Electronic Fund Transfers, 1638-1664 [06-145]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 71, Number 6 (Tuesday, January 10, 2006)]
[Rules and Regulations]
[Pages 1638-1664]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-145]



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Part III





Federal Reserve System





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12 CFR Part 205



Electronic Fund Transfers; Final Rule

Federal Register / Vol. 71 , No. 6 / Tuesday, January 10, 2006 / 
Rules and Regulations

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FEDERAL RESERVE SYSTEM

12 CFR Part 205

[Regulation E; Docket Nos. R-1210 and R-1234]


Electronic Fund Transfers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule; official staff interpretation.

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SUMMARY: The Board is amending Regulation E, which implements the 
Electronic Fund Transfer Act, and the official staff commentary to the 
regulation codified in Supplement I to Part 205. The commentary 
interprets the requirements of Regulation E to facilitate compliance 
primarily by financial institutions that offer electronic fund transfer 
services to consumers.
    The revisions address the regulation's coverage of electronic check 
conversion services. Under the final rule, merchants and other payees 
that initiate electronic check conversion transactions must obtain a 
consumer's authorization for each transaction. In addition, commentary 
revisions address preauthorized transfers, error resolution, and other 
matters.

DATES: The final rule is effective February 9, 2006. The mandatory 
compliance date is January 1, 2007.

FOR FURTHER INFORMATION CONTACT: Ky Tran-Trong, Senior Attorney, or 
Daniel G. Lonergan, David A. Stein or John C. Wood, Counsels, Division 
of Consumer and Community Affairs, Board of Governors of the Federal 
Reserve System, Washington, DC 20551, at (202) 452-2412 or (202) 452-
3667. For users of Telecommunications Device for the Deaf (TDD) only, 
contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Statutory Background

    The Electronic Fund Transfer Act (EFTA or Act) (15 U.S.C. 1693 et 
seq.), enacted in 1978, provides a basic framework establishing the 
rights, liabilities, and responsibilities of participants in electronic 
fund transfer (EFT) systems. The EFTA is implemented by the Board's 
Regulation E (12 CFR part 205). Examples of types of transfers covered 
by the Act and regulation include transfers initiated through an 
automated teller machine (ATM), point-of-sale (POS) terminal, automated 
clearinghouse (ACH), telephone bill-payment plan, or remote banking 
service. The Act and regulation require disclosure of terms and 
conditions of an EFT service; documentation of EFTs by means of 
terminal receipts and periodic account activity statements; limitations 
on consumer liability for unauthorized transfers; procedures for error 
resolution; and certain rights related to preauthorized EFTs. Further, 
the Act and regulation also prescribe restrictions on the unsolicited 
issuance of ATM cards and other access devices.
    The official staff commentary (12 CFR part 205 (Supp. I)) is 
designed to facilitate compliance and provide protection from liability 
under Sections 915 and 916 of the EFTA for financial institutions and 
persons subject to the Act. 15 U.S.C. 1693m(d)(1). The commentary is 
updated periodically to address significant questions that arise.

II. Background and Overview of Comments Received

    On September 17, 2004, the Board published a notice of proposed 
rulemaking in the Federal Register (69 FR 55996) (September 2004 
proposal) to provide guidance regarding the rights, liabilities, and 
responsibilities of parties engaged in electronic check conversion 
(ECK) transactions and to provide rules governing the coverage under 
Regulation E of payroll card accounts. In addition, proposed commentary 
revisions provided guidance on preauthorized electronic transfers from 
a consumer's account, error resolution procedures, ATM disclosures, and 
other matters.
    The Board received nearly 120 comment letters on the September 2004 
proposal. Comments were received from a variety of industry commenters, 
including banks, thrifts, credit unions, payment card companies, 
payment processing companies, and industry trade associations. Comments 
were also received from consumer groups, the Department of the 
Treasury, the Federal Trade Commission and individual consumers. The 
following is a summary of significant proposed revisions to the 
regulation and the staff commentary, and the comments received.

Electronic Check Conversion

    The EFTA expressly provides that transactions originated by check, 
draft, or similar paper instrument are not governed by the Act. In an 
ECK transaction, a consumer provides a check to a payee and information 
from the check is used to initiate a one-time EFT from the consumer's 
account. Specifically, the payee electronically scans and captures the 
MICR-encoding on the check for the routing, account, and serial 
numbers, and enters the amount to be debited from the consumer's asset 
account.
    Under the staff commentary, electronic check conversion 
transactions are covered by the EFTA and Regulation E if the consumer 
authorizes the transaction as an EFT. Under existing commentary 
provisions, a consumer authorizes an EFT if the consumer receives 
notice that the transaction will be processed as an EFT and the 
consumer completes the transaction. See comment 3(b)-3. This standard 
applies whether the check conversion occurs at a point-of-sale (where a 
person goes to a merchant's physical location to obtain goods or 
services) or in an accounts receivable conversion (ARC) transaction 
where the consumer mails a fully completed and signed check to the 
payee that is converted to an EFT. Although merchants and other payees 
are in the best position to provide notice to a consumer for the 
purpose of obtaining the consumer's authorization for an ECK 
transaction, they are not currently covered by the commentary provision 
in Regulation E addressing ECK transactions.
    Over the past few years, several issues have arisen relating to ECK 
transactions in general, and ARC transactions in particular. Concerns 
have been raised about the uniformity and adequacy of some of the 
notices provided to consumers about ECK transactions. Some in the 
industry would like the flexibility to obtain a consumer's 
authorization to process a transaction either as an EFT or as a check. 
Board staff also has received inquiries from financial institutions and 
other industry participants concerning their obligations under 
Regulation E in connection with ECK services.
    The Board proposed to revise the regulation to require merchants 
and other payees that use information from a check to initiate a one-
time EFT from a consumer's account to provide notice to the consumer 
and obtain the consumer's authorization for each EFT. The Board 
specifically solicited comment on whether payees should be required to 
obtain a consumer's written, signed authorization when the transaction 
occurs at POS. To help consumers understand the nature of an ECK 
transaction, the Board also proposed to require payees in ECK 
transactions to disclose to consumers that when a check is converted, 
funds may be withdrawn from their accounts quickly, and that the check 
will not be returned by the consumer's financial institution.
    Industry commenters supported many of the proposed revisions 
addressing ECK transactions, including coverage

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under Regulation E of merchants and other payees for the limited 
purpose of providing notice to obtain consumer authorization for ECK 
transactions. Some industry commenters, however, raised concerns about 
requiring the authorization to be written and signed for POS 
transactions. They also raised concerns about providing consumers with 
disclosures explaining that funds may be withdrawn from the account 
quickly and that checks will not be returned to the consumer. 
Commenters asserted, for example, that a written, signed authorization 
requirement could stifle industry innovation, and that the additional 
information about ECK transactions would result in overly lengthy 
disclosures.
    Consumer groups also supported many of the proposed revisions 
addressing ECK transactions, including merchant coverage and the 
additional disclosure requirements. Consumer groups stated, however, 
that the Board should require a consumer's written, signed 
authorization for other debits that may occur in connection with the 
underlying ECK transaction, such as for debits to collect service fees 
when consumers have insufficient funds in their account to cover the 
underlying transaction, since consumers are unlikely to expect the 
additional debits to their accounts.

Error Resolution

    Section 205.11(c)(4) provides that a financial institution may 
satisfy its obligation to investigate an alleged error by reviewing its 
own records if the alleged error concerns a transfer to or from a third 
party and there is no agreement between the institution and the third 
party for the type of EFT involved. This rule is commonly referred to 
as the ``four walls'' rule. The Board proposed to revise the staff 
commentary to clarify that an institution would not satisfy its error 
resolution obligations solely by reviewing the payment instructions if, 
for example, there is additional information within the institution's 
own records that would assist in resolving the alleged error.
    Many industry commenters opposed the Board's proposed commentary 
revisions, expressing concern about the potential scope of information 
that might need to be reviewed under the proposed revisions to the four 
walls standard. Consumer groups favored the proposed comment, and urged 
the Board to revise the comment to state that an institution's review 
should consider records that could be helpful to resolving the 
consumer's claim, not just those records that were dispositive.

Preauthorized Transfers

    Section 205.10(b) requires that recurring electronic debits from a 
consumer's account be authorized ``only by a writing signed or 
similarly authenticated by the consumer.'' Existing commentary provides 
that a tape recording of a telephone conversation with a consumer who 
agrees to preauthorized debits does not constitute written 
authorization under Sec.  205.10(b). The Board proposed to withdraw the 
existing commentary to address industry concerns that the guidance may 
conflict with the Electronic Signatures in Global and National Commerce 
Act (E-Sign Act), 15 U.S.C. 7001 et seq. Many industry commenters, in 
particular those representing retailers, supported the proposed 
withdrawal, with some of these commenters asking the Board to 
explicitly state that a recorded conversation complies with the E-Sign 
Act. Other commenters, however, opposed the withdrawal of the guidance 
due to concern about potential abuses and the possible increase in 
unauthorized transfers that could result. Consumer groups did not 
comment on the proposed withdrawal.

ATM Disclosures

    Section 205.16 provides that an ATM operator that imposes a fee 
(``surcharge'') on a consumer for initiating an EFT or balance inquiry 
must post a sign at ATMs that a fee will be imposed for providing EFT 
services or for balance inquiries. The September 2004 proposal included 
proposed commentary revisions to provide ATM operators flexibility when 
disclosing these surcharges. In particular, the proposal clarified that 
ATM operators could disclose on ATM signage that a surcharge ``may'' be 
imposed if there are circumstances where the operator would not impose 
such a fee for use of its ATM. (Before a surcharge may be imposed by an 
ATM operator, the operator must provide a separate on-screen notice or 
a receipt informing the consumer that a fee will be charged and the 
amount of the fee, and the consumer must elect to continue the 
transaction.) In August 2005, the Board withdrew the proposed 
commentary revisions and issued a new proposal to incorporate this 
clarification into both the regulation and the commentary. See 70 FR 
49891 (Aug. 25, 2005) (August 2005 proposal). The Board received 
approximately 25 comments on the August 2005 proposal from a variety of 
industry commenters, including banks, credit unions and trade 
associations. Industry commenters strongly supported the revised 
proposal stating that it would provide institutions with flexibility to 
provide more accurate disclosures and reduce consumer confusion. 
Consumer groups and one consumer rights advocate, however, asserted 
that the revised proposal would not ensure that consumers who are 
charged a fee will receive adequate notice on ATM signage.

Payroll Cards

    The September 2004 proposal also included rules governing the 
coverage under Regulation E of payroll card accounts that are 
established either directly or indirectly by an employer on behalf of a 
consumer for the purpose of providing salary, wages, or other employee 
compensation on a recurring basis. An interim final rule is being 
published separately in this Federal Register to address payroll card 
accounts.

III. Overview of the Final Rule

    The Board is adopting final revisions to Regulation E and the staff 
commentary largely as proposed. However, several clarifications and 
modifications to the proposal have been made to respond to commenters' 
concerns. The following is a summary of significant revisions to the 
regulation and the staff commentary. All of the revisions are discussed 
in detail below in the section-by-section analysis. The rule is 
effective February 9, 2006. The mandatory compliance date for the final 
rule is January 1, 2007.

Electronic Check Conversion

    Merchant coverage. The final rule provides that merchants and other 
payees that use information from a check to initiate a one-time EFT 
from a consumer's account are subject to the regulation solely for the 
limited purpose of obtaining a consumer's authorization for the one-
time transfer. Generally, authorization is obtained when the payee 
provides a notice to the consumer that a check received as payment will 
be converted to an EFT, and the consumer goes forward with the 
transaction. At POS, the notice must be posted in a prominent and 
conspicuous location, and a copy of the notice must be provided to the 
consumer at the time of the transaction, such as on a receipt. For ARC 
transactions, the notice will typically be provided on a billing 
statement or invoice. Model clauses are provided to try to minimize the 
risk that merchants and other payees will be subject to private 
actions.
    Alternative authorization. As proposed, the final rule recognizes 
that payees may obtain a consumer's authorization to use information 
from

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the consumer's check to initiate an EFT, or, alternatively, to process 
the transaction as a check.
    Additional disclosures about ECK transactions. To help consumers 
understand the nature of ECK transactions, the final rule provides that 
persons initiating an ECK transaction, whether at POS or in an ARC 
transaction, must disclose to the consumer that when a check provided 
as payment is used to initiate an EFT, funds may be withdrawn from the 
consumer's account as soon as the same day payment is made (for POS 
transactions) or received (for ARC transactions). Payees must also 
disclose, as applicable, that the consumer's check will not be returned 
by the consumer's financial institution. Under the final rule, for POS 
transactions, payees may provide these additional disclosures on a 
sign. The requirement to provide these disclosures sunsets three years 
from the mandatory compliance date of this final rule.

Collection of Service Fees Via EFT

    The final rule, as proposed, provides that payees that choose to 
collect a service fee via an EFT due to insufficient or uncollected 
funds in a consumer's account in connection with the underlying 
transaction must obtain the consumer's authorization to collect the 
fee. Authorization is obtained when a payee provides notice to the 
consumer stating that the fee will be collected via an EFT and the 
consumer goes forward with the transaction. Payees also are required to 
disclose the amount of the fee on the notice.

Error Resolution

    The final rule provides that a financial institution does not 
satisfy its error resolution responsibilities under the ``four walls'' 
rule by solely reviewing the payment instructions; an institution must 
review any additional information within the institution's own records 
pertaining to the particular account in question that would assist in 
resolving the alleged error.

Preauthorized Transactions

    The final rule, as proposed, withdraws the existing commentary 
stating that a tape recording of a telephone conversation with a 
consumer who agrees to preauthorized debits does not constitute written 
authorization under the regulation.

Disclosures at Automated Teller Machines

    The final rule, as proposed in the August 2005 proposal, revises 
the regulation to permit ATM operators to alternatively provide notice 
on ATM signage that a surcharge may be imposed (in place of a 
disclosure that a surcharge will be imposed) if there are circumstances 
in which an ATM fee may not be charged.

Effective Date of Rule

    The effective date of the final rule is February 9, 2006. While 
institutions may, if they choose, begin complying with the new 
requirements on February 9, 2006, compliance with this final rule is 
not mandatory until January 1, 2007. The additional time should give 
persons affected by this final rule adequate time to implement the new 
requirements, including developing the new required notices for ECK 
transactions.

IV. Section-by-Section Analysis

Section 205.3 Coverage

3(a) General
    Section 205.3(a) is revised to provide that Sec.  205.3(b)(2), 
discussed below, applies to any person.
3(b) Electronic Fund Transfer
    The term ``electronic fund transfer'' is defined in Sec.  
205.3(b)(1) as ``any transfer of funds that is initiated through an 
electronic terminal, telephone, computer, or magnetic tape for the 
purpose of ordering, instructing, or authorizing a financial 
institution to debit or credit an account.'' The term includes POS 
transfers, ATM transfers, direct deposits or withdrawals of funds, 
telephone transfers and debit card transactions. The final rule 
includes language in the existing regulation that was inadvertently 
omitted in the September 2004 proposal. Comments 3(b)-1 and 3(b)-2 are 
redesignated as comments 3(b)(1)-1 and 3(b)(1)-2, and conforming 
changes are made to comments 2(a)-2 and 3(c)(1)-2.

Electronic Check Conversion

    The EFTA excludes from the definition of ``electronic fund 
transfer'' any transaction ``originated by check, draft, or similar 
paper instrument.'' 15 U.S.C. 1693a; see also Sec.  205.3(c)(1). In ECK 
transactions, a consumer provides a check to a merchant or other payee 
to use as a source of information to initiate an EFT from the 
consumer's account as payment for the purchase of goods or services, 
and not to initiate a payment by check. The payee electronically 
captures the routing, account, and serial numbers from the check and 
initiates a one-time EFT from the consumer's account. The Board 
proposed to amend Sec.  205.3(b)(2) of Regulation E and comment 
3(b)(2)-1 to clarify that ECK transactions are covered by Regulation E 
and deemed not to originate by check. Substantially similar guidance 
previously had been provided in the commentary to Regulation E. The few 
commenters addressing the issue agreed that the guidance regarding the 
status of ECK transactions under Regulation E is more appropriately 
placed in the regulation. Accordingly, the proposal has been adopted in 
Sec.  205.3(b)(2)(i) with minor revisions. Section 205.3(b)(2)(i) 
further provides that a consumer must authorize an ECK transaction 
(discussed below).
    One industry commenter expressed concern that the proposed 
regulatory language was too broad in stating that a transaction is 
covered by Regulation E where a check is ``used as a source of 
information to initiate a one-time EFT.'' According to the commenter, 
some may interpret the language to include transactions arising from 
electronic check presentment or image exchange. The Board agrees; Sec.  
205.3(b)(2)(i) is intended to apply only when a payee uses a check as a 
source of information to initiate an EFT from the consumer's account. 
New comment 3(b)(1)-2.iv clarifies that transactions arising from the 
electronic collection, presentment, or return of checks through the 
check collection system, such as through the transmission of electronic 
check images, are not EFTs covered by Regulation E.
    A few commenters asked the Board to clarify that the rules applying 
to ECK transactions were not intended to apply to Internet- or 
telephone-initiated transactions (where a consumer provides 
information--including the MICR-encoding--from his or her check to pay 
for a purchase via these payment channels). While Internet- and 
telephone-initiated transactions are covered by Regulation E because 
they result in electronic transfers from the consumer's account, the 
rules for ECK transactions do not apply to these transactions.
    Coverage of merchants and other payees. Currently, a merchant or 
other payee that engages in ECK transactions is not covered by 
Regulation E because it does not meet the definition of ``financial 
institution.'' Under Sec.  205.2(i) the term ``financial institution'' 
means a ``bank, savings association, credit union, or any other person 
that directly or indirectly holds an account belonging to a consumer, 
or that issues an access device and agrees with a consumer to provide 
electronic fund transfer services.'' The Board has previously 
acknowledged that a merchant or other payee is in the best position to 
provide notice to a consumer for the purpose of obtaining authorization 
of an ECK transaction. See 66 FR 15187, 15189-90

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(March 16, 2001). The Board has not covered merchants and other payees 
previously under the regulation because it expected that these persons 
would provide consumers with the necessary notice. In response to 
concerns about the uniformity and adequacy of some of the notices 
provided to consumers about ECK transactions, the Board proposed to 
exercise its authority under Sections 904(c) and 904(d)(1) of the EFTA 
to require merchants and other payees that initiate a one-time EFT 
using information from the consumer's check, draft or similar paper 
instrument, to provide notice to obtain a consumer's authorization for 
the transfer. The final rule is adopted, as proposed. Coverage of 
merchants and other payees under the final rule is solely for the 
limited purpose of obtaining consumer authorizations for ECK 
transactions. A financial institution will be subject to the 
requirement to obtain consumer authorization for the transaction to the 
extent that the institution initiates an EFT using information from a 
consumer's check (e.g., if the institution converts checks provided as 
a payment for a mortgage loan).
    Most commenters supported the proposed revision in Sec.  
205.3(b)(2)(ii) because they believe the merchant is in the best 
position to provide the notice. According to one commenter, the 
consumer's financial institution has no control over a consumer 
receiving proper notice for purposes of authorization. A few commenters 
noted the importance of covering merchants and other payees for 
enforcement purposes. Several commenters also noted that requiring 
merchants and other payees to adhere to minimum authorization and 
related notice provisions will better inform consumers on a consistent 
basis about ECK transactions. Moreover, according to these commenters, 
the authorization requirement would not pose new or significant 
compliance burdens since payment system rules currently impose an 
authorization requirement on merchants and other payees. While 
supporting the proposed requirement, a few commenters requested 
clarification that merchants and other payees would be covered solely 
for the limited purpose of the authorization requirement for ECK 
transactions.
    Some industry commenters opposed the proposed requirement. A few 
commenters believed merchants and other payees should not be required 
to assume the liability risks that may be associated with ECK 
transactions. A few commenters requested clarification of the FTC's 
enforcement authority for merchants and other payees not regulated by 
federal banking agencies. A few commenters believed the requirement is 
an unnecessary duplication of payment system rules.
    The Board believes coverage of merchants and other payees in Sec.  
205.3(b)(2)(ii) for the limited purpose of providing a notice to obtain 
consumer authorization for ECK transactions is appropriate to ensure 
consumers understand that checks will be processed as EFTs. Without 
such a notice requirement, different information may be given by 
merchants to consumers, or information may be given solely by signage 
or other forms that may not be easily discernable by consumers. In 
addition, coverage of merchants and other payees for the limited 
purpose of obtaining consumer authorization for ECK transactions will 
provide a mechanism to ensure that consumers, in fact, receive 
appropriate notice of check conversion. For those entities subject to 
FTC enforcement, the FTC would have enforcement authority pursuant to 
Section 917(c) of the EFTA and under the Federal Trade Commission Act. 
Merchant coverage would also enable the Board to provide model clauses 
that will aid consumer understanding of ECK transactions. The model 
clauses provide a safe harbor from liability, thereby reducing 
liability risks. See Sec.  205.3(b)(2)(iv).
    General authorization requirements. As previously noted, revised 
Sec.  205.3(b)(2)(i) provides that a consumer must authorize an ECK 
transaction. The current commentary states that a consumer authorizes 
an ECK transaction when the consumer receives notice that the 
transaction will be processed as an EFT and completes the transaction. 
See comment 3(b)-3. This guidance, originally proposed to be placed in 
comment 3(b)(2)-1, is moved to Sec.  205.3(b)(2)(ii) of the final rule. 
The phrase ``completes the transaction'' is replaced with ``goes 
forward with the transaction'' to clarify that it is not necessary for 
a transaction to clear or settle in order for authorization to occur. 
In addition, under the final rule, for POS transactions, a notice must 
be posted in a prominent and conspicuous location, and a copy of the 
notice must be provided to the consumer at the time of the transaction, 
such as on a receipt.
    In the proposal, the Board stated that at POS, a written, signed 
authorization may be a more effective means than posted signage for 
informing consumers that their checks are being converted. The Board 
did not propose to require merchants or other payees to obtain the 
consumer's signed authorization to convert checks received at POS, but 
specifically solicited comment on whether this should be required. The 
final rule does not require a merchant or other payee to obtain the 
consumer's signed authorization for an ECK transaction.
    Some commenters supported a signed authorization requirement for 
POS transactions. Several of these commenters stated the requirement 
would be beneficial for enforcement purposes to ensure that consumer 
authorization is, in fact, obtained by a payee. A few commenters stated 
that the Regulation E rule should be consistent with the rules 
established by NACHA--the Electronic Payments Association (NACHA 
rule(s))--which requires a consumer's written, signed authorization. 
One such commenter stated making the rules consistent would address 
consumer confusion issues. Another commenter stated that the current 
difference between the NACHA rule and Regulation E creates the 
potential for monetary penalties imposed by NACHA if the payee follows 
the Regulation E notice rule and does not also comply with NACHA's 
signed authorization rule. A few commenters noted that there would be 
no additional regulatory burden associated with a signed authorization 
requirement since it is already required by NACHA. Some commenters 
expressed the view that a signed authorization requirement calls a 
consumer's attention to, and reinforces an awareness of, check 
conversion.
    The majority of commenters opposed a signed authorization 
requirement for POS transactions under Regulation E. Specifically, some 
of these commenters stated that the NACHA rule is sufficient, and that 
a payments system rules-driven approach is preferable to regulation. 
Several commenters expressed concern that such a requirement would 
unnecessarily delay transactions at POS. According to one commenter, a 
signed authorization requirement could impede the general movement 
toward facilitating paperless payments. A few commenters stated the 
requirement may limit the industry's flexibility to deal with changing 
market circumstances. Some commenters expressed concern that a signed 
authorization requirement may stifle the creation and development of 
payment system innovations.
    The final rule sets forth the authorization requirements for ECK 
transactions under Sec.  205.3(b)(2)(ii). Generally, a consumer 
authorizes a one-time EFT (in providing a check to a merchant or other 
payee for the MICR encoding) when the consumer receives a notice that 
the transaction will be processed as an EFT and goes forward with the 
transaction. This guidance was originally in proposed comment 3(b)(2)-

[[Page 1642]]

1. (Existing comment 3(b)-3 is deleted.) The phrase ``completes the 
transaction'' is replaced with ``goes forward with the transaction'' to 
clarify that it is not necessary for the transaction to clear or 
settle, for example, in order for authorization to occur. Section 
205.3(b)(2)(ii) also addresses the possibility that a payee might elect 
to obtain a consumer's authorization either to convert a check provided 
as payment to an EFT or to process the check as a check transaction. 
See also comment 3(b)(2)-2 (further discussed below).
    For ARC transactions, a payee (such as a utility company) obtains a 
consumer's authorization when it provides notice of its intent to 
convert checks received as payment--for example, on a monthly billing 
statement or invoice--and the consumer provides or mails a check as 
payment.
    For transactions at POS, the final rule requires payees to post the 
notice in a clear and prominent location. The requirement for posted 
signage is necessary to alert consumers that a check provided as 
payment will be converted to an EFT before the consumer selects a 
payment method. The Board believes that providing this notice on a sign 
enables the consumer to authorize the ECK transaction after being given 
prior notice. The final rule also requires merchants and other payees 
at POS to provide consumers with a copy of the notice in a form the 
consumer can keep at the time of the transaction. For example, 
merchants and other payees could provide the notice on the receipt 
given to the consumer. The written receipt allows consumers to refer to 
the notice later, if necessary.
    The final rule does not require merchants or other payees at POS to 
obtain a consumer's signed authorization for ECK transactions. The 
Board believes that a signed authorization requirement would provide 
minimal additional benefit given that consumers will be given notice 
that their checks will be converted at two different points during the 
ECK transaction, first through posted signage which consumers can read 
prior to providing a check as payment, and second on a receipt provided 
to the consumer, presumably after the check has been provided to the 
merchant. In addition, the periodic statement provided by the 
consumer's bank will typically reflect ECK transactions in a different 
manner than check transactions.
    New comment 3(b)(2)-1 provides that a payee at POS does not violate 
the requirement to provide a copy of the check conversion notice to the 
consumer if the payee is unable to provide notice because of a bona 
fide unintentional error, so long as the payee maintains procedures 
reasonably adapted to avoid such occurrences. Thus, for example, a 
payee will not be deemed to have violated the regulation if it cannot 
provide a paper notice if its terminal printing mechanism jams, 
provided that the payee maintains procedures reasonably adapted to 
avoid such occurrences.
    Authorization language. Proposed comment 3(b)(2)-2 provided that a 
payee must obtain the consumer's authorization to use information from 
his or her check to initiate an EFT or, alternatively, to process a 
check. The comment is adopted, largely as proposed. Model notices are 
provided in Appendix A-6 to assist merchants and other payees in 
complying with the requirements. See Sec.  205.3(b)(2)(iv). Regulation 
E coverage of ECK transactions continues to be predicated on the 
consumer's authorization to allow the merchant or other payee to use a 
check as a source of information to initiate an ECK transaction.
    Due to processing or technical errors, a transaction authorized as 
an ECK transaction ultimately may not be processed as an EFT. 
Furthermore, in some cases, a payee may decide to process the original 
check or create a demand draft, or the payee may choose to create a 
substitute check in accordance with the Check Clearing for the 21st 
Century Act (Check 21).\1\ Currently, if a payee obtained a consumer's 
authorization solely to initiate an EFT using information from the 
consumer's check, the payee may have difficulty processing the same 
document as a check because such an action would arguably fall outside 
the consumer's payment instructions. Thus, without the consumer's 
authorization to alternatively process the transaction as a check, the 
payee may not be able to obtain payment. In other cases, a merchant or 
payee operating in multiple states may choose to pilot ECK in some 
locations while processing the payments as checks in others. To address 
these and similar concerns, and to provide flexibility, the Board 
proposed three authorization approaches for ECK transactions.
---------------------------------------------------------------------------

    \1\ Pub. L. 108-100, 117 Stat. 1177 (codified at 12 U.S.C. 5001-
5018).
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    First, the Board proposed to allow a payee to obtain a consumer's 
authorization to use information from his or her check to initiate an 
EFT or, alternatively, to process the transaction as a check. See 
proposed Model Clause A-6(a). The Board specifically solicited comment, 
however, on whether this alternative authorization approach may result 
in any consumer harm or create any other risks. In particular, comment 
was solicited on whether payees that obtain alternative authorization 
should be required to specify the circumstances under which a check 
that can be used to initiate an EFT will be processed as a check. 
Second, the Board proposed an optional authorization clause for use by 
payees that intend to convert all checks to ECK transactions. See 
proposed Model Clause A-6(b). Third, the Board proposed an optional 
authorization clause for use by payees that choose to disclose the 
specific circumstances when checks will not be converted to ECK 
transactions. See proposed Model Clause A-6(c).
    Most industry commenters supported the alternative authorization 
approach as illustrated in proposed Model Clause A-6(a), stating that 
the approach provides needed flexibility. The majority of these 
commenters did not believe any consumer harm would result from the lack 
of specification of circumstances under which check conversion would or 
would not occur. One commenter did not believe consumers would be 
confused about their rights since many account-holding financial 
institutions list EFT and check transactions separately on periodic 
statements given to consumers. A few commenters stated that consumers 
will have sufficient protections regardless of how the transactions are 
processed.
    Some industry commenters supported alternative authorization, but 
stated that the Board should also require payees to disclose the 
circumstances under which conversion will not occur. One such commenter 
believed the disclosure of the specific circumstances would eliminate 
any risk of consumer harm.
    One federal enforcement agency observed generally that consumers 
may not understand the differences between checks and ECK transactions 
or the protections that apply to each, but did not otherwise express a 
view on the merits of permitting alternative authorization. This 
commenter thought that focus group testing of the model clauses would 
be useful to determine what information consumers understand.
    A few commenters opposed the alternative authorization clause as 
unclear and potentially confusing to consumers. According to one 
industry commenter, confusion arising from an alternative authorization 
may cause consumers to instruct their financial institutions to state 
that ECK transactions were unauthorized. This commenter therefore 
believed the rule

[[Page 1643]]

should require the authorization notice to specify the circumstances 
when conversion would not occur. According to another commenter, 
requiring payees to specify the circumstances when a check will be 
processed as a check is consistent with the purpose of the EFTA--for 
consumers to know their rights, responsibilities, and liabilities when 
they engage in EFT services. This commenter believed such disclosure 
also enhances consumer understanding by making it clear that there are 
different methods to collect checks and by providing greater certainty 
as to which method is most likely to apply to a particular transaction. 
The commenter stated that given the efficiency of check conversion, 
there should be limited circumstances to disclose. Accordingly, the 
commenter requested that the Board delete Model Clause A-6(a) as an 
option.
    Some industry commenters supported the approach illustrated in 
proposed Model Clause A-6(b) for when a payee converted all checks, as 
long as the use of the clause is optional. One commenter believed the 
clause unworkable absent additional authorization to process the 
transaction as a check where the ECK will not clear for technical 
reasons.
    A few industry commenters also supported the specific authorization 
approach illustrated in Model Clause A-6(c) as long as it is optional. 
Other industry commenters did not believe the clause would provide a 
significant benefit to consumers. Several commenters believed a 
specific disclosure would be highly detailed and complex; if 
circumstances changed new disclosures would be required. One consumer 
group commenter was concerned that the burden of providing this notice 
could result in payees favoring substitute checks under Check 21 which 
they believed would provide fewer consumer protections. A few industry 
commenters thought the clause should not be adopted.
    A few industry commenters stated that all three model clauses 
should be retained for flexibility. Other commenters believed that all 
three clauses should be consolidated to address various payment options 
available to payees. Several commenters supported having one model 
notice to avoid confusing consumers. Many commenters expressed concern 
about the length of the notices. A few commenters requested additional 
guidance on the clear and conspicuous standard as it pertains to the 
notices.
    In the final rule, Model Clause A-6(a) is retained as proposed, but 
proposed Model Clauses A-6(b) and (c) have been consolidated in a 
single Model Clause A-6(b) for simplicity and to facilitate compliance 
by payees. Model Clause A-6(a) may be used in all instances, including 
when a payee will process a check as an EFT in all circumstances, when 
the transaction is processed as a check for technical reasons, or 
because a payee simply chooses to process the transaction as a check. 
While the Board believes that most payees will likely choose to use 
Model Clause A-6(a) in all cases, the Board is aware that some payees 
may want to provide more specific information concerning their ECK 
practices for business reasons, such as for customer service and 
education, as well as to reduce possible consumer inquiries. Model 
Clause A-6(b) offers that flexibility. Thus, for example, payees may 
choose to use Model Clause A-6(b) to disclose the circumstances under 
which they will not process a check as an EFT, such as when it is 
impossible for technical or other processing reasons.
    Model Clauses A-6(a) and (b) have also been revised to clarify 
their application to transactions where a consumer's check is provided 
as payment. Some commenters expressed concern that without this 
revision, consumers might mistakenly believe the notice applied to 
preauthorized transfers--where a consumer provides a check and a signed 
authorization in advance to authorize future payments. See Sec.  
205.10.
    Consistent with Sec.  205.4(a)(1), notices provided to consumers 
regarding check conversion must be clear and readily understandable. 
For example, in ARC transactions, notices in small print and buried in 
the middle of unrelated information would likely not meet the standard. 
Payees may also consider using headings preceding the notice to call 
attention to the information presented. For POS transactions, signage 
informing consumers about check conversion should not be obscured by 
other information or signs that may also be located at POS.
    Notice for each transfer. ECK transactions are one-time, and not 
preauthorized, transfers. Therefore, under the final rule, a notice 
must be provided and an authorization must be obtained from the 
consumer for each transfer. Section 205.3(b)(2)(ii) contains the 
general rule that the person initiating an ECK transaction must provide 
notice of check conversion to the consumer before each transfer.
    Some industry commenters stated that while it may be appropriate to 
require notice for each transfer for most ECK transactions, there are 
certain circumstances where one advance notice may suffice. Coupon 
books were the most frequently-cited examples. Lenders provide coupon 
books to consumers typically for mortgages, automobile loans, personal 
loans, and other recurring loan payments. According to some commenters, 
coupon books do not present the same notice opportunities as POS and 
ARC transactions because they are provided in advance and include 
coupons for several payments. Some credit card issuers suggested that 
it may be similarly appropriate to allow a consumer to contract with 
its card issuer for regular ECK payments rather than requiring a notice 
to be sent on or with each periodic statement sent to the consumer. A 
few commenters stated that recurring notice is appropriate only for POS 
transactions. One commenter stated that the consumer benefit of 
receiving a notice with each periodic statement is negligible compared 
to the ongoing cost to institutions.
    Because a coupon book is designed so that a consumer must detach a 
coupon from the book and provide the coupon with each payment, the 
Board believes that it is unnecessary to require that a separate notice 
of check conversion be printed on each coupon. New comment 3(b)(2)-3 
provides that for coupon books, a notice placed on a conspicuous 
location of the coupon book that the consumer can retain is deemed to 
constitute the provision of notice on each coupon that accompanies a 
check provided as payment, for purposes of obtaining a consumer's 
authorization to convert each check. The notice must be placed on a 
location of the coupon book that a consumer can retain--for example, on 
the first page, or inside the front cover. The Board believes this new 
comment will facilitate compliance with the requirements of the Act and 
regulation.
    Unlike coupon books which contain several payment coupons and are 
sent once near the beginning of the payment period, periodic statements 
for credit card accounts are typically sent on a monthly basis. Thus, 
the Board believes that credit card issuers have the capability of 
providing a notice of check conversion with each statement without an 
undue burden. In contrast, payees that send coupon books may not 
otherwise send monthly information; thus, requiring a separate monthly 
notice could be costly for these payees. Accordingly, comment 3(b)(2)-3 
in the final rule is limited to coupon books.
    If a coupon book is issued before the effective date of the final 
rule, and will cover a time period when notice otherwise must be 
provided under the final rule, payees may provide a one-

[[Page 1644]]

time notice to obtain the consumer's authorization to convert each 
check submitted with a coupon. For example, a payee may provide a 
separate mailing informing the consumer that by mailing a check with 
each payment coupon included in the book, the consumer authorizes the 
payee to convert each check provided as payment to an EFT. Without such 
relief, payees would have to re-issue coupon books at considerable 
expense in order to comply with the new rule.
    The final rule also clarifies that the notice regarding a payee's 
intent to collect a service fee for insufficient or uncollected funds 
via an EFT and the notice providing additional information about the 
nature of ECK transactions (further discussed below) must also be 
provided for each transfer. However, the special exception regarding 
coupon books would also apply to notices regarding the electronic 
collection of service fees for insufficient or uncollected funds and 
the nature of ECK transactions.
    Imputed notice. Proposed Sec.  205.3(b)(2)(ii) provided that 
obtaining authorization from the consumer holding the account for which 
a check may be converted constitutes authorization for all checks 
provided for a single payment or invoice for that account. Proposed 
comment 3(b)(2)-4 stated that notice of check conversion to the person 
holding the account for which a check may be converted may be imputed 
to anyone who writes a check as payment for the particular invoice or 
bill. In the final rule, comment 3(b)(2)-4 is adopted with certain 
revisions for clarity. The guidance in proposed Sec.  205.3(b)(2)(ii) 
is also moved to comment 3(b)(2)-4, with some revisions for clarity.
    All commenters who addressed the issue of imputed notice supported 
the proposal. One commenter noted that the rule is consistent with 
current industry practice. Another commenter stated that complying with 
a different rule would be unduly burdensome, if not impossible. A few 
commenters supported the proposal, but stated that alternative 
authorization would also be necessary to accommodate payees who may 
choose not to process multiple transactions all as EFTs. A few 
commenters also suggested that the authorization of the person holding 
the billing account should apply to all checks received prior to the 
next bill, not just to checks related to the particular invoice.
    In the final rule, comment 3(b)(2)-4 provides that notice to the 
consumer listed on the billing account constitutes sufficient notice to 
convert all checks provided in payment for the billing cycle or the 
invoice for which notice has been provided, whether the check(s) is 
received from the consumer or someone else for that account. The notice 
applies to all checks submitted as payment until the provision of 
notice on or with the next invoice or statement. Thus, if a merchant or 
other payee receives a check as payment from the consumer listed on the 
billing account after providing notice that the check will be processed 
as a one-time EFT, the authorization from that consumer constitutes 
authorization to convert all other checks provided for a single invoice 
or statement.
    Other required notices for ECK transactions may also be similarly 
imputed to any other consumer who may provide a check for the same 
billing cycle or invoice if such notices are provided to the consumer 
listed on the billing account. Thus, for example, a notice to the 
consumer on the billing account informing the consumer that a service 
fee for insufficient or uncollected funds will be debited via an EFT 
from the consumer's account constitutes notice to obtain authorization 
for electronically collecting the fee to any other consumer who may 
provide a check for the same billing cycle or invoice.
    Additional ECK disclosures. Consistent with the EFTA's purpose to 
enable consumers to understand their rights, liabilities, and 
responsibilities concerning EFT services, and given the unique 
characteristics of ECK transactions, the Board believes it is 
appropriate to provide consumers with additional information to help 
them understand the nature and potential consequences of an ECK 
transaction. Proposed Sec.  205.3(b)(2)(iii) thus required a person 
that initiates an ECK transaction to provide a notice to the consumer 
that when a check is used to initiate an electronic fund transfer, 
funds may be debited from the consumer's account quickly, and, as 
applicable, that the consumer's check will not be returned by the 
financial institution holding the consumer's account. Under the 
proposal, this information would be provided at the same time a notice 
is provided to obtain authorization for the underlying ECK transaction. 
Section 205.3(b)(2)(iii) is adopted as proposed, with some revisions to 
address commenter concerns. Proposed comment 3(b)(2)-3 is re-designated 
as comment 3(b)(2)-5, and provides additional guidance to facilitate 
compliance.
    Consumer group commenters stated that the additional information 
answered many of the common questions they receive from consumers about 
ECK transactions; thus, they believed that the additional information 
would help avoid consumer confusion and enhance consumer understanding 
of ECK transactions. A federal enforcement agency similarly noted that 
consumers may be more willing to engage in ECK transactions if they 
better understand them. In particular, the agency stated that the 
disclosure regarding the quick debiting of deposit accounts through ECK 
transactions could help consumers avoid the possibility of overdrafts 
for insufficient funds.
    Some industry commenters requested that the Board revise the 
requirement to state instead that the transaction will be reported on 
the consumer's periodic account statement. One industry commenter 
stated that much of the consumer education responsibility for ECK 
transactions should be borne by the consumer's financial institution. A 
few industry commenters were concerned about the length of the 
disclosures, particularly in combination with the authorization 
disclosure, and expressed concern that consumers may be discouraged 
from reading them. One industry commenter stated that the disclosures 
may not be feasible as an ongoing requirement. Another industry 
commenter expressed concern about the cost of reprogramming terminals. 
One industry commenter thought the Board should require financial 
institutions to include the disclosures in their account agreements or 
on each periodic statement that includes an ECK transaction.
    A number of industry commenters opposed the proposed disclosure 
that states when a consumer's check is used for an ECK transaction, the 
transaction may clear quickly. Many of these commenters stated that in 
the majority of cases an EFT and a check will clear in roughly the same 
period of time. Other commenters stated that under Check 21, checks may 
clear as fast or faster than EFTs, and expressed concern that the 
disclosure may mislead consumers. A few commenters stated it might be 
impossible to explain the meaning of ``quickly'' in different 
circumstances.
    Many industry commenters also opposed the proposed disclosure that 
the consumer's check will not be returned by the consumer's financial 
institution. The majority of these commenters stated the disclosure 
would be misleading, particularly to consumers whose checks currently 
are not returned by their financial institutions under the terms of 
their account agreements. A few commenters

[[Page 1645]]

asserted the disclosure might become less significant to consumers in 
light of Check 21. One commenter believed that consumers may confuse 
the disclosure with similar statements from their financial institution 
about check handling under Regulation CC, as amended to implement Check 
21.
    As the payment system evolves, consumers' checks are being used 
differently than in the past, and consumer rights with respect to EFT 
transfers are different than those for check transactions. Given the 
unique characteristics of ECK transactions, the Board believes it would 
be beneficial to provide additional information to consumers to help 
them better understand the nature of these transactions. The additional 
information highlights and may draw consumers' attention to some of the 
key differences in the way payments are handled under the ECK process, 
and possibly reduce consumer confusion about ECK transactions. 
Moreover, the Board notes that some payees, particularly in the ARC 
environment, are currently providing this information to their 
customers to help reduce consumer inquiries and complaints. Requiring 
this notice could facilitate consumer understanding by ensuring that 
all consumers who engage in ECK transactions receive this information. 
Accordingly, the Board is exercising its authority under Sections 
904(c) and 904(d)(1) of the EFTA and adopting the proposed notice in 
the final rule, with certain modifications to address commenters' 
concerns.
    The Board recognizes that a check may be processed as fast or 
faster than an ECK transaction in some instances based on current 
industry practices and potential changes in check processing 
facilitated by the Check 21 Act. Nevertheless, the Board believes it is 
important to draw a consumer's attention to the fact that an ECK 
transaction ``may'' clear quickly. The purpose of the notice is to 
emphasize to consumers the importance of having sufficient funds in 
their accounts at the time of the transaction, since many consumers may 
still believe that use of a check will result in a significant time lag 
between the time the consumer provides a check as payment and when 
funds are in fact debited from the consumer's account. To address 
commenter concerns about potential comparisons with check processing, 
the notice in Sec.  205.3(b)(2)(iii) has been revised to state that 
funds may be debited from consumers' accounts as soon as the same day 
payment is received.
    Section 205.3(b)(2)(iii) also retains the requirement to notify 
consumers that they will not receive their checks back from their 
financial institution if their checks are converted. The disclosure 
addresses complaints received by the Board from consumers expressing 
confusion about not receiving their checks back in ECK transactions. In 
particular, some consumers may rely on the checks they receive back 
with their periodic statements for account reconciliation and 
recordkeeping purposes. Comment 3(b)(2)-5 clarifies that the statement 
that a check will not be returned by the consumer's financial 
institution is not required at POS, if, as is typically currently the 
case, the merchant returns the check to a consumer.
    To provide flexibility and address the concerns about the length of 
ECK disclosures, payees at POS may provide the notice in Sec.  
205.3(b)(2)(iii) on posted signage, and need not also provide the 
notice on the receipt provided to the consumer at the time of the 
transaction. However, payees in ARC transactions must provide the 
notice with the general notice to obtain consumer authorization for the 
ECK transaction. The Board expects that ARC payees will likely provide 
the combined notice on a billing statement or invoice. As provided in 
Sec.  205.3(b)(2)(iv), model clauses are provided in Appendix A-6 to 
help payees comply with the additional disclosure requirements. Model 
Clause A-6(c) sets forth two different formulations for the statement 
regarding when funds may be debited from a consumer's account, 
depending on where the payment is made. If the payment is made at POS, 
the statement refers to the possibility that funds may be debited from 
the consumer's account as soon as the same day the consumer makes the 
payment. For ARC transactions, the statement refers to the date that 
the payee receives the payment.
    Consistent with Sec.  205.4(a)(1), and as stated above in the 
context of the notice to obtain consumer authorization for an ECK 
transaction, the notice provided under Sec.  205.3(b)(2)(iii) to 
consumers about the nature of ECK transactions must be clear and 
readily understandable. For example, notices in small print and buried 
in the middle of unrelated information would likely not meet the 
standard. Payees may also consider using headings preceding the notice 
to call attention to the information presented. If payees elect to 
provide the information under Sec.  205.3(b)(2)(iii) separately on a 
sign, the notice should not be obscured by other information or signs 
that may also be located at POS.
    As stated above, with ECK transactions, consumers' checks are being 
used differently than in the past, and consumers may not be aware that 
the conversion of their checks to EFTs may impact the collection time 
for the payment, or that they will not receive their checks (or images 
of their checks) back with their statements as has been the case for 
check transactions in the past. Thus, the Board believes that these 
additional disclosures are appropriate at present. Moreover, many 
payees are already providing similar disclosures to reduce possible 
consumer inquiries. Nevertheless, the Board expects that over time, 
consumers will become more familiar with ECK transactions, thereby 
reducing the need for the additional information. Thus, the final rule 
provides a sunset date of three years from the mandatory compliance 
date of January 1, 2007 for the final rule, after which time payees 
will no longer be required to provide the notice set forth in Sec.  
205.3(b)(2)(iii).
    Transactions initiated by mistake. The supplementary information to 
the proposed rule clarified that where a merchant or other payee 
initiates an EFT in error, the transaction would not be covered by 
Regulation E where the transaction does not meet the definition of an 
EFT. Few commenters addressed the statement, but one requested 
clarification because the inability to process an item is not 
necessarily the result of an ``error.'' The Board agrees that the word 
``error'' has a particular meaning in the EFTA, Regulation E and other 
rules, and that in some cases a transaction may not be able to be 
processed as an EFT for other reasons. Accordingly, the Board believes 
that the statement applies to transactions where a payee mistakenly 
initiates an ECK transaction, such as when the payee attempts to 
convert a money order. Such a transaction is not subject to the 
coverage of the EFTA and Regulation E, even if initiated as an ECK 
transaction.

Collection of Service Fees Via Electronic Fund Transfer

    In the proposal, comment 3(b)-3 was added to clarify that an EFT 
from a consumer's account to collect a service fee due to insufficient 
funds is covered by Regulation E, and must be authorized by the 
consumer. Under the proposal, the provision of notice to the consumer, 
coupled with the consumer's decision to proceed with the transaction, 
would constitute authorization for the debit. This provision has been 
adopted in the regulation in new Sec.  205.3(b)(3), which also requires 
payees to notify consumers

[[Page 1646]]

about the specific amount of the fee in order to obtain the consumer's 
authorization for the transaction. Consistent with the authorization 
requirement at POS for ECK transactions, the final rule requires that 
where a service fee for insufficient or uncollected funds in connection 
with a POS transfer may be collected via an EFT, the notice must be 
posted in a prominent and conspicuous location, and a copy of the 
notice must be provided to the consumer. Comment 3(b)(3)-1 clarifies 
that the requirement to obtain the consumer's authorization does not 
apply to fees imposed against the consumer's account by the consumer's 
account-holding institution for paying overdrafts or returning a check 
or EFT unpaid.
    The majority of commenters generally agreed that EFTs initiated to 
collect service fees for insufficient funds should be covered by 
Regulation E. A few industry commenters stated coverage was appropriate 
as long as a merchant or other payee could obtain authorization of the 
service fee when it provides notice to the consumer that the fee will 
be debited electronically from the consumer's account, and the consumer 
decides to proceed with the transaction. Other industry commenters 
generally supported the notice requirement, but believed the Board 
should also require signed authorization. Several industry commenters 
requested clarification that additional authorization requirements may 
be established by payment system rules. A few commenters requested 
clarification that the proposed rule did not intend to address ``NSF'' 
fees assessed by a consumer's financial institution for returning a 
check unpaid. Some industry commenters requested revising the comment 
to clarify that a check might be returned for reasons other than 
``insufficient'' funds.
    Consumer group commenters opposed the proposed comment. These 
commenters stated that notice and the consumer writing a check alone 
should not be sufficient to authorize the debiting of service fees, 
noting that while a consumer may reasonably anticipate a withdrawal 
from his or her account for the face amount of the check, the consumer 
would not expect an additional debit for the fee, absent additional 
prior, written authorization. Consumer groups also stated that a 
written, signed authorization requirement would encourage consumers to 
exercise more care in determining their actual balances before making a 
payment.
    Some industry commenters also opposed the proposed comment. One 
commenter asserted that providing notice at POS would not sufficiently 
inform the consumer of the possibility that a service fee could be 
debited electronically from the consumer's account. A few commenters 
opposed the comment as inconsistent with the NACHA rule, which requires 
written, signed authorization for collection of service fees via an 
EFT. A couple of commenters believed it important to require signed 
authorization so a consumer will know and understand the fee imposed. 
One commenter expressed the concern that some payees believe the 
current Regulation E notice equals authorization comment grants a 
substantive right to collect a service fee, notwithstanding other 
federal or state law requirements that might apply.
    Proposed comment 3(b)-3 has been moved to the regulation as new 
Sec.  205.3(b)(3) in the final rule. In general, Sec.  205.3(b)(3) 
provides that a consumer authorizes the electronic collection of a fee 
for a check or EFT returned due to insufficient funds when the consumer 
receives notice of a payee's intent to collect the fee via an EFT, and 
the consumer goes forward with the transaction. The final rule also 
requires payees to include the specific amount of the fee imposed in 
the notice provided to consumers to ensure that consumers are informed 
of the amount of the fee they may be charged in the event they have 
insufficient funds in their account. Section 205.3(b)(3) requires 
payees to obtain a consumer's authorization for the debit regardless of 
whether the underlying transaction is an EFT or is a check transaction, 
as long as the payee intends to collect a service fee for insufficient 
funds via an EFT to the consumer's account. See also comment 3(c)(1)-1.
    In addition, section 205.3(b)(3) has been further revised to 
address some commenters' concerns. First, the provision was not 
intended to address fees assessed on a consumer's account by the 
consumer's financial institution for the return of a check or EFT 
unpaid (commonly known as ``NSF fees''), but rather, to address service 
charges assessed by a payee because the cons