Reg E Cancelled Recurring Transactions

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Question:

June 15, 2011 titled Debit Cards - Error Resolution Problems Solved. In that training, there were slides on cancelled recurring transactions that stated that these types of transactions were not covered by Reg E. Could you please provide the reference in Reg E where it supports that a transaction that occurs after the recurring transaction is cancelled is not considered unauthorized and therefore not covered by the regulation.

Answer:

The example provided in the training is based on the staff interpretations to Section 1005.10(c) Preauthorized transfers - Customer's right to stop payment.

2. Revocation of authorization. Once a financial institution has been notified that the consumer's authorization is no longer valid, it must block all future payments for the particular debit transmitted by the designated payee-originator. But see comment 10(c)-3. The institution may not wait for the payee-originator to terminate the automatic debits. The institution may confirm that the consumer has informed the payee-originator of the revocation (for example, by requiring a copy of the consumer's revocation as written confirmation to be provided within 14 days of an oral notification). If the institution does not receive the required written confirmation within the 14-day period, it may honor subsequent debits to the account.

3. Alternative procedure for processing a stop-payment request. If an institution does not have the capability to block a preauthorized debit from being posted to the consumer's accountâ€”as in the case of a preauthorized debit made through a debit card network or other system, for exampleâ€”the institution may instead comply with the stop-payment requirements by using a third party to block the transfer(s), as long as the consumer's account is not debited for the payment.

When cancelling a recurring authorization, the bank is required to block the payment if the cardholder provides notice to the bank that they are terminating the merchant's authorization. If the bank allows a recurring transaction to post after it has been notified by the cardholder that such transactions are not authorized, the recurring payment would be considered a Reg E error.

However, in the example provided in the training, the customer claims to have notified the merchant directly that they were cancelling services, but did not notify the bank and could not provide proof that they had notified the merchant. Consequently, the bank was free to treat this as a "merchant dispute" to be resolved outside of the Reg E requirements.

In hindsight, it is better for me to say that a recurring payment dispute COULD be covered by Reg E if the bank permits a recurring charge to hit an account AFTER it has knowledge that the authorization has been revoked.

First published on BankersOnline.com 12/10/12