This article has been updated and was originally published on December 09, 2020.
Regulation E protects consumers by establishing rights, responsibilities, and liabilities for consumers who use electronic and remittance funds transfers. It also provides consumers with a process to dispute unauthorized, incorrect, or fraudulent transactions. However, institutions often require refinements to internal processes to remain in compliance with Regulation E and meet customer expectations.
For purposes of this article, we will focus on the required investigation process for electronic funds transfers (EFT). An EFT is any transfer of funds initiated through an electronic terminal, telephone, computer, or magnetic tape to order, instruct, or authorize a financial institution to debit or credit a consumer's account. Accordingly, Regulation E applies to any person-to-person (P2P) or mobile payment transactions that meet the definition of EFTs, including debit cards, ACH, prepaid accounts, and other electronic transfers to or from a consumer account.
Ensuring timely investigations
We frequently see institutions delay starting an investigation or determine that an investigation is not required because the consumer doesn’t provide all the information the institution requests in connection with a disputed transaction. In order to dispute an ETF in an account, a consumer need only notify the financial institution (orally or in writing) of the error and include:
- The consumer’s name
- Account number
- A description of why the consumer believes there is an error
The institution can also ask the consumer for additional information, such as the amount and date of the disputed transaction. However, if the institution receives a notice that includes the bulleted items above, then the institution has sufficiently received a notice of error from the consumer. The regulation’s investigation and dispute resolution time limits begin when the institution receives a notice of error from a consumer.
All too often, institutions will require a written statement or affidavit to begin the investigation. If this is your approach, your procedures are out of compliance with Regulation E. You may request a written statement or affidavit, but an investigation into the error is required regardless of whether the consumer provides one. It’s important to note that the institution does not have to provide provisional credit if it requires a written confirmation of the notice of error and does not receive it within 10 business days of the initial oral notice.
Another contributor to delays in error resolution processes is when Regulation E errors are directed to different departments based on the nature or type of dispute. It is common to see Regulation E error resolution processes in various departments such as ACH, fraud, deposit operations, electronic banking, and others. Strict timelines are established for completing an investigation under section 1005.11(c), and investigations are commonly held up at the branch level or with another department while they figure out where to send the notice of error or whether to wait for additional information from the consumer. While this is ultimately up to the institution, based on our experience, various departments handling Regulation E errors can create delays in the investigation process and lead to inconsistencies in how errors are resolved and communicated to consumers.
Managing the review process
Conducting the error investigation can be challenging at times, and the onus for the investigation rests on the institution. A reasonable review of relevant information, including account histories and consumer statements, is extremely important. Once you have begun the investigation, do not hesitate to ask your customer for more details. However, they are under no obligation to provide this information, and you cannot deny a dispute because the consumer declined to provide additional requested information. For example, we often observe situations where consumers are told they must file police reports or sign a fraud affidavit for errors alleged to be fraudulent transactions. If the consumer does not provide the police report or fraud affidavit, the institution is still responsible for thoroughly investigating the reported error.
The financial marketplace has experienced an evolution in the types of EFTs available to consumers with the growth of person-to-person (P2P) payment services. These transactions are EFTs covered by the error resolution provisions of the regulation to protect consumers from liability for incorrect or fraudulent transactions. The Consumer Financial Protection Bureau (CFPB) issued additional guidance on Regulation E error resolution requirements related to P2P transactions through Frequently Asked Questions (FAQ). In the FAQ, the CFPB clearly established that consumers are protected from unauthorized ETFs if a fraudster steals the consumer’s account access or credentials or fraudulently induces a consumer into sharing account access information.
When conducting the error investigation, your institution should review all relevant information related to the transaction. Take, for example, a scenario where your customer verbally notifies you that they were incorrectly charged a monthly subscription fee after signing up for a “free trial” of a product or service. You should immediately begin an investigation and may ask the consumer to provide documentation from when they requested the free trial and any attempts they’ve made to cancel the subscription with the merchant.
If your customer does not provide the requested information (and remember, they are not required to), do not hesitate to reach out to the merchant involved. If possible, obtain copies of terms and conditions and receipts, as it is not uncommon for a consumer to agree (either knowingly or unknowingly) to additional charges in the merchant’s contractual terms and conditions. A review of terms and conditions can turn a Regulation E notice of error into a merchant dispute, which potentially relieves the institution of financial liability. However, prior transactions with the same merchant are not enough to deny disputed transactions the consumer reported were unauthorized or incorrect. We’ve seen several instances where customers disputed charges from popular retailers that they had previously purchased goods or services. Additional investigation into the facts of the consumer’s dispute is required.
