Does Reg E cover anything about dropping off/releasing debit card pre-authorizations? If not, is there a different regulation that covers this? We've had an instance where the merchant had contacted us (the bank) and requested to drop off/release the pre-authorization that they have put through to one of our customer accounts? How are these requests supposed to be handled. Since the merchant put through the pre-auth, does the bank need to obtain authorization from the customer prior to releasing the pre-auth?

There is no such regulation. The merchant is allowed to cancel an authorization; however instead of calling you, they should call their acquirer. The acquirer can instruct them how to put through a reverse authorization.

As the issuer of the card, you are not prohibited from removing the authorization hold in any way, and since you've been contacted by the merchant, it would be in the best interest of your consumer and his available funds to do this.

Don't be concerned about consumer approval prior to taking any action. The merchant owns the transaction and they can reverse it if they choose. If the merchant attempts to later submit the transaction with that initial authorization, you have chargeback rights. Also, you (the FI) own the card and can do with it (and it's administrative tools like the authorization system) as you see fit so long as you meet Visa or MasterCard requirements. You're under no obligation to advise the customer and I'd even advise against proactively tell them because most consumers don't understand the pre-authorization protocols.