I am sure we have all heard the saying, “The only real mistake is the one from which we learn nothing.” We should all take a moment to learn from the mistakes revealed in the recent USAA Federal Savings Bank $12 million fine for violating consumer protection laws.
The federally chartered institution was recently fined for violating the Electronic Fund Transfer Act and Regulation E. The Consumer Financial Protection Bureau (CFPB) alleged that USAA failed to honor stop payment requests for preauthorized payments, failed to properly resolve errors, and reopened accounts without prior authorization and notification to consumers.
Let’s take a moment to review a few provisions of Regulation E so we can better understand what went wrong.
The Electronic Fund Transfer Act (the “Act”) was passed by Congress in 1978 to establish the rights and liabilities of consumers, as well as the responsibilities of all parties involved in electronic fund transfer (EFT) activities.
The Act is very consumer friendly in that it does not allow financial institutions to place overly burdensome responsibilities on the consumer, such as requiring them to contact a merchant following an unauthorized transfer, provide written documentation prior to initiating an error investigation, or file a police report in instances of fraud.
Under the Act, when a consumer wishes to stop a payment on a preauthorized electronic debit, they must notify the financial institution three or more business days before the scheduled date of the transfer and provide enough information about the item to allow the financial institution to identify it. That seems pretty straightforward. Where it appears USAA fell short, was in its requirement, in some instances, for the consumer to contact the merchant who initiated the EFT prior to implementing the stop payment request.
Section 1005.11(b) states that all a consumer is required to do is provide the financial institution their name, account number and as much information as they have available to show why they believe an error exists. The institution may ask the consumer to assist in the investigation; but it cannot deny or delay a claim if the consumer refuses to comply.
In addition, the CFPB alleged that until January 2015, USAA lacked a systemwide mechanism to stop preauthorized EFTs processed via a debit card. It would be wise to ensure your system has the ability to stop a debit card preauthorized EFT when the debiting merchant has identified the item as recurring.
When reviewing Regulation E and error resolutions, Wipfli has seen many financial institutions delay or not honor error requests when the consumer is unable or unwilling to provide written documentation. This is not allowed under the regulation.
Commentary for 11(b)(1) states that while the financial institution may request a written statement from the consumer relating to the notice of error, it may not delay initiating or completing an investigation pending receipt of the statement. If your financial institution requires a written statement and does not receive it within 10 days, you may withhold the provisional credit of funds, but you may not delay initiating the investigation.
Now to clarify, this is in reference to errors that fall under Regulation E. If the dispute is not covered by Regulation E for reasons such as the consumer did not receive or is not happy with the merchandise purchased, you may require the consumer to comply with VISA/Master Card requirements regarding merchant contact prior to filing a chargeback. However, if the error falls under those outlined in Regulation E, you may not require these additional steps.
Finally, USAA was fined for reopening 16,980 previously closed accounts without obtaining the consumers’ authorization or providing the consumers timely notice when debits or credits to these accounts were received. When accounts were reopened to process debits, in some cases account balances became negative and potentially subject to fees, including fees for overdrafts or insufficient funds. Reopening accounts to process credits gave some creditors the opportunity to initiate debits to the account, also resulting in negative balances and applicable fees. About one third of the reopened accounts incurred fees. In addition, some of the debits that were processed involved items previously disputed or for which a stop payment had previously been requested. Once an account is closed, no transactions may be processed through the account except those that were originated before the account was closed.
As part of the settlement, which included restitution to consumers and a sizeable civil money penalty, USAA is required to comply with all related sections of the Electronic Fund Transfer Act and Regulation E. This includes, but is not limited to, granting stop payments to all consumers who contact the bank within three business days of the preauthorized electronic fund transfer; implementing these requests without requiring the consumer to first contact the merchant; honoring stop payment requests free of charge for a period of two years from the settlement; and conducting prompt, thorough and reasonable investigations of errors regardless of whether written authorization is provided. Apart from providing stop payments free of charge, these are all things your financial institution should be doing as well.
If you need help to better understand Regulation E or would like a review of your program, Wipfli is here to help.