Transaction compliance from E to Z


From smartphones to credit cards, modern consumers are making a wide variety of transactions, and each have their own regulatory requirements.

By Mary Thorson Wright

Plastic was just the beginning. Consumers now make purchases and transfer funds in what seems like innumerable ways. A community bank must recognize transactions covered by the Electronic Fund Transfers Act (EFTA), or Regulation E, and those covered by the Truth in Lending Act (TILA), or Regulation Z. How do these regulations compare for coverage, disclosure requirements, error resolution or billing errors? When does each apply?

Coverage

The EFTA covers basic rights, liabilities and responsibilities of consumers who use electronic fund transfer services, and of financial institutions or other persons that offer the services. Electronic fund transfer (EFT) means any transfer of funds initiated through an electronic terminal, a telephone, a computer or a magnetic tape to order, instruct or authorize a financial institution to debit or credit a consumer’s account. It could be preauthorized by the consumer to occur once or on a continuing basis. Debit card purchases and purchases for which the merchant scans the Magnetic Ink Character Recognition (MICR) on a consumer’s check at the point of sale are typical EFTs. Funds typically come from a deposit account.

Quick stat

111.1 billion

card payments were made by U.S. consumers in 2016 with a value of $5.98 trillion

Source: 2017 Federal Reserve Payments Study

When a consumer conducts an EFT, there may not be enough money in their deposit account and the transaction could be denied. If he or she has an overdraft line, or if the bank chooses to allow a draw on a line of credit, what began as a purchase covered by Regulation E could now be subject to overdraft line of credit rules under Regulation Z.

TILA promotes the informed use of consumer credit by requiring disclosures about terms and cost. Credit might be a single-extension, a closed-end loan or an open-end line of credit for which recurring transactions are expected. Funds for consumer credit transactions create a debt that the consumer must then repay, and may include fees and interest.

Initial disclosures

Disclosures under EFTA must be clear and readily understandable, in writing and in a form the consumer may keep, though the disclosures may be provided to the consumer in electronic form under certain circumstances. Initial disclosures are required at the time a consumer contracts for an EFT service or before the first EFT is made involving the consumer’s account.

TILA disclosures are specific to the type of credit and also must be clear, conspicuous and, generally, in a form the consumer can keep, but there are exceptions. Typically, closed-end credit disclosures must be made at or before loan closing, and initial open-end credit disclosures are required before the first transaction is made under the credit plan.

Subsequent disclosures

Disclosures made after the credit account is opened or after an EFT service is initiated commonly include periodic statement disclosures, receipts at ATMs and change-in-terms disclosures. Subsequent disclosure requirements are specific, and credit disclosures vary depending on the type of credit. Special rules apply to credit cards.

Resolving errors

Consumers have the right to dispute erroneous or unauthorized transactions. EFT offers a consumer the right to error resolution, and open-end consumer credit offers consumers a process to claim billing errors. While EFT error resolution and billing error resolution for consumer credit are similar, each requires a specific process and recordkeeping. TILA does not outline a formal process for disputing errors on closed-end credit accounts, but creditors have a responsibility to ensure accounts are accurate and function as disclosed. Failure to do so would likely violate contract provisions and the Unfair, Deceptive, or Abusive Acts or Practices Act (UDAAP). In April 2019, new amendments to EFTA and TILA become effective that modify rules for prepaid accounts.

If overpayments on a credit account create a credit balance, TILA requires corrective action. The guidance is provided for open-end and closed-end account credit balances.

Consumer liability

Generally, consumers have limited liability for unauthorized or erroneous transactions, whether they are EFTs or credit transactions. The EFTA stipulates a limit on consumers’ liability under federal law, and both EFTA and TILA require a specific process of consumers and financial institutions to limit liability and protect the bank. Credit card companies and some states also have limits on consumers’ liability, and they may be more protective.

For consumer credit cards, TILA sets a dollar ceiling and the procedures required of consumers to limit liability. For open-end credit that is not under a credit card account, TILA does not set a dollar limit for unauthorized or erroneous transactions. However, the consumer may have the right to withhold a disputed amount pending resolution.

For community banks, the keys are to know what you are dealing with and apply the right rules.

Plastic; transactions conducted via telephone, mobile phone or computer; point of sale; prepaid payment devices … the list expands exponentially with electronic and digital facilities. For community banks, the keys are to know what you are dealing with and apply the right rules.


Mary Thorson Wright, a former Federal Reserve managing examiner and compliance consultant, is a financial writer in Virginia.

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