[Federal Register Volume 71, Number 231 (Friday, December 1, 2006)]
[Rules and Regulations]
[Pages 69430-69438]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-20300]
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FEDERAL RESERVE SYSTEM
12 CFR Part 205
[Regulation E; Docket No. R-1265]
Electronic Fund Transfers
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; official staff interpretation.
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[[Page 69431]]
SUMMARY: The Board is amending Regulation E, which implements the
Electronic Fund Transfer Act, and the official staff commentary to the
regulation. The final rule clarifies that the requirement to obtain a
consumer's authorization to initiate an electronic fund transfer to the
consumer's account to collect a fee for an EFT or check that has been
returned applies to any person that intends to collect the fee in that
manner, and not to the account-holding financial institution. The final
rule also provides guidance on the consumer notice requirements when a
person initiates an electronic fund transfer to collect a returned item
fee or engages in an electronic check conversion transaction. The
amendments supersede corresponding provisions addressing these issues
in the Board's January 2006 final rule and August 2006 interim final
rule.
DATES: The final rule is effective January 1, 2007.
FOR FURTHER INFORMATION CONTACT: Vivian W. Wong, Attorney, or Ky Tran-
Trong or David A. Stein, 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 the 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 provide for disclosure of the
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))
interprets the requirements of Regulation E to facilitate compliance
and provides 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 January 10, 2006, the Board published a final rule which
addressed, among other things, how a payee can obtain a consumer's
authorization to electronically collect fees for items returned due to
insufficient or uncollected funds in the consumer's account. 71 FR
1,638 (January 10, 2006) (January 2006 final rule). Authorization is
obtained when notice is provided to the consumer stating that the fee
will be collected by means of an EFT, along with a disclosure of the
specific amount of the fee, and the consumer goes forward with the
underlying transaction. See 71 FR at 1,645-46, 1,659.
The Board subsequently published an interim final rule in August
2006 (August 2006 interim rule) to clarify certain provisions in the
January 2006 final rule. 71 FR 51,451 (August 30, 2006). The August
2006 interim rule corrected an omission in the January 2006 final rule
to provide that the requirement to obtain a consumer's authorization to
electronically collect fees for items returned due to insufficient or
uncollected funds in the consumer's account applies to the person
initiating an EFT to collect the fee in this manner, and not to the
consumer's account-holding financial institution. The August 2006
interim rule included further guidance regarding the notice
requirement, including how to disclose the amount of the fee when the
amount may vary based on the amount of the underlying transaction or
other factors. With respect to the notice requirements for obtaining
authorization at POS for both the electronic collection of insufficient
funds fees and for electronic check conversion transactions, the August
2006 interim rule clarified that the notice given to consumers at the
time of the transaction may be substantially similar, and need not be
identical, to the notice posted at POS. To give interested parties an
opportunity to comment on these revisions, the Board solicited comment
on the August 2006 interim rule.
The Board received 14 comment letters on the August 2006 interim
rule. Commenters included banks, credit unions, a check services
provider, a large retailer, and industry trade associations, and
consumer groups. The following is a summary of the comments received;
the section-by-section analysis discusses specific comments in more
detail.
In general, industry commenters supported the Board's clarification
that the notice and authorization requirements apply to the person
seeking to collect the insufficient or uncollected funds fee
electronically. They also supported the Board's clarification that the
authorization requirement does not apply to any fees for returned items
due to insufficient or uncollected funds imposed on the consumer's
account by the account-holding institution. Some industry commenters,
however, urged the Board to reconsider, for operational reasons, the
requirements to provide both a posted notice as well as a copy of that
notice, or substantially similar notice, to consumers at POS. Industry
commenters also expressed concerns about the requirement to disclose
the amount of the fee, particularly when the fee may vary from state to
state. By contrast, consumer groups disagreed with the notion that a
consumer can authorize the collection of an insufficient funds fee via
an EFT from the consumer's account solely by going forward with an
underlying transaction after receiving notice of the payee's intent to
collect the fee electronically.
III. Summary of the Final Rule
The Board is adopting final revisions to Regulation E and the staff
commentary largely as published in the August 2006 interim rule. The
rule has been revised to apply to any fees collected for an EFT or a
check that has been returned unpaid, and is not limited to fees
collected after an item has been returned due to insufficient or
uncollected funds in a consumer's account. Additional clarifications
and modifications have been made to respond to commenters' concerns.
In addition to explaining that the requirement to obtain the
consumer's authorization applies to the person electronically
collecting the returned item fee, the final rule clarifies that if the
amount of the fee may vary based on the transaction amount or on other
factors, an explanation of how the fee is calculated may generally be
provided.
For POS transactions, the person collecting the fee must provide
consumers with two separate notices, one that is posted in a prominent
and conspicuous location, and a second that the consumer may retain. If
the fee may vary depending on the amount of the transaction or for
other reasons, an
[[Page 69432]]
explanation of how that fee is determined may be stated on the posted
notice. However, if the amount of the fee can be calculated at the time
of the transaction, the person collecting the fee must state the
specific fee amount on the notice given to the consumer. The final rule
has been revised to allow persons that may not be able to provide a
retainable notice at the time of the transaction (e.g., because they do
not have terminals or registers capable of printing the necessary
disclosures) to send a notice to the consumer's address as soon as
reasonably practicable after the person has initiated an EFT to collect
the fee.
The effective date of the final rule is January 1, 2007. As
provided in the August 2006 interim rule, to facilitate compliance and
minimize the implementation costs, the final rule provides a one-year
delayed compliance date, until January 1, 2008, for the requirement to
disclose the amount of the returned item fee (or an explanation of how
the fee is determined) on the copy of the notice (or substantially
similar notice) provided to the consumer in connection with a POS
transaction.
IV. Section-by-Section Analysis
Section 205.3 Coverage
3(a) General
Section 205.3(a) is being adopted as set forth in the August 2006
interim rule to incorporate a revision that was inadvertently omitted
from the January 2006 final rule. See 71 FR 1,638 (January 10, 2006).
Specifically, Sec. 205.3(a) is revised, pursuant to the Board's
authority under Sections 904(c) and 904(d)(1) of the EFTA, to clarify
that the requirement in Sec. 205.3(b)(3) to obtain a consumer's
authorization to collect a fee for a returned EFT or check via an EFT
to the consumer's account applies to any person. See 71 FR at 1,645-46.
As further discussed under Sec. 205.3(b)(3), this amendment clarifies
that the requirement to obtain the consumer's authorization applies to
the person seeking to collect the returned item fee electronically and
not to the consumer's account-holding institution. No commenters
objected to this clarification.
3(b) Electronic Fund Transfer
Electronic Check Conversion
Under the January 2006 final rule, merchants and other payees in
electronic check conversion (ECK) transactions are required to obtain
the consumer's authorization for the one-time transfer.\1\ Generally,
authorization for the ECK transaction is obtained when the payee
provides a notice to the consumer that information from the consumer's
check received as payment may be used to initiate 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. See Sec. 205.3(b)(2); 71 FR at 1,640-41. Model
language was provided in the January 2006 final rule to facilitate
compliance. See Model Clause A-6.
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\1\ In an ECK transaction, a merchant or other payee takes
information from a consumer's check to initiate a one-time EFT from
the consumer's account.
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The August 2006 interim rule clarified that the notice given to the
consumer at the time of the transaction must be substantially similar
to the notice posted at POS, but need not be an exact copy of the
posted notice. The clarification allows a payee in an ECK transaction
to modify the text of the notice given to the consumer to make the
notice more meaningful to the consumer. For example, the payee could
change the text from ``You authorize us to use information from your
check * * * '' to ``I authorize you to use information from my check *
* * .'' Industry commenters supported the revision, and it is adopted
in the final rule.
Collection of Returned Item Fees Through an Electronic Fund Transfer
Persons Subject to the Requirement
An EFT from a consumer's account to collect a fee for the return of
an EFT or a check is covered by Regulation E and must be authorized by
the consumer. Under Sec. 205.3(b)(3) of the January 2006 final rule, a
consumer authorizes the electronic collection of a fee for a returned
EFT or check when the consumer receives notice of the intent to collect
the fee from the consumer's account by EFT, along with a disclosure of
the amount of the fee, and goes forward with the underlying
transaction. See 71 FR at 1,645-46. Although Sec. 205.3(b)(3) was
intended to apply to the person electronically collecting a fee for a
returned item, the rule did not specifically indicate the party that
was required to provide the notice.
Under Sec. 205.3(b)(3)(i) of the August 2006 interim rule, the
obligation to provide notice to obtain the consumer's authorization
applies to the person that initiates an EFT to collect the fee, which
typically would be a merchant or other payee. However, in some cases
this may be a third party, either on behalf of the payee as the payee's
service provider or after it has acquired the right to the payment from
the payee. Thus, if the person that initiates collection of the fee by
an EFT failed to obtain a consumer's authorization, the person
collecting the fee, and not the consumer's account-holding financial
institution, has violated the regulation.
All commenters addressing this provision agreed with the Board's
clarification that the notice and authorization requirement applies to
the person initiating an EFT to collect the fee, and the final rule
reflects this approach. However, because an EFT or check may be
returned for reasons other than insufficient or uncollected funds in a
consumer's account, the rule has been revised to apply the consumer
authorization requirement more generally to any fees collected
electronically when an EFT or check has been returned unpaid. For
example, a check may be returned if the check does not bear the
consumer's signature. In addition, the reference in Sec.
205.3(b)(3)(i) of the August 2006 interim rule referring to the return
of an unpaid item ``to that person'' has been deleted to acknowledge
that in some cases, the person collecting the fee will not necessarily
be the merchant or other payee, but may instead be a third party. The
commentary to the final rule clarifies that the requirement in Sec.
205.3(b)(3) to obtain a consumer's authorization to collect a fee for a
returned item is not intended to apply to the consumer's account-
holding financial institution when it assesses a separate fee against
the consumer's account for returning a check or EFT unpaid or for
paying an overdraft. See comment 3(b)(3)-1.
Notice Requirements--General
Authorization Requirements
Both the January 2006 final rule and the August 2006 interim rule
provided that to obtain a consumer's authorization to collect a fee for
an item that is returned unpaid due to insufficient or uncollected
funds in the consumer's account, notice must first be provided of the
intent to electronically collect that fee, and such notice also must
state the amount of the fee. See Sec. 205.3(b)(3)(i); 71 FR 1,645-46.
Consumers are deemed to authorize the electronic collection of the fee
if the consumer goes forward with the underlying transaction after
receiving such notice. Payees in accounts receivable conversion (ARC)
transactions will typically provide
[[Page 69433]]
written notice on a billing statement or invoice. See 71 FR at 1,646;
71 FR at 51,453. As further discussed below in Sec. 205.3(b)(3)(ii),
for one-time transactions 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. The August 2006 interim rule also provided
guidance regarding how the amount of the fee can be disclosed if it may
vary from transaction to transaction. The final rule substantially
adopts these provisions of the interim rule, with some modifications to
the regulation and commentary text to cover fees for returned items
generally, and to clarify how the requirement applies in practice.
Consumer groups objected to the notion that a consumer authorizes
the electronic collection of a fee for a returned item solely by
receiving notice of the payee's intent to do so and going through with
the underlying transaction. In their view, a consumer may intend to
enter into an underlying check conversion transaction, but is not
likely to anticipate having the item returned. Consequently, consumer
groups argue that the consumer cannot be said to intend to authorize a
debit to collect fees associated with the return of the underlying
item. Consumer groups were particularly concerned that the Board's rule
would facilitate the ability of Internet payday lenders to
electronically access consumers' accounts at any time without
restriction simply by including a clause in the on-line loan agreement
providing for such debits.
Under the final rule, a consumer may authorize a subsequent
electronic collection of a returned item fee when the consumer receives
notice (or notice is posted in the case of POS transactions) indicating
that possibility at the time of the underlying transaction. See also
comment 3(b)(3)-4, discussed below, addressing how notice may be
provided when the person collecting the returned item fee is not the
merchant or other payee to whom the consumer provides payment. The
Board believes that a notice provided to consumers (or posted on
signage) before a consumer selects a payment method will adequately
apprise consumers of the possibility that a fee may be debited from
their accounts in the event an item is returned unpaid. The prior
notice allows the consumer to make an informed decision about whether
to proceed with a particular payment method (e.g., a check conversion
transaction) or to pay by other means.
The final rule does not address whether a person has a substantive
right to collect a returned item fee--that is a matter of state or
other law. The Board further notes that other federal or state laws,
such as the Fair Debt Collection Practices Act, as well as payment
system rules may impose additional substantive requirements. In
addition, the Board also understands that in some cases, a payee may
seek to collect more than one returned item fee in connection with a
single underlying item that has been returned unpaid more than once.
Although Regulation E does not prohibit the collection of more than one
fee for a single underlying item if appropriate notice is provided to
the consumer, such a practice may nevertheless be impermissible under
certain state laws, and could potentially raise concerns about unfair
or deceptive practices.
A few industry commenters raised concerns about the statement in
the supplementary information for the August 2006 interim rule that a
separate notice to obtain the consumer's authorization must be provided
each time a payee seeks to collect an insufficient funds fee for a
returned item. In particular, these commenters expressed concern that
this statement could be interpreted to require separate consumer
authorizations for each fee collected electronically even when the
consumer has agreed to preauthorized transfers for the underlying
transactions under Sec. 205.10(b). For example, a consumer authorizing
monthly debits under Sec. 205.10(b) may also agree to the electronic
collection of returned item fees in connection with those debits under
the terms of the same agreement. The Board did not intend to suggest
that Regulation E requires separate consumer authorizations for each
returned item fee collected electronically when the consumer has agreed
to preauthorized transfers for the underlying transactions. The Board
notes, however that, as is the case for all disclosures under
Regulation E, the notice regarding the person's intent to collect
returned item fees electronically must be clear and readily
understandable to the consumer. See Sec. 205.4(a). Moreover, if the
consumer later revokes his or her authorization under the agreement,
the payee must terminate all subsequent debits under that
authorization. See Sec. 205.10(c); comment 10(c)-2.
Disclosure of Returned Item Fees
The final rule also adopts the provision in the August 2006 interim
rule in Sec. 205.3(b)(3)(i) permitting the person collecting a fee for
a returned EFT or check to provide an explanation of how the fee is
determined if the amount of the fee may vary based on the amount of the
underlying transaction or other factors. The August 2006 interim rule
recognized that state laws governing the maximum fee that may be
collected for items returned unpaid are not uniform. For example, in
some states, the fee may vary based on the transaction amount or the
amount of time the obligation is outstanding. Thus, persons that intend
to collect the maximum amount permitted by state law may be unable to
disclose a specific dollar amount on a notice that would be given to
all consumers. For example, a payee at POS would be unable to post a
notice disclosing a specific fee amount if the fee will vary depending
on the amount of the underlying transaction.
Industry commenters generally supported the flexibility provided by
Sec. 205.3(b)(3)(i), but a few commenters asserted that the rule
continues to impose unnecessary burden on businesses operating in
multiple states. The commenters noted that even when the amount of the
fee is fixed under an applicable state law, payees would have to modify
their notice in each state. Moreover, the rule could potentially result
in lengthy explanations about how to calculate the fee which would not
necessarily enhance consumer understanding. A trade association of
finance and treasury professionals asserted that consumers would
receive adequate disclosure so long as they are provided a general
statement that the fee will not exceed the maximum amount permitted by
applicable state law. The Board believes, however, that merely
disclosing that a fee will be collected in an amount that is in
accordance with state law would not provide consumers with sufficient
detail about the fee because consumers are unlikely to be familiar with
the limits established under the state law governing the individual
transaction. The vagueness of such a disclosure would thus make it
difficult for consumers to later reconcile any debits to collect the
fee with information on their periodic statements. Accordingly, the
Board is adopting Sec. 205.3(b)(3)(i) as set forth in the August 2006
interim rule to require disclosure of the fee (or an explanation of how
that fee is determined where the fee amount may vary from transaction
to transaction). Thus, the rule would require for example, a merchant
or other payee that does business in two different states, one of which
allows a maximum returned item fee of $25, and the other allowing a
maximum fee of $35, to disclose the specific fee that would be
collected electronically in each state.
Comment 3(b)(3)-2 is adopted largely as proposed and provides an
example of
[[Page 69434]]
how the rule would apply when a person seeks to collect a returned item
fee electronically in connection with an ARC transaction. The comment
has been revised in the final rule to clarify that the term ``ARC
transaction'' may also cover situations where a consumer makes an in-
person payment for an invoice at the payee's physical location (e.g.,
when a consumer goes to a bank branch to make a loan payment at a
teller window) or leaves the payment in a dropbox, instead of mailing
the payment to the payee. These circumstances would thus not be subject
to the notice requirements for POS transactions under Sec.
205.3(b)(3)(ii).
To facilitate compliance, Model Clause A-8 of Appendix A in the
final rule includes model language that payees may use to disclose
their intent to collect a fee for an EFT or check returned unpaid
electronically and the amount of the fee. The model language is
modified from the wording used in the August 2006 interim rule to apply
to all types of returned item fees and to reflect that in some cases
the person collecting the fee may not be the merchant or other payee to
whom the consumer has provided payment. One commenter expressed concern
that state law may require the person collecting the fee to use
specific wording for such notices, which might be inconsistent with the
Board's model language. While use of the model language would provide a
safe harbor for persons seeking to collect returned item fees
electronically, the regulation does not mandate use of the model
language. Thus, a person may comply with the rule without using the
Board's model language so long as that person apprises the consumer
that the fee will be collected electronically and states the amount of
the fee (or how the fee is determined).
Notice Requirements--POS Transactions
Forms of Notice
Under the August 2006 interim rule, payees at POS must post notice
of their intent to electronically collect a fee for a returned EFT or
check (along with the amount of the fee) in a prominent and conspicuous
location, and a copy of the notice, or substantially similar notice,
must be provided to the consumer at the time of the transaction, such
as on the sales receipt. See Sec. 205.3(b)(3)(ii). If the amount of
the fee to be collected electronically can be determined at the time of
the transaction, the notice provided to the consumer must state the
specific amount of the fee. The final rule generally adopts the
approach set forth in the interim rule in Sec. 205.3(b)(3)(ii), but
allows a payee to mail a notice to a consumer's address as an
alternative to providing a consumer a retainable notice at the time of
the transaction.
One large retailer urged the Board to allow payees to choose a
single method for notifying consumers about the fee, either posting a
notice at POS or providing consumers with such notice via a receipt.
This retailer stated that the costs of providing both forms of notice
to consumers at POS would be a significant barrier to wider industry
adoption of ACH payment methods and, moreover, that the information
provided in the notices was irrelevant to the vast majority of
consumers who do not have checks returned. A vendor of check processing
services commented that some merchants do not convert checks received
at POS but may nevertheless collect fees electronically if an item is
returned unpaid. According to this commenter, merchants that do not
convert checks are unlikely to upgrade their registers to provide
consumers with receipts containing the required disclosures. As a
result, the commenter stated that the interim rule would prevent these
merchants from being able to collect such fees by means of an EFT, a
process that is considerably more efficient than other traditional
collection methods, such as processing a demand draft (or remotely
created check). This commenter suggested that the Board allow merchants
to send a notice to the consumer after the transaction occurs but
before any debit to the consumer's account to collect the insufficient
funds fee. Because a very high percentage of checks are paid when
presented, the commenter noted that the notice would thus only have to
be mailed to the small number of consumers for whom the notice would be
relevant, i.e., those who have their checks or other items returned.
The final rule adopts Sec. 205.3(b)(3)(ii) largely as set forth in
the interim rule with a minor change to the rule text to refer to the
person ``initiating an EFT'' to collect the insufficient funds fee for
consistency with the general rule in Sec. 205.3(b)(3)(i). In addition,
Sec. 205.3(b)(3)(ii) has been revised to allow a person collecting
returned item fees electronically to subsequently send a copy of the
posted notice (or a substantially similar notice) to consumers instead
of providing a notice at the time of the transaction. Persons
collecting the fee would still be required to post notice of their
intent to collect fees for returned items and a disclosure of the
amount of the fee (or a description of how that fee is determined). The
revised rule, however, permits persons that may not be able to provide
notices at the time of the transaction (for example, because they do
not have registers or terminals capable of printing receipts or of
providing the required notices) the flexibility to collect any
resulting returned item fees electronically. The flexibility provided
in the revised rule would also be available for persons who, for
operational or other reasons, choose not to provide notices at the time
of the transaction. The Board believes that the purpose served by the
notice given to the consumer, that is, to provide a source of
information about the fee that the consumer can refer to later (e.g.,
if necessary to reconcile with entries on a periodic statement), can
also be accomplished by permitting the payee to mail the notice at a
later time. This alternative has the added benefit of providing notice
only to those consumers for whom the notice is particularly relevant.
Persons electing to mail notices to a consumer's address must send the
notice as soon as reasonably practicable after the person initiates an
EFT to collect the fee from the consumer's account. Thus, given the
notice's intended purpose of providing the consumer information about
the debit, the final rule does not require the notice to be sent prior
to the initiation of the EFT to collect the fee. If, however, the
person does not provide a consumer with a notice at the time of the
transaction and is unable to mail a notice because, for example, the
consumer's check does not bear the consumer's address, the person would
violate the rule. Similarly, in a debit card transaction where the
consumer's address typically would not be collected, the person
collecting the returned item fee would violate the rule if it does not
provide the consumer a copy of the notice regarding the fee, or a
substantially similar notice, either at the time of the transaction or
in a subsequent mailing.
Comment 3(b)(3)-4 is added in the final rule to address the
situation where the merchant or other payee to whom the underlying
payment is made is not the same person that collects a returned item
fee electronically if the payment is returned. Because the obligation
to obtain the consumer's authorization for the EFT debit falls on the
person collecting the fee in this manner, comment 3(b)(3)-4 states that
the person initiating the EFT to the consumer's account to collect the
fee may provide the requisite notices under Sec. 205.3(b)(3) through a
third party, such as a merchant. For example, the person electronically
collecting a returned item
[[Page 69435]]
fee could have the merchant at POS post the required signage and
provide a retainable copy of the notice to the consumer on the person's
behalf.
Disclosure of Returned Item Fee for POS Transactions
Under Sec. 205.3(b)(3)(ii) of the August 2006 interim rule, if the
dollar amount of the fee can be calculated at the time of the
transaction, the copy of the notice (or substantially similar notice)
provided to the consumer at the time of the transaction must state that
dollar amount, rather than an explanation of how that fee is
determined. This provision is adopted generally as set forth in the
August 2006 interim rule. Persons that elect to send notices to a
consumer's address are required to state the amount of the fee being
collected at the time the notice is mailed. Comment 3(b)(3)-3
illustrates, by way of example, how a person would disclose the amount
of any fees assessed for a returned item in connection with a POS
transaction.
Industry commenters continued to raise concerns about the costs of
reprogramming terminals at POS to provide the amount of the fee on the
notice provided to the consumer at the time of the transaction and
urged the Board to delete the requirement. The Board believes the one-
year delayed compliance date, discussed below, should significantly
reduce the implementation costs and has retained the requirement to
disclose the fee on the retainable notice in the final rule. Moreover,
the alternative described above permitting the person collecting the
fee to send a notice by mail after the transaction should further
reduce the costs of compliance.
Delayed Compliance Date for Fee Disclosures Provided to Consumers at
POS Terminals
The Board provided a one-year delayed compliance date for the
requirement to disclose the amount of the fee on the notice given to
the consumer to minimize the expense associated with reprogramming
terminals by the January 1, 2007 compliance date. No commenters
objected to the delayed compliance date and it is adopted as proposed.
The delayed compliance date applies whether the retainable notice is
provided at the time of the transaction or subsequently sent to the
consumer.
One industry commenter also suggested extending the delayed
compliance date to other requirements of the August 2006 interim rule.
Given that payees will already have had approximately one year to
implement the other requirements, and because those requirements do not
present the same programming issues as the disclosure of the amount of
the fee on the notice given to consumers, the January 1, 2007
compliance date is retained. Accordingly, this delayed compliance
provision is limited solely to the disclosure on the retainable notice
given to the consumer regarding the amount of the returned item fee
that may be collected and does not apply to the requirement to disclose
the payee's intent to electronically collect the fee on that notice.
The delayed compliance date also does not apply to the requirement to
provide the amount of the fee, or an explanation of how the fee is
determined, on the posted notice.
V. Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA)
generally requires an agency to perform an assessment of the impact a
rule is expected to have on small entities. However, 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 that the rule will not have a significant economic
impact on a substantial number of small entities, and provides a
statement providing the factual basis for such certification. Based on
its analysis and for the reasons stated below, the Board certifies that
the 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 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 Act 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 Act],
to prevent circumvention or evasion [of the Act], or to facilitate
compliance [with the Act].'' 15 U.S.C. 1693b(c). The Act 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 act] are made applicable to such persons and services.'' 15 U.S.C.
1693b(d). The Board believes that the revisions to Regulation E
discussed below are within Congress's broad grant of authority to the
Board to adopt provisions that carry out the purposes of the statute.
The Board is revising Regulation E to clarify that a person that
intends to collect a fee for a returned EFT or check by means of an EFT
from a consumer's account must obtain the consumer's authorization.
Authorization is obtained when the person collecting the fee
electronically provides a written notice (or posts the notice in the
case of a POS transaction) of the intent to collect the fee
electronically, along with a disclosure of the dollar amount of the
fee, and the consumer goes forward with the underlying transaction
after receiving that notice. This requirement would allow consumers to
receive prior notice of a person's intent to electronically collect a
returned item fee and enable the Board to promote consistency in the
notice provided to consumers.
In response to industry requests for flexibility with respect to
the requirement to provide consumers with a copy of the notice posted
at POS informing them of the person's intent to electronically collect
a returned item fee, the final rule states that persons may provide a
notice that is substantially similar to the posted notice. A parallel
revision is made with respect to the electronic check conversion
requirements at POS. Accordingly, payees may provide consumers with a
notice that is substantially similar to the notice posted at POS
informing consumers that the payee may convert checks received as
payment to EFTs.
In addition, to address state laws that, for example, permit a fee
for returned items to be imposed based on a percentage of the
underlying transaction (rather than a flat fee regardless of the
transaction amount), the final rule permits persons collecting the fee
to disclose a description of how the fee will be determined in lieu of
an actual dollar amount. However, if the dollar amount of the fee can
be calculated at the time the notice is given to the consumer, this
amount must be stated on the version of the notice provided to the
consumer. In response to concerns about the costs of implementing
systems to provide a copy of the posted notice or substantially similar
notice to the consumer at the time of a POS transaction with the dollar
amount of the fee, or an explanation of how such
[[Page 69436]]
fee would be calculated if the fee may vary based on the underlying
transaction amount or other factors, the final rule permits persons to
send such notice to a consumer's address at a later time.
2. Issues raised by comments in response to the initial regulatory
flexibility analysis. In accordance with section 603(a) of the RFA, the
Board conducted an initial regulatory flexibility analysis in
connection with the September 2004 proposal (69 FR 55,996 (September
17, 2004)). In accordance with section 604(a) of the RFA, the Board
also conducted a final regulatory flexibility analysis in connection
with its January 2006 final rule (71 FR 1,638 (January 10, 2006)) and
with its August 2006 interim rule (71 FR 51,451 (August 30, 2006)). The
Board did not receive any comments on any of these regulatory
flexibility analyses specifically with respect to the disclosure of a
person's intent to electronically collect a returned item fee. However,
one commenter, a major provider of check processing services, in
response to the September 2004 proposal, noted that in general any
changes to the authorization language provided to consumers in
electronic check conversion transactions at POS locations would entail
re-programming of the terminals typically used to provide notices and
obtain the consumer's authorization. In response to the August 2006
interim rule, three commenters, including the same provider of check
processing services, asserted that it will be costly to reprogram POS
terminals to state the amount of the returned item fee that would be
collected electronically.
3. Small entities affected by the final rule. Persons that initiate
one-time EFTs from a consumer's account to electronically collect a fee
for items returned unpaid will be required under the regulation to
obtain the consumer's authorization for the transfer. The person that
initiates the EFT to debit the consumer's account for the fee must
provide written notice of the intent to collect the fees electronically
and disclose the dollar amount of the fee. For ARC transactions, notice
will likely be provided on a billing statement or invoice. At POS,
notice must be provided by posted signage, and a copy of the notice or
a substantially similar notice must be given to the consumer either at
the time of the transaction or sent at a later time.
The Board believes many small businesses that electronically
collect fees for returned items are currently providing written notices
regarding the intent to collect such fees electronically, either on
posted signage or on a transaction receipt at POS, and possibly both.
Similarly, the Board believes that payees are providing written notices
in ARC transactions because payment system rules currently require
written notices. Therefore, small entities affected by this final rule
are unlikely to have to craft entirely new notices as a result of this
rule. Although they will have to review, and likely revise, their
existing notices, including reprogramming the terminals used to
generate these notices, the Board does not expect that the burden
associated with these tasks will be significant. To further facilitate
compliance, the Board provided model language for the notice
requirement in this final rule. In addition, the final rule extends for
one year, the compliance date for the requirement to disclose the
dollar amount of the returned item fee on the retainable notice
provided to the consumer to allow additional time for any necessary
programming changes. For fees collected in connection with returned
items in a POS transaction, the final rule also permits the person
collecting the fee to mail a copy of the notice regarding electronic
collection of fees for returned items at a later time as an alternative
to providing a copy of such notice at the time of the underlying
transaction. Therefore, small entities that do not currently have
systems in place to provide the notice at the time of the transaction
need not invest in new systems at POS to comply with the rule.
4. Other federal rules. The Board has not identified any federal
rules that duplicate, overlap, or conflict with the final revisions to
Regulation E.
VI. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR 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 205.3(b)(3). 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 persons, such as merchants and other payees, that may collect a
returned item fee via an EFT from the consumer's account potentially
are affected by this collection of information, because these persons
will be required to obtain a consumer's authorization for the
electronic transfer under Sec. 205.3(b)(3).
Burden with respect to the requirement to provide notice to the
consumer for the purpose of obtaining the consumer's authorization for
the electronic collection of fees for returned items was previously
estimated in the January 2006 final rule (Docket No. R-1210 and R-
1234), and reported in accordance with those estimates in documents
filed with OMB. Under the Board's prior analysis, the total burden
under Regulation E, including but not limited to the burden of
obtaining a consumer's authorization to collect a returned item fee
electronically as a result of the January 2006 final rule as further
amended by this final rule, is 1,252,684 hours. The burden estimate
comprises the total paperwork burden for all persons subject to the
regulation and is not limited to the burden for the 1,289 respondents
regulated by the Federal Reserve that are required to comply with
Regulation E.
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.
Text of Final Revisions
Comments are numbered to comply with Federal Register publication
rules.
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 interim final rule
amending 12 CFR part 205 and the Official Staff Commentary which was
published at 71 FR 51451 on August 30, 2006, is adopted as a final rule
with the following changes:
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. In Sec. 205.3, paragraphs (a) and (b)(2)(ii) are republished, and
(b)(3) is revised as follows:
[[Page 69437]]
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) and (b)(3), 205.10(b), (d), and (e)
and 205.13, this part applies to any person.
(b) Electronic fund transfer. * * *
(2) Electronic fund transfer using information from a check. * * *
(ii) The person initiating an electronic fund transfer using the
consumer's check as a source of information for the transfer must
provide a notice that the transaction will or may be processed as an
electronic fund transfer, 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 underlying
transaction. For point-of-sale transfers, the notice must be posted in
a prominent and conspicuous location, and a copy thereof, or a
substantially similar notice, must be provided to the consumer at the
time of the transaction.
* * * * *
(3) Collection of returned item fees via electronic fund transfer.
(i) General. The person initiating an electronic fund transfer to
collect a fee for the return of an electronic fund transfer or a check
that is unpaid, including due to insufficient or uncollected funds in
the consumer's account, must obtain the consumer's authorization for
each transfer. A consumer authorizes a one-time electronic fund
transfer from his or her account to pay the fee for the returned item
or transfer if the person collecting the fee provides notice to the
consumer stating that the person may electronically collect the fee,
and the consumer goes forward with the underlying transaction. The
notice must state that the fee will be collected by means of an
electronic fund transfer from the consumer's account if the payment is
returned unpaid and must disclose the dollar amount of the fee. If the
fee may vary due to the amount of the transaction or due to other
factors, then, except as otherwise provided in paragraph (b)(3)(ii) of
this section, the person collecting the fee may disclose, in place of
the dollar amount of the fee, an explanation of how the fee will be
determined.
(ii) Point-of-sale transactions. If a fee for an electronic fund
transfer or check returned unpaid may be collected electronically in
connection with a point-of-sale transaction, the person initiating an
electronic fund transfer to collect the fee must post the notice
described in paragraph (b)(3)(i) of this section in a prominent and
conspicuous location. The person also must either provide the consumer
with a copy of the posted notice (or a substantially similar notice) at
the time of the transaction, or mail the copy (or a substantially
similar notice) to the consumer's address as soon as reasonably
practicable after the person initiates the electronic fund transfer to
collect the fee. If the amount of the fee may vary due to the amount of
the transaction or due to other factors, the posted notice may explain
how the fee will be determined, but the notice provided to the consumer
must state the dollar amount of the fee if the amount can be calculated
at the time the notice is provided or mailed to the consumer.
(iii) Delayed compliance date for fee disclosure. Through December
31, 2007, the notice required to be provided to consumers under
paragraph (b)(3)(ii) of this section in connection with a point-of-sale
transaction, whether given to the consumer at the time of the
transaction or subsequently mailed to the consumer, need not include
either the dollar amount of any fee collected electronically for a
check or electronic fund transfer returned unpaid or an explanation of
how the amount of the fee will be determined.
* * * * *
0
3. In Appendix A to Part 205, in Section A-8, the heading ``Model
Clause for Electronic Collection of Insufficient Funds Fees'' is
revised as ``Model Clause for Electronic Collection of Returned Item
Fees'', and the text of the paragraph is revised.
Appendix A to Part 205--Model Disclosure Clauses and Forms
* * * * *
A-8 MODEL CLAUSE FOR ELECTRONIC COLLECTION OF RETURNED ITEM FEES (Sec.
205.3(b)(3))
If your payment is returned unpaid, you authorize [us/ name of
person collecting the fee electronically] to make a one-time electronic
fund transfer from your account to collect a fee of [$----]. [If your
payment is returned unpaid, you authorize [us/ name of person
collecting the fee electronically] to make a one-time electronic fund
transfer from your account to collect a fee. The fee will be determined
[by]/ [as follows]: [----------------].]
0
4. In Supplement I to Part 205, under Section 205.3--Coverage, the
heading ``Paragraph 3(b)(3)--Collection of Insufficient Funds Fees via
Electronic Fund Transfer'' is revised as ``Paragraph 3(b)(3)--
Collection of Returned Item Fees via Electronic Fund Transfer'',
paragraphs 1. through 3. are revised, and paragraph 4. is added.
SUPPLEMENT I TO PART 205--OFFICIAL STAFF INTERPRETATIONS
* * * * *
Section 205.3--Coverage
* * * * *
3(b) Electronic Fund Transfer
* * * * *
Paragraph 3(b)(3)--Collection of Returned Item Fees via Electronic
Fund Transfer
1. Fees imposed by account-holding institution. The requirement to
obtain a consumer's authorization to collect a fee via EFT for the
return of an EFT or check unpaid applies only to the person that
intends to initiate an EFT to collect the returned item fee from the
consumer's account. The authorization requirement does not apply to any
fees assessed by the consumer's account-holding financial institution
when it returns the unpaid underlying EFT or check or pays the amount
of an overdraft.
2. Accounts receivable transactions. In an accounts receivable
(ARC) transaction where a consumer sends in a payment for amounts owed
(or makes an in-person payment at a biller's physical location, such as
when a consumer makes a loan payment at a bank branch or places a
payment in a dropbox), a person seeking to electronically collect a fee
for items returned unpaid must obtain the consumer's authorization to
collect the fee in this manner. A consumer authorizes a person to
electronically collect a returned item fee when the consumer receives
notice, typically on an invoice or statement, that the person may
collect the fee through an EFT to the consumer's account, and the
consumer goes forward with the underlying transaction by providing
payment. The notice must also state the dollar amount of the fee.
However, an explanation of how that fee will be determined may be
provided in place of the dollar amount of the fee if the fee may vary
due to the amount of the transaction or due to other factors, such as
the number of days the underlying transaction is left outstanding. For
example, if a state law permits a maximum fee of $30 or 10% of the
underlying transaction, whichever is greater, the person collecting the
fee may explain how the fee is determined,
[[Page 69438]]
rather than state a specific dollar amount for the fee.
3. Disclosure of dollar amount of fee for POS transactions. The
notice provided to the consumer in connection with a POS transaction
under Sec. 205.3(b)(3)(ii) must state the amount of the fee for a
returned item if the dollar amount of the fee can be calculated at the
time the notice is provided or mailed. For example, if notice is
provided to the consumer at the time of the transaction, if the
applicable state law sets a maximum fee that may be collected for a
returned item based on the amount of the underlying transaction (such
as where the amount of the fee is expressed as a percentage of the
underlying transaction), the person collecting the fee must state the
actual dollar amount of the fee on the notice provided to the consumer.
Alternatively, if the amount of the fee to be collected cannot be
calculated at the time of the transaction (for example, where the
amount of the fee will depend on the number of days a debt continues to
be owed), the person collecting the fee may provide a description of
how the fee will be determined on both the posted notice as well as on
the notice provided at the time of the transaction. However, if the
person collecting the fee elects to send the consumer notice after the
person has initiated an EFT to collect the fee, that notice must state
the amount of the fee to be collected.
4. Third party providing notice. The person initiating an EFT to a
consumer's account to electronically collect a fee for an item returned
unpaid may obtain the authorization and provide the notices required
under Sec. 205.3(b)(3) through third parties, such as merchants.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, November 27, 2006.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E6-20300 Filed 11-30-06; 8:45 am]
BILLING CODE 6210-01-P