Regulation E imposes special error-resolution rules for account aggregators and certain other service providers995 that issue access devices and offer electronic fund transfer services in connection with accounts at other financial institutions:
The Expedited Funds Availability Act, discussed in § 4.5.2, supra, sets out the rules governing when a consumer’s deposits by cash, check, or electronic funds transfer must be made available to the consumer.
If there is an error in a direct deposit—or other deposit made to a consumer’s account—that is, in theory, an error that the consumer may assert under the error resolution rules. The error resolution rules described in § 5.6, supra, include incorrect transfers “to” a consumer’s account.
The EFTA prohibits an employer or a government agency from requiring that a consumer receive payments by electronic transfer to an account at a particular institution. The EFTA rule is discussed in § 5.2.2.3, supra.
If an electronic fund transfer is presented against an account that does not have sufficient funds to cover the transfer, the financial institution may nonetheless honor the transfer but impose an overdraft fee. As with checks that would otherwise bounce, institutions may honor a payment despite insufficient funds when a preauthorized electronic payment is presented against an account (either through the ACH system or through a preauthorized debit card transaction) or when the consumer uses a debit or ATM card directly.
Regulation E requires financial institutions to provide a reasonable opportunity for the consumer to affirmatively consent, or opt-in election, before assessing an overdraft fee for ATM or one-time debit card transactions that overdraw an account.1040
The terms “ATM” and “debit card” are not defined by Regulation E, though they are in other laws.1041
Financial institutions are required to provide consumers with a notice in writing or electronically (if the consumer agrees to electronic disclosures) describing the institution’s overdraft program.1059 In assessing compliance with the notice requirements, courts may look beyond the letter of the account agreement if it is ambiguous or does not accurately describe the conditions under which an overdraft fee would be assessed.1060 No notice is required for institutions that have a policy of declining to pay any ATM or one-tim
To prevent coerced opt-ins, the rule requires that financial institutions provide a reasonable opportunity for the consumer to decide whether to affirmatively consent to coverage of ATM and one-time debit card overdrafts as a condition for the institution’s payment of other types of overdrafts—that is, overdrafts by check or ACH transaction.1081 The FRB’s research found that many consumers prefer to have their check and ACH overdrafts paid.1082 Thus, conditioning payment of those overdrafts o
Merchants, lenders, and other entities often charge returned item fees if a payment made by check or electronic fund transfer fails to clear for insufficient funds. These fees may be collected electronically.
Preauthorized electronic transfers are subject to special EFTA rules. Those rules, discussed in the sections that follow, impact the type of authorization needed, disclosures when the transfer is a variable amount, the right to stop payment, and the prohibition on creditors conditioning credit on the consumer giving consent to a preauthorized transfer.
Preauthorized transfers from a consumer’s account may be authorized only by a writing signed or similarly authenticated by the consumer.1103 The consumer must be given a copy of the authorization.1104
Authorization is valid if it is “readily identifiable as such and the terms of the preauthorized transfer are clear and readily understandable.”1105 NACHA rules use the same standard.1106
For recurring transfers authorized by telephone, NACHA rules require compliance with Regulation E authorization standards, but also specify minimum information that must be included as part of the authorization:
The Restore Online Shoppers’ Confidence Act (ROSCA) provides several protections to consumers in online transactions. ROSCA is generally discussed in another volume in this series.1159
The card networks may also have authorization requirements governing recurring payments. MasterCard adopted a rule that requires merchants to gain cardholder approval at the conclusion of a free trial before they start billing.1168 Merchants are required to send the cardholder—by email or text—the transaction amount, payment date, and merchant name, along with explicit instruction on how to cancel a trial.
When a preauthorized electronic fund transfer from the consumer’s account will vary in amount from the previous transfer under the same authorization or from the preauthorized amount, the designated payee or the financial institution must send the consumer written notice of the amount and date of the transfer at least ten days before the date the transfer is to take place.1169 Advance notice is not required if the amounts do not actually vary, even if the contract provides that the amounts may vary.1170
The EFTA gives consumers the right to stop payment of a preauthorized electronic fund transfer (EFT).1181 As discussed above, the definition of “preauthorized electronic fund transfer” requires the payment to be recurring.1182 Thus, the EFTA does not provide a right to stop payment of a one-time debit card transaction or other one-time EFT,1183 but it does require financial institutions to stop recurring debit card, ACH, and other EFT
The Restore Online Shoppers’ Confidence Act (ROSCA)1225 requires online transactions that elicit renewals through negative options to provide a simple mechanism for a consumer to stop recurring charges from being placed on the consumer’s credit card, debit card, bank account, or other financial account.1226 One court has granted the FTC a preliminary injunction in light of evidence that the defendants violated ROSCA where the mechanis
The ban on conditioning credit on payment by preauthorized electronic fund transfer applies to both financial institutions and other persons.1250 The statute, which generally imposes requirements on “financial institutions,” states that “[n]o person” may condition credit on electronic payment.1251 Regulation E says “[n]o financial institution or other person,”1252 and the Official Interpretations use the term “creditors,”1253 whereas both are typically careful
Traditionally, consumers taking out payday loans have visited a physical location to obtain a payday loan, leaving a post-dated check as security. However, brick and mortar payday lenders may obtain authorization for electronic payments, either as an initial repayment method or as a backup mechanism if a check bounces.1262 Loans taken out online or by telephone normally require or steer consumers to authorize electronic repayment, though sometimes with the option of a remotely created check or payment order.
Traditional short-term payday loans are single payment loans. Lenders claim that these loans fall outside the definition of “preauthorized electronic fund transfer,” which requires recurring transfers.1263 Thus, the lenders typically do not comply with the rules applicable to such transfers, including those governing written authorization, notice when a transfer will vary in amount, stop-payment orders, or the ban on conditioning credit on electronic repayment.
Even when EFTA preauthorized transfer rules do not apply to a payday loan, NACHA rules apply if the loan provides for an ACH payment.