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To Err Is Human, to Forgive Is Not Standard Practice for Regulators

By Kristen Eustis, Compliance Specialist

We’ve all heard the saying, “The only real mistake is the one from which we learn nothing.” What can we learn from mistakes revealed in the recent $12 million fine USSA Federal Saving Bank received for violating consumer protection laws?

USAA was fined for violating the Electronic Fund Transfer Act and Regulation E. The Consumer Financial Protection Bureau alleged the bank failed to honor stop payment requests for preauthorized payments, failed to properly resolve errors and reopened accounts without prior authorization and notification to consumers.

The Electronic Fund Transfer Act was passed by Congress in 1978 to establish the rights and liabilities of consumers, as well as the responsibilities of all parties involved in electronic fund transfer activities. The Act is very consumer-friendly: it does not allow financial institutions to place overly burdensome responsibilities on consumers, such as requiring them to contact a merchant following an unauthorized transfer, provide written documentation prior to initiating an error investigation or file a police report in instances of fraud.

Under the Act, when a consumer wishes to stop payment on a preauthorized electronic debit, they must notify the financial institution three or more business days before the scheduled date of transfer and provide information that will allow the financial institution to identify the item. USAA fell short by, in some instances, requiring consumers to contact the merchants that initiated the EFT prior to implementation of the stop payment request.

Section 1005.11(b) states that a consumer must provide the financial institution with their name, account number and as much information as they have available to show why they believe an error exists. The institution may ask the consumer to assist in the investigation, but it cannot deny or delay a claim if the consumer refuses to comply.

Wipfli has seen many financial institutions delay or not honor error requests when the consumer is unable or unwilling to provide written documentation. This is not allowed under the regulation. Commentary for 11(b)(1) states that while the financial institution may request a written statement from the consumer relating to the notice of error, it may not delay initiating or completing an investigation pending receipt of the statement. If your financial institution requires a written statement and does not receive it within 10 days, it may withhold the provisional credit of funds, but it may not delay initiating the investigation.

To clarify, this is in reference to errors that fall under Regulation E. For disputes not covered by Regulation E, i.e., if the consumer did not receive or is not happy with the merchandise purchased, you may require the consumer to comply with VISA/Master Card requirements regarding merchant contact prior to filing a chargeback. If the error falls under Regulation E, you may not require these additional steps.

USAA was also fined for reopening 16,980 previously closed accounts without obtaining the consumers’ authorization or providing consumers timely notice when debits or credits to these accounts were received. In some cases, accounts were reopened to process debits resulting in negative balances and incurring fees. Reopening accounts to process credits gave creditors the opportunity to initiate debits to accounts, also causing negative balances and fee incursion. Moreover, some of the debits that were processed involved items previously disputed or for which a stop payment had been requested. Once an account is closed, no transactions may be processed through the account except those originated before the account was closed.

As part of the settlement, which includes restitution to consumers and a sizeable civil money penalty, USAA must comply with all related sections of the EFT Act and Regulation E, including granting stop payments to all consumers who contact the bank within three business days of the preauthorized electronic fund transfer; implementing requests without requiring the consumer to first contact the merchant; honoring stop payment requests free of charge for a period of two years from the settlement; and conducting prompt, thorough and reasonable investigations of errors regardless of whether written authorization is provided. Apart from providing stop payments free of charge, these are all things your financial institution should be doing as well.

If you need help to better understand Regulation E or would like a review of your program, Wipfli is here to help.

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