E6-20300. 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. 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 [phone] or [phone]. For users of Telecommunications Device for the Deaf (TDD) only, contact [phone].

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 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, § 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 § 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 § 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 § 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.

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 § 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 § 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 § 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 § 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 § 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 § 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 written notice on a billing statement or invoice. See 71 FR at 1,646; 71 FR at 51,453. As further discussed below in § 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 § 205.10(b). For example, a consumer authorizing monthly debits under § 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 § 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 § 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 § 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 § 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 § 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 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 § 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 § 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 § 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 § 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 § 205.3(b)(3)(i). In addition, § 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 § 205.3(b)(3) through a third party, such as a merchant. For example, the person electronically collecting a returned item 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 § 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 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 § 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

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)

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

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

2. In § 205.3, paragraphs (a) and (b)(2)(ii) are republished, and (b)(3) is revised as follows:

§ 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 §§ 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.

* * * * *

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 (§ 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]: [________].]

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, 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 § 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 § 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.

Footnotes

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.