Electronic Fund Transfers, 51437-51451 [06-7223]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 71, Number 168 (Wednesday, August 30, 2006)]
[Rules and Regulations]
[Pages 51437-51451]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-7223]


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FEDERAL RESERVE SYSTEM

12 CFR Part 205

[Regulation E; Docket No. R-1247]


Electronic Fund Transfers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is amending Regulation E, which implements the

[[Page 51438]]

Electronic Fund Transfer Act, and the official staff commentary to the 
regulation, which interprets the requirements of Regulation E. The 
final rule provides that Regulation E covers payroll card accounts that 
are established directly or indirectly through an employer, and to 
which transfers of the consumer's salary, wages, or other employee 
compensation are made on a recurring basis. The final rule also 
provides financial institutions with an alternative to providing 
periodic statements for payroll card accounts if they make account 
information available to consumers by specified means.

DATES: This final rule is effective July 1, 2007.

FOR FURTHER INFORMATION CONTACT: Ky Tran-Trong, Senior Attorney, or 
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 (15 U.S.C. 1693 et seq.) (EFTA or 
Act), 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 provide for 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. The Act 
and regulation also restrict the unsolicited issuance of ATM cards and 
other access devices.
    The official staff commentary (12 CFR part 205 (Supp. I)), which 
interprets the requirements of Regulation E, is designed to facilitate 
compliance and provide protection from liability under Sections 915 and 
916 of the EFTA for financial institutions and other 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

    Payroll cards have become increasingly popular with some employers, 
financial institutions, and payroll service providers as a means of 
providing a consumer's wages or other recurring compensation payments--
assets that the consumer is able to access and spend through an access 
device that provides functionality comparable to a debit card. 
Typically, an employer will arrange with a bank or a third-party 
service provider to make available to its employees a magnetic stripe-
backed card; this card accesses an account (or subaccount) assigned to 
the individual employee. Each payday, the employer credits this account 
for the amount of the employee's compensation instead of providing the 
employee with a paper check or making a direct deposit of salary to the 
employee's checking or deposit account. The employee then can use the 
payroll card to withdraw the funds at an ATM and to make purchases at 
POS (and possibly get cash back). Some payroll cards may offer features 
such as convenience checks and electronic bill payment. Payroll cards 
are often marketed to employers as a cost-effective means of providing 
wages to employees who lack a traditional banking relationship. For 
``unbanked'' consumers, payroll card products can serve as substitutes 
for traditional transaction accounts at a financial institution.
    On September 17, 2004, the Board published a notice of proposed 
rulemaking in the Federal Register (69 FR 55,996) (September 2004 
proposal) to provide, among other things, that the term ``account'' 
under Regulation E includes payroll card accounts established by an 
employer for the purpose of providing an employee's compensation on a 
recurring basis. Under the September 2004 proposal, a payroll card 
account would be subject to the regulation whether it is operated or 
managed by the employer, a third-party payroll processor, or a 
depository institution. The Board received nearly 50 comment letters on 
the proposed revisions addressing payroll card accounts.
    Both industry and consumer group commenters generally reacted 
favorably to the September 2004 proposal, agreeing that coverage of 
payroll card accounts under Regulation E was appropriate. Consumer 
groups further urged the Board to expand the scope of the proposal to 
cover any stored-value card product that is marketed or used as an 
account substitute, or that is used to receive payments of significant 
household funds, such as workers' compensation or unemployment 
benefits.
    Most industry commenters urged the Board to grant financial 
institutions relief from the requirement to provide paper periodic 
statements. These commenters cited various reasons, including that 
other means of accessing balance and transaction information, such as 
by telephone or through the Internet, provided more useful and timely 
information to consumers at less cost to financial institutions.
    On January 10, 2006, the Board published an interim final rule in 
the Federal Register (71 FR 1,473) (interim rule), that adopted the 
proposed treatment of payroll card accounts as ``accounts'' for 
purposes of coverage under Regulation E. In response to commenters' 
suggestions, the interim rule included a new Sec.  205.18 which granted 
financial institutions an alternative means to provide account 
transaction information to payroll card users instead of providing 
periodic statements. Specifically, a financial institution could 
provide account information by: (1) Making balance information 
available to the consumer through a readily available telephone line; 
(2) making available to the consumer an electronic history of the 
consumer's account transactions, such as through an Internet Web site, 
covering a period of at least 60 days; and (3) providing promptly upon 
the consumer's request, a written history of the consumer's account 
transactions covering a period of at least 60 days prior to the 
request. The interim rule included additional revisions regarding 
initial disclosures, error resolution rights, and other consumer 
protections. To give interested parties an opportunity to comment on 
these modifications, particularly the alternative means of providing 
account information, the Board requested additional comment on the 
interim rule.
    The Board received approximately 30 comment letters on the interim 
rule. A variety of business entities, including banks, credit unions, 
payroll services providers, and industry trade associations, provided 
comments. Consumer groups and a state attorney general also provided 
comments. This section provides a brief overview of the comments 
received. The section-by-section analysis discusses specific comments, 
and sets forth the Board's analysis of those comments, in more detail.

[[Page 51439]]

    Many commenters addressed the scope of the interim rule. Industry 
commenters generally continued to support the Board's coverage of 
payroll card accounts under Regulation E. Several industry commenters 
urged the Board not to extend the scope of the rule to cover additional 
stored-value, or prepaid, products, as this could discourage the 
continued evolution of such products. However, other industry 
commenters recommended that the interim rule's definition of ``payroll 
card account'' be extended to cover other card products to which a 
consumer might elect to add his or her salary by direct deposit and 
which are not necessarily ``established by an employer.'' A few 
industry commenters also expressed concern about the proposal to treat 
employers who make payroll cards available to their employees as 
financial institutions subject to the regulation. Consumer groups urged 
the Board to engage immediately in a separate rulemaking to provide 
specifically that Regulation E covers any card product that is marketed 
or used as an account substitute, or to any card product used to 
receive payments of significant household funds, such as workers' 
compensation or unemployment benefits.
    Commenters also addressed the appropriateness of the interim rule's 
alternative to providing paper periodic statements. Most industry 
commenters commended the Board's grant of relief from the requirement 
to provide paper periodic statements if account information is 
available through alternative means, but many asked for clarification 
or proposed specific changes regarding the alternative methods of 
delivery. A few industry commenters asked the Board to provide similar 
relief for other types of card accounts, such as accounts to which 
government benefits are deposited on a recurring basis. In contrast, 
consumer groups asserted that full Regulation E protections should 
apply to payroll card accounts, including the requirement to provide 
paper periodic statements. These groups stated that paper periodic 
statements would enable consumers to track their balances and 
transactions more effectively.

III. Summary of the Final Rule

    The Board is revising Regulation E substantially as published in 
the January 2006 interim rule, with one significant revision regarding 
the scope of entities that are subject to the regulation with respect 
to payroll card accounts and a few additional clarifying modifications.
    Under the final rule, payroll card accounts specifically are 
included in the definition of ``account'' for purposes of Regulation E. 
A ``payroll card account'' is defined as an account directly or 
indirectly established through an employer to which transfers of the 
consumer's wages or other compensation are made on a recurring basis. 
Section 205.18 of the final rule grants financial institutions 
flexibility in providing certain account information to payroll card 
users. In particular, a financial institution need not provide periodic 
statements under Sec.  205.9 if the institution: (1) Makes available 
balance information to the consumer through a readily available 
telephone line; (2) makes available to the consumer an electronic 
history, such as through an Internet Web site, of the consumer's 
account transactions covering a period of at least 60 days preceding 
the date the consumer electronically accesses the account; and (3) upon 
the consumer's oral or written request, promptly provides a written 
history of the consumer's account transactions covering a period of at 
least 60 days prior to the request. The history of account transactions 
provided electronically or upon request must set forth the same type of 
information required on periodic statements under Regulation E, 
including information about any fees for EFTs imposed during the 60-day 
period.
    Unlike the approach set forth in the interim final rule, the final 
rule would generally not cover employers and third-party service 
providers as ``financial institutions'' under the regulation because 
they typically do not hold payroll card accounts, or issue payroll 
cards and agree to provide EFT services to payroll card holders. 
However, if an employer or a service provider were to undertake either 
of these functions, it would become a financial institution subject to 
the rule.
    In addition, the final rule clarifies how financial institutions 
that do not provide periodic statements under Sec.  205.9 can comply 
with the error resolution procedures in Sec.  205.11 of Regulation E. 
As provided in the interim rule, a consumer's 60-day period to report 
errors begins on the earlier of the date the consumer electronically 
accesses the account (provided that information about the alleged error 
is made available to the consumer) or the date the financial 
institution sends a written history including that transaction. To 
assist institutions that may not, or are unable to, track when 
consumers electronically access their accounts, the final rule also 
provides that institutions can comply with the error resolution 
provisions if they allow a consumer to report an error up to 120 days 
after the date the transaction allegedly in error was credited or 
debited to the consumer's account. As explained in more detail in the 
section-by-section analysis, this approach allows an institution to 
comply with the regulation without tracking when consumers 
electronically access their account information and, at the same time, 
ensures that consumers will have at least 60 days from the date of 
every transaction listed in the electronic or written statement to 
report an error. A similar clarification is provided with respect to 
the liability provisions in Sec.  205.6.
    The effective date of the final rule with respect to the payroll 
card provisions is July 1, 2007.

IV. Section-by-Section Analysis

Section 205.2 Definitions

2(b) Account
    The EFTA and Regulation E apply to any EFT that authorizes a 
financial institution to debit or credit a consumer's asset account. 
Under the final rule, the term ``account'' in Sec.  205.2(b) is revised 
to include a ``payroll card account,'' which is defined as an account 
directly or indirectly established through an employer to which 
transfers of the consumer's wages, salary, or other employee 
compensation are made on a recurring basis. A payroll card account is 
an account subject to the regulation whether the account is operated or 
managed by the employer, a third-party payroll processor, or a 
depository institution.
    Many industry commenters agreed that the scope of the rule was 
appropriately limited to payroll card accounts as defined in the 
interim rule, and stated that a rule with broader coverage could stifle 
the development of other stored-value, or prepaid, card products. One 
such commenter urged the Board to state expressly in the commentary 
that other card products offered by third parties that may be used by 
consumers to access their salary are not covered by the regulation.
    Several industry commenters, however, asserted that the final rule 
should be revised, or interpreted, to cover other card products that 
may also be used primarily to access recurring deposits of salary, even 
if they are established by a consumer without the involvement of an 
employer. In this regard, a few commenters noted that some depository 
institutions offer payroll card products directly to consumers who may 
not want to

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manage, or who may not qualify for, a traditional deposit account and 
whose employers may not offer a payroll card option. These commenters 
observed that, like the payroll card accounts covered by the interim 
rule, these products may permit only electronic deposits of salary and 
wages and allow access to funds only by means of a card.
    A few industry commenters urged the Board to extend the rule to 
also cover general spending cards that permit a consumer to add value 
through a variety of means, including through direct deposits of 
salary. Some industry commenters asked the Board to clarify the status 
of Regulation E coverage for other card products, such as cards used to 
deliver health benefits or to deliver government-managed or directed 
consumer payments, such as child support, unemployment insurance, and 
workers' compensation.
    Consumer groups supported coverage of payroll card accounts, but 
stated that consumer protection could be strengthened by also covering 
card products used to receive one-time payments of wages, salary, and 
other compensation, which, in their view, should be similarly protected 
from unauthorized use under Regulation E. Consumer groups also urged 
the Board to initiate a separate rulemaking to cover additional cards 
used to deliver important household funds, such as emergency benefit 
payments, income tax refunds, or loan proceeds, as well as other cards 
marketed or used as deposit account substitutes.
    By express definition, the coverage of EFT services under the EFTA 
and Regulation E depends upon whether a transaction involves an EFT to 
or from a consumer's account. Section 903(2) of the EFTA defines an 
``account'' as a ``demand deposit, savings deposit, or other asset 
account * * * as described in regulations of the Board, established 
primarily for personal, family, or household purposes.'' As explained 
in the interim rule, in light of the characteristics of payroll cards, 
the Board believes it is appropriate to exercise its authority under 
Sections 903(2) and 904(d) of the EFTA to classify payroll card 
accounts as ``accounts'' for purposes of Regulation E.\1\ Payroll card 
accounts are assigned to an identifiable consumer and represent a 
recurring stream of payments that is likely the primary source of the 
consumer's income. They are replenished on a recurring basis and 
designed for ongoing use at multiple locations and for multiple 
purposes. Payroll card accounts utilize the same kinds of access 
devices, electronic terminals, and networks as do other EFT services 
historically covered by the EFTA.
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    \1\ Under Section 904(d) of the EFTA, ``[i]f EFT services are 
made available to consumers by a person other than a financial 
institution holding a consumer's account, the Board shall by 
regulation assure that the disclosures, protections, 
responsibilities, and remedies created by [the EFTA] are made 
applicable to such persons and services.''
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    Section 205.2(b)(2) is generally adopted as set forth in the 
interim rule and provides that the term ``account'' includes a 
``payroll card account,'' which is an account that is directly or 
indirectly established through an employer, and to which EFTs of the 
consumer's wages, salary, or other employee compensation are made on a 
recurring basis. (Former Sec.  205.2(b)(2) was previously redesignated 
under the interim final rule as Sec.  205.2(b)(3).) The definition 
generally includes a payroll card account that represents the means by 
which an employer regularly pays the employee's wages, salary, or other 
form of employee compensation and would include, for example, card 
accounts for seasonal workers or employees that are paid on a 
commission basis. Coverage under Regulation E applies whether the 
account is operated or managed by an employer, a third-party payroll 
processor, or a depository institution. However, as further discussed 
below under Sec.  205.18(a), the fact an employee is paid by payroll 
card account through the employment relationship would not make the 
employer a financial institution subject to the regulation unless the 
employer holds payroll card funds, or issues the payroll card and 
agrees with the employee to provide EFT services. The definition has 
been revised to refer to accounts established ``through'' an employer, 
rather than ``by'' an employer as in the interim rule to clarify what a 
payroll card account is, regardless of which entities are covered as 
financial institutions with respect to the account. In addition, the 
reference in the definition to a payroll card account that is 
established ``on behalf of a consumer'' has been deleted as 
unnecessary.
    A few industry commenters observed that an employer may elect to 
provide bonuses or other incentive-based payments on a non-recurring 
basis more than once during a year on a card used only for that 
purpose. Thus, these commenters urged that the Board clarify that the 
term ``payroll card account'' does not include cards used to disburse 
such ``isolated or limited'' payments. The Board agrees with 
commenters' suggestions and has revised comment 2(b)-2 to clarify that 
the term ``payroll card account'' generally does not include a card 
used solely to disburse bonuses or other incentive-based payments 
because such payments are unlikely to be the consumer's primary source 
of salary or compensation. In contrast, the term would include card 
accounts that receive deposits of commission-based payments paid to an 
employee, even if not made on regular intervals (for example, if based 
on sales), because such payments are typically the primary means by 
which that employee receives his salary or other compensation. See also 
Sec.  205.2(b)(2). Comment 2(b)-2 further clarifies that cards 
exclusively used to disburse payments other than compensation, such as 
petty cash or travel expenses, are not ``payroll card accounts.'' 
Nevertheless, to the extent bonuses or other incentive-based payments, 
payments to reimburse travel expenses, or any other deposits of funds 
(for example, if a consumer is permitted to add his or her funds) are 
transferred to an account that otherwise meets the definition of a 
payroll card account, such transfers are EFTs covered by the 
regulation.
    The fact that an employee only remains in the employer's hire for a 
short time, for example, a few pay cycles, does not negate coverage, so 
long as the employer intended to make recurring payments to the payroll 
card account. However, if the employer only transmits funds to an 
account accessible by a card in isolated instances--for example, in 
final-payment situations, or in emergency situations when other payment 
methods are unavailable, such a card ``account'' would not fall within 
the definition of a payroll card account. See also comment 2(b)-2. In 
these cases, the Board believes that the costs of applying Regulation 
E's protections and providing disclosures for a card serving a one-time 
or limited use would outweigh any incremental benefit to consumers.
    As noted in the supplemental information to the interim rule, a 
payroll card account is covered under the final rule whether the 
underlying funds are held in individual employee accounts or in a 
pooled account with some form of ``subaccounting'' maintained by a 
depository institution (or by a third party) to enable a determination 
of the amounts of money owed or attributed to particular employees. See 
71 FR at 1,475. This approach assures uniform application and minimizes 
potential circumvention of the rule.
    The Board's final rule limits the scope of the payroll card account 
definition to payroll card accounts established

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directly or indirectly through an employer. Thus, the term ``payroll 
card account'' does not include accounts directly established by a 
consumer at a depository institution without the involvement of an 
employer, even if the depository institution limits the account to 
receiving direct deposits of recurring payments of salary or other 
compensation. The requirement that a payroll card account be 
established through a consumer's employer creates a bright-line test 
for determining which accounts are subject to special rules regarding 
payroll card accounts. Moreover, it would be difficult for financial 
institutions and others to distinguish an account directly established 
by a consumer to receive deposits of salary (without the involvement of 
an employer) from a ``traditional'' deposit account opened by a 
consumer. As a result, the definition of a payroll card account is 
limited as explained above. Accounts established directly by a consumer 
at a depository institution are fully covered by Regulation E because 
they fall within the existing definition of ``account'' in Sec.  
205.2(b)(1).
    Gift cards issued by merchants that can be used to purchase items 
in the merchant's store are not covered by Regulation E. The regulation 
also does not cover general spending cards to which a consumer might 
transfer by direct deposit some portion of the consumer's wages. 
Although consumers might choose to send some or all of their salary or 
other compensation by direct deposit into a general spending card 
account, the consumer also may use these products for other purposes or 
for limited periods of time, like gift cards or other stored-value, or 
prepaid, cards. Consumers would derive little benefit from receiving 
full Regulation E protections for cards that may only be used for 
limited purposes or on a short-term basis, and which may hold minimal 
funds, while the issuer's costs of compliance with Regulation E might 
be significant. In contrast, for payroll card accounts that are 
established through an employer, there is a greater likelihood that the 
account will serve as a consumer's principal transaction account and 
hold significant funds for an extended period of time.
    In addition, cards used solely for health-related expenses--such as 
cards linked to flexible spending accounts, health savings accounts or 
health reimbursement arrangements--are not covered by the regulation, 
whether funded by the employer or the employee. The Board will continue 
to monitor the development of the prepaid card market and could 
reconsider whether the current treatment of these products under 
Regulation E remains appropriate over time. But see 62 FR 43,467, 
43,468 (August 14, 1997) (stating that accounts established by a 
government agency for distributing state or local employment-related 
benefits, such as unemployment benefits, are electronic benefit 
transfer (EBT) accounts covered by Sec.  205.15).
    Former comment 2(b)-2, which addresses examples of accounts not 
covered by Regulation E, was previously redesignated under the interim 
rule as comment 2(b)-3.

Section 205.18 Requirements for Financial Institutions Offering Payroll 
Card Accounts

    In the interim rule, the Board proposed to grant financial 
institutions relief from the requirement to provide periodic statements 
for payroll card accounts, provided that the financial institution 
makes account information available to the consumer through certain 
alternative means. The final rule adopts the approach set forth in the 
interim rule substantially as proposed, with a few clarifying changes 
to address commenters' concerns. In addition, the final rule applies 
the general definition of ``financial institution'' to describe the 
entities subject to the payroll card requirements. Thus, unlike the 
approach in the interim rule, employers and third-party service 
providers will generally not be covered as financial institutions under 
the regulation because they typically do not hold payroll card 
accounts, or issue payroll cards and agree with a consumer to provide 
EFT services.
    Financial institutions covered under the rule are not required to 
provide periodic statements for payroll card accounts if they provide 
specified account information by telephone, electronically, and, upon 
the consumer's request, in writing. Section 205.18 of the final rule 
further addresses the requirements governing initial disclosures, the 
issuance of access devices, error resolution, and limitations on 
liability under the modified approach.
18(a) Coverage
    The final rule adopts the existing definition of ``financial 
institution'' in Sec.  205.2(i) to identify the entities that are 
subject to the regulation with respect to a payroll card account. See 
Sec.  205.2(i). Thus, unlike the interim rule, employers and service 
providers typically would be excluded from the scope of the regulation 
because they are unlikely to either hold payroll card accounts or issue 
payroll cards and agree to provide EFT services to payroll card account 
holders. Except as modified by Sec.  205.18, all provisions of 
Regulation E apply to financial institutions with respect to payroll 
card accounts in the same manner and to the same extent that they apply 
with respect to other accounts subject to the regulation.
    Under one typical payroll card model, an employer contracts with a 
depository institution to provide payroll cards to its employees. In 
many cases, the depository institution may use a third-party service 
provider to perform some or a substantial proportion of the compliance 
duties (e.g., in a turnkey arrangement), including mailing account 
terms and conditions and providing error resolution services. Or, the 
depository institution may elect to perform all of the compliance 
duties in-house. Under another payroll card model, the employer may 
contract directly with the third-party service provider for the payroll 
card program. Under both arrangements, a depository institution's 
participation in the payroll card program will be necessary both to 
hold the underlying funds as well as to issue the payroll card itself. 
In addition, the account relationship will generally be between the 
issuing bank and the employee, regardless of whether it is the bank or 
a service provider that is ultimately responsible for performing a 
particular compliance obligation. An employer's involvement in a 
particular payroll card program is likely to be limited to providing 
initial payroll card account disclosures on behalf of the depository 
institution or service provider.
    Under the interim rule, an entity would have been treated as a 
financial institution if it directly or indirectly held a payroll card 
account or directly or indirectly issued a payroll card. Thus, 
employers that provided payroll cards to their employees would have 
been subject to the regulation because the scope of coverage did not 
require a person issuing an access device for a payroll card account to 
also agree with a consumer to provide EFT services. Similarly, a 
service provider would have been treated as a financial institution if 
it indirectly issued payroll cards through a bank. See 71 FR at 1,477.
    Two commenters, one representing card issuers and a second 
representing specialists in corporate treasury functions, observed that 
most employers will not have expertise in complying with the 
regulation, and thus requested that the Board exclude employers from 
coverage under Sec.  205.18(a) entirely. In particular, these 
commenters asserted that the compliance burden could be a

[[Page 51442]]

disincentive for some employers to offer payroll cards as a payment 
option for their employees. In this regard, a few commenters asserted 
that even if employers shift compliance duties to a third-party service 
provider by contract, the employer might still be liable for that 
party's failure to comply. In contrast, consumer groups agreed with the 
interim rule's treatment of all entities participating in card 
distribution, card processing, or transfer of payroll card funds as 
financial institutions.
    Upon further consideration and analysis of the issue, the Board is 
revising Sec.  205.18(a) to use the same definition of ``financial 
institution'' with respect to payroll card accounts that applies to 
other types of accounts to determine which entities providing payroll 
card services are covered under the rule. See Sec.  205.2(i). Thus, an 
entity would be deemed a ``financial institution'' with respect to a 
payroll card account if it holds the payroll card account or if it 
issues a payroll card and agrees with the consumer to provide EFT 
services. Accordingly, the depository institution holding the funds 
will always be treated as a financial institution under the rule, but 
employers and service providers typically will not be covered because 
they generally do not hold payroll card accounts or issue payroll cards 
and agree with a consumer to provide EFT services.
    Because payroll card account holders will, at a minimum, be able to 
assert their Regulation E rights against the depository institution 
holding their account in all cases, the Board believes that there would 
be little, if any, benefit of also covering employers under Regulation 
E. Under the interim rule's approach, employer coverage might lead 
employers who are generally unfamiliar with Regulation E's requirements 
to incur additional compliance costs and risk. The Board believes the 
imposition of such costs and risks on employers who neither hold 
payroll card accounts nor issue payroll cards could deter some 
employers from adopting payroll cards. Accordingly, under the final 
rule, if an employer arranges or contracts with a depository 
institution or third-party payroll services provider to pay its 
employees by payroll card account, the employer would not be a 
``financial institution'' subject to the regulation.
    Similarly, based upon the Board's understanding of how payroll card 
programs are structured, while a third-party service provider may 
perform some, most, or even all of the compliance duties for a 
particular payroll card program, it will neither hold payroll card 
accounts nor issue the payroll card itself. Thus, a third-party service 
provider typically would not be deemed a financial institution subject 
to the regulation. New comment 18(a)-2 sets forth the preceding 
discussion of how the final rule applies to employers and service 
providers. The comment also states that to the extent that an employer 
or a service provider undertakes to hold payroll card accounts or issue 
payroll cards and agree with a consumer to provide EFT services, it 
would become a financial institution subject to the regulation.
    To the extent that more than one party (e.g., a depository 
institution and a third-party service provider) each qualify as a 
financial institution with respect to the same payroll card account, 
those parties may contract among themselves to ensure compliance with 
the final rule. See also Sec.  205.4(e) (stating that institutions 
providing EFT services jointly may contract among themselves to 
allocate requirements under the regulation). Thus, for example, 
disclosure obligations satisfied by one party, such as a service 
provider, would satisfy the disclosure obligations for any other 
financial institution with respect to that payroll card account. 
However, if the party that has contractually agreed to satisfy a 
compliance obligation fails to do so, each of the parties would be 
accountable under the EFTA and the final rule. These parties could also 
allocate among themselves the financial obligation for any liability 
resulting from the failure.
    The final rule includes comment 18(a)-1 as proposed to clarify that 
a financial institution may issue an access device for a payroll card 
account only in response to an oral or written request for the device, 
or as a renewal or substitute of an accepted access device. See Sec.  
205.5(a). The comment further clarifies that a consumer is deemed to 
request an access device when the consumer chooses to receive his or 
her compensation through a payroll card account. The compulsory use 
prohibition in Sec.  205.10(e) would not be violated as long as a job 
applicant is not required to establish a payroll card account as a 
condition of employment.
    One commenter asked the Board to clarify whether an employer may 
include an unactivated payroll card with materials provided to 
employees about the terms and conditions of the payroll card account. 
Such a procedure would not violate Regulation E, provided that the 
terms and conditions for issuing an unsolicited access device as 
provided under Sec.  205.5(b) are satisfied and the consumer retained 
the option to receive compensation by means other than the payroll card 
account.
18(b) Alternative to Periodic Statement
General Provisions
    In the September 2004 proposal, the Board proposed that all 
provisions of Regulation E should apply to payroll card accounts in the 
same manner that they apply to other accounts, including the 
requirement to provide periodic statements. Most industry commenters 
urged the Board to permit entities offering payroll cards an 
alternative means of providing account information similar to the rules 
in Sec.  205.15 of Regulation E for accounts established for the 
electronic transfer of government benefits (EBT accounts). The January 
2006 interim rule granted relief from the requirement to provide 
periodic statements under Sec.  205.9(b), provided that financial 
institutions make account information available by telephone, 
electronically, and, upon the consumer's request, in writing. The final 
rule adopts this approach. Some modifications have been made to clarify 
certain issues raised by commenters.
    Industry commenters strongly supported the Board's decision to 
provide relief from the periodic statement requirement for payroll card 
accounts. Many stated that the alternative set forth in the interim 
rule strikes an appropriate balance between the needs of consumers and 
the costs to employers and institutions. A few industry commenters 
urged the Board to provide similar relief for other types of accounts 
that receive recurring payments, including accounts established by 
consumers at depository institutions without the involvement of an 
employer that only receive deposits of employee compensation and 
accounts funded solely by government benefit payments. One commenter 
recommended that the Board grant relief from the periodic statement 
requirements for all retail payment cards, including general spending 
cards, to the extent such cards may be covered under Regulation E. 
Another commenter suggested that the Board consider the adoption of a 
similar approach for the delivery of information for accounts generally 
under Regulation E, as well as for accounts and other banking products 
under other consumer financial services regulations (e.g., Regulations 
Z and DD).
    In contrast, consumer group commenters asserted that payroll card 
accounts should be given the same protections as are provided for other 
consumer accounts under the EFTA, including the right to paper periodic

[[Page 51443]]

statements. Consumer group commenters noted that periodic statements 
assist consumers in tracking their account balances and transactions 
and discovering unauthorized transfers or other errors involving their 
accounts. One state attorney general recognized that some employees are 
transient but recommended that the Board require periodic statements 
for any consumer that can provide a mailing address to the employer.
    When the Board addressed EBT programs in 1994, it recognized that 
periodic statements are a central component of Regulation E's 
disclosure scheme. However, the Board granted EBT providers relief from 
the periodic statement requirement in light of the limited types of 
transactions involved, the availability of other means to obtain 
account information for benefit recipients, and the expense of 
routinely mailing monthly statements to all recipients. See 59 FR 
10,678, 10,681 (March 7, 1994). Similarly, the Board is exercising its 
authority under Section 904(c) of the EFTA to grant financial 
institutions flexibility in connection with the periodic statement 
requirement for payroll card accounts.
    In addition to the comments received on the September 2004 proposal 
and the January 2006 interim rule, the Board considered data it 
collected during focus group testing of payroll card holders during the 
fall of 2005. As described in more detail in the supplemental 
information for the interim rule, the majority of focus group 
participants regularly checked their balances over the telephone or 
checked balance and transaction information on-line; some checked their 
accounts through these methods multiple times per week. Most focus 
group participants who received paper periodic statements stated that 
they generally kept their statements as a record of account activity 
but otherwise rarely used them to track transactions or look for 
errors. Participants generally attributed their lack of statement use 
to the fact that they monitored their account information frequently 
during the month by the telephone or on-line. While a few participants 
wanted to receive paper statements, most indicated a clear preference 
for using alternative means of monitoring account activity, in 
particular by phone and on-line. See 71 FR at 1,476.
    As with EBT products, the Board is persuaded that the alternative 
methods of providing account transaction information currently used by 
many payroll card providers are comparable to, and in some respects, 
better than, paper periodic statements. Information available by 
telephone or on-line is updated routinely, in contrast to periodic 
statements which only provide information as of the end of each 
statement cycle. Thus, consumers using telephone and on-line methods 
often have access to more timely information, which may assist 
consumers in more effectively tracking transactions to avoid 
overdrawing their accounts.
    The Board also has weighed the potential burden and benefits of 
requiring financial institutions to provide periodic statements. Such a 
requirement could impose considerable one-time implementation costs, as 
well as ongoing costs for mailing such statements, on financial 
institutions currently offering such accounts and could discourage 
other financial institutions from offering them in the future. Weighing 
these considerations along with the alternative methods available to 
consumers for obtaining account information and consumers' actual 
account-monitoring practices, the Board concludes that granting relief 
from the periodic statement requirement for payroll card accounts is 
appropriate.
    Section 205.18(b) of the final rule provides financial institutions 
flexibility either to provide periodic statements under Sec.  205.9 as 
they would for other accounts or, as an alternative, to: (1) Make 
balance information available through a readily available telephone 
line; (2) make available an electronic history of the consumer's 
account transactions, such as through an Internet web site, that covers 
at least 60 days preceding the date the consumer electronically 
accesses the account; and (3) provide promptly upon request a written 
history of the consumer's account transactions, covering at least 60 
days preceding the date the institution receives the consumer's 
request. As further explained below in the discussion about the error 
resolution and liability limit time frames, a consumer ``electronically 
accesses'' an account once the consumer enters a user identification 
code or a password or otherwise complies with a security procedure used 
by an institution to verify the consumer's identity.
    The final rule does not provide relief from the requirement to 
provide paper periodic statements for other types of accounts. However, 
the Board will continue to monitor this issue and may reassess whether 
it would be appropriate to propose such relief in the future.
Readily Available Telephone Line
    The Board stated in the supplementary information for the interim 
rule that a readily available telephone line for providing balance 
information must be a local or toll-free line that, at a minimum, is 
available during standard business hours. Consumer groups and the state 
attorney general that commented suggested that the telephone line 
should be operable beyond standard business hours in each time zone so 
that employees have sufficient time to access their account information 
when they are not at work. Consumer groups also urged the Board to 
require institutions to provide transaction information by telephone.
    As in the interim rule, the final rule requires that institutions, 
at a minimum, make available a local or toll-free line for consumers to 
obtain their available balance during standard business hours. The 
Board expects that, in most cases, institutions will provide 24-hour 
access to balance information through an automated line, which would 
ensure that employees can access balance information at their 
convenience. Because the Board believes it may be operationally 
difficult for some institutions to include 60 days' worth of 
transactions through a telephone system, the final rule does not 
require institutions to provide information about specific transactions 
by telephone. In addition, the Board's focus group testing indicated 
that while limited transaction information was available through the 
telephone, most consumers chose not to access transaction information 
in that manner. See 71 FR at 1,476.
    Model Form A-7(a), discussed below, contains a model clause that 
institutions may use to inform consumers at account-opening about how 
to access their account information, including a reference to the 
telephone number that consumers may call to obtain this information. 
Consumer groups urged the Board to also require that institutions print 
the telephone number on each payroll card as a reminder for consumers. 
The Board is aware that many payroll cards already display the 
telephone number for obtaining account information on the back of the 
card and, therefore, the Board has chosen not to impose such a 
requirement in the final rule. If the Board learns in the future, 
however, that consumers are unaware of the ability to obtain account 
information by telephone, the Board will consider whether additional 
protections are needed.
Electronic History
    For transaction histories provided electronically, institutions are 
not limited to using an Internet Web site to comply with the rule. 
However, because electronic histories are disclosures

[[Page 51444]]

under Regulation E, they must be provided in a form that the consumer 
may keep, as is required for disclosures generally under Sec.  
205.4(a)(1). A new comment 18(b)-2 explains that financial institutions 
satisfy this requirement if the electronic history is available in a 
format that is capable of being retained by the consumer. For example, 
an institution would satisfy the requirement if it provides a history 
at an Internet Web site in a format that is capable of being printed or 
downloaded using an Internet web browser.
    A few industry commenters asked the Board to clarify that ATM 
access to a transaction history constitutes an acceptable means of 
providing an electronic history of transactions. Although the Board is 
unaware of any ATMs that currently offer the option of printing 
transaction histories of at least 60 days, institutions would be able 
to provide an electronic history at an ATM if consumers were able to 
print a copy of all the required information at the ATM.
Written History Upon Consumer's Request
    The Board solicited comment on whether the requirement to provide a 
written history of transactions upon the consumer's oral or written 
request was a necessary or appropriate protection. Consumer groups and 
most industry commenters stated that the option to obtain a written 
history of transactions was both necessary and appropriate because some 
consumers may not be able to access the information electronically. 
However, a few industry commenters believed that institutions should be 
given flexibility in the manner in which they provide transaction 
information and that, accordingly, the rule should not require 
institutions to provide both an electronic and a written history.
    The final rule retains the requirement that a financial institution 
mails or delivers a written history of account transactions promptly 
upon the consumer's oral or written request to address the possibility 
that some consumers may have limited on-line access. An institution 
would not satisfy the requirement to provide a written history by 
making a printed history available at an ATM because it does not ensure 
that a consumer is able to obtain a written history in all cases (for 
example, if the ATM is located in an inconvenient location).
    The Board anticipates that, in general, written histories will be 
sent the next business day or soon after the institution receives the 
consumer's oral or written request. Institutions also may designate a 
specific telephone number for consumers to call and a specific address 
for consumers to write to request a written copy of account 
transactions. A few industry commenters asked whether a financial 
institution could charge a fee if a consumer makes frequent or multiple 
requests for copies of account statements within a short time frame. 
Although the final rule does not address the issue, the Board believes 
that charging fees to consumers who make occasional requests for 
written histories could have a chilling effect on consumers' ability to 
obtain information about transactions and thus, to exercise their error 
resolution rights.
Sixty-Day Transaction History
    Most industry commenters stated that the requirement to provide 60 
days of transactions was appropriate regardless of the means by which 
the account history is provided. Some industry commenters observed that 
many institutions provide up to 12 months of transactions on their 
Internet Web sites. However, a trade association representing community 
banks noted that some of its members currently can only provide a 30-
day or a 45-day account history and expressed concern that these 
members would not be able to take advantage of the alternative to 
providing periodic account statements. A few industry commenters stated 
that providing a rolling 60-day transaction history might pose 
operational difficulties for those institutions that have developed 
systems that provide transaction histories only for specific statement 
cycles. One commenter asked the Board to clarify whether account 
histories must include transactions that have not yet posted to the 
account.
    The final rule requires institutions to provide 60 days of 
transaction information, as proposed. Thus, if the consumer 
electronically accesses his or her account, the history must cover at 
least the preceding 60 days. Similarly, if the consumer requests a 
written history of transactions, the written history must cover at 
least 60 days preceding the date of the institution's receipt of that 
request.
    The Board believes the 60-day requirement is appropriate for 
payroll card account holders because these consumers will not 
automatically be sent a statement that sets forth transaction 
information for each transfer occurring during a monthly cycle as they 
would for most other accounts covered by Regulation E. For those 
payroll card holders who do not access or request a copy of their 
transaction history at least on a monthly basis, the 60-day requirement 
is intended to help them avoid inadvertently losing their right to 
assert an error under Sec.  205.11. New comment 18(b)-1 clarifies that 
a financial institution must include a transaction in the account 
history only if the transaction has posted to the payroll card account.
    Section 205.18(b)(2) of the final rule requires that the account 
history provided under this section, whether provided electronically or 
in writing, contain the same type of account information that would be 
provided in a periodic statement under Sec.  205.9(b)(1)-(6), including 
information about fees, account balances, and an address and telephone 
number for inquiries. Although a few commenters expressed concern that 
requiring all the information typically included on periodic statements 
could impose significant and costly systems changes, the Board believes 
such a requirement is necessary to ensure that consumers receive 
comparable account information regardless of whether they receive 
periodic statements or transaction histories under the alternative 
procedures in this final rule. The Board also believes that requiring 
that the same information be provided for payroll card accounts as for 
other accounts should facilitate institutions' ability to use the same 
systems for delivering account information and minimize the need to 
construct new systems.
18(c) Modified Requirements
Initial Disclosures and Annual Error-Resolution Notice
    For financial institutions that do not furnish periodic statements, 
Sec.  205.18(c) sets forth provisions clarifying the requirements 
relating to disclosures, liability limits, and error resolution 
procedures under Regulation E. Section 205.18(c)(1) generally sets 
forth modified disclosures that a financial institution must provide in 
addition to or in lieu of required initial disclosures under Sec.  
205.7(b). Commenters did not address this provision, and the Board has 
adopted Sec.  205.18(c)(1) of the interim rule with minor revisions for 
clarity.
    Section 205.18(c)(1)(i) requires the initial disclosures for 
payroll card accounts to disclose the means by which consumers can 
access information about their account, including the telephone number 
that may be used to obtain the account balance, and information about 
how an electronic history of account transactions can be obtained, such 
as the address of an Internet Web site. The initial disclosures also 
must include a

[[Page 51445]]

summary of the consumer's right to obtain a written history of account 
transactions upon request, including a telephone number to call to 
request a written history, in place of the summary of the consumer's 
right to receive periodic statements pursuant to Sec.  205.7(b)(6). 
Under Sec.  205.18(c)(1)(ii), the initial disclosures must contain a 
notice explaining the error resolution rights associated with payroll 
card accounts in place of the error resolution notice required by Sec.  
205.7(b)(10). In addition to these disclosures, institutions must also 
provide the other required disclosures set forth in Sec.  205.7, 
including the disclosures explaining the consumer's liability for 
unauthorized EFTs and the fees imposed for EFTs or for the right to 
make transfers.
    The final rule provides Model Clauses that financial institutions 
may use to facilitate compliance with the initial disclosure 
requirements, located in section A-7 of Appendix A to Part 205. 
Institutions choosing to utilize model clauses for initial disclosures 
will also have to modify paragraph (a) in section A-2 of Appendix A to 
Part 205 as appropriate to explain the consumer liability provisions if 
they opt not to provide periodic statements under this rule.
    Section 205.18(c)(2) of the interim rule required financial 
institutions to provide an annual notice describing error-resolution 
rights substantially similar to the notice contained in section A-7(b) 
in Appendix A in place of the notice required by Sec.  205.8(b). 
Several industry commenters urged the Board to give financial 
institutions the option to provide an abbreviated notice on a regular 
basis, as is currently permitted on periodic statements under Sec.  
205.8(b). These commenters believed an abbreviated notice could be 
provided when providing balance information by telephone, or when 
providing an account history electronically or in writing. In 
particular, some industry commenters noted that it was difficult to 
provide error resolution notices by mail to transient employees. The 
Board agrees that the approach suggested by these commenters is likely 
to provide payroll card users with information about their error 
resolution rights on a more timely basis, that is, when consumers are 
reviewing their history of account transactions. Accordingly, the final 
rule is revised to permit institutions to provide a notice similar to 
the abbreviated notice provided in Appendix A-3(b). Institutions must 
modify this notice to reflect the error resolution time frames and 
procedures set forth in this final rule. The abbreviated notice would 
have to be provided on each history of transactions, whether provided 
electronically or in writing upon the consumer's request, in lieu of 
the annual error resolution notice. The Board does not believe that it 
would be appropriate to permit the abbreviated notice to be provided 
exclusively through a telephone line because consumers would not be 
able to retain a copy of the notice.
Limitations on Liability and Error Resolution
    Sections 205.18(c)(3) and (4) of the final rule are substantively 
similar to the interim rule and explain the limitations on liability 
and error resolution procedures for payroll card accounts when a 
financial institution does not provide periodic statements but instead 
follows the modified requirements. To address the concerns of some 
commenters about potential operational difficulties in determining when 
the liability limit and error resolution time frames begin to run, the 
final rule has been revised to provide a safe harbor that will satisfy 
the timing requirements in all instances.
    As proposed in the interim rule, the final rule contains two 
different triggers for beginning the 60-day period for limiting 
liability for unauthorized EFTs in Sec.  205.18(c)(3), depending on 
when and how the consumer has obtained a history of his or her account 
transactions. If the consumer obtains transaction information 
electronically under Sec.  205.18(b)(1)(ii), the 60-day period begins 
on the date the account is electronically accessed by the consumer. If 
the consumer has requested a written history of his or her account 
transactions under Sec.  205.18(b)(1)(iii), the 60-day period begins on 
the date the institution sends the written history. In either case, in 
order for the 60-day period to begin running, the alleged unauthorized 
transaction must be reflected in the electronic history or on the 
written history provided to the consumer. If a consumer accesses an 
electronic history and also requests a written history, both of which 
reflect information about the disputed transaction, the applicable 60-
day period for reporting an unauthorized EFT begins on the earlier of 
these two events.
    A similar rule is established in Sec.  205.18(c)(4) for determining 
when the 60-day period begins for reporting an error under the 
procedures set forth in Sec.  205.11. Thus, if a consumer obtains 
transaction information electronically under Sec.  205.18(b)(1)(ii), 
the 60-day period for reporting an error begins on the date the account 
is electronically accessed by the consumer. If the consumer requests a 
written history of transactions under Sec.  205.18(b)(1)(iii), the 60-
day period begins on the date the institution sends the written 
history. Again, in either case, in order for the 60-day period to begin 
running, the alleged error must be reflected on the electronic history 
or on the written history provided to the consumer. Also, if the 
consumer both accesses an account electronically and requests a written 
history, the applicable 60-day period for reporting an alleged error 
begins on the earlier of these two events. Transactions that have not 
yet posted to the account do not trigger either the liability limit or 
the error resolution time frames.
    Several industry commenters suggested alternate triggers for 
determining when the liability limit and error resolution time frames 
begin to run. For example, some industry commenters asserted that the 
60-day period should begin running at the time information about a 
specific transfer is posted and becomes available to the consumer, 
regardless of when the consumer actually obtains the information. A few 
industry commenters suggested that the 60-day period should begin on 
the date of the transaction. Others stated that the 60-day period 
should begin when the consumer accesses an account balance by 
telephone. One industry commenter noted that the rule should provide 
certainty to financial institutions and merchants so that their systems 
need only retain information for a set period of time. In this regard, 
some industry commenters suggested that the Board clarify that a 
consumer's error resolution rights do not apply to a transaction more 
than 120 days old.
Safe Harbor
    As proposed, the final rule provides that consumers' 60-day period 
to report an error with respect to a particular transaction begins on 
the date the consumer accesses the electronic history reflecting the 
alleged error or the date the institution sends a written history that 
includes that error, whichever is earlier. In response to comments 
received, the Board has revised the final rule to clarify institutions' 
options for compliance. A few industry commenters noted that some 
institutions may prefer to develop compliance systems that do not track 
consumers' access to their electronic history or when a written history 
is sent. The final rule provides a safe harbor to clarify that these 
institutions would comply with the error resolution provisions as long 
as they treat a notice of error as timely when it is received from the 
consumer

[[Page 51446]]

within 120 days after the transaction allegedly in error was credited 
or debited to the consumer's account. See Sec.  205.18(c)(4)(ii). 
Providing consumers 120 days after the date a transaction has posted to 
a consumer's account to report an error ensures that the consumer will 
have at least 60 days to report an error even if the consumer first 
accesses the information on the last day that the transaction is 
required to be included in the account history. Institutions choosing 
to follow this practice would in most cases be affording consumers more 
than the minimum time period required by the regulation. A similar safe 
harbor is provided for reporting unauthorized transactions under Sec.  
205.18(c)(3)(ii).
    New comment 18(c)-1 provides that institutions that choose to 
determine the consumers' reporting period in this way may still 
disclose the time period required by the regulation (as set forth in 
the Model Form in Appendix A-7). For example, an institution may 
disclose to payroll card account holders that the institution will 
investigate a notice of error provided within 60 days after the date 
the consumer electronically accesses an account or the date the 
institution sends a written history of transactions even if the 
institution actually provides a longer period of time for the consumer 
to report an error (i.e., up to 120 days following the date a 
transaction has posted). Comment 18(c)-1 further states that an 
institution's summary of the consumer's liability (as required under 
Sec.  205.7(b)(1)) may disclose that liability is based on the consumer 
providing notice of error within 60 days of the consumer electronically 
accessing an account or receiving a written history reflecting the 
error even if the institution may allow a consumer to assert a notice 
of error up to 120 days from the date of the posting of the alleged 
error.
Example
    As discussed above, the history of account transactions provided 
under Sec.  205.18(b)(1), whether provided electronically or in 
writing, must cover at least 60 days preceding the date that the 
information is made available or provided to the consumer. Thus, if a 
consumer accesses a payroll card account electronically, or is sent a 
written history, on June 1, then the history of transactions must cover 
a period of at least 60 days prior to June 1 and include any EFTs 
posted from April 2 through May 31. Assuming that the consumer did not 
previously access or receive account information reflecting 
transactions during April or May, the consumer must have at least 60 
days, or until July 31, to assert any unauthorized EFTs or other errors 
occurring between April 2 and May 31 to preserve his or her rights 
under Sec. Sec.  205.6 and 205.11 with respect to those transfers.
    In the example, suppose the consumer electronically accesses his or 
her account on June 1 and discovers an error resulting from a 
transaction that posted on May 10. In this case, under Sec.  
205.18(c)(4)(i), the consumer must provide notice of that error to the 
institution no later than July 31 to trigger the institution's 
obligation to investigate the error. If the consumer provides a notice 
of the May 10 error after July 31, the institution would not be 
required to comply with the procedures and time limits in Sec.  205.11 
for investigating the error. Nevertheless, if the error involves an 
unauthorized EFT, liability for the unauthorized transfer may not be 
imposed on the consumer unless the institution satisfies the 
requirements of Sec.  205.6. See comment 18(c)-3, discussed below.
    For an institution electin