FINAL RULE--AMENDMENT TO REGULATION E.

The Board of Governors is amending 12 C.F.R. Part 205, its Official Staff Commentary to Regulation E, which implements the Electronic Fund Transfer Act. The commentary interprets the requirements of Regulation E to facilitate compliance by financial institutions that offer electronic fund transfer services to consumers. The final rule provides guidance on Regulation E coverage of electronic check conversion transactions and computer-initiated bill payments; authorization of recurring debits from a consumer's account; telephone-initiated transfer; and other issues.

Effective March 15, 2001, 12 C.F.R. Part 205 is amended as follows:

Part 205--Electronic Fund Transfers (Regualtion E)

1. The authority citation for Part 205 is revised to read as follows:

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

2. In Supplement I to Part 205, the following amendments are made:

a. Under Section 205.2-Definitions, under 2(a) Access Device, a new paragraph 2. is added;

b. Under Section 205.2-Definitions, under 2(h) Electronic Terminal, paragraph 2. is revised;

c. Under Section 205.2-Definitions, a new heading 2(k) Preauthorized Electronic Fund Transfer, and a new paragraph 1. are added;

d. Under Section 205.2-Definitions, under 2(m) Unauthorized Electronic Fund Transfer, a new paragraph 5. is added;

e. Under Section 205.3-Coverage, under 3(b) Electronic Fund Transfer, new paragraphs 1.v., 1.vi., and 3. are added;

f. Under Section 205.3-Coverage, under 3(c) Exclusions from Coverage, a new heading "Paragraph 3(c)(1)-Checks" is added;

g. Under Section 205.3-Coverage, under 3(c) Exclusions from Coverage, under newly added heading Paragraph 3(c)(1)-Checks, paragraphs 1. and 2. are added;

h. Under Section 205.3-Coverage, under 3(c) Exclusions from Coverage, under Paragraph 3(c)(6)Telephone-Initiated Transfers, paragraph 1. is revised and paragraph 2.v. is added;

i. Under Section 205.6-Liability Of Consumer For Unauthorized Transfers, under Paragraph 6(b)(1)-Timely Notice Given, new paragraph 3. is added;

j. Under Section 205. 7-Initial Disclosures, under 7(a) Timing of Disclosures, paragraph 2. is revised;

k. Under Section 205. 7-Initial Disclosures, under Paragraph 7(b)(10) Error Resolution, paragraph 2. is revised;

l. Under Section 205.8-Change-In-Terms Notice; Error Resolution Notice, under 8(b) Error Resolution Notice, a new paragraph 2. is added;

m. Under Section 205.9-Receipts At Electronic Terminals; Periodic Statements, under Paragraph 9(a)(5)Terminal Location, paragraph 1. is revised;

n. Under Section 205.9-Receipts At Electronic Terminals; Periodic Statements, under Paragraph 9(a)(5)(iv), paragraphs 1. and 2. are redesignated as paragraphs 3. and 4. under paragraph 9(a)(5) and republished;

o. Under Section 205.9-Receipts At Electronic Terminals; Periodic Statements, Paragraph 9(a)(5)(iv) is removed;

p. Under Section 205.9-Receipts At Electronic Terminals; Periodic Statements, under 9(b) Periodic Statements, paragraph 4. is revised;

q. Under Section 205.9-Receipts At Electronic Terminals; Periodic Statements, under 9(c) Exceptions to the Periodic Statement Requirements for Certain Accounts, a new heading, Paragraph 9(c)(1)-Preauthorized Transfers to Accounts is added and new paragraphs 1. and 2. are added to the newly designated heading;

r. Under Section 205.10-Preauthorized Transfers, under 10(b) Written Authorization for Preauthorized Transfers from Consumer's Account, paragraph 5. is revised, and new paragraph 7. is added;

s. Under Section 205.10-Preauthorized Transfers, under Paragraph 10(e)(2)-Employment or Government Benefit, paragraph 1. is revised;

t. Under Section 205.11-Procedures For Resolving Errors, under 11(a) Definition of Error, paragraph 2. is revised; and

u. Under Section 205.12-Relation To Other Laws, under 12(a) Relation to Truth in Lending, paragraph 1. is revised.

Supplement 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)-l(v).)

2(h) Electronic Terminal

2. POS terminals. A POS terminal that captures data electronically, for debiting or crediting to a consumer's asset account, is an electronic terminal for purposes of Regulation E even if no access device is used to initiate the transaction. (See section 205.9 for receipt requirements.)

2(k) Preauthorized Electronic Fund Transfer

1. Advance authorization. A "preauthorized electronic fund transfer" under Regulation E is one authorized by the consumer in advance of a transfer that will take place on a recurring basis, at substantially regular intervals, and will require no further action by the consumer to initiate the transfer. In a bill-payment system, for example, if the consumer authorizes a financial institution to make monthly payments to a payee by means of EFTs, and the payments take place without further action by the consumer, the payments are preauthorized EFTs. In contrast, if the consumer must take action each month to initiate a payment (such as by entering instructions on a touch-tone telephone or home computer), the payments are not preauthorized EFTs.

2(m) Unauthorized Electronic Fund Transfer

5. Reversal of direct deposits. The reversal of a direct deposit made in error is not an unauthorized EFT when it involves:

i. A credit made to the wrong consumer's account;

ii. A duplicate credit made to a consumer's account; or

iii. A credit in the wrong amount (for example, when the amount credited to the consumer's account differs from the amount in the transmittal instructions).

Section 205.3--Coverage

3(b) Electronic Fund Transfer

1. Fund transfers covered.

v. A transfer via ACH where a consumer has provided a check to enable the merchant or other payee to capture the routing, account, and serial numbers to initiate the transfer, whether the check is blank, partially completed, or fully completed and signed; whether the check is presented at POS or is mailed to a merchant or other payee or lockbox and later converted to an EFT; or whether the check is retained by the consumer, the merchant or other payee, or the payee's financial institution.

vi. A payment made by a bill payer under a bill-payment service available to a consumer via computer or other electronic means, unless the terms of the bill-payment service explicitly state that all payments, or all payments to a particular payee or payees, will be solely by check, draft, or similar paper instrument drawn on the consumer's account, and the payee or payees that will be paid in this manner are identified to the consumer.

3. Authorization of one-time EFT initiated using MICR encoding on a check. A consumer authorizes a one-time EFT (in providing a check to a merchant or other payee for the MICR encoding), where the consumer receives notice that the transaction will be processed as an EFT and completes the transaction. Examples of notice include, but are not limited to, signage at POS and written statements.

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 authorized by the consumer to be debited electronically from the consumer's account because the check was returned for insufficient funds. Authorization occurs where the consumer has received notice that a fee imposed for returned checks will be debited electronically from the consumer's account.

2. Check used to capture information for a one-time EFT. See comment 3(b)-1(v).

Paragraph 3(c)(6) Telephone-Initiated Transfers

1. Written plan or agreement. A transfer that the consumer initiates by telephone is covered by Regulation E if the transfer is made under a written plan or agreement between the consumer and the financial institution making the transfer. A written statement available to the public or to account holders that describes a service allowing a consumer to initiate transfers by telephone constitutes a plan--for example, a brochure, or material included with periodic statements. The following, however, do not by themselves constitute a written plan or agreement:

i. A hold-harmless agreement on a signature card that protects the institution if the consumer requests a transfer.

ii. A legend on a signature card, periodic statement, or passbook that limits the number of telephone-initiated transfers the consumer can make from a savings account because of reserve requirements under Regulation D (12 C.F.R. Part 204).

iii. An agreement permitting the consumer to approve by telephone the rollover of funds at the maturity of an instrument.

2. Examples of covered transfers.

v. The consumer initiates the transfer using a financial institution's audio-response or voice-response telephone system.

Section 205.6--Liability of Consumer for Unauthorized Transfers

6(b) Limitations on Amount of Liability

Paragraph 6(b)(1) Timely Notice Given

3. Two-business-day rule. The two-business-day period does not include the day the consumer learns of the loss or theft or any day that is not a business day. The rule is calculated based on two 24-hour periods, without regard to the financial institution's business hours or the time of day that the consumer learns of the loss or theft. For example, a consumer learns of the loss or theft at 6 p.m. on Friday. Assuming that Saturday is a business day and Sunday is not, the two-business-day period begins on Saturday and expires at 11:59 p.m. on Monday, not at the end of the financial institution's business day on Monday.

Section 205.7--Initial Disclosures

7(a) Timing of Disclosures

2. Lack of advance notice of a transfer. Where a consumer authorizes a third party to debit or credit the consumer's account, an account-holding institution that has not received advance notice of the transfer or transfers must provide the required disclosures as soon as reasonably possible after the first debit or credit is made, unless the institution has previously given the disclosures.

Paragraph 7(b)(10)-Error Resolution

2. Extended time-period for certain transactions. To take advantage of the longer time periods for resolving errors under section 205.11(c)(3) (for new accounts as defined in Regulation CC (12 C.F.R. Part 229), transfers initiated outside the United States, or transfers resulting from POS debit-card transactions), a financial institution must have disclosed these longer time periods. Similarly, an institution that relies on the exception from provisional crediting in section 205.11(c)(2) for accounts subject to Regulation T (12 C.F.R. Part 220) must have disclosed accordingly.

Section 205.8--Change-in-Terms Notice; Error Resolution Notice

8(b) Error Resolution Notice

2. Exception for new accounts. For new accounts, disclosure of the longer error resolution time periods under section 205.11(c)(3) is not required in the annual error resolution notice or in the notice that may be provided with each periodic statement as an alternative to the annual notice.

Section 205.9--Receipts at Electronic Terminals; Periodic Statements

9(a) Receipts at Electronic Terminals

Paragraph 9(a)(5)Terminal Location

1. Options for identifying terminal. The institution may provide either:

i. The city, state or foreign country, and the information in sections 205.9(a)(5)(i), (ii), or (iii), or

ii. A number or a code identifying the terminal. If the institution chooses the second option, the code or terminal number identifying the terminal where the transfer is initiated may be given as part of a transaction code.

3. Omission of state. The state may be omitted from the location information on the receipt if:

i. All the terminals owned or operated by the financial institution providing the statement (or by the system in which it participates) are located in that state, or

ii. All transfers occur at terminals located within 50 miles of the financial institution's main office.

4. Omission of city and state. The city and state may be omitted if all the terminals owned or operated by the financial institution providing the statement (or by the system in which it participates) are located in the same city.

9(b) Periodic Statements

4. Statement pickup. A financial institution may permit, but may not require, consumers to pick up their periodic statements at the financial institution.

9(c) Exceptions to the Periodic Statement Requirements for Certain Accounts

Paragraph 9(c)(1) Preauthorized Transfers to Accounts

1. Accounts that may be accessed only by preauthorized transfers to the account. The exception for "accounts that may be accessed only by preauthorized transfers to the account" includes accounts that can be accessed by means other than EFTs, such as checks. If, however, an account may be accessed by any EFT other than preauthorized credits to the account, such as preauthorized debits or ATM transactions, the account does not qualify for the exception.

2. Reversal of direct deposits. For direct-deposit-only accounts, a financial institution must send a periodic statement at least quarterly. A reversal of a direct deposit to correct an error does not trigger the monthly statement requirement when the error represented a credit to the wrong consumer's account, a duplicate credit, or a credit in the wrong amount. (See also comment 2(m)-5.)

Section 205.10--Preauthorized Transfers

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

5. Similarly authenticated. The similarly authenticated standard permits signed, written authorizations to be provided electronically. The writing and signature requirements of this section are satisfied by complying with the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. 7001 et seq., which defines electronic records and electronic signatures. Examples of electronic signatures include, but are not limited to, digital signatures and security codes. A security code need not originate with the account-holding institution. The authorization process should evidence the consumer's identity and assent to the authorization. The person that obtains the authorization must provide a copy of the terms of the authorization to the consumer either electronically or in paper form. Only the consumer may authorize the transfer and not, for example, a third-party merchant on behalf of 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. If the payee is unable to determine, at the time of the authorization, whether a credit or debit card number is involved, and later finds that the card used is a debit card, 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(e) Compulsory Use

Paragraph 10(e)(2) Employment or Government Benefit

1. Payroll. An employer (including a financial institution) may not require its employees to receive their salary by direct deposit to any particular institution. An employer may require direct deposit of salary by electronic means if employees are allowed to choose the institution that will receive the direct deposit. Alternatively, an employer may give employees the choice of having their salary deposited at a particular institution (designated by the employer) or receiving their salary by another means, such as by check or cash.

Section 205.11--Procedures for Resolving Errors

11(a) Definition of Error

2. Verifying an account debit or credit. If the consumer contacts the financial institution to ascertain whether a payment (for example, in a home-banking or bill-payment program) or any other type of EFT was debited to the account, or whether a deposit made via ATM, preauthorized transfer, or any other type of EFT was credited to the account, without asserting an error, the error resolution procedures do not apply.

Section 205.12--Relation to other Laws

12(a) Relation to Truth in Lending

1. Determining applicable regulation.

i. For transactions involving access devices that also function as credit cards, whether Regulation E or Regulation Z (12 C.F.R. Part 226) applies depends on the nature of the transaction. For example, if the transaction solely involves an extension of credit, and does not include a debit to a checking account (or other consumer asset account), the liability limitations and error resolution requirements of Regulation Z apply. If the transaction debits a checking account only (with no credit extended), the provisions of Regulation E apply. If the transaction debits a checking account but also draws on an overdraft line of credit attached to the account, Regulation E's liability limitations apply, in addition to sections 226.13(d) and (g) of Regulation Z (which apply because of the extension of credit associated with the overdraft feature on the checking account). If a consumer's access device is also a credit card and the device is used to make unauthorized withdrawals from a checking account, but also is used to obtain unauthorized cash advances directly from a line of credit that is separate from the checking account, both Regulation E and Regulation Z apply.

ii. The following examples illustrate these principles:

A. A consumer has a card that can be used either as a credit card or a debit card. When used as a debit card, the card draws on the consumer's checking account. When used as a credit card, the card draws only on a separate line of credit. If the card is stolen and used as a credit card to make purchases or to get cash advances at an ATM from the line of credit, the liability limits and error resolution provisions of Regulation Z apply; Regulation E does not apply.

B. In the same situation, if the card is stolen and is used as a debit card to make purchases or to get cash withdrawals at an ATM from the checking account, the liability limits and error resolution provisions of Regulation E apply; Regulation Z does not apply.

C. In the same situation, assume the card is stolen and used both as a debit card and as a credit card; for example, the thief makes some purchases using the card as a debit card, and other purchases using the card as a credit card. Here, the liability limits and error resolution provisions of Regulation E apply to the unauthorized transactions in which the card was used as a debit card, and the corresponding provisions of Regulation Z apply to the unauthorized transactions in which the card was used as a credit card.

D. Assume a somewhat different type of card, one that draws on the consumer's checking account and can also draw on an overdraft line of credit attached to the checking account. There is no separate line of credit, only the overdraft line, associated with the card. In this situation, if the card is stolen and used, the liability limits and the error resolution provisions of Regulation E apply. In addition, if the use of the card has resulted in accessing the overdraft line of credit, the error resolution provisions of section 226.13(d) and (g) of Regulation Z also apply, but not the other error resolution provisions of Regulation Z.