We have a customer that gave out the card and the pin - the individual used it for authorized purposes and unauthorized purposes. The customer is refusing to pay for the unauthorized usage. Are we obligated to credit the customer's account for the unauthorized usage.

No. Read section 205.2(m), the definition of "Unauthorized Electronic Funds Transfer." It states:

Unauthorized electronic fund transfer means an electronic fund transfer from a consumer’s account initiated by a person other than the consumer without actual authority to initiate the transfer and from which the consumer receives no benefit. The term does not include an electronic fund transfer initiated:

a) By a person who was furnished the access device to the consumer’s account by the consumer, unless the consumer has notified the financial institution that transfers by that person are no longer authorized;
b) With fraudulent intent by the consumer or any person acting in concert with the consumer; or
c) By the financial institution or its employee.

Since your customer gave the card and PIN to a friend, they are on the hook for all transfers by the friend up until the moment your customer notifies you that they are not authorized now. Sure they are unauthorized, but they don't meet the definition of Reg E and don't fall under the error resolution procedures.

This is optional, but you may want to paint a big "S" on your customers forehead. This stands for "stupid." Just an option.

Thank you David for your prompt response. Your expertise along with others is truely appreciated and so helpful. In fact this site is more responsive than the outside audit/compliance group we hired, and user friendly!

I agree with David. You do not owe the customer a credit for transactions prior to notification. You should cancel the card immediately if you have not already done so.

David is correct. You may refuse the claim and terminate card privileges since it was used irresponsibly and may be again.

However, while the bank is not obligated to pay, the branch manager or even senior management may not want the customer to be harmed because of “who the customer is” and then the manager, etc. makes the customer whole. Frustratingly, I have seen done.

The other option is to inform the customer that the Bank will file criminal charges against the user, and the customer may then be called as a witness in the trial.

People don't stop and think about the consequences of these actions. It's as if they think "Hey, I can claim it as unauthorized and let the Bank deal with it so it's not my problem." When they learn that their friend or family member may be arrested or be convicted of a crime, many times they will have a change of heart.

I don't recommend the last approach (stating you'll drag the user into court). That allows your customer to walk away from his carelessness in allowing the user to "borrow" the card. And it puts the bank in the position of having to spend money (court time, filing fees, etc.) to recover something it didn't have to give up.

Let the careless customer decide if he wants to drag the user into court. Of course, if the customer decides to try to drag the bank in (as some will, notwithstanding the definition of unauthorized EFT), you'll want to join the user to the suit as third party defendant.

And if you have a soft-hearted branch manager who decides to give the customer back the money anyhow, your management needs to deal with it. Either charge it to the manager's budget or include it in his/her performance review. Or chalk it up to customer relations, if that's what you're paying branch managers to do.

We have recently started taking a tougher stand with customers who claim unauthorized ATM usage. We now require the customer to report the unauthorized usage to the police and bring us a copy of the report. If there was extreme neglegence on the part of the customer, we are reluctant to refund them. We were running into situations were the customer was claiming unauthorized usage and not providing us with any suspect. I would estimate in over 75% of these situations it was a friend or family member. By requiring the police report it makes them think about who may have done this before they file any claim. I know that over half of the claims we see go away when we ask for the police report. If the transactions happen at our machine and we tell them that we have video often they drop the subject as well.

I am always amazed at the customer who has no idea who used their card - here's a hint, it's someone who had access to your card and knew your PIN! That should narrow it down for them, but often it doesn't.

I thought that you could not 'require' them to file a police report before requesting provisional credit.

Thomasj --

I think that your bank's practice will be suspect when reviewed by regulators, due to its chilling effect on customer's ability to exercise their rights under the EFTA.

We may not like the fact that the EFTA and Regulation E are so heavily stacked in favor of the consumer, but that's the hand we are dealt.

I strongly suggest that you reconsider playing hardball with E-customers, or risk getting gigged on your next exam. And don't forget the court of public opinion, perhaps the most important venue. "ABC Bank ignores consumers' rights" is not the headline I'd want spread across our local broadsheet! (And don't forget, perception is reality for the public.)

Since the bank is usually the one with the loss after we refund the 'unauthorized' withdrawals, we tell the customer how sorry we are that this happened, assure them that we'll refund the money to them, and that we'll do everything we can to find the perpetrator and bring them to justice. We tell them that we'll be filing the police report, researching security camera tapes, etc. to determine who is taking their money without their authorization. Produces the same back-peddling results without the bad customer service perception.

There are times, though, when we just have to take the loss and try to not dwell on the unfairness of it all!

I have no problem with getting the police involved but remember that that section 202.11(c) says you have 10 days from notice of error. Section 202.11(b) states that you must comply with any notice - either written or oral. If your customer tells you that they had an error and you tell them to go to the police, you had better start your investigation. If you don't get a police report until the 11th day, you have a violation.

Also, keep in mind the commentary to 205.11(c)#3:
Charges for error resolution. If a billing error occurred, whether as alleged or in a different amount or manner, the financial institution may not impose a charge related to any aspect of the error-resolution process (including charges for documentation or investigation). Since the act grants the consumer error-resolution rights, the institution should avoid any chilling effect on the good-faith assertion of errors that
might result if charges are assessed when no billing error has occurred.