7/18/07

Karl Leslie Senior and Lead Attorney for Deposit, Wolters Kluwer Financial Services

Background

On July 5, 2007, the Federal Reserve Board published a final rule amending Regulation E. The final rule amends section 12 CFR 205.9; the section that entitles a consumer to a receipt for a terminal transfer. Under the final rule, a consumer is no longer entitled to a receipt for a transfer of $15 or less. The rule is effective August 6, 2007.

The intent of the rule is to create a legal framework for receipt-less, small-dollar, transactions. In particular, the Board acknowledges that the receipt requirement has been an obstacle to the industry's ability to respond to the shift in consumer preferences to pay by debit card instead of with cash. This is especially true in payment environments that exclusively handle small-dollar transactions where it would be either too expensive to install equipment capable of producing a receipt (e.g., vending machines and parking meters) or otherwise impractical (e.g., imagine the delays caused by printing a receipt at the gate of a mass transit system for each consumer debit card transaction).

The Impact to the Initial Disclosure

The final rule impacts the initial Reg E disclosure. This may have been an unforeseen consequence as the final rule does not provide any new model text and the supplementary information issued with the final rule is silent as to any impact on the initial disclosure. However, the current model text for section 205.9 states that a consumer can get a receipt for "any transfer" made at an ATM or point of sale terminal. Obviously, that statement is no longer true.

The Safe Harbor in the Current Model Text Might Have Vanished

Financial institutions should seriously consider amending the Terminal Transfer paragraph in their initial Reg E disclosure to inform the consumer that he/she may not get a receipt if the amount of the transfer is $15 or less. In fact, using the current model text may no longer provide a safe harbor. Under the Electronic Funds Transfer Act (EFTA), using model language only provides a safe harbor if it is "appropriate." However, since the model language says the consumer can get a receipt for "any transfer" at an ATM or point of sale terminal, an argument can very easily be made that the current model text is inaccurate, potentially deceptive, and no longer appropriate. In the past, the Federal Reserve has stated that financial institutions are free to adjust the model text as necessary to fit the situation. This appears to be one of those situations.

If You Say It, It Better Be True

Your disclosures are part of your contract. If you continue to use the current model language, you are telling consumers that they can get a receipt for any transaction.  Nothing good can come from a situation where you don't fulfill your responsibilities as described in your account documentation.  Failing a documented obligation may be a regulatory violation, breach of contract, or even an unfair or deceptive trade practice.  The bottom line is that financial institutions will have no control over whether a receipt will be made available on any given transaction. Given that reality, a financial institution does not want to be bound, contractually or otherwise, to provide a receipt for all transactions. The easy solution is to amend your initial Reg E disclosure to make sure that it accurately describes what will happen.

Providing a Change Notice: Good Customer Service...and More

Reg E does not require a change notice under these circumstance because none of the section 205.8 criteria (increased fees, increased liability, fewer types of transfers, or stricter dollar/frequency limitations) are present. However, the same concerns discussed above exist and a financial institution does not want to be contractually bound to provide a receipt to any consumer – whether they are a new or existing accountholder – when whether a receipt is actually made available is out of the financial institution's control. As a result, financial institutions would be well-advised to send a change notice to existing consumer accountholders.

Financial institutions should also keep customer service in mind. Many consumers rely on receipts for recording-keeping. These consumers will not like the changes brought about by this rule. The consumer's need for a receipt, whether real or perceived, was made readily apparent in the consumer comment letters that the Board received. The consumer comment letters overwhelmingly indicated a need/preference for receipts. By providing consumers with a change notice, financial institutions will not only be putting themselves in a better position from a contractual standpoint, but will also be helping to educate consumers about the change; and that could reduce the number of customer service inquiries.

State Law Considerations

Of interest, some states have laws that require a receipt to be provided (e.g., Colorado, Massachusetts and Michigan). Under EFTA, state laws that are more protective of the consumer are not altered or annulled by EFTA or Reg E. As a result, it appears that these states still have receipt requirements regardless of the dollar amount. This, however, should not affect a financial institution's decision to update its' disclosure text to inform the consumer that he/she may not get a receipt if the amount of the transfer is $15 or less. Just because one state requires a receipt doesn't mean a consumer won't use his or her card in a state without such a requirement.

The Effective Date

As mentioned, the rule is effective August 6, 2007. This creates some degree of urgency for financial institutions to act. However, the short effective date means it will be virtually impossible to update in time to meet the effective date. Financial institutions can take some comfort in the fact that few, if any, retailers will have receipt-less equipment installed by August 6th either.

Conclusion

The bottom line is that the legal framework for receipt-less, small dollar, transactions will be in place effective August 6, 2007. Financial institutions should act promptly and prudently to update their disclosures and send change notices but not panic about the short time between the rule and the effective date.