What to know about erroneous transactions

Community banks can get up to speed on current legislation and regulations to both protect their customers from unauthorized or false deposit account transactions and to prevent them from happening in the future.

By Mary Thorson Wright

Mistakes, system glitches and fraud happen. Direct deposit or bill pay failures, transaction input errors or operating system malfunctions could show up on a consumer’s deposit account statement. Unauthorized transactions may also appear on the statement. What should a community bank do about erroneous, fraudulent or unauthorized transactions reported on a consumer’s deposit account?

Quick Stat

127 million

The number of Americans who have had a fraudulent transaction

Source: Security.org

Many transaction issues on deposit accounts are the result of electronic funds transfers that are erroneous or unauthorized. The primary resource for deposit account error resolution is Regulation E—the Electronic Funds Transfer Act (EFTA). It covers the basic rights, liabilities and responsibilities of consumers who use electronic fund transfer (EFT) services and of financial institutions or other persons that offer the services.

“Electronic fund transfer” means any transfer of funds initiated through an electronic terminal, telephone, computer or magnetic tape to order, instruct or authorize a financial institution to debit or credit a consumer’s account. The consumer could preauthorize it 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 customer’s check at the point of sale are typical EFTs. Funds usually come from a deposit account.

In support of a robust error resolution process, the bank should confirm its own internal practices through monitoring and audits, monitor those of third-party service providers and provide staff training.

The road to resolution

Section 1005.11 of Regulation E specifies the timing and steps banks must take to investigate and resolve EFT errors consumers allege. It is important for a community bank to create and implement detailed procedures on how to handle EFT error investigations. The procedures should include a description of errors that trigger the EFT error resolution process; how bank staff should conduct an investigation; and what bank staff should do upon completion of the investigation. In support of a robust error resolution process, the bank should confirm its own internal practices through monitoring and audits, monitor those of third-party service providers and provide staff training. The bank should maintain thorough documentation.

Other federal laws, regulations and rules may also dictate bank actions to resolve errors on consumer deposit accounts, including the following.

▪︎   Regulation CC. This implements the Expedited Funds Availability Act (EFAA) and the Check Clearing Act (Check 21). It requires financial institutions to make funds deposited into transaction accounts available consistent with specific time schedules and to disclose their funds availability policies to customers. It includes rules to facilitate collection and return of checks and electronic checks and describes requirements that affect banks that create or receive substitute checks, including requirements related to consumer disclosures and expedited recredit procedures. The regulation specifies availability schedules, exceptions, payment of interest and bank liability for noncompliance. It also states rules for expeditiously returning checks, the responsibilities of paying and returning banks and more guidance.

▪︎   Regulation DD—Truth in Savings Act (TISA). When consumer complaints about errors lead to deposit account disclosures, fees and the payment of interest, this regulation may apply. TISA requires banks to use uniform disclosures to aid comparison shopping by informing consumers about the fees, annual percentage yield, interest rate and other terms for deposit accounts. The regulation also includes requirements on the payment of interest, the methods of calculating the balance on which interest is paid, the calculation of the annual-percentage yield, the content of periodic statements and advertising.

UDAAP considerations

No discussion of bank compliance would be complete without mention of the Unfair, Deceptive or Abusive Acts or Practices (UDAAP) Act. UDAAP is the “shape shifter” of regulatory rules. While there are federal examination procedures for UDAAP, it broadly defines prohibited abusive acts or practices and does not conform to an objective checklist. So, while consumers may bring an issue to the bank’s attention that is not founded in a specific violation of consumer protection such as TISA or EFTA, any information that is misleading, inaccurate, inconsistent or omitted might be categorized as an unfair, deceptive or abusive act or practice as defined in UDAAP.

It is important to note that, in March 2021, the CFPB rescinded a policy statement that restrained the agency’s enforcement against “abusive” acts and practices. CFPB stated that UDAAP broadly defines four types of prohibited abusive acts or practices: materially interfering with someone’s ability to understand a product or service; taking unreasonable advantage of someone’s lack of understanding; someone who cannot protect themselves; or who reasonably relies on a company to act in their interests.

Additional sources may be needed to resolve reports of account errors, such as the Garnishment Rule issued by the Department of the Treasury, Social Security Administration, Department of Veterans Affairs, Railroad Retirement Board and the Office of Personnel Management; the Dodd-Frank remittance transfers rules; or CFPB rules to provide comprehensive consumer protections on prepaid accounts. State laws or banking rules may also come into play.

Mistakes and glitches happen. Fraud and unauthorized use happen. Community banks should arm themselves with solid procedures for an effective, efficient process to resolve deposit account issues quickly for the benefit of consumers and the bank.

Mary Thorson Wright is a writer in Virginia.