 
established either directly or indirectly by an employer on behalf of a 
consumer for the purpose of providing salary, wages, or other employee 
compensation on a recurring basis. An interim final rule is being 
published separately in this Federal Register to address payroll card 
accounts.

III. Overview of the Final Rule

    The Board is adopting final revisions to Regulation E and the staff 
commentary largely as proposed. However, several clarifications and 
modifications to the proposal have been made to respond to commenters' 
concerns. The following is a summary of significant revisions to the 
regulation and the staff commentary. All of the revisions are discussed 
in detail below in the section-by-section analysis. The rule is 
effective February 9, 2006. The mandatory compliance date for the final 
rule is January 1, 2007.

Electronic Check Conversion

    Merchant coverage. The final rule provides that merchants and other 
payees that use information from a check to initiate a one-time EFT 
from a consumer's account are subject to the regulation solely for the 
limited purpose of obtaining a consumer's authorization for the one-
time transfer. Generally, authorization is obtained when the payee 
provides a notice to the consumer that a check received as payment will 
be converted to an EFT, and the consumer goes forward with the 
transaction. At POS, the notice must be posted in a prominent and 
conspicuous location, and a copy of the notice must be provided to the 
consumer at the time of the transaction, such as on a receipt. For ARC 
transactions, the notice will typically be provided on a billing 
statement or invoice. Model clauses are provided to try to minimize the 
risk that merchants and other payees will be subject to private 
actions.
    Alternative authorization. As proposed, the final rule recognizes 
that payees may obtain a consumer's authorization to use information 
from

[[Page 1640]]

the consumer's check to initiate an EFT, or, alternatively, to process 
the transaction as a check.
    Additional disclosures about ECK transactions. To help consumers 
understand the nature of ECK transactions, the final rule provides that 
persons initiating an ECK transaction, whether at POS or in an ARC 
transaction, must disclose to the consumer that when a check provided 
as payment is used to initiate an EFT, funds may be withdrawn from the 
consumer's account as soon as the same day payment is made (for POS 
transactions) or received (for ARC transactions). Payees must also 
disclose, as applicable, that the consumer's check will not be returned 
by the consumer's financial institution. Under the final rule, for POS 
transactions, payees may provide these additional disclosures on a 
sign. The requirement to provide these disclosures sunsets three years 
from the mandatory compliance date of this final rule.

Collection of Service Fees Via EFT

    The final rule, as proposed, provides that payees that choose to 
collect a service fee via an EFT due to insufficient or uncollected 
funds in a consumer's account in connection with the underlying 
transaction must obtain the consumer's authorization to collect the 
fee. Authorization is obtained when a payee provides notice to the 
consumer stating that the fee will be collected via an EFT and the 
consumer goes forward with the transaction. Payees also are required to 
disclose the amount of the fee on the notice.

Error Resolution

    The final rule provides that a financial institution does not 
satisfy its error resolution responsibilities under the ``four walls'' 
rule by solely reviewing the payment instructions; an institution must 
review any additional information within the institution's own records 
pertaining to the particular account in question that would assist in 
resolving the alleged error.

Preauthorized Transactions

    The final rule, as proposed, withdraws the existing commentary 
stating that a tape recording of a telephone conversation with a 
consumer who agrees to preauthorized debits does not constitute written 
authorization under the regulation.

Disclosures at Automated Teller Machines

    The final rule, as proposed in the August 2005 proposal, revises 
the regulation to permit ATM operators to alternatively provide notice 
on ATM signage that a surcharge may be imposed (in place of a 
disclosure that a surcharge will be imposed) if there are circumstances 
in which an ATM fee may not be charged.

Effective Date of Rule

    The effective date of the final rule is February 9, 2006. While 
institutions may, if they choose, begin complying with the new 
requirements on February 9, 2006, compliance with this final rule is 
not mandatory until January 1, 2007. The additional time should give 
persons affected by this final rule adequate time to implement the new 
requirements, including developing the new required notices for ECK 
transactions.

IV. Section-by-Section Analysis

Section 205.3 Coverage

3(a) General
    Section 205.3(a) is revised to provide that Sec.  205.3(b)(2), 
discussed below, applies to any person.
3(b) Electronic Fund Transfer
    The term ``electronic fund transfer'' is defined in Sec.  
205.3(b)(1) as ``any transfer of funds that is initiated through an 
electronic terminal, telephone, computer, or magnetic tape for the 
purpose of ordering, instructing, or authorizing a financial 
institution to debit or credit an account.'' The term includes POS 
transfers, ATM transfers, direct deposits or withdrawals of funds, 
telephone transfers and debit card transactions. The final rule 
includes language in the existing regulation that was inadvertently 
omitted in the September 2004 proposal. Comments 3(b)-1 and 3(b)-2 are 
redesignated as comments 3(b)(1)-1 and 3(b)(1)-2, and conforming 
changes are made to comments 2(a)-2 and 3(c)(1)-2.

Electronic Check Conversion

    The EFTA excludes from the definition of ``electronic fund 
transfer'' any transaction ``originated by check, draft, or similar 
paper instrument.'' 15 U.S.C. 1693a; see also Sec.  205.3(c)(1). In ECK 
transactions, a consumer provides a check to a merchant or other payee 
to use as a source of information to initiate an EFT from the 
consumer's account as payment for the purchase of goods or services, 
and not to initiate a payment by check. The payee electronically 
captures the routing, account, and serial numbers from the check and 
initiates a one-time EFT from the consumer's account. The Board 
proposed to amend Sec.  205.3(b)(2) of Regulation E and comment 
3(b)(2)-1 to clarify that ECK transactions are covered by Regulation E 
and deemed not to originate by check. Substantially similar guidance 
previously had been provided in the commentary to Regulation E. The few 
commenters addressing the issue agreed that the guidance regarding the 
status of ECK transactions under Regulation E is more appropriately 
placed in the regulation. Accordingly, the proposal has been adopted in 
Sec.  205.3(b)(2)(i) with minor revisions. Section 205.3(b)(2)(i) 
further provides that a consumer must authorize an ECK transaction 
(discussed below).
    One industry commenter expressed concern that the proposed 
regulatory language was too broad in stating that a transaction is 
covered by Regulation E where a check is ``used as a source of 
information to initiate a one-time EFT.'' According to the commenter, 
some may interpret the language to include transactions arising from 
electronic check presentment or image exchange. The Board agrees; Sec.  
205.3(b)(2)(i) is intended to apply only when a payee uses a check as a 
source of information to initiate an EFT from the consumer's account. 
New comment 3(b)(1)-2.iv clarifies that transactions arising from the 
electronic collection, presentment, or return of checks through the 
check collection system, such as through the transmission of electronic 
check images, are not EFTs covered by Regulation E.
    A few commenters asked the Board to clarify that the rules applying 
to ECK transactions were not intended to apply to Internet- or 
telephone-initiated transactions (where a consumer provides 
information--including the MICR-encoding--from his or her check to pay 
for a purchase via these payment channels). While Internet- and 
telephone-initiated transactions are covered by Regulation E because 
they result in electronic transfers from the consumer's account, the 
rules for ECK transactions do not apply to these transactions.
    Coverage of merchants and other payees. Currently, a merchant or 
other payee that engages in ECK transactions is not covered by 
Regulation E because it does not meet the definition of ``financial 
institution.'' Under Sec.  205.2(i) the term ``financial institution'' 
means a ``bank, savings association, credit union, or any other person 
that directly or indirectly holds an account belonging to a consumer, 
or that issues an access device and agrees with a consumer to provide 
electronic fund transfer services.'' The Board has previously 
acknowledged that a merchant or other payee is in the best position to 
provide notice to a consumer for the purpose of obtaining authorization 
of an ECK transaction. See 66 FR 15187, 15189-90

[[Page 1641]]

(March 16, 2001). The Board has not covered merchants and other payees 
previously under the regulation because it expected that these persons 
would provide consumers with the necessary notice. In response to 
concerns about the uniformity and adequacy of some of the notices 
provided to consumers about ECK transactions, the Board proposed to 
exercise its authority under Sections 904(c) and 904(d)(1) of the EFTA 
to require merchants and other payees that initiate a one-time EFT 
using information from the consumer's check, draft or similar paper 
instrument, to provide notice to obtain a consumer's authorization for 
the transfer. The final rule is adopted, as proposed. Coverage of 
merchants and other payees under the final rule is solely for the 
limited purpose of obtaining consumer authorizations for ECK 
transactions. A financial institution will be subject to the 
requirement to obtain consumer authorization for the transaction to the 
extent that the institution initiates an EFT using information from a 
consumer's check (e.g., if the institution converts checks provided as 
a payment for a mortgage loan).
    Most commenters supported the proposed revision in Sec.  
205.3(b)(2)(ii) because they believe the merchant is in the best 
position to provide the notice. According to one commenter, the 
consumer's financial institution has no control over a consumer 
receiving proper notice for purposes of authorization. A few commenters 
noted the importance of covering merchants and other payees for 
enforcement purposes. Several commenters also noted that requiring 
merchants and other payees to adhere to minimum authorization and 
related notice provisions will better inform consumers on a consistent 
basis about ECK transactions. Moreover, according to these commenters, 
the authorization requirement would not pose new or significant 
compliance burdens since payment system rules currently impose an 
authorization requirement on merchants and other payees. While 
supporting the proposed requirement, a few commenters requested 
clarification that merchants and other payees would be covered solely 
for the limited purpose of the authorization requirement for ECK 
transactions.
    Some industry commenters opposed the proposed requirement. A few 
commenters believed merchants and other payees should not be required 
to assume the liability risks that may be associated with ECK 
transactions. A few commenters requested clarification of the FTC's 
enforcement authority for merchants and other payees not regulated by 
federal banking agencies. A few commenters believed the requirement is 
an unnecessary duplication of payment system rules.
    The Board believes coverage of merchants and other payees in Sec.  
205.3(b)(2)(ii) for the limited purpose of providing a notice to obtain 
consumer authorization for ECK transactions is appropriate to ensure 
consumers understand that checks will be processed as EFTs. Without 
such a notice requirement, different information may be given by 
merchants to consumers, or information may be given solely by signage 
or other forms that may not be easily discernable by consumers. In 
addition, coverage of merchants and other payees for the limited 
purpose of obtaining consumer authorization for ECK transactions will 
provide a mechanism to ensure that consumers, in fact, receive 
appropriate notice of check conversion. For those entities subject to 
FTC enforcement, the FTC would have enforcement authority pursuant to 
Section 917(c) of the EFTA and under the Federal Trade Commission Act. 
Merchant coverage would also enable the Board to provide model clauses 
that will aid consumer understanding of ECK transactions. The model 
clauses provide a safe harbor from liability, thereby reducing 
liability risks. See Sec.  205.3(b)(2)(iv).
    General authorization requirements. As previously noted, revised 
Sec.  205.3(b)(2)(i) provides that a consumer must authorize an ECK 
transaction. The current commentary states that a consumer authorizes 
an ECK transaction when the consumer receives notice that the 
transaction will be processed as an EFT and completes the transaction. 
See comment 3(b)-3. This guidance, originally proposed to be placed in 
comment 3(b)(2)-1, is moved to Sec.  205.3(b)(2)(ii) of the final rule. 
The phrase ``completes the transaction'' is replaced with ``goes 
forward with the transaction'' to clarify that it is not necessary for 
a transaction to clear or settle in order for authorization to occur. 
In addition, under the final rule, for POS transactions, a notice must 
be posted in a prominent and conspicuous location, and a copy of the 
notice must be provided to the consumer at the time of the transaction, 
such as on a receipt.
    In the proposal, the Board stated that at POS, a written, signed 
authorization may be a more effective means than posted signage for 
informing consumers that their checks are being converted. The Board 
did not propose to require merchants or other payees to obtain the 
consumer's signed authorization to convert checks received at POS, but 
specifically solicited comment on whether this should be required. The 
final rule does not require a merchant or other payee to obtain the 
consumer's signed authorization for an ECK transaction.
    Some commenters supported a signed authorization requirement for 
POS transactions. Several of these commenters stated the requirement 
would be beneficial for enforcement purposes to ensure that consumer 
authorization is, in fact, obtained by a payee. A few commenters stated 
that the Regulation E rule should be consistent with the rules 
established by NACHA--the Electronic Payments Association (NACHA 
rule(s))--which requires a consumer's written, signed authorization. 
One such commenter stated making the rules consistent would address 
consumer confusion issues. Another commenter stated that the current 
difference between the NACHA rule and Regulation E creates the 
potential for monetary penalties imposed by NACHA if the payee follows 
the Regulation E notice rule and does not also comply with NACHA's 
signed authorization rule. A few commenters noted that there would be 
no additional regulatory burden associated with a signed authorization 
requirement since it is already required by NACHA. Some commenters 
expressed the view that a signed authorization requirement calls a 
consumer's attention to, and reinforces an awareness of, check 
conversion.
    The majority of commenters opposed a signed authorization 
requirement for POS transactions under Regulation E. Specifically, some 
of these commenters stated that the NACHA rule is sufficient, and that 
a payments system rules-driven approach is preferable to regulation. 
Several commenters expressed concern that such a requirement would 
unnecessarily delay transactions at POS. According to one commenter, a 
signed authorization requirement could impede the general movement 
toward facilitating paperless payments. A few commenters stated the 
requirement may limit the industry's flexibility to deal with changing 
market circumstances. Some commenters expressed concern that a signed 
authorization requirement may stifle the creation and development of 
payment system innovations.
    The final rule sets forth the authorization requirements for ECK 
transactions under Sec.  205.3(b)(2)(ii). Generally, a consumer 
authorizes a one-time EFT (in providing a check to a merchant or other 
payee for the MICR encoding) when the consumer receives a notice that 
the transaction will be processed as an EFT and goes forward with the 
transaction. This guidance was originally in proposed comment 3(b)(2)-

[[Page 1642]]

1. (Existing comment 3(b)-3 is deleted.) The phrase ``completes the 
transaction'' is replaced with ``goes forward with the transaction'' to 
clarify that it is not necessary for the transaction to clear or 
settle, for example, in order for authorization to occur. Section 
205.3(b)(2)(ii) also addresses the possibility that a payee might elect 
to obtain a consumer's authorization either to convert a check provided 
as payment to an EFT or to process the check as a check transaction. 
See also comment 3(b)(2)-2 (further discussed below).
    For ARC transactions, a payee (such as a utility company) obtains a 
consumer's authorization when it provides notice of its intent to 
convert checks received as payment--for example, on a monthly billing 
statement or invoice--and the consumer provides or mails a check as 
payment.
    For transactions at POS, the final rule requires payees to post the 
notice in a clear and prominent location. The requirement for posted 
signage is necessary to alert consumers that a check provided as 
payment will be converted to an EFT before the consumer selects a 
payment method. The Board believes that providing this notice on a sign 
enables the consumer to authorize the ECK transaction after being given 
prior notice. The final rule also requires merchants and other payees 
at POS to provide consumers with a copy of the notice in a form the 
consumer can keep at the time of the transaction. For example, 
merchants and other payees could provide the notice on the receipt 
given to the consumer. The written receipt allows consumers to refer to 
the notice later, if necessary.
    The final rule does not require merchants or other payees at POS to 
obtain a consumer's signed authorization for ECK transactions. The 
Board believes that a signed authorization requirement would provide 
minimal additional benefit given that consumers will be given notice 
that their checks will be converted at two different points during the 
ECK transaction, first through posted signage which consumers can read 
prior to providing a check as payment, and second on a receipt provided 
to the consumer, presumably after the check has been provided to the 
merchant. In addition, the periodic statement provided by the 
consumer's bank will typically reflect ECK transactions in a different 
manner than check transactions.
    New comment 3(b)(2)-1 provides that a payee at POS does not violate 
the requirement to provide a copy of the check conversion notice to the 
consumer if the payee is unable to provide notice because of a bona 
fide unintentional error, so long as the payee maintains procedures 
reasonably adapted to avoid such occurrences. Thus, for example, a 
payee will not be deemed to have violated the regulation if it cannot 
provide a paper notice if its terminal printing mechanism jams, 
provided that the payee maintains procedures reasonably adapted to 
avoid such occurrences.
    Authorization language. Proposed comment 3(b)(2)-2 provided that a 
payee must obtain the consumer's authorization to use information from 
his or her check to initiate an EFT or, alternatively, to process a 
check. The comment is adopted, largely as proposed. Model notices are 
provided in Appendix A-6 to assist merchants and other payees in 
complying with the requirements. See Sec.  205.3(b)(2)(iv). Regulation 
E coverage of ECK transactions continues to be predicated on the 
consumer's authorization to allow the merchant or other payee to use a 
check as a source of information to initiate an ECK transaction.
    Due to processing or technical errors, a transaction authorized as 
an ECK transaction ultimately may not be processed as an EFT. 
Furthermore, in some cases, a payee may decide to process the original 
check or create a demand draft, or the payee may choose to create a 
substitute check in accordance with the Check Clearing for the 21st 
Century Act (Check 21).\1\ Currently, if a payee obtained a consumer's 
authorization solely to initiate an EFT using information from the 
consumer's check, the payee may have difficulty processing the same 
document as a check because such an action would arguably fall outside 
the consumer's payment instructions. Thus, without the consumer's 
authorization to alternatively process the transaction as a check, the 
payee may not be able to obtain payment. In other cases, a merchant or 
payee operating in multiple states may choose to pilot ECK in some 
locations while processing the payments as checks in others. To address 
these and similar concerns, and to provide flexibility, the Board 
proposed three authorization approaches for ECK transactions.
---------------------------------------------------------------------------

    \1\ Pub. L. 108-100, 117 Stat. 1177 (codified at 12 U.S.C. 5001-
5018).
---------------------------------------------------------------------------

    First, the Board proposed to allow a payee to obtain a consumer's 
authorization to use information from his or her check to initiate an 
EFT or, alternatively, to process the transaction as a check. See 
proposed Model Clause A-6(a). The Board specifically solicited comment, 
however, on whether this alternative authorization approach may result 
in any consumer harm or create any other risks. In particular, comment 
was solicited on whether payees that obtain alternative authorization 
should be required to specify the circumstances under which a check 
that can be used to initiate an EFT will be processed as a check. 
Second, the Board proposed an optional authorization clause for use by 
payees that intend to convert all checks to ECK transactions. See 
proposed Model Clause A-6(b). Third, the Board proposed an optional 
authorization clause for use by payees that choose to disclose the 
specific circumstances when checks will not be converted to ECK 
transactions. See proposed Model Clause A-6(c).
    Most industry commenters supported the alternative authorization 
approach as illustrated in proposed Model Clause A-6(a), stating that 
the approach provides needed flexibility. The majority of these 
commenters did not believe any consumer harm would result from the lack 
of specification of circumstances under which check conversion would or 
would not occur. One commenter did not believe consumers would be 
confused about their rights since many account-holding financial 
institutions list EFT and check transactions separately on periodic 
statements given to consumers. A few commenters stated that consumers 
will have sufficient protections regardless of how the transactions are 
processed.
    Some industry commenters supported alternative authorization, but 
stated that the Board should also require payees to disclose the 
circumstances under which conversion will not occur. One such commenter 
believed the disclosure of the specific circumstances would eliminate 
any risk of consumer harm.
    One federal enforcement agency observed generally that consumers 
may not understand the differences between checks and ECK transactions 
or the protections that apply to each, but did not otherwise express a 
view on the merits of permitting alternative authorization. This 
commenter thought that focus group testing of the model clauses would 
be useful to determine what information consumers understand.
    A few commenters opposed the alternative authorization clause as 
unclear and potentially confusing to consumers. According to one 
industry commenter, confusion arising from an alternative authorization 
may cause consumers to instruct their financial institutions to state 
that ECK transactions were unauthorized. This commenter therefore 
believed the rule

[[Page 1643]]

should require the authorization notice to specify the circumstances 
when conversion would not occur. According to another commenter, 
requiring payees to specify the circumstances when a check will be 
processed as a check is consistent with the purpose of the EFTA--for 
consumers to know their rights, responsibilities, and liabilities when 
they engage in EFT services. This commenter believed such disclosure 
also enhances consumer understanding by making it clear that there are 
different methods to collect checks and by providing greater certainty 
as to which method is most likely to apply to a particular transaction. 
The commenter stated that given the efficiency of check conversion, 
there should be limited circumstances to disclose. Accordingly, the 
commenter requested that the Board delete Model Clause A-6(a) as an 
option.
    Some industry commenters supported the approach illustrated in 
proposed Model Clause A-6(b) for when a payee converted all checks, as 
long as the use of the clause is optional. One commenter believed the 
clause unworkable absent additional authorization to process the 
transaction as a check where the ECK will not clear for technical 
reasons.
    A few industry commenters also supported the specific authorization 
approach illustrated in Model Clause A-6(c) as long as it is optional. 
Other industry commenters did not believe the clause would provide a 
significant benefit to consumers. Several commenters believed a 
specific disclosure would be highly detailed and complex; if 
circumstances changed new disclosures would be required. One consumer 
group commenter was concerned that the burden of providing this notice 
could result in payees favoring substitute checks under Check 21 which 
they believed would provide fewer consumer protections. A few industry 
commenters thought the clause should not be adopted.
    A few industry commenters stated that all three model clauses 
should be retained for flexibility. Other commenters believed that all 
three clauses should be consolidated to address various payment options 
available to payees. Several commenters supported having one model 
notice to avoid confusing consumers. Many commenters expressed concern 
about the length of the notices. A few commenters requested additional 
guidance on the clear and conspicuous standard as it pertains to the 
notices.
    In the final rule, Model Clause A-6(a) is retained as proposed, but 
proposed Model Clauses A-6(b) and (c) have been consolidated in a 
single Model Clause A-6(b) for simplicity and to facilitate compliance 
by payees. Model Clause A-6(a) may be used in all instances, including 
when a payee will process a check as an EFT in all circumstances, when 
the transaction is processed as a check for technical reasons, or 
because a payee simply chooses to process the transaction as a check. 
While the Board believes that most payees will likely choose to use 
Model Clause A-6(a) in all cases, the Board is aware that some payees 
may want to provide more specific information concerning their ECK 
practices for business reasons, such as for customer service and 
education, as well as to reduce possible consumer inquiries. Model 
Clause A-6(b) offers that flexibility. Thus, for example, payees may 
choose to use Model Clause A-6(b) to disclose the circumstances under 
which they will not process a check as an EFT, such as when it is 
impossible for technical or other processing reasons.
    Model Clauses A-6(a) and (b) have also been revised to clarify 
their application to transactions where a consumer's check is provided 
as payment. Some commenters expressed concern that without this 
revision, consumers might mistakenly believe the notice applied to 
preauthorized transfers--where a consumer provides a check and a signed 
authorization in advance to authorize future payments. See Sec.  
205.10.
    Consistent with Sec.  205.4(a)(1), notices provided to consumers 
regarding check conversion must be clear and readily understandable. 
For example, in ARC transactions, notices in small print and buried in 
the middle of unrelated information would likely not meet the standard. 
Payees may also consider using headings preceding the notice to call 
attention to the information presented. For POS transactions, signage 
informing consumers about check conversion should not be obscured by 
other information or signs that may also be located at POS.
    Notice for each transfer. ECK transactions are one-time, and not 
preauthorized, transfers. Therefore, under the final rule, a notice 
must be provided and an authorization must be obtained from the 
consumer for each transfer. Section 205.3(b)(2)(ii) contains the 
general rule that the person initiating an ECK transaction must provide 
notice of check conversion to the consumer before each transfer.
    Some industry commenters stated that while it may be appropriate to 
require notice for each transfer for most ECK transactions, there are 
certain circumstances where one advance notice may suffice. Coupon 
books were the most frequently-cited examples. Lenders provide coupon 
books to consumers typically for mortgages, automobile loans, personal 
loans, and other recurring loan payments. According to some commenters, 
coupon books do not present the same notice opportunities as POS and 
ARC transactions because they are provided in advance and include 
coupons for several payments. Some credit card issuers suggested that 
it may be similarly appropriate to allow a consumer to contract with 
its card issuer for regular ECK payments rather than requiring a notice 
to be sent on or with each periodic statement sent to the consumer. A 
few commenters stated that recurring notice is appropriate only for POS 
transactions. One commenter stated that the consumer benefit of 
receiving a notice with each periodic statement is negligible compared 
to the ongoing cost to institutions.
    Because a coupon book is designed so that a consumer must detach a 
coupon from the book and provide the coupon with each payment, the 
Board believes that it is unnecessary to require that a separate notice 
of check conversion be printed on each coupon. New comment 3(b)(2)-3 
provides that for coupon books, a notice placed on a conspicuous 
location of the coupon book that the consumer can retain is deemed to 
constitute the provision of notice on each coupon that accompanies a 
check provided as payment, for purposes of obtaining a consumer's 
authorization to convert each check. The notice must be placed on a 
location of the coupon book that a consumer can retain--for example, on 
the first page, or inside the front cover. The Board believes this new 
comment will facilitate compliance with the requirements of the Act and 
regulation.
    Unlike coupon books which contain several payment coupons and are 
sent once near the beginning of the payment period, periodic statements 
for credit card accounts are typically sent on a monthly basis. Thus, 
the Board believes that credit card issuers have the capability of 
providing a notice of check conversion with each statement without an 
undue burden. In contrast, payees that send coupon books may not 
otherwise send monthly information; thus, requiring a separate monthly 
notice could be costly for these payees. Accordingly, comment 3(b)(2)-3 
in the final rule is limited to coupon books.
    If a coupon book is issued before the effective date of the final 
rule, and will cover a time period when notice otherwise must be 
provided under the final rule, payees may provide a one-

[[Page 1644]]

time notice to obtain the consumer's authorization to convert each 
check submitted with a coupon. For example, a payee may provide a 
separate mailing informing the consumer that by mailing a check with 
each payment coupon included in the book, the consumer authorizes the 
payee to convert each check provided as payment to an EFT. Without such 
relief, payees would have to re-issue coupon books at considerable 
expense in order to comply with the new rule.
    The final rule also clarifies that the notice regarding a payee's 
intent to collect a service fee for insufficient or uncollected funds 
via an EFT and the notice providing additional information about the 
nature of ECK transactions (further discussed below) must also be 
provided for each transfer. However, the special exception regarding 
coupon books would also apply to notices regarding the electronic 
collection of service fees for insufficient or uncollected funds and 
the nature of ECK transactions.
    Imputed notice. Proposed Sec.  205.3(b)(2)(ii) provided that 
obtaining authorization from the consumer holding the account for which 
a check may be converted constitutes authorization for all checks 
provided for a single payment or invoice for that account. Proposed 
comment 3(b)(2)-4 stated that notice of check conversion to the person 
holding the account for which a check may be converted may be imputed 
to anyone who writes a check as payment for the particular invoice or 
bill. In the final rule, comment 3(b)(2)-4 is adopted with certain 
revisions for clarity. The guidance in proposed Sec.  205.3(b)(2)(ii) 
is also moved to comment 3(b)(2)-4, with some revisions for clarity.
    All commenters who addressed the issue of imputed notice supported 
the proposal. One commenter noted that the rule is consistent with 
current industry practice. Another commenter stated that complying with 
a different rule would be unduly burdensome, if not impossible. A few 
commenters supported the proposal, but stated that alternative 
authorization would also be necessary to accommodate payees who may 
choose not to process multiple transactions all as EFTs. A few 
commenters also suggested that the authorization of the person holding 
the billing account should apply to all checks received prior to the 
next bill, not just to checks related to the particular invoice.
    In the final rule, comment 3(b)(2)-4 provides that notice to the 
consumer listed on the billing account constitutes sufficient notice to 
convert all checks provided in payment for the billing cycle or the 
invoice for which notice has been provided, whether the check(s) is 
received from the consumer or someone else for that account. The notice 
applies to all checks submitted as payment until the provision of 
notice on or with the next invoice or statement. Thus, if a merchant or 
other payee receives a check as payment from the consumer listed on the 
billing account after providing notice that the check will be processed 
as a one-time EFT, the authorization from that consumer constitutes 
authorization to convert all other checks provided for a single invoice 
or statement.
    Other required notices for ECK transactions may also be similarly 
imputed to any other consumer who may provide a check for the same 
billing cycle or invoice if such notices are provided to the consumer 
listed on the billing account. Thus, for example, a notice to the 
consumer on the billing account informing the consumer that a service 
fee for insufficient or uncollected funds will be debited via an EFT 
from the consumer's account constitutes notice to obtain authorization 
for electronically collecting the fee to any other consumer who may 
provide a check for the same billing cycle or invoice.
    Additional ECK disclosures. Consistent with the EFTA's purpose to 
enable consumers to understand their rights, liabilities, and 
responsibilities concerning EFT services, and given the unique 
characteristics of ECK transactions, the Board believes it is 
appropriate to provide consumers with additional information to help 
them understand the nature and potential consequences of an ECK 
transaction. Proposed Sec.  205.3(b)(2)(iii) thus required a person 
that initiates an ECK transaction to provide a notice to the consumer 
that when a check is used to initiate an electronic fund transfer, 
funds may be debited from the consumer's account quickly, and, as 
applicable, that the consumer's check will not be returned by the 
financial institution holding the consumer's account. Under the 
proposal, this information would be provided at the same time a notice 
is provided to obtain authorization for the underlying ECK transaction. 
Section 205.3(b)(2)(iii) is adopted as proposed, with some revisions to 
address commenter concerns. Proposed comment 3(b)(2)-3 is re-designated 
as comment 3(b)(2)-5, and provides additional guidance to facilitate 
compliance.
    Consumer group commenters stated that the additional information 
answered many of the common questions they receive from consumers about 
ECK transactions; thus, they believed that the additional information 
would help avoid consumer confusion and enhance consumer understanding 
of ECK transactions. A federal enforcement agency similarly noted that 
consumers may be more willing to engage in ECK transactions if they 
better understand them. In particular, the agency stated that the 
disclosure regarding the quick debiting of deposit accounts through ECK 
transactions could help consumers avoid the possibility of overdrafts 
for insufficient funds.
    Some industry commenters requested that the Board revise the 
requirement to state instead that the transaction will be reported on 
the consumer's periodic account statement. One industry commenter 
stated that much of the consumer education responsibility for ECK 
transactions should be borne by the consumer's financial institution. A 
few industry commenters were concerned about the length of the 
disclosures, particularly in combination with the authorization 
disclosure, and expressed concern that consumers may be discouraged 
from reading them. One industry commenter stated that the disclosures 
may not be feasible as an ongoing requirement. Another industry 
commenter expressed concern about the cost of reprogramming terminals. 
One industry commenter thought the Board should require financial 
institutions to include the disclosures in their account agreements or 
on each periodic statement that includes an ECK transaction.
    A number of industry commenters opposed the proposed disclosure 
that states when a consumer's check is used for an ECK transaction, the 
transaction may clear quickly. Many of these commenters stated that in 
the majority of cases an EFT and a check will clear in roughly the same 
period of time. Other commenters stated that under Check 21, checks may 
clear as fast or faster than EFTs, and expressed concern that the 
disclosure may mislead consumers. A few commenters stated it might be 
impossible to explain the meaning of ``quickly'' in different 
circumstances.
    Many industry commenters also opposed the proposed disclosure that 
the consumer's check will not be returned by the consumer's financial 
institution. The majority of these commenters stated the disclosure 
would be misleading, particularly to consumers whose checks currently 
are not returned by their financial institutions under the terms of 
their account agreements. A few commenters

[[Page 1645]]

asserted the disclosure might become less significant to consumers in 
light of Check 21. One commenter believed that consumers may confuse 
the disclosure with similar statements from their financial institution 
about check handling under Regulation CC, as amended to implement Check 
21.
    As the payment system evolves, consumers' checks are being used 
differently than in the past, and consumer rights with respect to EFT 
transfers are different than those for check transactions. Given the 
unique characteristics of ECK transactions, the Board believes it would 
be beneficial to provide additional information to consumers to help 
them better understand the nature of these transactions. The additional 
information highlights and may draw consumers' attention to some of the 
key differences in the way payments are handled under the ECK process, 
and possibly reduce consumer confusion about ECK transactions. 
Moreover, the Board notes that some payees, particularly in the ARC 
environment, are currently providing this information to their 
customers to help reduce consumer inquiries and complaints. Requiring 
this notice could facilitate consumer understanding by ensuring that 
all consumers who engage in ECK transactions receive this information. 
Accordingly, the Board is exercising its authority under Sections 
904(c) and 904(d)(1) of the EFTA and adopting the proposed notice in 
the final rule, with certain modifications to address commenters' 
concerns.
    The Board recognizes that a check may be processed as fast or 
faster than an ECK transaction in some instances based on current 
industry practices and potential changes in check processing 
facilitated by the Check 21 Act. Nevertheless, the Board believes it is 
important to draw a consumer's attention to the fact that an ECK 
transaction ``may'' clear quickly. The purpose of the notice is to 
emphasize to consumers the importance of having sufficient funds in 
their accounts at the time of the transaction, since many consumers may 
still believe that use of a check will result in a significant time lag 
between the time the consumer provides a check as payment and when 
funds are in fact debited from the consumer's account. To address 
commenter concerns about potential comparisons with check processing, 
the notice in Sec.  205.3(b)(2)(iii) has been revised to state that 
funds may be debited from consumers' accounts as soon as the same day 
payment is received.
    Section 205.3(b)(2)(iii) also retains the requirement to notify 
consumers that they will not receive their checks back from their 
financial institution if their checks are converted. The disclosure 
addresses complaints received by the Board from consumers expressing 
confusion about not receiving their checks back in ECK transactions. In 
particular, some consumers may rely on the checks they receive back 
with their periodic statements for account reconciliation and 
recordkeeping purposes. Comment 3(b)(2)-5 clarifies that the statement 
that a check will not be returned by the consumer's financial 
institution is not required at POS, if, as is typically currently the 
case, the merchant returns the check to a consumer.
    To provide flexibility and address the concerns about the length of 
ECK disclosures, payees at POS may provide the notice in Sec.  
205.3(b)(2)(iii) on posted signage, and need not also provide the 
notice on the receipt provided to the consumer at the time of the 
transaction. However, payees in ARC transactions must provide the 
notice with the general notice to obtain consumer authorization for the 
ECK transaction. The Board expects that ARC payees will likely provide 
the combined notice on a billing statement or invoice. As provided in 
Sec.  205.3(b)(2)(iv), model clauses are provided in Appendix A-6 to 
help payees comply with the additional disclosure requirements. Model 
Clause A-6(c) sets forth two different formulations for the statement 
regarding when funds may be debited from a consumer's account, 
depending on where the payment is made. If the payment is made at POS, 
the statement refers to the possibility that funds may be debited from 
the consumer's account as soon as the same day the consumer makes the 
payment. For ARC transactions, the statement refers to the date that 
the payee receives the payment.
    Consistent with Sec.  205.4(a)(1), and as stated above in the 
context of the notice to obtain consumer authorization for an ECK 
transaction, the notice provided under Sec.  205.3(b)(2)(iii) to 
consumers about the nature of ECK transactions must be clear and 
readily understandable. For example, notices in small print and buried 
in the middle of unrelated information would likely not meet the 
standard. Payees may also consider using headings preceding the notice 
to call attention to the information presented. If payees elect to 
provide the information under Sec.  205.3(b)(2)(iii) separately on a 
sign, the notice should not be obscured by other information or signs 
that may also be located at POS.
    As stated above, with ECK transactions, consumers' checks are being 
used differently than in the past, and consumers may not be aware that 
the conversion of their checks to EFTs may impact the collection time 
for the payment, or that they will not receive their checks (or images 
of their checks) back with their statements as has been the case for 
check transactions in the past. Thus, the Board believes that these 
additional disclosures are appropriate at present. Moreover, many 
payees are already providing similar disclosures to reduce possible 
consumer inquiries. Nevertheless, the Board expects that over time, 
consumers will become more familiar with ECK transactions, thereby 
reducing the need for the additional information. Thus, the final rule 
provides a sunset date of three years from the mandatory compliance 
date of January 1, 2007 for the final rule, after which time payees 
will no longer be required to provide the notice set forth in Sec.  
205.3(b)(2)(iii).
    Transactions initiated by mistake. The supplementary information to 
the proposed rule clarified that where a merchant or other payee 
initiates an EFT in error, the transaction would not be covered by 
Regulation E where the transaction does not meet the definition of an 
EFT. Few commenters addressed the statement, but one requested 
clarification because the inability to process an item is not 
necessarily the result of an ``error.'' The Board agrees that the word 
``error'' has a particular meaning in the EFTA, Regulation E and other 
rules, and that in some cases a transaction may not be able to be 
processed as an EFT for other reasons. Accordingly, the Board believes 
that the statement applies to transactions where a payee mistakenly 
initiates an ECK transaction, such as when the payee attempts to 
convert a money order. Such a transaction is not subject to the 
coverage of the EFTA and Regulation E, even if initiated as an ECK 
transaction.

Collection of Service Fees Via Electronic Fund Transfer

    In the proposal, comment 3(b)-3 was added to clarify that an EFT 
from a consumer's account to collect a service fee due to insufficient 
funds is covered by Regulation E, and must be authorized by the 
consumer. Under the proposal, the provision of notice to the consumer, 
coupled with the consumer's decision to proceed with the transaction, 
would constitute authorization for the debit. This provision has been 
adopted in the regulation in new Sec.  205.3(b)(3), which also requires 
payees to notify consumers

[[Page 1646]]

about the specific amount of the fee in order to obtain the consumer's 
authorization for the transaction. Consistent with the authorization 
requirement at POS for ECK transactions, the final rule requires that 
where a service fee for insufficient or uncollected funds in connection 
with a POS transfer may be collected via an EFT, the notice must be 
posted in a prominent and conspicuous location, and a copy of the 
notice must be provided to the consumer. Comment 3(b)(3)-1 clarifies 
that the requirement to obtain the consumer's authorization does not 
apply to fees imposed against the consumer's account by the consumer's 
account-holding institution for paying overdrafts or returning a check 
or EFT unpaid.
    The majority of commenters generally agreed that EFTs initiated to 
collect service fees for insufficient funds should be covered by 
Regulation E. A few industry commenters stated coverage was appropriate 
as long as a merchant or other payee could obtain authorization of the 
service fee when it provides notice to the consumer that the fee will 
be debited electronically from the consumer's account, and the consumer 
decides to proceed with the transaction. Other industry commenters 
generally supported the notice requirement, but believed the Board 
should also require signed authorization. Several industry commenters 
requested clarification that additional authorization requirements may 
be established by payment system rules. A few commenters requested 
clarification that the proposed rule did not intend to address ``NSF'' 
fees assessed by a consumer's financial institution for returning a 
check unpaid. Some industry commenters requested revising the comment 
to clarify that a check might be returned for reasons other than 
``insufficient'' funds.
    Consumer group commenters opposed the proposed comment. These 
commenters stated that notice and the consumer writing a check alone 
should not be sufficient to authorize the debiting of service fees, 
noting that while a consumer may reasonably anticipate a withdrawal 
from his or her account for the face amount of the check, the consumer 
would not expect an additional debit for the fee, absent additional 
prior, written authorization. Consumer groups also stated that a 
written, signed authorization requirement would encourage consumers to 
exercise more care in determining their actual balances before making a 
payment.
    Some industry commenters also opposed the proposed comment. One 
commenter asserted that providing notice at POS would not sufficiently 
inform the consumer of the possibility that a service fee could be 
debited electronically from the consumer's account. A few commenters 
opposed the comment as inconsistent with the NACHA rule, which requires 
written, signed authorization for collection of service fees via an 
EFT. A couple of commenters believed it important to require signed 
authorization so a consumer will know and understand the fee imposed. 
One commenter expressed the concern that some payees believe the 
current Regulation E notice equals authorization comment grants a 
substantive right to collect a service fee, notwithstanding other 
federal or state law requirements that might apply.
    Proposed comment 3(b)-3 has been moved to the regulation as new 
Sec.  205.3(b)(3) in the final rule. In general, Sec.  205.3(b)(3) 
provides that a consumer authorizes the electronic collection of a fee 
for a check or EFT returned due to insufficient funds when the consumer 
receives notice of a payee's intent to collect the fee via an EFT, and 
the consumer goes forward with the transaction. The final rule also 
requires payees to include the specific amount of the fee imposed in 
the notice provided to consumers to ensure that consumers are informed 
of the amount of the fee they may be charged in the event they have 
insufficient funds in their account. Section 205.3(b)(3) requires 
payees to obtain a consumer's authorization for the debit regardless of 
whether the underlying transaction is an EFT or is a check transaction, 
as long as the payee intends to collect a service fee for insufficient 
funds via an EFT to the consumer's account. See also comment 3(c)(1)-1.
    In addition, section 205.3(b)(3) has been further revised to 
address some commenters' concerns. First, the provision was not 
intended to address fees assessed on a consumer's account by the 
consumer's financial institution for the return of a check or EFT 
unpaid (commonly known as ``NSF fees''), but rather, to address service 
charges assessed by a payee because the consumer's check or EFT was 
returned unpaid. Accordingly, references to ``NSF fees'' in the 
proposed comment have been deleted and replaced with ``service fee(s)'' 
in the final rule. New comment 3(b)(3)-1 further provides that the 
authorization requirement does not apply to fees imposed against the 
consumer's transaction account by the consumer's account-holding 
institution for paying overdrafts or returning a check or EFT unpaid. 
(However, where a financial institution holds the consumer's deposit or 
checking account and also acts as a payee, such as in connection with a 
loan or credit card account, it would be required to obtain the 
consumer's authorization in order to collect a service fee for 
insufficient or uncollected funds in connection with the underlying 
transaction, but not to collect any separate service fee that may be 
assessed against the deposit or checking account for returning the 
check or EFT unpaid.)
    Second, because a check or EFT may be returned for reasons other 
than insufficient funds in the consumer's account, Sec.  205.3(b)(3) 
states that the rule applies where an EFT or check is returned for 
``insufficient or uncollected'' funds.
    Third, consistent with the authorization requirements for the ECK 
transaction, the Board is exercising its authority under Sections 
904(c) and 904(d)(1) of the EFTA to require payees at POS to provide 
notice of their intent to collect service fees for insufficient or 
uncollected funds via EFT, and to disclose the amount of the fee, on 
signage posted in a prominent and conspicuous location at POS. A copy 
of the notice must also be provided to the consumer at the time of the 
transaction, such as on the sales receipt. Payees in ARC transactions 
will typically provide written notice on a billing statement or 
invoice. Model Clause A-6 contains model language that payees may use 
to obtain a consumer's authorization for the collection of the service 
fee for insufficient or uncollected funds via an EFT.
    The final rule does not require payees to obtain a consumer's 
signature to authorize the collection of service fees for insufficient 
or uncollected funds via an EFT. Particularly at POS, the Board 
believes the added benefit of a signature would be minimal in light of 
the requirements to provide notice of the intent to collect the service 
fee via an EFT both on posted signage, and on a receipt provided to the 
consumer at the time of the transaction. The Board further notes that 
Sec.  205.3(b)(3) addresses only the requirement that a payee obtain a 
consumer's authorization for a service fee for insufficient or 
uncollected funds the payee intends to collect via EFT. The final rule 
does not, however, address whether a payee has a substantive right to 
collect the service fee--that is a matter of state or other law. The 
Board notes that other federal or state laws, such as the Fair Debt 
Collection Practices Act, as well as payment system rules, may impose 
additional requirements.

[[Page 1647]]

3(c) Exclusions From Coverage
    When payees re-present checks electronically, they may also seek to 
debit a service fee for insufficient funds via EFT from the consumer's 
account. Although the electronic re-presentment of the returned check 
(RCK) is not covered by Regulation E because the transaction was 
originated by check, the separate electronic debit of the service fee 
is covered by the regulation. Proposed comment 3(c)(1)-1 clarified that 
a consumer authorizes the debit of the service fee when the consumer 
goes forward with the transaction after receiving notice that the fee 
will be collected electronically. No commenters opposed the 
clarification. Comment 3(c)(1)-1 is revised, consistent with Sec.  
205.3(b)(3), to add a reference to ``uncollected'' funds and to provide 
that authorization at POS for the electronic debit of the service fee 
from the consumer's account in connection with a re-presented check 
requires notice posted on signage, with a copy of the notice provided 
to the consumer.

Section 205.5 Issuance of Access Devices

    Section 911 of the EFTA, which is implemented by Sec.  205.5 of 
Regulation E, generally prohibits financial institutions from issuing 
debit cards or other access devices except (1) in response to requests 
or applications or (2) as renewals or substitutes for previously 
accepted access devices. Comment 5(a)(2)-1 generally provides that a 
financial institution may not issue more than one access device as a 
renewal of or substitute for an accepted device (the ``one-for-one 
rule''). Section 205.5(b) provides, among other things, that any access 
device issued on an unsolicited basis must not be validated at the time 
of issuance. Under the proposal, comment 5(b)-5 clarified that a 
financial institution may issue more than one access device in 
connection with the renewal or substitution of a previously accepted 
access device, provided it complied with the conditions set forth in 
Sec.  205.5(b) for the additional unsolicited devices. The proposal 
retained the general one-for-one rule in comment 5(a)(2)-1; however, a 
cross-reference to proposed comment 5(b)-5 was added. The revisions are 
being adopted substantially as proposed, with some modifications to 
address commenters' concerns.
    Most commenters addressing this issue supported the proposal. One 
commenter asserted that since liability for unauthorized use is on a 
per-account (not per-device) basis, issuing additional devices would 
not impose added risk on the consumer. Another commenter agreed that an 
additional access device should be issued in unvalidated form, but 
suggested that new initial Regulation E disclosures should not be 
required to accompany the additional device. (One of the requirements 
for issuing an unsolicited access device under Sec.  205.5(b) is to 
provide the initial disclosures required by Sec.  205.7 that will apply 
to the device. See Sec.  205.5(b)(3).) One commenter suggested that the 
proposed commentary changes be expanded to provide financial 
institutions flexibility to replace access devices having limited 
functions with devices having additional functions. For example, cards 
usable only at ATMs could, under this approach, be replaced with cards 
usable at POS as well.
    A few commenters suggested the Board clarify that when an 
additional access device is issued at the time of replacement or 
substitution, both the additional device and the device that replaces 
the accepted access device may be issued in unvalidated form and a 
single validation procedure may be used to validate both devices. Under 
such a procedure, the consumer would not have the option to validate 
only the device replacing the existing device and refuse to validate 
the additional device; the consumer would have to choose to validate 
both devices or neither device.
    The revisions to the commentary regarding the issuance of 
additional access devices are adopted as proposed, with a few 
clarifying changes as described below. Unlike credit cards, a 
consumer's own funds are at risk of loss in the event of unauthorized 
use of a debit card or other access device. The potential for 
unauthorized use may increase if validated cards are intercepted in the 
mail and consumers are unaware that they may be receiving multiple 
cards as replacements for an existing access device. The validation 
requirement of Sec.  205.5(b) limits the risk of monetary losses from 
the theft of debit cards sent through the mail. Although there would be 
no increase in a consumer's liability where multiple access devices are 
issued, asserting a claim of unauthorized use can be inconvenient and 
time-consuming, and, at least temporarily, the consumer may be deprived 
of needed funds. Therefore, the Board believes the benefits afforded by 
the one-for-one rule and the validation requirements of Sec.  205.5(b) 
are critical in the context of debit cards, and outweigh any benefits 
of providing greater flexibility to issue access devices. In addition 
to the validation requirement in Sec.  205.5(b), the Board notes that 
where additional access devices are issued unsolicited, whether in 
connection with the issuance of a replacement or substitute device or 
otherwise, the other provisions of Sec.  205.5(b), including the 
requirement to provide new initial disclosures, also apply. (See, 
however, comment 2(a)-2, providing that the term ``access device'' does 
not include a check used as a source of information to initiate an 
EFT.)
    With respect to the suggestion to expand the proposed comment to 
provide financial institutions with flexibility to replace access 
devices with limited functions with devices having additional 
functions, comment 5(a)(2)-1 already addresses the issue; institutions 
are permitted to expand functions upon replacement or substitution of 
access devices. When the proposed revisions to comment 5(a)(2)-1 were 
issued, existing commentary language on this point was not included for 
the sake of brevity. To clarify this matter, the language in question 
is set forth in full in the text of the final commentary revisions. 
Also, the language is modified slightly to make clear that either the 
access device replacing the existing device, or the additional access 
device (or both), may provide expanded functions compared to the 
existing device.
    Regarding validation procedures, an institution may require a 
consumer to choose to either validate all access devices provided by an 
issuer, including the replacement and any additional devices, or 
validate none of the issued devices. Also, although an institution is 
permitted to issue a validated access device to replace an existing 
accepted access device, the institution may choose instead to issue the 
replacement device in a form that requires validation. Furthermore, an 
institution may choose to link the validation of one access device with 
the validation of another one. Accordingly, comment 5(b)-5 is revised 
to include a clarification on this issue. The comment also notes that 
an institution using such a validation procedure should disclose to the 
consumer in a clear and readily understandable manner that the single 
validation will validate both access devices, to ensure that the 
consumer will not, for example, improperly discard the additional, now 
validated, device.

Section 205.7 Initial Disclosures

7(a) Timing of Disclosures
    Electronic check conversion transactions are a new type of EFT 
requiring new disclosures. See discussion below under Sec.  205.7(c). 
The Board proposed to revise comment 7(a)-1 to provide that an 
institution may

[[Page 1648]]

choose to provide disclosures about ECK transactions early, i.e., prior 
to the first ECK transaction involving the consumer's account. 
Commenters supported the proposed revision. One trade association 
representing credit unions observed that early notification is a cost-
effective way of enabling institutions to establish a single means of 
notifying and educating consumers about their rights concerning 
electronic fund transfers. Comment 7(a)-1 is adopted as proposed, with 
a minor revision. See also comment 7(a)-2 (permitting an institution 
that has not received advance notice of a third party transfer to 
provide required disclosures as soon as reasonably possible after the 
first transfer).
7(b) Content of Disclosures
    The Board proposed to clarify that financial institutions must list 
ECK transactions among the types of transfers that a consumer can make. 
See proposed comment 7(b)(4)-4. As further discussed below under Sec.  
205.7(c), the Board adopts comment 7(b)(4)-4 as proposed.
7(c) Addition of Electronic Fund Transfer Services
    Former comment 7(a)-4 stated that if an EFT service is added to a 
consumer's account and is subject to terms and conditions different 
from those described in the initial disclosures, disclosures for the 
new service are required. Under the final rule, as proposed, this 
interpretation is moved to Sec.  205.7(c) of the regulation for 
consistency with other regulations. See, e.g., Sec.  226.9(b)(2) of 
Regulation Z. New comment 7(c)-1 is adopted as proposed to provide that 
ECK transactions are a new type of transfer requiring new disclosures 
to the consumer, to the extent applicable. The model clauses for 
initial disclosures are revised to provide guidance to institutions 
regarding their disclosure obligations to consumers about ECK 
transactions. See Appendix A, Model Clauses in A-2.
    The Board proposed comment 7(c)-1 to address industry uncertainty 
about the extent of an account-holding institution's disclosure 
obligations to new and existing consumers regarding ECK transactions. 
As stated in the proposal, new disclosures about ECK transactions are 
necessary because a consumer's check can be used differently than in 
the past, that is, information from the check can be used to initiate 
EFTs. Industry comments generally favored including information about 
ECK transactions in initial disclosures, and many noted that they 
already have adjusted their disclosures to reflect the fact that ECK 
transactions are a new type of transfer that may be made to or from the 
consumer's account. One commenter stated that ECK transactions should 
not be treated as a new type of transfer because the consumer intended 
to pay by check, rather than by EFT. The Board notes, however, that if 
a merchant or other payee provides proper notice about the transaction 
(see Sec.  205.3(b)(2)), a consumer, by providing the check as payment, 
authorizes the use of the check as a source of information to initiate 
a one-time EFT from the consumer's account. Comment 7(c)-1 is thus 
adopted as proposed.
    To assist institutions in implementing the new disclosure 
requirements, the Board also proposed model initial disclosure language 
to reflect that one-time EFTs are a new type of transfer that may be 
made from a consumer's account using information from the consumer's 
check, and to further instruct consumers to notify account-holding 
institutions when an unauthorized EFT has occurred using information 
from their check. Commenters supporting the new model language stated 
that the proposed language was clear, concise, and helpful. A few 
commenters requested sufficient time for institutions to make the new 
disclosures.
    A few industry commenters stated that certain of the disclosures 
were unnecessary. Two commenters observed that referring specifically 
to ECK transactions in the initial disclosures regarding error 
resolution might mislead consumers to believe that they only had error 
resolution rights when their check is converted to an EFT. Another 
commenter, however, believed that including information about ECK 
transactions in the liability provisions was appropriate, but this 
commenter objected to listing ECK transactions as a new type of 
transfer since the consumer intended to pay by check, and not by EFT, 
and therefore ECK transactions should not be considered to be EFTs. The 
Board notes that the model language informs consumers that, in addition 
to notifying their bank when their card or code has been lost or 
stolen, or when money has been transferred from their account without 
their permission, they may also contact their institution if an 
unauthorized transfer has been made using the information from their 
check.
    Consumer groups commented that the new model disclosure language 
was helpful, but urged the Board to also include other practical 
information about the nature of ECK transactions, and to include 
information about consumers' rights under check law to differentiate 
such transactions from ECK transactions. For example, while the current 
model disclosures describe the 60-day time frame for consumers to 
exercise their error resolution rights with respect to EFTs, including 
ECK transactions, shorter time periods for asserting errors may apply 
to checks processed by means other than check conversion. While 
institutions may choose to provide consumers with additional 
information regarding their rights when a check is processed by other 
means, the model disclosures are solely intended to address consumers' 
rights under the EFTA when the transaction involves an EFT to the 
consumer's account. Other error resolution rights which may exist under 
other laws, including state check law, are outside the scope of this 
rulemaking. Consumer groups further suggested that the error resolution 
notice should state more clearly that an institution ``must'' correct 
any error within 10 business days, rather than use the current language 
that an institution ``will correct any error promptly.'' However, under 
certain circumstances, including where an institution provides a 
provisional credit to the consumer's account or where the error 
involves a new account, an institution may extend their investigation 
period to up to 90 days. Therefore, the Board believes the current 
language is more accurate.
    Consumer groups also urged the Board to subject the model notices 
to a complete review for readability and understandability. For 
instance, consumer groups observed that the term ``code'' may not be as 
well understood as ``PIN'' or even ``access code.'' Based on the 
Flesch-Kincaid scale, the model initial disclosures in the final rule 
score at a 9.9 grade level, with a Flesch reading ease score of 60.3 on 
a 100.0 scale, indicating a high level of readability. The Board agrees 
that in general consumer disclosures benefit from consumer testing, and 
anticipates that testing of this and other notices could be made part 
of a future comprehensive review of the regulation.
    One trade association and a company that provides compliance forms 
for institutions expressed their concerns about the scope of the 
proposed disclosures, stating that the Board's model disclosures were 
not broad enough to address other types of third-party initiated EFTs 
which may be initiated using account information from a check, in 
particular those initiated via a telephone or the Internet. As noted 
previously in the discussion of Sec.  205.3(b), while telephone and 
Internet transactions are covered by Regulation E, the proposed rule 
was intended to

[[Page 1649]]

address ECK transactions only; other types of EFTs are not addressed by 
these provisions in the final rule.
    A few industry commenters asserted that since most banks have 
considered electronically converted checks to be EFTs since adoption of 
the 2001 commentary, and have already amended their initial disclosures 
to include ECK transactions, institutions should not be required to 
amend their disclosures again to include additional detail that is only 
applicable to ECK transactions. These institutions also stated that the 
cost of reprinting and mailing the revised disclosures would far exceed 
any consumer benefit of receiving a notice that explains a process that 
financial institutions have already been following. Two commenters 
asked the Board to clarify that the introduction of ECK services would 
not require change-in-terms notices to existing consumers, because none 
of the terms of the underlying account agreement are affected by the 
new type of transfer.
    Under the final rule, for customers opening accounts after the 
mandatory compliance date of January 1, 2007, institutions must include 
in initial disclosures that ECK transactions are among the types of 
transfers that a consumer can make. Where institutions have already 
amended their disclosures to notify their consumers that ECK 
transactions may be made from their account, they would not be required 
to make new disclosures about such transactions to those consumers. New 
disclosures to existing customers would be required to be provided 
after the mandatory compliance date, however, if an institution has not 
disclosed to those consumers that ECK transactions may be made, even if 
other terms of the underlying account agreement would equally apply to 
the new type of transfer. See comment 7(c)-1.
    The Board specifically solicited comment on whether six months 
following adoption of the final rule would provide sufficient time for 
financial institutions to revise their disclosures to comply with the 
rule. The vast majority of industry commenters urged the Board to 
extend the time for compliance to one year. The final rule reflects 
commenters' suggestions; institutions will have until the mandatory 
compliance date of January 1, 2007 to revise their initial disclosures 
to reflect ECK transactions, and to provide new disclosures to existing 
customers if necessary. The Board anticipates that institutions will 
have depleted their existing stocks of initial disclosures by that 
time. Institutions are not required to provide new disclosures 
reflecting ECK transactions until the mandatory compliance date.

Section 205.10 Preauthorized Transfers

10(b) Written Authorization for Preauthorized Transfers From Consumer's 
Account
    Under Sec.  205.10(b), preauthorized EFTs from a consumer's account 
may be authorized only by a writing signed or similarly authenticated 
by the consumer. Under existing comment 10(b)-3, a merchant or other 
payee could not obtain authorization by tape recording a telephone 
conversation with a consumer who agrees to recurring debits. Comment 
10(b)-3 was adopted prior to the enactment of the E-Sign Act. The final 
rule withdraws the interpretation in comment 10(b)-3 would be withdrawn 
in light of the E-Sign Act, as proposed.
    The E-Sign Act provides, in general, that electronic records and 
electronic signatures satisfy legal requirements for traditional 
written records and signatures. Some have suggested that, given the E-
Sign Act's broad definitions of ``electronic record'' and ``electronic 
signature,'' a tape-recorded authorization, or certain types of tape-
recorded authorizations, for preauthorized debits might be deemed to 
satisfy the Regulation E signed or similarly authenticated written 
authorization requirements. The Board proposed to withdraw the guidance 
regarding tape recordings because of E-Sign Act considerations, but did 
not propose to amend comment 10(b)-3 to address how the E-Sign Act 
should be interpreted with regard to tape recordings of telephone 
conversations.
    Many commenters, including several financial institutions and 
financial trade associations, as well as a retailer trade association, 
supported the proposed withdrawal. These commenters stated that without 
the proposed change, consumers who do not have, or do not want to use, 
credit cards would not be able to use the telephone to purchase goods 
or services involving recurring debits to their deposit accounts. One 
commenter noted that many less affluent consumers do not own computers, 
so such consumers would be unable to electronically authorize recurring 
payments unless the proposal is adopted. Another commenter noted that 
if the proposal is not adopted, merchants may tend to use alternatives 
such as demand drafts, which offer less consumer protection than debit 
cards.
    Other commenters, including financial institutions and financial 
trade associations, retailer trade associations, automated clearing 
house organizations, and a federal government agency, supported the 
proposal but with modifications or conditions. A few commenters 
recommended that merchants be permitted to obtain authorization for 
recurring debits by telephone, without recording, followed by written 
confirmation, if the consumer was given the option to cancel the 
transaction. Because of concerns about deceptive telemarketing, other 
commenters suggested that the use of telephone authorization be limited 
to situations where (1) the consumer and the merchant have a 
preexisting relationship, or (2) the consumer initiates the telephone 
call.
    Several industry commenters urged the Board to remove uncertainty 
by explicitly stating that a recorded telephone conversation complies 
with the E-Sign Act and, therefore, Regulation E, to facilitate 
telephone authorizations of recurring debits. A few such commenters 
argued that merely withdrawing a portion of comment 10(b)-3 as proposed 
would cause further confusion and, absent additional guidance, would 
lead merchants to adopt differing practices. One commenter, a federal 
enforcement agency, recommended that the Board state affirmatively that 
if a payee relies upon the E-Sign Act in connection with obtaining the 
consumer's authorization, it must also fully comply with the E-Sign Act 
with respect to other provisions of the EFTA and Regulation E, 
including the requirement to provide a clear and conspicuous copy of 
the full authorization to the consumer. In contrast, a law firm 
representing retailers asserted that further clarifications regarding 
the E-Sign Act in the recurring debit context are unnecessary and may 
cause confusion in other instances when such clarifications are not 
provided.
    A few industry commenters opposed the proposed withdrawal of the 
guidance due to the potential abuses and increased unauthorized 
transfers that could result. One such commenter contended that tape 
recordings do not provide clear evidence of a consumer's authorization, 
which may be important in the event of a dispute. This commenter also 
asserted that banks receive many complaints from consumers alleging 
that the consumer only authorized a one-time electronic debit, but that 
recurring debits are being processed.
    The final rule withdraws the existing guidance regarding whether a 
tape recording may satisfy the requirement to obtain a consumer's 
written authorization for recurring debits as

[[Page 1650]]

proposed. The final rule does not interpret Regulation E to treat 
recorded telephone authorizations as written authorizations; however, 
the Board believes that the E-Sign Act's provisions regarding written 
documents are applicable to the EFTA and Regulation E. As a result, if, 
under the E-Sign Act, a tape-recorded authorization, or certain types 
of tape-recorded authorizations, constitute a written and signed (or 
similarly authenticated) authorization, then the authorization would 
satisfy the Regulation E requirements.
    In addition to complying with the E-Sign Act,\2\ payees will need 
to ensure that they comply with the requirements of Sec.  205.10(b) of 
Regulation E. Specifically, the authorization must be readily 
identifiable as such to the consumer, and the terms of the 
preauthorized debits must be clear and readily understandable to the 
consumer. See comment 10(b)-6. Payees must also provide the consumer a 
copy of the authorization. With respect to additional suggestions from 
commenters to permit authorization by telephone without recording but 
with written confirmation, or to limit the use of telephone 
authorizations to specific circumstances, such changes would require 
amendments to the EFTA or Regulation E rather than the staff 
commentary, and thus the Board has decided not to consider these 
suggestions at this time.
---------------------------------------------------------------------------

    \2\ See, e.g., section 106(5) of the E-Sign Act (definition of 
``electronic signature'').
---------------------------------------------------------------------------

    Comment 10(b)-7 addresses authorizations for recurring payments 
obtained by telephone or on-line, and states that the payee's failure 
to obtain written authorization is not a violation if the failure was 
not intentional and resulted from a bona fide error, notwithstanding 
the maintenance of procedures reasonably adapted to avoid any such 
error. For example, an error might occur where the consumer indicates 
that a credit card (for which no written authorization would be 
required) is being used for the authorization, when in fact the card is 
a debit card.
    Concerns were expressed by retail and other industry groups about 
what procedures would be deemed reasonably adapted to avoid error where 
a telemarketer seeks to obtain a consumer's authorization for recurring 
payments for goods or services, such as newspaper subscriptions, using 
the consumer's credit or debit card. The Board proposed to revise 
comment 10(b)-7 to state that procedures reasonably adapted to avoid 
error will vary with the circumstances. The proposed revision also 
stated that asking the consumer to specify whether the card to be used 
for the authorization is a debit card or a credit card, using those 
terms, is a reasonable procedure.
    The Board also proposed to add an example of a payee learning, 
after the transaction occurred, that the card used was a debit card as 
a result of the consumer bringing the matter to the payee's attention. 
For example, the consumer may call the merchant to assert a complaint 
about use of a debit card.
    Most industry commenters supported the proposal as written, and a 
few suggested modifications. No commenters opposed the proposal. One 
trade association representing retailers suggested that comment 10(b)-7 
not provide the example of asking the consumer whether the card being 
used is a debit card or a credit card as the safe harbor for 
compliance. Another trade association requested that the comment not 
state that a reasonable procedure would require use of the term ``debit 
card.'' This commenter also recommended that the Board indicate in the 
comment that confirmation of the type of card being used is not 
necessary when the authorization is given in writing, including on-
line. In contrast to the comments from the retailer trade associations, 
a federal enforcement agency urged the Board to require payees to ask 
whether the consumer is using a debit or credit card, in lieu of 
creating a safe harbor for that procedure. However, one law firm 
representing retailers opposed this suggestion contending that such a 
requirement would be unduly restrictive because merchants might have 
procedures that would not include asking whether the card is a debit or 
credit card.
    The federal enforcement agency also suggested that the Board 
clarify that, in some cases, merchants should consider additional 
information as part of reasonable procedures to avoid error. Such 
information might include, for example, repeated consumer complaints 
about unauthorized debits. This commenter suggested that the commentary 
provide that if a merchant becomes aware of repeated authorization 
problems, it should examine and possibly change its procedures. A law 
firm, however, argued that such a requirement would be unnecessary 
because merchants would have insufficient guidance as to what other 
information they should consider and under what circumstances.
    One consumer group stated that the final rule should require that 
where the merchant learns only later, after the telephone 
authorization, that the card used was a debit card, the merchant must 
obtain a written and signed (or similarly authenticated) authorization 
or cease debiting the consumer's account.
    The Board adopts the revisions to comment 10(b)-7 as proposed, with 
minor revisions. As stated in the proposal, it may have been reasonable 
in the past, when relatively few debit cards were in use compared to 
credit cards, for payees to use procedures that did not involve asking 
questions about the type of card being used. Today, however, given the 
growth of debit card usage, the Board believes that reasonable 
procedures should include interaction with the consumer specifically 
designed to elicit information about whether a debit card is involved. 
Accordingly, the final rule retains the safe harbor example of a 
reasonable procedure of asking the consumer to specify whether the card 
to be used for the authorization is a debit (or check) card or a credit 
card. The final comment includes a reference to ``check cards'' to 
reflect current terminology. To illustrate the safe harbor, assume that 
a consumer makes a purchase which will result in a series of recurring 
payments. After the merchant inquires about the payment method, the 
consumer indicates that they intend to use ``Bank X'' card, without 
stating whether the card is a debit card or a credit card. In order to 
fall under the safe harbor, the merchant should then ask the consumer 
whether the card is a debit (or check) card or a credit card.
    The final rule does not impose an express requirement of inquiring 
whether a card provided is a debit card or a credit card, because the 
determination of whether a procedure is reasonably adapted to avoid the 
error of failing to obtain a consumer's written authorization for 
recurring debits may vary with the circumstances. Similarly, although 
it may be reasonable in some cases for a merchant to revise their 
authorization procedures to avoid error based on additional information 
about potential authorization problems, such as repeated consumer 
complaints about unauthorized debits, the Board believes it is 
unnecessary to add a specific provision to the commentary that would 
require revised procedures in those limited instances.
    The Board also does not believe that it is necessary to incorporate 
in the final rule a requirement that a merchant should promptly notify 
the consumer when it chooses to cease debiting the consumer's account 
upon learning that the card used was a debit card. The Board believes 
that a merchant, due to its own interest, will likely contact the

[[Page 1651]]

consumer to arrange for some other means of payment.
    A few industry commenters also addressed the Board's discussion in 
the proposal regarding whether merchants should be required to verify 
card numbers presented by consumers against lists of credit and debit 
card Bank Identification Numbers, commonly referred to as ``BIN 
tables,'' as a reasonable procedure to avoid error. See In re Visa 
Check/Mastermoney Antitrust Litigation, No. CV-96-5238 (E.D.N.Y. 2003) 
(requiring Visa and MasterCard to make BIN tables available to 
merchants as part of a litigation settlement). These commenters agreed 
with the Board's observation that to the extent that BIN tables are not 
available to merchants in an on-line, real-time form, it would be 
burdensome for merchants to verify card numbers presented by consumers 
against the BIN tables. Moreover, the Board understands that Visa and 
MasterCard debit cards issued after January 1, 2005, display the word 
``debit'' on the front of the card. Accordingly, the final rule does 
not require merchants to obtain or consult BIN tables to maintain 
procedures reasonably adapted to avoid error. Similarly, merchants are 
not required to check card numbers already on file against BIN tables.
10(c) Consumer's Right To Stop Payment
    Proposed comment 10(c)-3 stated that an institution need not have 
the capability to block preauthorized debits, for example, where a 
preauthorized debit is made through a debit card system, and may 
instead use a third party to block the transfer(s), as long as such 
payments are in fact stopped. The proposal revised comment 10(c)-2 to 
cross-reference the new proposed comment. Comment 10(c)-2 is adopted as 
proposed, and comment 10(c)-3 is adopted with revisions for clarity.
    In the proposal, comment 10(c)-3 was added to address procedures 
for stopping recurring debits where the account-holding institution is 
unable to block a payment from being posted to the consumer's account 
because, for example, the posting occurs soon after the transaction has 
been approved, such as where the transaction takes place over a debit 
card network. In these cases, the institution may not have sufficient 
time to identify payments against which stop-payment orders have been 
entered. The proposed comment provided an alternative procedure for how 
the account-holding institution can comply with the stop payment 
requirements of Regulation E in these circumstances.
    Most commenters addressing this issue supported the proposal. One 
commenter observed that in the case of debit card transactions, the 
interception of transactions at the network level may be more effective 
than blocking transactions at the level of the account-holding 
institution. Some commenters requested clarification on various points. 
A few industry commenters asked that the Board clarify that comment 
10(c)-3 does not apply to recurring debits processed through batch 
systems, such as the ACH network. Consumer groups were concerned that 
the proposal might imply that even if a consumer revokes authority for 
all future recurring debits by a payee, the financial institution may 
comply by stopping a single payment; these commenters believed that the 
obligation should be to cancel the debits permanently.
    A number of commenters suggested that the Board adopt other 
revisions to the existing commentary under Sec.  205.10(c). Several 
industry commenters asserted that the EFTA and Regulation E only 
require a financial institution to stop a single preauthorized debit, 
and do not require the institution to take action to respond to a 
consumer's revocation of authority for all future debits from a 
particular payee, as stated in comment 10(c)-2. The commenters 
suggested that the comment be removed or modified accordingly. In 
addition, some commenters suggested revising comment 10(c)-1 to state 
that a stop payment order need not be maintained by the consumer's 
financial institution for more than six months, maintaining that such a 
revision would make the comment consistent with Uniform Commercial Code 
(UCC) provisions relating to stop payment orders on checks and with 
industry practice.
    Comment 10(c)-3 is adopted as proposed. The comment permits an 
institution, upon receiving a consumer's stop payment order, to use a 
third party to block a preauthorized transfer if the institution does 
not have the capability to block the preauthorized debit from being 
posted to the consumer's account, as long as the payment is in fact 
stopped, i.e., the consumer's account is not debited for the payment. 
Comment 10(c)-2 is also revised as proposed. The Board did not intend 
to imply that an institution's obligation to honor a stop-payment 
request is limited to a single preauthorized debit. If a consumer 
revokes authority for all further payments from a particular payee, the 
institution (through its own procedures or by using those of a third 
party, as provided in new comment 10(c)-3 must make arrangements such 
that no further debits originated by that payee are made to the 
consumer's account. However, the Board notes that under comment 10(c)-
2, institutions may require the consumer to provide a copy of a written 
notice sent to the payee, revoking authority for the payee to originate 
debits to the consumer's account. If the consumer does not provide the 
copy within 14 days, the institution is not required to continue 
stopping payments to the payee.
    As stated above, the proposal was intended to address problems in 
stopping recurring debits that take place over debit card networks, 
where the account-holding institution may not be able to timely block a 
debit from being posted to the consumer's account. Nevertheless, 
although comment 10(c)-3 primarily focuses on debits over debit card 
networks and other ``real-time'' systems, the comment is not limited to 
such systems and any institution that does not have the capability to 
block a preauthorized debit from being posted to the consumer's account 
may instead use a third party to block the debit, so long as the 
consumer's account is not debited for the payment.
10(d) Notice of Transfers Varying in Amount
    When a preauthorized EFT from a consumer's account will vary in 
amount from the previous transfer, or from the preauthorized amount, 
Sec.  205.10(d) requires the designated payee or the consumer's 
financial institution to send written notice of the amount and date of 
the transfer at least 10 days before the scheduled date of the 
transfer. Paragraph 10(d)(2) permits the payee or the institution to 
give the consumer the option of receiving notice only when a transfer 
falls outside a specified range of amounts or only when a transfer 
differs from the most recent transfer by more than an agreed-upon 
amount. Under the proposal, comment 10(d)(2)-2 would, in limited 
circumstances, relieve financial institutions of giving the consumer 
the option of receiving notice each time a transfer varies from the 
previous transfer. The final rule adopts proposed comment 10(d)(2)-2, 
with some revisions for consistency with the regulation.
    Some financial institutions have suggested that while the notice 
requirement is appropriate where consumer funds are transferred to a 
third party, it should not apply when the transfer is between accounts, 
as defined under Regulation E, that are owned by the same consumer, 
even when the accounts are held at different financial institutions. 
These institutions

[[Page 1652]]

assert that the advance notice requirement is particularly burdensome 
for institutions that offer certificate of deposit (CD) products that 
allow customers to set up preauthorized transfers of interest from the 
CD account to another account of the consumer held at a different 
institution. For such products, monthly interest payments might vary 
solely because of the different number of days in each month, yet such 
variance would require the institution to send the consumer advance 
notice in each instance before transferring the funds. The proposed 
comment would give financial institutions flexibility to provide notice 
only when a preauthorized transfer falls outside a specified range 
where funds are transferred and credited to an account of the consumer 
held at a different financial institution. (Preauthorized transfers 
between accounts of the same consumer held at the same institution 
qualify for the intra-institutional exclusion from coverage in Sec.  
205.3(c)(5).) Also, the proposal provided that the range must be an 
acceptable range that could be anticipated by the consumer, and the 
institution would have to notify the consumer of the range.
    Commenters generally supported the proposed comment. Some industry 
commenters believed that the new comment could eliminate the need for 
unnecessary notices without detriment to consumers, while providing 
cost savings for those institutions that offer consumers the option of 
transferring funds to an account at another institution on a 
preauthorized basis. One industry commenter requested that the Board 
provide examples of acceptable ranges of balances and provide optional 
model language. Another industry commenter urged the Board to go 
further and exclude CD interest via ACH transfers from the scope of 
Sec.  205.10(d) altogether, since CD accounts are not transaction 
accounts, and because transfers involve accrued interest only.
    In contrast, one ACH trade association suggested that it may not be 
appropriate to allow institutions to avoid providing notices with each 
varying transfer without first obtaining consumer consent given that 
identity theft is an increasingly prevalent problem. This commenter 
noted that the NACHA rules already allow for ranges, and few companies 
take advantage of that opportunity. Consumer groups believed that the 
proposed commentary provision could facilitate transfers out of a 
consumer's account to repay payday loans, and urged the Board either to 
withdraw the proposed commentary provision, or to strictly limit the 
exception to transfers of interest earned in one account to another 
account held in the same name.
    The final rule adopts comment 10(d)(2)-2 as proposed, with minor 
revisions for clarity. Given the express language in Section 907(b) of 
the EFTA, it is not appropriate to remove the notice requirement 
entirely. Nevertheless, the Board believes that requiring a notice for 
each varying transfer where the transfer is between accounts owned by 
the same consumer provides little benefit to the consumer while 
imposing unnecessary costs on the financial institution making the 
transfer. Because this exception is limited to transfers of consumer 
funds between accounts held by the same consumer at different 
institutions, the Board believes the risk of loss from identity theft 
is minimal. In addition, because the transfers must be between consumer 
accounts held at different financial institutions, the exception would 
not be applicable to transfers to repay loans, including payday loans, 
which are not accounts under Regulation E. The Board is not aware of 
any other circumstances that pose additional risks to a consumer's 
account if this comment is adopted, and thus believes it is unnecessary 
to limit the exception to accounts solely involving transfers of CD 
interest.
    For consistency with Sec.  205.10(d)(2), the final comment is 
revised to provide that a financial institution may elect to provide 
notice only when a preauthorized transfer falls outside a specified 
range, or differs from a specified amount from the most recent 
transfer, without providing the consumer the option of receiving notice 
of all varying transfers, if the funds are transferred and credited to 
an account of the consumer held at another financial institution. The 
range or amount of variance must be reasonably anticipated by the 
consumer, and the institution must notify the consumer of the range or 
amount at the time the institution obtains the consumer's authorization 
for the preauthorized transfers. Comment 10(d)(2)-2 includes an example 
of an acceptable range where the preauthorized transfers are for 
transfers of interest for a fixed-rate CD account. In this case, an 
institution could provide a range based on transfers of interest for 
months containing 28 days and for months containing 31 days.

Section 205.11 Procedures for Resolving Errors

11(b) Notice of Error From Consumer
    The Board proposed to clarify in comment 11(b)-7 that an 
institution need not comply with the procedures and time limits in 
Sec.  205.11 for investigating a consumer's assertion of an error when 
the consumer provides a notice of error after the time period specified 
in Sec.  205.11(b). Where the error involves an unauthorized EFT, 
however, liability for the unauthorized transfer may not be imposed on 
the consumer unless the institution satisfies the requirements of Sec.  
205.6. Comment 11(b)-7 is adopted generally as proposed, with some 
revisions to address commenters' concerns.
    Commenters on the issue uniformly supported the proposed comment, 
although some industry commenters asked the Board to provide certain 
additional clarifications. A few commenters believed that it was 
unclear which provisions of Sec.  205.6 were applicable where the 
asserted error involves an unauthorized transaction. For example, one 
commenter stated that the generic reference to Sec.  205.6 is confusing 
in light of the limitation on liability in Sec.  205.6(b)(1) when the 
consumer provides timely notice. The final rule retains the general 
reference because the requirements for the consumer to provide timely 
notice is different under Sec.  205.6 than under Sec.  205.11. Under 
Sec.  205.11, the consumer must provide notice 60 days after the 
financial institution sends the periodic statement on which the alleged 
error is reflected. In contrast, under Sec.  205.6, the consumer must 
provide notice two business days after learning of the loss or theft of 
an access device. Moreover, the consequences to the consumer for 
failing to provide timely notice differ under Sec. Sec.  205.6 and 
205.11. For example, a consumer may not find out about the loss or 
theft of an access device until more than 60 days after a periodic 
statement is sent.\3\ In such case, the consumer's liability could 
still be capped at $50 or less as provided under Sec.  205.6(b)(1), so 
long as the consumer notifies his or her financial institution within 
two business days after learning of the loss or theft of the access 
device, notwithstanding the fact that the procedures and time frames in 
Sec.  205.11 would not apply.
---------------------------------------------------------------------------

    \3\ Comment 6(b)(1)-2 states that the fact that a consumer has 
received a periodic statement that reflects unauthorized transfers 
cannot be deemed to represent conclusive evidence that the consumer 
had such knowledge.
---------------------------------------------------------------------------

    Industry commenters also suggested that the Board conform the 60-
day time

[[Page 1653]]

frame for providing notices of error in Sec.  205.11 to time frames 
provided under other laws or payment system rules. Several commenters 
urged the Board to conform the time frame for reporting an error in 
Sec.  205.11(b)(1) from 60 days after the date of availability of the 
periodic statement to 60 days after the settlement date of the 
transaction consistent with the NACHA rules. The 60-day time frame for 
providing a notice of error in connection with an EFT after a periodic 
statement is sent, however, is a statutory requirement under Section 
908(a) of the EFTA. Some commenters believed that the Board should 
adopt a time limitation for asserting a claim of an unauthorized EFT of 
one year from the date of availability of the periodic statement, 
consistent with time frames established by Check 21 and Sec.  4-408 of 
the UCC. The EFTA does not contain a time limitation for asserting a 
claim of unauthorized EFTs, and the Board did not propose such a 
limitation. Accordingly, the Board declines to adopt the suggested 
changes.
    Finally, one banking trade association recommended that the Board 
recognize the exception in Sec.  205.6(b)(4) for extending the time 
frames for reporting an unauthorized transaction if the consumer's 
delay in notification is due to extenuating circumstances. The Board 
agrees that where a consumer is unable to provide timely notice for an 
unauthorized EFT due to extenuating circumstances, such as extended 
travel or a hospitalization, an institution must extend the time frames 
provided in Sec.  205.6(b) for reporting the unauthorized transaction.
11(c) Time Limits and Extent of Investigation
    Section 205.11(c)(4) permits an institution to limit the 
investigation of an alleged error to ``a review of its own records'' 
where the allegation pertains to a transfer to or from a third party 
with whom the institution has no agreement for the type of EFT 
involved. This is commonly referred to as the ``four walls'' rule. 
Comment 11(c)(4)-4 provides that a financial institution does not have 
an agreement with a third party solely because it participates in 
transactions that occur under the federal recurring payments programs, 
or that are cleared through an ACH or similar arrangement for the 
clearing and settlement of fund transfers generally, or because it 
agrees to be bound by the rules of such an arrangement. Proposed 
comment 11(c)(4)-5 provided that an institution's ``own records'' may 
not be limited to the payment instructions where additional information 
is available within the institution relevant to resolving the 
consumer's particular claim. As explained in the supplementary 
information to the proposal, because the number and variety of ACH 
payments has expanded significantly since the ``four walls'' rule was 
first adopted in 1980, an institution's review of additional 
information beyond the payment instructions may be necessary to provide 
consumers with a meaningful investigation of an allegedly erroneous or 
unauthorized payment. Comment 11(c)(4)-5 is adopted as proposed, with 
some modifications to address commenter concerns.
    Some commenters favored the proposed comment, including consumer 
groups, a federal enforcement agency, and a few industry commenters. 
These commenters generally agreed with the Board's stated rationale for 
the proposed comment. For example, several credit union commenters 
stated that it is reasonable to expect financial institutions to 
exhaust their review of internal records when responding to alleged 
errors regarding consumers' Regulation E transactions. Consumer groups 
urged the Board to revise the comment to state that an institution's 
reviews should consider records that could be helpful to resolving a 
consumer's claim(s), not just those records that are dispositive. One 
industry commenter generally agreed with the proposal in light of both 
the increased variety of EFT transaction types and its belief that 
information relevant to an assertion of error could likely to be 
outside the payment instructions but within the institution's ``four 
walls'' and records.
    Most industry commenters opposed the proposed comment. Many 
industry commenters raised concerns about ambiguity as to the scope of 
the required investigation, the potential burden on institutions, and 
the low likelihood of yielding additional, helpful information. Several 
commenters asserted that it would unnecessarily require institutions to 
look beyond their own records and could potentially require that they 
seek to obtain information from additional parties to the transaction 
when payment instructions could resolve the claim of error.
    Many industry commenters were also concerned that the proposed 
comment might require that an institution look for any and all 
potentially relevant records--even in cases where a consumer may have 
many different relationships with the institution (deposit, credit, 
investment). One commenter stated that it would be impractical for a 
large bank to comply with the proposed comment, since it would require 
a review of information relating to other accounts and transactions 
stored in various locations. Similarly, a few commenters noted that a 
bank employee conducting an investigation might not be aware of all of 
these relationships or may lack a practical ability to obtain all 
information about the bank's dealings with that customer. These 
commenters argued that a reasonable interpretation of the ``four 
walls'' rule must limit the bank's duty to inquire not just about 
information within the institution's own records relevant to resolving 
the consumer's particular claim, but to information that is reasonably 
available to the bank employee investigating the consumer's claim.
    Several ACH associations asserted that the proposal could further 
confuse what is already a troublesome section of the Commentary for 
their members. These and other commenters generally believed that 
institutions would be unlikely to have readily available information in 
their records beyond the payment instructions that would assist in the 
review of the particular transaction, noting, for example, that the 
consumer's authorization for the transaction would be in the possession 
of the originator-payee, not the consumer's institution. These 
commenters stated that searching for, and obtaining, such additional 
information would be time-consuming and costly. They added that since 
authorization is between the consumer and the originator of the 
transaction, the proposed comment could inappropriately place the 
consumer's institution in the position of deciding the legitimacy of 
the authorization. In their view, this issue should be resolved between 
the merchant or other payee and the consumer--not by the consumer's 
financial institution.
    Many industry commenters, including ACH associations, noted that 
the NACHA rules already ensure a remedy under which the consumer is 
already made whole in a timely manner.\4\ One industry commenter, 
however, argued that the NACHA rules were insufficient because of the 
shorter time period for reversing transactions (chargebacks), urging 
instead that the Board withdraw the proposed comment and encourage 
NACHA to amend its rules to conform its chargeback period to the period 
set forth under Sec.  205.11 for reporting

[[Page 1654]]

alleged errors.\5\ This commenter asserted that this change would 
properly place the burden of assuring proper authorization of 
transactions on the originating merchant and financial institution--the 
two parties best positioned to monitor and ensure compliance with this 
requirement. This commenter maintained that the automatic right to 
charge back under the NACHA rules works well for most ACH disputes and 
that extending the time period for permitting charge backs would not 
impose significant additional costs on merchants or its financial 
institution.
---------------------------------------------------------------------------

    \4\ Under the NACHA rules, if the consumer executes a written 
statement under penalty of perjury within the prescribed time frame 
of 60 days from the date of the transaction, the financial 
institution will promptly re-credit the consumer's account and 
return the transaction to the payee.
    \5\ Section 205.11(b) of Regulation E generally requires a 
financial institution to investigate a claim of error that is 
received no later than 60 days after the institution sends the 
periodic statement on which the alleged error is first reflected.
---------------------------------------------------------------------------

    Many industry commenters recommended that the regulation require a 
``reasonable'' investigation and to provide examples of appropriate 
steps to be taken to minimize the compliance burden similar to existing 
guidance under Regulation Z. See, e.g., Sec.  226.12(b)-3. In their 
view, a reasonable investigation might, for example, consist of an 
examination of the institution's records for the account in question, 
but not all accounts held by the particular consumer at the financial 
institution. These commenters believed that a ``reasonable 
investigation'' standard would enable institutions to take measures 
appropriate to the nature of the error and the size of the institution.
    A few commenters, including consumer groups, asked the Board to 
clarify an institution's error resolution responsibilities under the 
``four walls'' rule when it has outsourced relevant aspects of its 
operations, such as payment processing or the investigation of 
disputes. These commenters believe that in such cases an institution's 
records should include a review of information that is within the 
institution's possession or control and not merely within the 
institution's physical offices. Another commenter inquired how the 
proposed error resolution process would work where an EFT service 
provider (rather than an account holding institution) is providing the 
EFT service. This commenter asserted that currently, account holding 
institutions have limited error-resolution obligations with respect to 
errors resulting from a third-party service provider, and that the 
proposed commentary language should clarify whether there is any 
intended change in the error resolution responsibilities between the 
service provider and account holding institution.
    As stated in the proposal, the ``four walls'' rule was adopted when 
most third party transfers involved preauthorized credits to a 
consumer's account to pay salary or other compensation, or 
preauthorized debits from a consumer's account to pay a utility company 
or other payee. In the absence of an agreement between the financial 
institution and the third party, it was deemed reasonable to permit an 
institution to limit its investigation to the institution's own 
records. See 45 FR 8248 (Feb. 6, 1980). Historically, alleged errors 
often pertained to the amount of the transfer. Consequently, an 
institution would likely have very limited information--such as the ACH 
payment instructions--for purposes of conducting its investigation. The 
``four walls'' approach thus sought to strike a balance between an 
institution's investigatory burden relative to the types of errors 
commonly asserted and the institution's practical ability to procure 
relevant information in light of its lack of an agreement with the 
third party.
    In the twenty-five years since the ``four walls'' analysis was 
adopted, the increasing use of ACH as a means to effectuate a wide 
variety of third-party transfers (and preauthorized transfers) has 
expanded significantly, and, as a result, the types of errors that may 
occur is far greater than those originally contemplated. For example, 
the ACH network today is used to process ECK transactions. Similarly, a 
merchant may use the ACH network in an on-line or telephone transaction 
to initiate an EFT from a consumer's account using the consumer's 
checking account number. In these cases, consumers may encounter errors 
concerning authorizations and the types of transfers, in addition to 
errors regarding the amounts of the resulting ACH debits. The risk that 
a consumer's check or checking account number could be used in a 
fraudulent manner to make an ACH transfer from the consumer's account 
was not a concern when the ``four walls'' analysis was adopted, since 
the typical ACH transfer then involved a preauthorized transfer to or 
from a known party.
    Today, when a consumer believes that a transaction is unauthorized, 
information such as the location of the payee, the particular number of 
the check (to determine if it is notably out of order), or prior 
consumer account transactions with the same payee, that could be 
relevant to the investigation would more likely be within the 
institution's own records. Thus, for ACH and ECK transactions, for 
example, the Board believes that an institution's review of its ``own 
records'' should not be confined to a mere confirmation of the payment 
instructions when other information within the institution's ``four 
walls'' could also be reviewed.
    Any investigation conducted under the four walls rule must be 
reasonable. Because the nature of a consumer's allegation of error can 
vary, the scope of an investigation may vary. In each case, an 
institution should use relevant information available within its own 
records for purposes of determining whether an error occurred. Given 
the potential size and complexity of institutions and their many 
different relationships with a single consumer, however, it may be 
impractical and burdensome for an institution to look throughout its 
entire operation for potentially relevant records. The final rule 
clarifies that the information reviewed should pertain to the account 
for which the assertion of error is made and cover a reasonable period 
of time. The revised comment also provides examples of information that 
an institution might review. These examples are not set forth as an 
exclusive list.
    Institutions have flexibility to determine what information is 
relevant to a meaningful investigation of the error in question. To the 
extent that an account-holding institution has outsourced relevant 
aspects of its operations, the investigation should include a review of 
service provider records if such records could help to resolve the 
consumer's claim. Under the ``four walls'' rule, the institution need 
not, however, include a review of records that are not within its 
possession or control--such as the consumer's authorization for the 
transaction if such authorization is in the possession of a third-party 
payee. Additional requirements may be established by payment system or 
other rules, however.
    The proposal also solicited comment as to whether there are 
circumstances in which the ``four walls'' rule should not apply. 
Industry commenters generally stated that they were unaware of such 
circumstances at this time, and that there is typically no need to 
require banks to conduct investigations outside of their own records. 
The Board will continue to monitor institutions' error resolution 
practices to assess the continued viability of the ``four walls'' 
approach to error investigation.

[[Page 1655]]

Section 205.16 Disclosures at Automated Teller Machines

    Section 205.16 requires an ATM operator that imposes a fee on a 
consumer for initiating an EFT or a balance inquiry to provide notice 
to the consumer that a fee will be imposed for providing the EFT 
service or for a balance inquiry and to disclose the amount of the fee. 
An ATM operator is any person who operates an ATM at which consumers 
initiate an EFT or a balance inquiry, and that does not hold the 
account to or from which the transfer is made, or about which an 
inquiry is made. Notice of the imposition of the fee must be provided 
in a prominent and conspicuous location on or at the ATM. The operator 
must also provide notice that the fee will be charged and the amount of 
the fee either on the screen of the ATM or by providing it on paper, 
before the consumer is committed to paying a fee.
    In the September 2004 proposal, the Board proposed to revise 
comment 205.16(b)(1)-1 to clarify that ATM operators can disclose on 
the ATM signage that a fee may be imposed or specify the type of EFTs 
or consumers for which a fee is imposed, if there are circumstances in 
which an ATM surcharge will not be charged for a particular 
transaction. (69 FR at 56005.) After consideration of the comments 
received, the Board withdrew the proposed commentary revisions and 
instead proposed to amend Sec.  205.16(b) to clarify that ATM operators 
may disclose on ATM signage that a fee will be imposed or, in the 
alternative, that a fee may be imposed on consumers initiating an EFT 
or for a balance inquiry if there are circumstances under which some 
consumers would not be charged for such services. (70 FR 49891 (Aug. 
25, 2005).) The proposed commentary was revised to clarify that ATM 
operators that impose an ATM surcharge in all cases must provide notice 
on the ATM signage that a fee will be imposed. The revisions are 
adopted largely as proposed, with certain revisions for clarity.
    Several large institutions have asked whether it is permissible 
under Sec.  205.16 to provide notice on the ATM that a fee ``may be'' 
charged for providing EFT services because many ATM operators, 
particularly those owned or operated by banks, apply ATM surcharges to 
some categories of their ATM users, but not others. For example, an ATM 
operator might not charge a fee to holders of cards issued by foreign 
financial institutions, cardholders of banks that are part of a 
surcharge-free network or that have entered into a contractual 
relationship with the ATM operator with respect to surcharges, and 
holders of cards issued under governmental electronic benefit transfer 
(EBT) programs. (While many financial institutions do not impose ATM 
surcharges on their own cardholders, they are not ATM operators with 
respect to those cardholders for purposes of Sec.  205.16 because the 
institutions hold the cardholders' accounts.) More recently, many banks 
voluntarily waived surcharges for consumers from areas affected by 
Hurricane Katrina. Also, an ATM operator might charge a fee for cash 
withdrawals, but not for balance inquiries. Accordingly, the Board 
recognized in its two proposals that a disclosure on the ATM that a fee 
``will'' be imposed in all instances could be overly broad with respect 
to consumers who would not be assessed a fee for usage of the ATM.
    Industry commenters strongly supported the August 2005 proposal, 
stating that it would give ATM operators the flexibility to more 
accurately disclose their surcharging practices, and thereby reduce 
consumer confusion. Several industry commenters asserted that a 
``will'' disclosure could cause consumers who would not be charged a 
fee by the particular ATM to go to a different ATM, which could 
inconvenience the consumer, as well as possibly result in a fee 
surcharge at the second ATM that could have been avoided with a more 
accurate disclosure. Another industry commenter noted that most 
consumers will be unaware that the ATM signage disclosure is only 
required for consumers who do not hold accounts with the ATM operator, 
and that the use of ``may'' could easily be understood by ATM users as 
accommodating the ATM operator's cardholders.
    Industry commenters also agreed with the Board's observation in the 
August 2005 proposal's supplementary information that the signage 
disclosure is intended to allow consumers to identify ATMs that 
generally charge a fee for use, while the on-screen disclosure made 
after the consumer has entered his or her card into the machine but 
before the consumer is committed to the transaction provides a more 
specific disclosure regarding whether a fee will be incurred in that 
particular transaction. To support their view that the proposal is 
consistent with Sections 904(d)(3)(A) and (B) of the EFTA, industry 
commenters cited a press release issued by the original act's sponsor, 
Rep. Marge Roukema, which stated that the act ``simply puts existing 
practice into law.'' \6\ One banking trade association noted that prior 
to the enactment of the Gramm-Leach-Bliley Act, the operating rules for 
one of the country's largest ATM networks required ATM operators 
imposing a surcharge for use of their ATMs to post conspicuous notice 
on the ATM that the operator ``may'' charge a fee for cash withdrawals. 
The trade association further noted that this practice of disclosing 
that a fee ``may'' be imposed on signage followed by a more 
transaction-specific on-screen disclosure was, and continues to be, the 
common practice of some of the other larger ATM networks in the United 
States.
---------------------------------------------------------------------------

    \6\ Banking Committee OKs Roukema ATM Fee Disclosure (March 10, 
1999), http://finanialservices.house.gov/banking/3109rou.htm.
---------------------------------------------------------------------------

    Several industry commenters specifically addressed the Board's 
decision to amend the regulation in the August 2005 proposal, instead 
of revising the commentary as originally proposed. One banking trade 
association stated that amending both the regulation and the commentary 
would facilitate industry understanding and compliance. Two other 
commenters, representing credit unions, observed that the proposal to 
amend only the commentary was arguably inconsistent with Sec.  205.16's 
current language, and therefore the Board's new proposal was 
appropriate. A few industry commenters asked the Board to clarify that 
the revisions do not represent a change in the ATM disclosure scheme, 
but merely a restatement and clarification of the requirements of 
existing law.
    Although agreeing that the EFTA permits signage at the ATM machine 
indicating that the fee is not charged in every instance, consumer 
groups believed that the revised proposal did not sufficiently 
implement the statute because it did not ensure that consumers who 
``will'' be charged a fee would be adequately notified of that fact. 
Consumer groups believed that the circumstances in which fees will not 
be charged generally are limited. Therefore, consumer groups proposed 
an alternative approach that would require ATM operators to generally 
disclose that a fee ``will'' be imposed along with a list of exceptions 
when a fee would not be imposed. Consumer groups believed that the 
revised disclosure would more adequately apprise consumers of the fact 
that a fee will be imposed while still allowing ATM operators the 
flexibility to make more accurate disclosures regarding their 
surcharging practices.

[[Page 1656]]

    Industry commenters, however, noted that a rule requiring a 
``will'' disclosure along with a list of the circumstances under which 
a fee would not be disclosed would likely result in lengthy and 
complicated signs that consumers are unlikely to read. Moreover, 
industry commenters also believed that the expense of replacing signs 
each time a surcharge policy is changed could have the unintended 
effect of discouraging ATM operators from waiving fees to accommodate 
consumers in special circumstances, such as in response to a natural 
disaster.
    A consumer rights attorney who opposed the Board's September 2004 
proposal on this issue reiterated his view that the current rule and 
commentary more correctly implements the statute's intent, and cited 
his prior comments. This attorney urged the Board to withdraw the 
current proposal.
    The August 2005 revisions are adopted as proposed under the Board's 
authority under Section 904(d) of the EFTA. Amending both the rule and 
the commentary addresses any potential inconsistencies between the 
current language of Sec.  205.16 and the earlier proposed commentary, 
thereby facilitating industry compliance. However, while the Board is 
amending the regulation to address this issue, this amendment does not 
represent a change in the Board's interpretation of the rule's 
requirements.
    The final rule clarifies the two-part disclosure scheme established 
in Section 904(d)(3)(B) of the EFTA. The first disclosure, on ATM 
signage posted on or at the ATM, allows consumers to identify quickly 
ATMs that generally charge a fee for use. This disclosure is not 
intended to provide a complete disclosure of the fees associated with 
the particular type of transaction the consumer seeks to conduct. Until 
a consumer uses his or her card at an ATM, the ATM operator does not 
know whether a surcharge will be imposed for that particular consumer. 
Rather, it is the second, more specific disclosure, made either on the 
ATM screen or on an ATM receipt, that informs the consumer before he or 
she is committed to the transaction whether, in fact, a fee will be 
imposed for the transaction and the amount of the fee. Thus, consumers 
who are charged a fee would not be adversely affected by a general 
notice that a fee ``may'' be imposed because they will have the 
opportunity to terminate the transaction after receiving the on-screen 
notice or receipt containing the transaction-specific disclosure.
    The Board further believes that an alternative rule requiring 
institutions to provide a general disclosure that a fee ``will'' be 
imposed, while also specifying the circumstances under which a fee will 
not be imposed, would impose significant costs on ATM operators without 
corresponding benefit to consumers. Commenters indicated at least ten 
different circumstances in which a waiver may apply for a given ATM 
transaction, including surcharge-free networks, other contractual 
relationships, cards issued by foreign financial institutions, cards 
delivering governmental benefits, corporate affiliations with the ATM 
operator, and in response to special circumstances, such as to provide 
disaster relief. Thus, consumers could be confused or discouraged by 
signage containing potentially lengthy disclosures listing the many 
circumstances under which a fee would not be imposed. Such a rule could 
also require ATM operators to modify all of their signs each time they 
revised their surcharge practices, at considerable cost. Industry 
commenters estimated the cost of a systemwide change in ATM signage 
anywhere between $200,000 for an institution with approximately 6,000 
ATMs to over $1 million for an institution with over 16,500 ATMs. 
Moreover, the time necessary for changing all of the signs would render 
at least some of the signs inaccurate for a period of time.
    Accordingly, for the reasons discussed above, Sec.  205.16(b) is 
revised to explicitly clarify that ATM operators may disclose on ATM 
signage that a fee will be imposed or, in the alternative, that a fee 
may be imposed on consumers initiating an EFT or for a balance inquiry 
if there are circumstances under which some consumers would not be 
charged for such services. The flexibility provided in the final rule 
allows ATM operators that currently disclose that a fee ``will'' be 
charged to continue to use existing signs even if a fee is not charged 
in all cases. Comment 16(b)(1)-1 is revised for consistency with the 
final rule, and to clarify that ATM operators that impose an ATM 
surcharge in all cases must provide notice on the ATM signage that a 
fee ``will'' be charged.

Appendix A--Model Disclosure Clauses and Forms

A-2--Model Clauses for Initial Disclosures
    Model clauses for initial disclosures contained in Appendix A (Form 
A-2) are revised to provide disclosures about ECK transactions. In 
particular, model clauses (a) and (b) are revised to instruct consumers 
to notify their account holding institution when unauthorized EFTs have 
been made without the consumer's permission using information from 
their checks. The discussion on the applicable liability limits remains 
generally unchanged, however, because the first two tiers of liability 
do not apply to unauthorized transfers made without an access device 
(for example, those made using information from a check to initiate a 
one-time ACH debit). See comments 2(a)-2, 6(b)(3)-2.
    Model clause (d) also is revised to list as a new type of transfer 
a one-time electronic fund transfer made from a consumer account using 
information from the consumer's check. See comment 7(b)(4)-4.
A-3--Model Forms for Error-Resolution Notice
    Paragraph (b) of Model Form A-3 is included after its inadvertent 
deletion following publication of the March 2001 interim final rule 
establishing uniform standards for the electronic delivery of 
disclosures required by the EFTA and Regulation E. 66 FR 17786 (April 
4, 2001). No changes are intended by the re-inclusion of paragraph (b). 
Paragraph (a) is reprinted for convenience.
A-6--Model Clauses for Authorizing One-Time Electronic Fund Transfer 
Using Information From a Check (Sec.  205.3(b)(2))
    Model Form A-6 is added to provide model clauses for the 
authorization requirements of Sec.  205.3(b)(2) for a person that 
initiates an EFT using information from a consumer's check. Consistent 
with comment 2 for Appendix A, the use of appropriate clauses in making 
disclosures will provide protection from liability under Sections 915 
and 916 of the EFTA provided the clauses accurately reflect the 
institution's EFT services. See also Sec.  205.3(b)(2)(iv). Model 
Clause A-6(a), which permits payees to obtain a consumer's 
authorization to use information from his or her check to initiate an 
EFT or to process the transaction as a check, is adopted generally as 
proposed. Model Clause A-6(a) may be used in all instances. Model 
Clause A-6(b) is also adopted to accommodate those payees who may want 
to provide more specific information concerning their ECK practices for 
business reasons, and consolidates proposed Model Clauses A-6(b) and 
(c). The additional information about when funds may be debited from 
the consumer's account and the non-return of checks is provided in 
Model Clause A-6(c) of the final rule.

[[Page 1657]]

V. Final Regulatory Flexibility Analysis

    The Board prepared an initial regulatory flexibility analysis as 
required by the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
in connection with the September 2004 proposal. The Board received no 
comments on its initial regulatory flexibility analysis.
    Under Section 605(b) of the RFA, 5 U.S.C. 605(b), the regulatory 
flexibility analysis otherwise required under Section 604 of the RFA is 
not required if an agency certifies, along with a statement providing 
the factual basis for such certification, that the rule will not have a 
significant economic impact on a substantial number of small entities. 
Based on its analysis and for the reasons stated below, the Board 
certifies that this final rule will not have a significant economic 
impact on a substantial number of small entities.
    1. Statement of the need for, and objectives of, the final rule. 
The Board is revising Regulation E to require a person initiating an 
EFT using information from a consumer's check to obtain the consumer's 
authorization. Generally, authorization would be obtained by the payee 
providing a notice that a check will or may be converted, and the 
consumer providing a check as payment. The requirement would enable the 
Board to promote consistency in the notice provided to consumers by 
merchants and other payees.
    Additional guidance is provided in the staff commentary about a 
financial institution's error resolution obligations for certain 
transactions, and to clarify financial institution and merchant 
responsibilites for preauthorized transfers from consumer accounts.
    The EFTA was enacted to provide a basic framework establishing the 
rights, liabilities, and responsibilities of participants in electronic 
fund transfer systems. The primary objective of the EFTA is the 
provision of individual consumer rights. 15 U.S.C. 1693. The EFTA 
authorizes the Board to prescribe regulations to carry out the purpose 
and provisions of the statute. 15 U.S.C. 1693b(a). The EFTA expressly 
states that the Board's regulations may contain ``such classifications, 
differentiations, or other provisions, * * * as, in the judgment of the 
Board, are necessary or proper to effectuate the purposes of [the 
EFTA], to prevent circumvention or evasion [of the act], or to 
facilitate compliance [with the EFTA].'' 15 U.S.C. 1693b(c). The EFTA 
also states that ``[i]f electronic fund transfer services are made 
available to consumers by a person other than a financial institution 
holding a consumer's account, the Board shall by regulation assure that 
the disclosures, protections, responsibilities, and remedies created by 
[the EFTA] are made applicable to such persons and services.'' 15 
U.S.C. 1693b(d). The Board believes that the revisions to Regulation E 
discussed above are within Congress' broad grant of authority to the 
Board to adopt provisions that carry out the purposes of the statute.
    2. Issues raised by comments in response to the initial regulatory 
flexibility analysis. In accordance with Section 3(a) of the RFA, the 
Board conducted an initial regulatory flexibility analysis in 
connection with the proposed rule. The Board did not receive any 
comments on its initial regulatory flexibility analysis.
    3. Small entities affected by the final rule. Merchants or other 
payees that initiate one-time EFTs from a consumer's account using 
information from the consumer's check are required under the regulation 
to obtain the consumer's authorization for the transfers. For POS and 
ARC transactions, payees must provide a notice that a check will or may 
be converted. For ARC transactions, notice will likely be provided on a 
billing statement or invoice. At POS, notice also must be provided on 
posted signage, and a copy of the notice must be given to the consumer 
at the time of the transaction. Payees in ECK transactions must also 
provide notice that funds may be debited from a consumer's account as 
soon as the same day payment is made or received and that the 
consumer's check will not be returned by the consumer's financial 
institution. In addition, before a payee may collect a service fee for 
insufficient or uncollected funds via EFT from a consumer's account, 
the payee must provide a notice that such a fee may be collected by use 
of an EFT and disclose the amount of the fee. Account-holding 
institutions are required under the regulation to disclose to their 
consumers that electronic check conversion transactions are a new type 
of transfer that can be made from a consumer's account.
    Merchants and other payees that engage in check conversion 
transactions must obtain consumers' authorizations for electronic check 
conversion transactions and for the collection of fees debited via an 
EFT if a payment is returned unpaid, and generally do so via signage 
and on a transaction receipt at the POS. In particular, payment system 
rules require that authorization for one-time debits to a consumer's 
account must be in writing and signed or similarly authenticated by the 
consumer. The Board further understands that many payees provide notice 
on receipts at POS. Similarly, payees are generally providing written 
notices in ARC transactions because payment system rules require 
written notices to be provided to consumers.
    Under the amendments to Regulation E, payees must review the 
notices that they presently provide in accordance with payment system 
rules, and may be required to revise these notices in some cases to 
ensure compliance with the amendments to Regulation E. The Board 
believes that these amendments will not have a significant economic 
impact on small entities because payees are generally providing notices 
regarding ECK and the collection of service fees for insufficient funds 
electronically in accordance with payment system rules. Furthermore, 
the Board believes that obtaining consumer authorization for ECK 
transactions via signage at the POS is less costly than obtaining 
authorization via signed receipts.
    Payees will have to revise their notices to inform consumers in ECK 
transactions that funds may be debited from their account soon after 
payment is received and, if applicable, that consumers' checks will not 
be returned by their financial institutions. At POS, this additional 
information may be provided separately from the general authorization 
notice. The Board understands that many payees in ARC transactions are 
already providing notice to consumers regarding when funds may be 
debited from a consumer's account when consumers' checks are converted, 
and stating that consumers' checks will not be returned by their 
financial institutions. For those payees that are not already providing 
some form of notice at POS or for ARC transactions, the final rule 
provides model language to facilitate compliance. Thus, the Board does 
not believe that the requirement to provide notice about the nature of 
ECK transactions will have a significant economic impact on small 
entities.
    Small financial institutions may need to review their initial 
disclosures, and perhaps revise them to reflect that electronic check 
conversion transactions are a new type of transfer that can be made 
from a consumer's account. This disclosure is also ``generic'' and will 
not vary among consumers. Model language is provided in the rule to 
facilitate compliance. Thus, the Board believes this requirement also 
should not have a significant economic impact on small entities. The 
Board also understands that many institutions have already

[[Page 1658]]

revised their periodic statements to reflect that checks may be 
converted.
    4. Other federal rules. The Board believes no federal rules 
duplicate, overlap, or conflict with the final revisions to Regulation 
E.
    5. Significant alternatives to the proposed revisions. The Board 
solicited comment about potential ways to reduce regulatory burden. 
Several commenters urged the Board not to require written, signed 
authorization for checks converted at POS. In light of the potential 
impact on entities and limited additional consumer benefit, the final 
rule does not require a payee to obtain a consumer's signature to 
convert a check. In the final rule, the Board is also providing a 
sunset period of three years for the additional ECK disclosures about 
when funds may be debited from the consumer's account and the non-
return of checks. The Board anticipates that increased consumer 
familiarity with ECK transactions over time will make unnecessary the 
provision of this additional information.

VI. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the rule 
under the authority delegated to the Board by the Office of Management 
and Budget (OMB). The final rule contains requirements subject to the 
PRA. The collection of information that is required by this rule is 
found in 12 CFR 205.2(b)(3), 205.3(b)(2) and 205.7. The Federal Reserve 
may not conduct or sponsor, and an organization is not required to 
respond to, this information collection unless the information 
collection displays a currently valid OMB control number. The OMB 
control number is 7100-0200. This information is required to provide 
benefits for consumers and is mandatory (15 U.S.C. 1693 et seq.). The 
respondents/recordkeepers are for-profit financial institutions, 
including small businesses. Institutions are required to retain records 
for 24 months.
    All financial institutions subject to Regulation E, of which there 
are approximately 19,300, are considered respondents for the purposes 
of the PRA and may be required to provide notice to accountholders that 
electronic check conversion (ECK) transactions are a new type of 
transfer that may be made from a consumer's account under Sec.  205.7. 
In addition, all persons, such as merchants and other payees, that 
engage in ECK transactions, of which there are approximately 80,000, 
potentially are affected by this collection of information, because 
these merchants and payees will be required to obtain a consumer's 
authorization for the electronic transfer under Sec.  205.3(b)(2).
    The following estimates represent an average across all respondents 
and reflect variations among institutions based on their size, 
complexity, and practices. The other federal agencies are responsible 
for estimating and reporting to OMB the total paperwork burden for the 
institutions for which they have administrative enforcement authority. 
They may, but are not required to, use the Federal Reserve's burden 
estimate methodology.
    The first disclosure requirement, described in Sec.  205.7, is the 
initial disclosure that a financial institution must provide to their 
accountholders reflecting that ECK transactions are a new type of 
transfer that can be made from a consumer's account. The Federal 
Reserve estimates that each of the institutions, for which it has 
administrative enforcement authority (collectively referred to in the 
following paragraphs as ``respondents regulated by the Federal 
Reserve'') will be required to provide a revised initial disclosure to 
their accountholders. Currently, all respondents regulated by the 
Federal Reserve are required to provide a disclosure of basic terms, 
costs, and rights relating to EFT services under Regulation E. For 
purposes of this PRA analysis, the Federal Reserve estimates that it 
will take financial institutions, on average, 8 hours (one business 
day) to reprogram and update systems to include the new notice 
requirement relating to ECK transactions; therefore, the Federal 
Reserve estimates that the total annual burden for all financial 
institutions for this requirement will be 154,400 hours. With respect 
to the 1,289 Federal-Reserve-regulated institutions which must comply 
with Regulation E, it is estimated that the total annual burden for 
this requirement will be 10,312 hours. The final revisions to 
Regulation E provide institutions with model clauses for the initial 
disclosure requirement for ECK transactions (provided in Appendix A) 
that they may use to comply with the notice requirement.
    The second disclosure requirement, described in Sec.  205.3(b)(2), 
is required when persons, such as merchants and other payees, engage in 
ECK transactions. Under the final rule, merchants and payees are 
generally required to provide written notice to obtain a consumer's 
authorization for the one-time EFT. Merchants and payees will also be 
required to provide a written notice to obtain a consumer's 
authorization to collect any service fees for insufficient or 
uncollected funds via an EFT to the consumer's account. The notice must 
also disclose the amount of the service fee. Finally, merchants and 
payees that engage in ECK transactions must provide a notice to 
consumers that when a check is used to initiate an EFT, funds may be 
debited from a consumer's account as soon as the same day payment is 
made or received and consumers' checks will not be returned by their 
financial institution.
    The Federal Reserve estimates that of the 1,289 respondents 
regulated by the Federal Reserve that are required to comply with 
Regulation E, approximately 10 originate ECK transactions. The Federal 
Reserve estimates that it will take each respondent, on average, 8 
hours (1 business day) to reprogram and update their systems to include 
the new notice requirement relating to ECK transactions; therefore, the 
Federal Reserve estimates that the total annual burden is 80 hours. The 
final revisions to Regulation E provide institutions with model clauses 
(provided in Appendix A) for the new disclosure requirements. Using the 
Federal Reserve's methodology, the total annual burden for all other 
merchants and payees engaging in ECK transactions is 639,920 hours.
    A third disclosure requirement applies to ATM operators who are 
required to provide notice to consumers of an ATM surcharge. Under this 
final rule, ATM operators will be permitted to disclose on signage 
posted at the ATM that a surcharge ``may'' be imposed if there are 
circumstances under which a surcharge is not imposed. All financial 
institutions, of which there are approximately 19,300, potentially are 
subject to this requirement to the extent they are ATM operators under 
the rule. The extent to which this collection of information affects a 
particular financial institution depends on the number of ATMs an 
institution operates, and on whether the institution elects to revise 
its ATM signage disclosures. For purposes of this PRA analysis, the 
Federal Reserve estimates that it will take financial institutions, on 
average, 8 hours (one business day) to revise and update ATM signage; 
therefore the Federal Reserve estimates that the total annual burden 
for all depository institutions for this requirement will be 154,400 
hours. With respect to the 1,289 Federal Reserve-regulated institutions 
which must comply with Regulation E, it is estimated that the total 
annual burden for this requirement will be 10,312 hours.
    The Federal Reserve's current annual burden for Regulation E 
disclosures is

[[Page 1659]]

estimated to be 63,047 hours. The final rule will increase the total 
burden under Regulation E for all Federal Reserve-regulated 
institutions by 20,704 hours, from 63,047 to 83,751 hours. (This burden 
estimate does not include the burden associated with the new disclosure 
requirements in connection with payroll card accounts as announced in a 
separate interim final rule (Docket No. R-1247).) Using the methodology 
explained above, the final rule would increase total burden under 
Regulation E for all other financial institutions by approximately 
928,096 hours.
    Because the records would be maintained by the institutions and the 
notices are not provided to the Federal Reserve, no issue of 
confidentiality arises under the Freedom of Information Act.

List of Subjects in 12 CFR Part 205

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


0
For the reasons set forth in the preamble, the Board amends 12 CFR part 
205 and the Official Staff Commentary, as follows:

PART 205--ELECTRONIC FUND TRANSFERS (REGULATION E)

0
1. The authority citation for part 205 continues to read as follows:


    Authority: 15 U.S.C. 1693b.

0
2.-3. Section 205.3 is amended by revising paragraph (a), redesignating 
paragraph (b) as paragraph (b)(1), revising paragraph (b)(1), and 
adding new paragraphs (b)(2) and (b)(3) to read as follows:


Sec.  205.3  Coverage.

    (a) General. This part applies to any electronic fund transfer that 
authorizes a financial institution to debit or credit a consumer's 
account. Generally, this part applies to financial institutions. For 
purposes of Sec. Sec.  205.3(b)(2), 205.10(b), (d), and (e) and 205.13, 
this part applies to any person.
    (b) Electronic fund transfer--(1) Definition. The term electronic 
fund transfer means any transfer of funds that is initiated through an 
electronic terminal, telephone, computer, or magnetic tape for the 
purpose of ordering, instructing, or authorizing a financial 
institution to debit or credit a consumer's account. The term includes, 
but is not limited to--
    (i) Point-of-sale transfers;
    (ii) Automated teller machine transfers;
    (iii) Direct deposits or withdrawals of funds;
    (iv) Transfers initiated by telephone; and
    (v) Transfers resulting from debit card transactions, whether or 
not initiated through an electronic terminal.
    (2) Electronic fund transfer using information from a check. (i) 
This part applies where a check, draft, or similar paper instrument is 
used as a source of information to initiate a one-time electronic fund 
transfer from a consumer's account. The consumer must authorize the 
transfer.
    (ii) The person that initiates an electronic fund transfer using 
the consumer's check as a source of information for the transfer shall 
provide a notice that the transaction will or may be processed as an 
EFT, and obtain a consumer's authorization for each transfer. A 
consumer authorizes a one-time electronic fund transfer (in providing a 
check to a merchant or other payee for the MICR encoding, that is, the 
routing number of the financial institution, the consumer's account 
number and the serial number) when the consumer receives notice and 
goes forward with the transaction. For point-of-sale transfers, the 
notice must be posted in a prominent and conspicuous location, and a 
copy of the notice must be provided to the consumer at the time of the 
transaction.
    (iii) The person that initiates an electronic fund transfer using 
the consumer's check as a source of information for the transfer shall 
also provide a notice to the consumer at the same time it provides the 
notice required under paragraph (b)(2)(ii) that when a check is used to 
initiate an electronic fund transfer, funds may be debited from the 
consumer's account as soon as the same day payment is received, and, as 
applicable, that the consumer's check will not be returned by the 
financial institution holding the consumer's account. For point-of-sale 
transfers, the person initiating the transfer may post the notice 
required in this paragraph (b)(2)(iii) in a prominent and conspicuous 
location and need not include this notice on the copy of the notice 
given to the consumer under paragraph (b)(2)(ii). The requirements in 
this paragraph (b)(2)(iii) shall remain in effect until December 31, 
2009.
    (iv) A person may provide notices that are substantially similar to 
those set forth in Appendix A-6 to comply with the requirements of this 
paragraph (b)(2).
    (3) Collection of service fees via electronic fund transfer. A 
consumer authorizes a one-time electronic fund transfer from the 
consumer's account to pay a fee for the return of an electronic fund 
transfer or a check unpaid due to insufficient or uncollected funds in 
the consumer's account, when the consumer receives a notice stating 
that the fee will be collected by an electronic fund transfer from the 
consumer's account, along with a disclosure of the amount of the fee, 
and the consumer goes forward with the transaction. If the service fee 
for insufficient or uncollected funds may be collected in connection 
with a point-of-sale transfer, the notice must be posted in a prominent 
and conspicuous location, and a copy of the notice must be provided to 
the consumer at the time of the transaction.
* * * * *

0
4. Section 205.7 is amended by adding a new paragraph (c) as follows:


Sec.  205.7  Initial disclosures.

* * * * *
    (c) Addition of electronic fund transfer services. If an electronic 
fund transfer service is added to a consumer's account and is subject 
to terms and conditions different from those described in the initial 
disclosures, disclosures for the new service are required.

0
5. Section 205.16 is amended by revising paragraph (c) as follows:


Sec.  205.16  Disclosures at automated teller machines.

* * * * *
    (c) Notice requirement. To meet the requirements of paragraph (b) 
of this section, an automated teller machine operator must comply with 
the following:
    (1) On the machine. Post in a prominent and conspicuous location on 
or at the automated teller machine a notice that:
    (i) A fee will be imposed for providing electronic fund transfer 
services or for a balance inquiry; or
    (ii) A fee may be imposed for providing electronic fund transfer 
services or for a balance inquiry, but the notice in this paragraph 
(c)(1)(ii) may be substituted for the notice in paragraph (c)(1)(i) 
only if there are circumstances under which a fee will not be imposed 
for such services; and
    (2) Screen or paper notice. Provide the notice required by 
paragraphs (b)(1) and (b)(2) of this section either by showing it on 
the screen of the automated teller machine or by providing it on paper, 
before the consumer is committed to paying a fee.
* * * * *

0
6. In Appendix A to Part 205,

[[Page 1660]]

0
a. In A-2 Model Clauses for Initial Disclosures (Sec.  205.7(b)), 
paragraphs (a), (b) and (d) are revised;
0
b. In A-3 Model Forms for Error Resolution Notice (Sec. Sec.  
205.7(b)(10) and 205.8(b)), paragraph (a) is republished, and paragraph 
(b) is added;
0
c. Section A-6 Model Clauses for Authorizing One-Time Electronic Fund 
Transfer Using Information From a Check (Sec.  205.3(b)(2)) is added.

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

* * * * *

A-2 Model Clauses for Initial Disclosures (Sec.  205.7(b))

    (a) Consumer Liability (Sec.  205.7(b)(1)).
    (Tell us AT ONCE if you believe your [card] [code] has been lost or 
stolen, or if you believe that an electronic fund transfer has been 
made without your permission using information from your check. 
Telephoning is the best way of keeping your possible losses down. You 
could lose all the money in your account (plus your maximum overdraft 
line of credit). If you tell us within 2 business days after you learn 
of the loss or theft of your [card] [code], you can lose no more than 
$50 if someone used your [card][code] without your permission.)
    If you do NOT tell us within 2 business days after you learn of the 
loss or theft of your [card] [code], and we can prove we could have 
stopped someone from using your [card] [code] without your permission 
if you had told us, you could lose as much as $500.
    Also, if your statement shows transfers that you did not make, 
including those made by card, code or other means, tell us at once. If 
you do not tell us within 60 days after the statement was mailed to 
you, you may not get back any money you lost after the 60 days if we 
can prove that we could have stopped someone from taking the money if 
you had told us in time. If a good reason (such as a long trip or a 
hospital stay) kept you from telling us, we will extend the time 
periods.
    (b) Contact in event of unauthorized transfer (Sec.  205.7(b)(2)). 
If you believe your [card] [code] has been lost or stolen, call: 
[Telephone number] or write: [Name of person or office to be notified] 
[Address]
    You should also call the number or write to the address listed 
above if you believe a transfer has been made using the information 
from your check without your permission.
* * * * *
    (d) Transfer types and limitations (Sec.  205.7(b)(4))--(1) Account 
access. You may use your [card][code] to:
    (i) Withdraw cash from your [checking] [or] [savings] account.
    (ii) Make deposits to your [checking] [or] [savings] account.
    (iii) Transfer funds between your checking and savings accounts 
whenever you request.
    (iv) Pay for purchases at places that have agreed to accept the 
[card] [code].
    (v) Pay bills directly [by telephone] from your [checking] [or] 
[savings] account in the amounts and on the days you request.
    Some of these services may not be available at all terminals.
    (2) Electronic check conversion. You may authorize a merchant or 
other payee to make a one-time electronic payment from your checking 
account using information from your check to:
    (i) Pay for purchases.
    (ii) Pay bills.
    (3) Limitations on frequency of transfers--(i) You may make only 
[insert number, e.g., 3] cash withdrawals from our terminals each 
[insert time period, e.g., week].
    (ii) You can use your telephone bill-payment service to pay [insert 
number] bills each [insert time period] [telephone call].
    (iii) You can use our point-of-sale transfer service for [insert 
number] transactions each [insert time period].
    (iv) For security reasons, there are limits on the number of 
transfers you can make using our [terminals] [telephone bill-payment 
service] [point-of-sale transfer service].
    (4) Limitations on dollar amounts of transfers--(i) You may 
withdraw up to [insert dollar amount] from our terminals each [insert 
time period] time you use the [card] [code].
    (ii) You may buy up to [insert dollar amount] worth of goods or 
services each [insert time period] time you use the [card] [code] in 
our point-of-sale transfer service.
* * * * *

A-3 Model Forms for Error Resolution Notice (Sec. Sec.  205.7(b)(10) 
and 205.8(b))

    (a) Initial and annual error resolution notice (Sec. Sec.  
205.7(b)(10) and 205.8(b)).
    In Case of Errors or Questions About Your Electronic Transfers 
Telephone us at [insert telephone number], or Write us at [insert 
address] [or E-mail us at [insert electronic mail address]] as soon as 
you can, if you think your statement or receipt is wrong or if you need 
more information about a transfer listed on the statement or receipt. 
We must hear from you no later than 60 days after we sent the FIRST 
statement on which the problem or error appeared.
    (1) Tell us your name and account number (if any).
    (2) Describe the error or the transfer you are unsure about, and 
explain as clearly as you can why you believe it is an error or why you 
need more information.
    (3) Tell us the dollar amount of the suspected error.
    If you tell us orally, we may require that you send us your 
complaint or question in writing within 10 business days.
    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.
    For errors involving new accounts, point-of-sale, or foreign-
initiated transactions, we may take up to 90 days to investigate your 
complaint or question. For new accounts, we may take up to 20 business 
days to credit your account for the amount you think is in error.
    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.
    (b) Error resolution notice on periodic statements (Sec.  
205.8(b)).
    In Case of Errors or Questions About Your Electronic Transfers 
Telephone us at [insert telephone number] or Write us at [insert 
address] as soon as you can, if you think your statement or receipt is 
wrong or if you need more information about a transfer on the statement 
or receipt. We must hear from you no later than 60 days after we sent 
you the FIRST statement on which the error or problem appeared.
    (1) Tell us your name and account number (if any).
    (2) Describe the error or the transfer you are unsure about, and 
explain as clearly as you can why you believe it is an error or why you 
need more information.
    (3) Tell us the dollar amount of the suspected error.

[[Page 1661]]

    We will investigate your complaint and will correct any error 
promptly. If we take more than 10 business days to do this, we will 
credit your account 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.
* * * * *

A-6 Model Clauses for Authorizing One-Time Electronic Fund Transfers 
Using Information From a Check (Sec.  205.3(b)(2))

(a)--Notice About Electronic Check Conversion

    When you provide a check as payment, you authorize us either to use 
information from your check to make a one-time electronic fund transfer 
from your account or to process the payment as a check transaction.
    [You authorize us to collect a fee of $-- through an electronic 
fund transfer from your account if your payment is returned unpaid.]

(b)--Alternative Notice About Electronic Check Conversion (Optional)

    When you provide a check as payment, you authorize us to use 
information from your check to make a one-time electronic fund transfer 
from your account. In certain circumstances, such as for technical or 
processing reasons, we may process your payment as a check transaction.
    [Specify other circumstances (at payee's option).]
    [You authorize us to collect a fee of $-- through an electronic 
fund transfer from your account if your payment is returned unpaid.]

(c)--Notice For Providing Additional Information About Electronic Check 
Conversion

    When we use information from your check to make an electronic fund 
transfer, funds may be withdrawn from your account as soon as the same 
day [you make] [we receive] your payment[, and you will not receive 
your check back from your financial institution].

Supplement I to Part 205--Disclosures on Automated Teller Machines

0
7. In Supplement I to Part 205, the following amendments are made:
0
a. Under Section 205.2--Definitions, under 2(a) Access Device, 
paragraph 2. is revised;
0
b. Under Section 205.30--Coverage, under 3(b) Electronic Fund Transfer, 
a new heading ``Paragraph 3(b)(1)--Definition'' is added, paragraphs 1. 
and 2. are redesignated as paragraphs 3(b)(1)1 and 3(b)(1)2, and 
paragraph 3. is removed;
0
c. Under Section 205.3--Coverage, under 3(b) Electronic Fund Transfer, 
under Paragraph 3(b)(1)--Definition, paragraph 2.iv. is added;
0
d. Under Section 205.3--Coverage, under 3(b) Electronic Fund Transfer, 
a new heading ``Paragraph 3(b)(2)--Electronic Fund Transfer Using 
Information From a Check'' is added, and paragraphs 1. through 5. are 
added;
0
e. Under Section 205.3--Coverage, under 3(b) Electronic Fund Transfer, 
a new heading ``Paragraph 3(b)(3)--Collection of Service Fees via 
Electronic Fund Transfer'' is added, and paragraph 1. is added;
0
f. Under Section 205.3--Coverage, under 3(c) Exclusions from coverage, 
under heading Paragraph 3(c)(1)--Checks, paragraphs 1. and 2. are 
revised;
0
g. Under Section 205.5--Issuance of Access Devices, under 5(a) 
Solicited Issuance, under Paragraph 5(a)(2), paragraph 1. is revised;
0
h. Under Section 205.5--Issuance of Access Devices, under 5(b) 
Unsolicited Issuance, paragraph 5. is added;
0
i. Under Section 205.7--Initial Disclosures, under 7(a) Timing of 
Disclosures, paragraph 1. is revised, paragraph 4. is removed, and 
paragraphs 5. and 6. are redesignated as paragraphs 4. and 5.;
0
j. Under Section 205.7--Initial Disclosures, under 7(b) Content of 
Disclosures, under Paragraph 7(b)(4)--Types of Transfers; Limitations, 
paragraph 4. is added;
0
k. Under Section 205.7--Initial Disclosures, a new heading ``7(c) 
Addition of Electronic Fund Transfer Services'' is added, and paragraph 
1. is added;
0
l. Under Section 205.10--Preauthorized Transfers, under 10(b) Written 
Authorization for Preauthorized Transfers from Consumer's Account, 
paragraphs 3. and 7. are revised;
0
m. Under Section 205.10--Preauthorized Transfers, under 10(c) 
Consumer's Right to Stop Payment, paragraph 2. is revised, and 
paragraph 3. is added;
0
n. Under Section 205.10--Preauthorized Transfers, under 10(d) Notice of 
Transfers Varying in Amount, under Paragraph 10(d)(2)--Range, paragraph 
2. is added;
0
o. Under Section 205.11--Procedures for Resolving Errors, under 11(b) 
Notice of Error from Consumer, under Paragraph 11(b)(1)--Timing; 
Contents, paragraph 7. is added;
0
p. Under Section 205.11--Procedures for Resolving Errors, under 11(c) 
Time Limits and Extent of Investigation, under Paragraph 11(c)(4)--
Investigation, paragraph 5. is added; and
0
q. Under Section 205.16--Disclosures at Automated Teller Machines, 
under 16(b) General, under Paragraph 16(b)(1), paragraph 1. is revised.
    The revisions and additions read as follows:

Supplement I to Part 205--Official Staff Interpretations

* * * * *

Section 205.2--Definitions

2(a) Access Device

* * * * *
    2. Checks used to capture information. The term ``access device'' 
does not include a check or draft used to capture the MICR (Magnetic 
Ink Character Recognition) encoding to initiate a one-time ACH debit. 
For example, if a consumer authorizes a one-time ACH debit from the 
consumer's account using a blank, partially completed, or fully 
completed and signed check for the merchant to capture the routing, 
account, and serial numbers to initiate the debit, the check is not an 
access device. (Although the check is not an access device under 
Regulation E, the transaction is nonetheless covered by the regulation. 
See comment 3(b)(1)-1.v.)
* * * * *

Section 205.3--Coverage

* * * * *

3(b) Electronic Fund Transfer

Paragraph 3(b)(1)--Definition
* * * * *
    2. Fund transfers not covered.
* * * * *
    iv. Transactions arising from the electronic collection, 
presentment, or return of checks through the check collection system, 
such as through transmission of electronic check images.
Paragraph 3(b)(2)--Electronic Fund Transfer Using Information From a 
Check
    1. Notice at POS not furnished due to inadvertent error. If the 
copy of the notice under section 205.3(b)(2)(ii) for ECK transactions 
is not provided to the consumer at POS because of a bona fide 
unintentional error, such as when a terminal printing mechanism jams, 
no violation results if the payee maintains procedures reasonably 
adapted to avoid such occurrences.
    2. Authorization to process a transaction as an EFT or as a check. 
In order to process a transaction as an EFT or alternatively as a 
check, the payee must obtain the consumer's authorization to do so. A 
payee may, at its option, specify the circumstances

[[Page 1662]]

under which a check may not be converted to an EFT. (See model clauses 
in Appendix A-6.)
    3. Notice for each transfer. Generally, a notice to authorize an 
electronic check conversion transaction must be provided for each 
transaction. For example, a consumer must receive a notice that the 
transaction will be processed as an EFT for each transaction at POS or 
each time a consumer mails a check in an accounts receivable (ARC) 
transaction to pay a bill, such as a utility bill, if the payee intends 
to convert a check received as payment. Similarly, the consumer must 
receive notice if the payee intends to collect a service fee for 
insufficient or uncollected funds via an EFT for each transaction 
whether at POS or if the consumer mails a check to pay a bill. The 
notice about when funds may be debited from a consumer's account and 
the non-return of consumer checks by the consumer's financial 
institution must also be provided for each transaction. However, if in 
an ARC transaction, a payee provides a coupon book to a consumer, for 
example, for mortgage loan payments, and the payment dates and amounts 
are set out in the coupon book, the payee may provide a single notice 
on the coupon book stating all of the required disclosures under 
paragraph (b)(2) of this section in order to obtain authorization for 
each conversion of a check and any debits via EFT to the consumer's 
account to collect any service fees imposed by the payee for 
insufficient or uncollected funds in the consumer's account. The notice 
must be placed on a conspicuous location of the coupon book that a 
consumer can retain--for example, on the first page, or inside the 
front cover.
    4. Multiple payments/multiple consumers. If a merchant or other 
payee will use information from a consumer's check to initiate an EFT 
from the consumer's account, notice to a consumer listed on the billing 
account that a check provided as payment during a single billing cycle 
or after receiving an invoice or statement will be processed as a one-
time EFT or as a check transaction constitutes notice for all checks 
provided in payment for the billing cycle or the invoice for which 
notice has been provided, whether the check(s) is submitted by the 
consumer or someone else. The notice applies to all checks provided in 
payment for the billing cycle or invoice until the provision of notice 
on or with the next invoice or statement. Thus, if a merchant or other 
payee receives a check as payment for the consumer listed on the 
billing account after providing notice that the check will be processed 
as a one-time EFT, the authorization from that consumer constitutes 
authorization to convert any other checks provided for that invoice or 
statement. Other notices required under this paragraph (b)(2) (for 
example, to collect a service fee for insufficient or uncollected funds 
via an EFT) provided to the consumer listed on the billing account also 
constitutes notice to any other consumer who may provide a check for 
the billing cycle or invoice.
    5. Additional disclosures about ECK transactions at POS. When a 
payee initiates an EFT at POS using information from the consumer's 
check, and returns the check to the consumer at POS, the payee need not 
provide a notice to the consumer that the check will not be returned by 
the consumer's financial institution.
Paragraph 3(b)(3)--Collection of Service Fees via Electronic Fund 
Transfer
    1. Fees imposed by account-holding institution. The requirement to 
obtain a consumer's authorization at POS to collect a fee via EFT for 
the return of an EFT or check unpaid due to insufficient or uncollected 
funds in the consumer's account does not apply to fees assessed against 
the consumer's account by the consumer's account-holding institution 
for the return of an EFT or a check unpaid or for paying overdrafts.

3(c) Exclusions From Coverage

Paragraph 3(c)(1)--Checks
    1. Re-presented checks. The electronic re-presentment of a returned 
check is not covered by Regulation E because the transaction originated 
by check. Regulation E does apply, however, to any fee debited via an 
EFT from a consumer's account by the payee because the check was 
returned for insufficient or uncollected funds. The person debiting the 
fee electronically must obtain the consumer's authorization.
    2. Check used to capture information for a one-time EFT. See 
comment 3(b)(1)-1.v.
* * * * *

Section 205.5--Issuance of Access Devices

* * * * *

5(a) Solicited Issuance

* * * * *
Paragraph 5(a)(2)
    1. One-for-one rule. In issuing a renewal or substitute access 
device, only one renewal or substitute device may replace a previously 
issued device. For example, only one new card and PIN may replace a 
card and PIN previously issued. A financial institution may provide 
additional devices at the time it issues the renewal or substitute 
access device, however, provided the institution complies with Sec.  
205.5(b). (See comment 5(b)-5.) If the replacement device or the 
additional device permits either fewer or additional types of 
electronic fund transfer services, a change-in-terms notice or new 
disclosures are required.
* * * * *

5(b) Unsolicited Issuance

* * * * *
    5. Additional access devices in a renewal or substitution. A 
financial institution may issue more than one access device in 
connection with the renewal or substitution of a previously issued 
accepted access device, provided that any additional access device 
(beyond the device replacing the accepted access device) is not 
validated at the time it is issued, and the institution complies with 
the other requirements of Sec.  205.5(b). The institution may, if it 
chooses, set up the validation procedure such that both the device 
replacing the previously issued device and the additional device are 
not validated at the time they are issued, and validation will apply to 
both devices. If the institution sets up the validation procedure in 
this way, the institution should provide a clear and readily 
understandable disclosure to the consumer that both devices are 
unvalidated and that validation will apply to both devices.
* * * * *

Section 205.7--Initial Disclosures

7(a) Timing of Disclosures

    1. Early disclosures. Disclosures given by a financial institution 
earlier than the regulation requires (for example, when the consumer 
opens a checking account) need not be repeated when the consumer later 
enters into an agreement with a third party to initiate preauthorized 
transfers to or from the consumer's account, unless the terms and 
conditions differ from those that the institution previously disclosed. 
This interpretation also applies to any notice provided about one-time 
EFTs from a consumer's account initiated using information from the 
consumer's check. On the other hand, if an agreement for EFT services 
to be provided by an account-holding institution is directly between 
the consumer and the account-holding institution, disclosures must be 
given in close proximity to the event requiring disclosure, for 
example, when

[[Page 1663]]

the consumer contracts for a new service.
* * * * *

7(b) Content of Disclosures

* * * * *
Paragraph 7(b)(4)--Types of Transfers; Limitations
* * * * *
    4. One-time EFTs initiated using information from a check. 
Financial institutions must disclose the fact that one-time EFTs 
initiated using information from a consumer's check are among the types 
of transfers that a consumer can make. (See Appendix A-2.)
* * * * *

7(c) Addition of Electronic Fund Transfer Services

    1. Addition of electronic check conversion services. One-time EFTs 
initiated using information from a consumer's check are a new type of 
transfer requiring new disclosures, as applicable. (See Appendix A-2.)
* * * * *

Section 205.10--Preauthorized Transfers

* * * * *

10(b) Written Authorization for Preauthorized Transfers From Consumer's 
Account

* * * * *
    3. Written authorization for preauthorized transfers. The 
requirement that preauthorized EFTs be authorized by the consumer 
``only by a writing'' cannot be met by a payee's signing a written 
authorization on the consumer's behalf with only an oral authorization 
from the consumer.
* * * * *
    7. Bona fide error. Consumers sometimes authorize third-party 
payees, by telephone or on-line, to submit recurring charges against a 
credit card account. If the consumer indicates use of a credit card 
account when in fact a debit card is being used, the payee does not 
violate the requirement to obtain a written authorization if the 
failure to obtain written authorization was not intentional and 
resulted from a bona fide error, and if the payee maintains procedures 
reasonably adapted to avoid any such error. Procedures reasonably 
adapted to avoid error will depend upon the circumstances. Generally, 
requesting the consumer to specify whether the card to be used for the 
authorization is a debit (or check) card or a credit card is a 
reasonable procedure. Where the consumer has indicated that the card is 
a credit card (or that the card is not a debit or check card), the 
payee may rely on the consumer's statement without seeking further 
information about the type of card. If the payee believes, at the time 
of the authorization, that a credit card is involved, and later finds 
that the card used is a debit card (for example, because the consumer 
later brings the matter to the payee's attention), the payee must 
obtain a written and signed or (where appropriate) a similarly 
authenticated authorization as soon as reasonably possible, or cease 
debiting the consumer's account.

10(c) Consumer's Right to Stop Payment

* * * * *
    2. Revocation of authorization. Once a financial institution has 
been notified that the consumer's authorization is no longer valid, it 
must block all future payments for the particular debit transmitted by 
the designated payee-originator. (However, see comment 10(c)-3.) The 
institution may not wait for the payee-originator to terminate the 
automatic debits. The institution may confirm that the consumer has 
informed the payee-originator of the revocation (for example, by 
requiring a copy of the consumer's revocation as written confirmation 
to be provided within 14 days of an oral notification). If the 
institution does not receive the required written confirmation within 
the 14-day period, it may honor subsequent debits to the account.
    3. Alternative procedure for processing a stop-payment request. If 
an institution does not have the capability to block a preauthorized 
debit from being posted to the consumer's account--as in the case of a 
preauthorized debit made through a debit card network or other system, 
for example--the institution may instead comply with the stop-payment 
requirements by using a third party to block the transfer(s), as long 
as the consumer's account is not debited for the payment.

10(d) Notice of Transfers Varying in Amount

* * * * *
Paragraph 10(d)(2)--Range
* * * * *
    2. Transfers to an account of the consumer held at another 
institution. A financial institution need not provide a consumer the 
option of receiving notice with each varying transfer, and may instead 
provide notice only when a debit to an account of the consumer falls 
outside a specified range or differs by more than a specified amount 
from the most recent transfer, if the funds are transferred and 
credited to an account of the consumer held at another financial 
institution. The specified range or amount, however, must be one that 
reasonably could be anticipated by the consumer, and the institution 
must notify the consumer of the range or amount at the time the 
consumer provides authorization for the preauthorized transfers. For 
example, if the transfer is for payment of interest for a fixed-rate 
certificate of deposit account, an appropriate range might be based on 
a month containing 28 days and a month containing 31 days.
* * * * *

Section 205.11--Procedures for Resolving Errors

* * * * *

11(b) Notice of Error from Consumer

Paragraph 11(b)(1)--Timing; Contents
* * * * *
    7. Effect of late notice. An institution is not required to comply 
with the requirements of this section for any notice of error from the 
consumer that is received by the institution later than 60 days from 
the date on which the periodic statement first reflecting the error is 
sent. Where the consumer's assertion of error involves an unauthorized 
EFT, however, the institution must comply with Sec.  205.6 before it 
may impose any liability on the consumer.
* * * * *

11(c) Time Limits and Extent of Investigation

* * * * *
Paragraph 11(c)(4)--Investigation
* * * * *
    5. No EFT agreement. When there is no agreement between the 
institution and the third party for the type of EFT involved, the 
financial institution must review any relevant information within the 
institution's own records for the particular account to resolve the 
consumer's claim. The extent of the investigation required may vary 
depending on the facts and circumstances. However, a financial 
institution may not limit its investigation solely to the payment 
instructions where additional information within its own records 
pertaining to the particular account in question could help to resolve 
a consumer's claim.
    Information that may be reviewed as part of an investigation might 
include:
    i. The ACH transaction records for the transfer;

[[Page 1664]]

    ii. The transaction history of the particular account for a 
reasonable period of time immediately preceding the allegation of 
error;
    iii. Whether the check number of the transaction in question is 
notably out-of-sequence;
    iv. The location of either the transaction or the payee in question 
relative to the consumer's place of residence and habitual transaction 
area;
    v. Information relative to the account in question within the 
control of the institution's third-party service providers if the 
financial institution reasonably believes that it may have records or 
other information that could be dispositive; or
    vi. Any other information appropriate to resolve the claim.
* * * * *

Section 205.16--Disclosures on Automated Teller Machines

16(b) General

Paragraph 16(b)(1)
    1. Specific notices. An ATM operator that imposes a fee for a 
specific type of transaction--such as for a cash withdrawal, but not 
for a balance inquiry, or for some cash withdrawals, but not for others 
(such as where the card was issued by a foreign bank or by a card 
issuer that has entered into a special contractual relationship with 
the ATM operator regarding surcharges)--may provide a notice on or at 
the ATM that a fee will be imposed or a notice that a fee may be 
imposed for providing EFT services or may specify the type of EFT for 
which a fee is imposed. If, however, a fee will be imposed in all 
instances, the notice must state that a fee will be imposed.

    By order of the Board of Governors of the Federal Reserve 
System, December 30, 2005.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 06-145 Filed 1-9-06; 8:45 am]
BILLING CODE 6210-01-P