Regulation E error resolution misconceptions and common errors
- The 60-day rule does not automatically eliminate a consumer’s protections. Even when an error claim is reported more than 60 days after a statement is issued, financial institutions must still evaluate liability for unauthorized transactions under Regulation E Section 1005.6, rather than simply denying the claim.
- Consumer liability depends on the type of transaction and when the error is reported. Unauthorized transactions tied to lost or stolen access devices have specific liability limits, while many unauthorized EFTs that do not involve an access device may result in no consumer liability during the initial 60-day period.
- Many Regulation E violations stem from improper error resolution practices. Common mistakes include requiring written claims before starting an investigation, delaying investigations, holding claims open unnecessarily and requiring consumers to contact merchants before the institution begins its review.
Although the Electronic Fund Transfer Act and its implementing Regulation E were enacted in 1978 and have been amended only a handful of times over the past 48 years, compliance with the Act’s error resolution requirements continues to present challenges. Auditors and examiners still frequently identify violations related to these requirements.
Confusion over the 60-day period
One of the more common violations seen lately has been the practice of denying an error claim because it was submitted more than 60 days after the periodic statement was issued containing the transaction with the error. This violation appears to be the result of a passage in Regulation E, Section 1005.11, which states:
“A financial institution shall comply with the requirements of this section with respect to any oral or written notice of error from the consumer that is received by the institution no later than 60 days after the institution sends the periodic statement or provides the passbook documentation required by section 1005.9 on which the alleged error is first reflected.”
This sentence has caused a lot of confusion over the years. Many reading this sentence stop there, interpreting it to mean they do not need to investigate an error claim if it’s received more than 60 days after the date of the periodic statement with the error (late notice). Sending a letter denying an error claim because the consumer submitted the error claim late would violate liability requirements within section 1005.6 of Regulation E.
The key words to focus on in the bolded paragraph above are “the requirements of this section”. While you do not have to follow the provisions of section 1005.11 for a late error claim, which includes requirements for providing provisional credit, timing and communication requirements, you do have to follow the requirements of section 1005.6 of Regulation E, which limits the liability of consumers for unauthorized transactions.
The commentary to section 1005.11 states that an institution:
“… is not required to comply with the requirements of this section for any notice of error from the consumer that is received by the institution later than 60 days from the date on which the periodic statement first reflecting the error is sent. Where the consumer’s assertion of error involves an unauthorized EFT; however, the institution must comply with section 1005.6 before it may impose any liability on the consumer.”
Section 1005.6 covers the liability of the consumer for unauthorized EFT transactions and explains that while consumers may be liable for transactions occurring more than 60 days after the first periodic statement containing the error, consumers have limited liability for errors that occurred within the first 60 days.
Monetary liability limitations
For electronic funds transfer errors related to an access device, liability is limited to the lesser of $50 or the amount of the transaction for losses reported to the financial institution within two business days of the consumer learning their access device was lost or stolen. It’s $500 when reported after the first two business days but prior to the 61st day after the periodic statement containing the first error was sent. The consumer is liable for errors that occur beyond the 60-day period if the financial institution can show the errors would not have happened had the financial institution been notified.
For electronic funds transfer errors that are not related to an access device, the above two tiers of liability ($50 second business day/$500 after the second business day) do not apply. The consumer has no liability for errors occurring during the first 60 days following the receipt of the periodic statement with the error.
While this violation occurs frequently, root causes can vary. Written procedures may contain directions to deny claims received beyond 60 days from the statement date, or in some cases, it’s a misunderstanding of the regulation, resulting from ineffective training.
Other common Regulation E violations
Other common violations related to the Regulation E error resolution requirements include the following:
- Misunderstanding who is liable when a consumer is a victim of fraud. When a consumer is fraudulently induced into a transaction, the consumer is generally liable because they conducted the transaction themselves. Conversely, if a consumer is tricked into giving away information that allows the fraudster to access their account and conduct the transaction, the consumer is not liable. This is because the definition of an unauthorized electronic funds transfer states that it’s a transaction initiated by someone other than the consumer, without their authority and from which the consumer receives no benefit. Exceptions to this include consumers who initiate ATM transactions by force during a robbery.
- Requiring the consumer to provide the error claim in writing before investigating an error claim. Regulation E allows a financial institution to forego providing provisional credit if the consumer has not provided the error claim in writing. But it still requires the remaining provisions in section 1005.11 related to error resolution to be followed, including promptly investigating upon receipt of oral or written notice of an error claim. Many financial institutions confuse the requirements of other rules, such as ACH requirements, as being applied to Regulation E. Even if other rules require an affidavit or other written notice of error, Regulation E does not; therefore, error resolution requirements would still apply.
- Failing to promptly investigate an error claim or to provide the results to the consumer in a timely manner. Some financial institutions hold an error claim open for the full 45 days (90 days for point-of-sale) allowed by Regulation E. This would be a violation of Regulation E, which requires the investigation to begin promptly, make corrections within one business day and notification to consumers of the outcome of the investigation within 3 business days of concluding the investigation.
- Requiring the consumer to contact the merchant prior to conducting an investigation. Similar to the above, Regulation E requires the financial institution to promptly investigate an error claim and may not delay initiating or completing an investigation pending receipt of information from the consumer. While other rules, such as those from Mastercard or Visa, may require the consumer to first contact the merchant, Regulation E does not.
- Failing to consider an error related to a non-bank P2P transaction. If the transaction occurs through an account held by your financial institution belonging to a consumer, Regulation E error resolution requirements exist for the financial institution that holds the account; therefore, error resolution requirements under Regulation E are applicable.
How Wipfli can help
Even though Regulation E has been in place for decades, it can be confusing. At Wipfli, we have the knowledge and experience to help your organization navigate the requirements with confidence. Start a conversation.
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