United States

Regulation E error resolution and common pitfalls

AML AND COMPLIANCE NEWS  | 

We all know that Regulation E is designed to protect consumers from financial harm, but at times it can be difficult to determine the consumer’s role in the dispute. While it’s generally simple to resolve the complaint when a person’s debit card has been used halfway around the world despite the person clearly remaining in quarantine, it is more difficult when the disputes are not so straightforward. These situations can create issues related to staying in compliance with Regulation E Error Resolution requirements. For purposes of this article, we focus on the required investigation process without delving into the nuances of consumer liability limits.  

One common issue we see is a delay in starting an investigation, despite the sole requirement of verbal notification to the financial institution no later than 60 days after the periodic statement is sent, including information such as the customer number, account number and why the consumer thinks it is an error. Based on that that information, the institution must open an investigation. All too often, institutions will require a written statement or affidavit to begin the investigation—and per the regulation, you have already violated the statute if this is your approach. You may request a written statement or affidavit, but an investigation into the dispute 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 dispute and does not receive the written confirmation within 10 business days of the initial oral dispute. 

Another contributor to delays in dispute resolution is when Regulation E dispute processes are handled in different departments based on the nature or type of dispute. It’s common to see Regulation E dispute resolution processes in various departments such as ACH, Fraud, Deposit Operations, Electronic Banking and others. There are strict timelines for completing an investigation under Section 1005.11(c), and it is not uncommon for disputes to be held up at the branch level, or with another department, while they figure out which department to send it to or await additional information from the consumer. While this is ultimately up to the institution, based on our experience, various departments handling Regulation E disputes can create delays in the investigation process and lead to inconsistencies in how disputes are handled and communicated to consumers.

Conducting the dispute investigation can be challenging at times, and the onus for the investigation rests on the institution. It is extremely import to conduct a reasonable review of relevant information, including account histories and consumer statements. Once you have begun the investigation, do not hesitate to ask your customer for more information—however, they are under no obligation to provide this information, and you cannot deny a dispute based on such. For example, we still observe situations where consumers are told they must file police reports in fraud disputes. If the consumer does not file a police report, the institution still has a responsibility to conduct a thorough investigation.  

Distinguishing what is a Regulation E dispute versus a merchant transaction can be difficult at times, can potentially have a positive impact on your institution’s bottom line. Take, for example, a scenario where your customer verbally notifies you they were charged an incorrect amount by a car rental agency. You should immediately begin the investigation, as an incorrect charge is covered under Section 1005.11(a). If your customer will not provide much 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, such as payment for damages to a vehicle. A review of terms and conditions can turn a Regulation E dispute into a merchant dispute, which potentially relieves the institution of liability.

Common merchant disputes that do not fall under the Regulation E error definition include:

  • Issues involving quality of goods or defective/broken merchandise
  • Non-receipt of merchandise or receiving incorrect merchandise
  • Signing up for a “free trial” and larger charges later post as cancellation was not made within the appropriate timeframe
  • Services not rendered

Another consideration is the break-even point, which balances the cost of a full investigation against the amount of the dispute. In some cases, it’s beneficial to set a minimum flood limit for investigations and simply reimburse customers for disputed amounts below the limit. Though we look to protect our institutions from frivolous claims, at some level, institutions may be better off simply reimbursing the customer instead of spending the time and resources to review, investigate and process small-dollar items. If you’re considering implementing an investigation flood limit, careful analysis of the amount of small-dollar claims versus the time and resources required for a typical investigation should be performed to determine the appropriate flood limit for your institution.

One commonly misunderstood issue regarding Regulation E Error Resolution arises when a consumer notifies you of unauthorized transactions after 60 days from the date of the statement first reflecting the error. In these cases, an investigation is not required. However, there are limits on how much liability the consumer has for the disputed transaction(s). Often institutions want to deny these claims for late notice; however, the Regulation does not allow this. Instead, subject to liability limits the institution can impose, the consumer is entitled to reimbursement of unauthorized charges for those first 60 days. In these cases, the amount of consumer liability is nuanced based on various factors and circumstances. 

We also encounter a misapplication of the 60-day rule, wherein institutions count back 60 days from the date of the consumer’s notification of the error as opposed to counting forward 60 days from the date of the first statement with the disputed transaction(s) when calculating the amount of reimbursement to the consumer.   

Lastly, we frequently see issues with consumer correspondence. Notification to consumers (Section 1005.11 (d)) is critical in Regulation E, whether informing them of a provisional credit, a credit that has been reversed or one has been made final. First, written notice is only required if the investigation determines that no error, or an error different than the one reported, has occurred. However, it is common to provide written notice of provisional credit and final notice of the investigation results regardless of the outcome. Typically, providing the correspondence within the required timelines is not the issue; often, the issue is that the verbiage in the correspondence is inaccurate or does not provide appropriate information. For example, labeling a provisional credit as ‘final’ can jeopardize the institution’s ability to reclaim the credit in the event the investigation determines that no error has occurred. We also see situations, particularly when a claim is denied or a provisional credit is reversed, where institutions do not offer the consumer the option to review the evidence that was relied upon in making the decision, which is required. It is imperative to review your letters to verify that you are providing the consumer with accurate information in accordance with the Regulation.

So how can you avoid a misstatement while navigating the Regulation E environment? Training for all appropriate employees, coupled with robust investigation procedures and a solid monitoring program, is paramount for ensuring your institution conquers all aspects of Regulation E Error Resolution compliance.

Authors

John Bono
Manager


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