New Reg E Rules on Check Conversions, Payroll Cards By BOL Gurus Andy Zavoina and John Burnett
New Reg E Rules on Check Conversions, Payroll Cards
By BOL Gurus Andy Zavoina and John Burnett
As bankers across the country were ending the final business day of 2005, the Federal Reserve Board on December 30 sent out a New Year's "gift" as it announced final and interim final amendments to Regulation E. The changes address electronic check conversions (ECKs) and payroll cards. Both rules were published in the Federal Register on January 10, 2005. The final check conversion amendments will become effective February 9, 2006, with a mandatory compliance date of January 1, 2007. The interim rules affecting payroll cards have a delayed effective and mandatory compliance date of July 1, 2007.
As a general rule, Regulation E does not apply to a transaction that is done on paper. An electronic check conversion, or ECK, is an exception, however. It originates on paper but the check doesn't enter the traditional paper-check collection stream. Instead, the MICR-encoded information on the bottom of the check is used to initiate a one-time electronic transfer from the consumer's account.
Two types of payments are addressed by the ECK-related amendments. One takes place at the point of purchase (hence, its ACH "POP" label) where the consumer is at the merchant's place of business and writes a check for goods or services. The other is an account receivable conversion (ARC) where a consumer's check is mailed in for a payment. This is common in credit card and public utility payment processing.
Compliance Timeline
Final Rule Overview:
Electronic Check Conversion
Merchants who were not subject to Regulation E will be, albeit in a limited manner. They must obtain the consumer's authorization for the POP/ARC transaction. At point of purchase transactions, there must be a prominent and conspicuous notice posted and a written copy of the notice must be provided at the time of the transaction, such as on the receipt. For ARC transactions, the notice will typically be on a billing statement or invoice. The revisions include model language for the notices. NACHA rules already include a notice requirement; the written copy for POP transactions is new.
The disclosures are meant to answer questions and complaints often heard about these transactions. They will inform the consumer that an electronic transfer will occur, that the withdrawal may happen as soon as that same day for POS transactions, or when the payment is received for ARC transactions. They must also disclose that the check will not be returned to the consumer's financial institution.
A consumer's authorization will now be required to electronically collect a service fee connected with a POP/ARC transaction. If a nonsufficient funds fee, as an example, is charged by the merchant and collected by EFT, disclosure of the fee amount and the consumer's authorization are required.
It will not be the job of your financial institution to ensure that merchants post proper signage before processing your customer's transactions. Your work is expanded however, in the area of error resolution. Currently you may follow the "four walls" rule, which allows you to investigate only your own records when you have no agreement with the third party to conduct the EFT in question. This means you could review only the payment instruction and be done. The new rule requires you to also review any additional records you may have which would help resolve the dispute.
Use of audio recordings for authorizations
Current staff interpretations of ? 205.10 rules do not accept a tape recording of a consumer's authorization to conduct preauthorized transfers as a "signed or similarly authenticated" written authorization. Because this may conflict with the E-Sign rules, that interpretation has been withdrawn and audio recordings may be acceptable forms of authorization.
Surcharge notices at ATMs
Currently ATM operators must post a sign that a fee will be imposed for use of the ATM, even if the fee is not charged in all cases. Under the revised rule, the notice can now say a fee may be imposed, but only if it is not always charged.
The Final Rule was published January 10, 2006, at 71 Federal Register 1638.
Payroll Cards
The interim final rule tells us that a payroll card, established by an employer for a consumer, will be subject to Regulation E. The card's value represents income from salary, wages or other employee compensation and the balance increases on a recurring basis.
Bringing the cards under Regulation E's control imposes new statement requirements for payroll card accounts. Some innovation is permitted under the regulation, which allows for alternatives to paper. The financial institution may make balance information available via telephone, electronic means such as internet banking, or on paper, upon request. The content of these statements will be similar to what is currently required for consumer deposit accounts, including information about EFT fees.
The Interim Final Rule and Request for Public Comment were published January 10, 2006, at 71 Federal Register 1473.
Your Reg. E amendments checklist:
- Review the final rules and interim final rules in detail.
- Consider informing commercial customers about the changes to the Regulation and how it may now apply to them if they use check conversions or issue payroll cards. It may be an opportunity to gain new business and demonstrate your added value to these customers.
- Consider educating your consumer customers about the new rules and what to look for when they issue a check to a merchant or other business taking advantage of POP/ARC check conversions.
- If you operate ATMs and do not always charge a user fee, your "will" pay a fee notice should be changed to "may" pay a fee.
- Determine if the payroll card provisions will apply to you currently or in your long term plans. Separate accounting and statement information availability will need to be addressed. This may affect your product pricing.
The changes were first made public on September 17, 2004, when the Fed published proposed amendments to Regulation E, which implements the Electronic Fund Transfer Act. Those proposals were reviewed in a BankersOnline.com article, "Proposed Regulation E Amendments: Something for Everyone -- Or Not?". The final and interim rules were issued after review of the 120 comments that were received in response to the proposal.
First published on BankersOnline.com 01/04/06; updated 01/11/06
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