Electronic Fund Transfers, 69430-69438 [E6-20300]

Agencies

• FEDERAL RESERVE SYSTEM

[Federal Register Volume 71, Number 231 (Friday, December 1, 2006)]
[Rules and Regulations]
[Pages 69430-69438]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-20300]


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FEDERAL RESERVE SYSTEM

12 CFR Part 205

[Regulation E; Docket No. R-1265]


Electronic Fund Transfers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule; official staff interpretation.

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[[Page 69431]]

SUMMARY: The Board is amending Regulation E, which implements the 
Electronic Fund Transfer Act, and the official staff commentary to the 
regulation. The final rule clarifies that the requirement to obtain a 
consumer's authorization to initiate an electronic fund transfer to the 
consumer's account to collect a fee for an EFT or check that has been 
returned applies to any person that intends to collect the fee in that 
manner, and not to the account-holding financial institution. The final 
rule also provides guidance on the consumer notice requirements when a 
person initiates an electronic fund transfer to collect a returned item 
fee or engages in an electronic check conversion transaction. The 
amendments supersede corresponding provisions addressing these issues 
in the Board's January 2006 final rule and August 2006 interim final 
rule.

DATES: The final rule is effective January 1, 2007.

FOR FURTHER INFORMATION CONTACT: Vivian W. Wong, Attorney, or Ky Tran-
Trong or David A. Stein, 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 the 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 the 
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)) 
interprets the requirements of Regulation E to facilitate compliance 
and provides 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 January 10, 2006, the Board published a final rule which 
addressed, among other things, how a payee can obtain a consumer's 
authorization to electronically collect fees for items returned due to 
insufficient or uncollected funds in the consumer's account. 71 FR 
1,638 (January 10, 2006) (January 2006 final rule). Authorization is 
obtained when notice is provided to the consumer stating that the fee 
will be collected by means of an EFT, along with a disclosure of the 
specific amount of the fee, and the consumer goes forward with the 
underlying transaction. See 71 FR at 1,645-46, 1,659.
    The Board subsequently published an interim final rule in August 
2006 (August 2006 interim rule) to clarify certain provisions in the 
January 2006 final rule. 71 FR 51,451 (August 30, 2006). The August 
2006 interim rule corrected an omission in the January 2006 final rule 
to provide that the requirement to obtain a consumer's authorization to 
electronically collect fees for items returned due to insufficient or 
uncollected funds in the consumer's account applies to the person 
initiating an EFT to collect the fee in this manner, and not to the 
consumer's account-holding financial institution. The August 2006 
interim rule included further guidance regarding the notice 
requirement, including how to disclose the amount of the fee when the 
amount may vary based on the amount of the underlying transaction or 
other factors. With respect to the notice requirements for obtaining 
authorization at POS for both the electronic collection of insufficient 
funds fees and for electronic check conversion transactions, the August 
2006 interim rule clarified that the notice given to consumers at the 
time of the transaction may be substantially similar, and need not be 
identical, to the notice posted at POS. To give interested parties an 
opportunity to comment on these revisions, the Board solicited comment 
on the August 2006 interim rule.
    The Board received 14 comment letters on the August 2006 interim 
rule. Commenters included banks, credit unions, a check services 
provider, a large retailer, and industry trade associations, and 
consumer groups. The following is a summary of the comments received; 
the section-by-section analysis discusses specific comments in more 
detail.
    In general, industry commenters supported the Board's clarification 
that the notice and authorization requirements apply to the person 
seeking to collect the insufficient or uncollected funds fee 
electronically. They also supported the Board's clarification that the 
authorization requirement does not apply to any fees for returned items 
due to insufficient or uncollected funds imposed on the consumer's 
account by the account-holding institution. Some industry commenters, 
however, urged the Board to reconsider, for operational reasons, the 
requirements to provide both a posted notice as well as a copy of that 
notice, or substantially similar notice, to consumers at POS. Industry 
commenters also expressed concerns about the requirement to disclose 
the amount of the fee, particularly when the fee may vary from state to 
state. By contrast, consumer groups disagreed with the notion that a 
consumer can authorize the collection of an insufficient funds fee via 
an EFT from the consumer's account solely by going forward with an 
underlying transaction after receiving notice of the payee's intent to 
collect the fee electronically.

III. Summary of the Final Rule

    The Board is adopting final revisions to Regulation E and the staff 
commentary largely as published in the August 2006 interim rule. The 
rule has been revised to apply to any fees collected for an EFT or a 
check that has been returned unpaid, and is not limited to fees 
collected after an item has been returned due to insufficient or 
uncollected funds in a consumer's account. Additional clarifications 
and modifications have been made to respond to commenters' concerns.
    In addition to explaining that the requirement to obtain the 
consumer's authorization applies to the person electronically 
collecting the returned item fee, the final rule clarifies that if the 
amount of the fee may vary based on the transaction amount or on other 
factors, an explanation of how the fee is calculated may generally be 
provided.
    For POS transactions, the person collecting the fee must provide 
consumers with two separate notices, one that is posted in a prominent 
and conspicuous location, and a second that the consumer may retain. If 
the fee may vary depending on the amount of the transaction or for 
other reasons, an

[[Page 69432]]

explanation of how that fee is determined may be stated on the posted 
notice. However, if the amount of the fee can be calculated at the time 
of the transaction, the person collecting the fee must state the 
specific fee amount on the notice given to the consumer. The final rule 
has been revised to allow persons that may not be able to provide a 
retainable notice at the time of the transaction (e.g., because they do 
not have terminals or registers capable of printing the necessary 
disclosures) to send a notice to the consumer's address as soon as 
reasonably practicable after the person has initiated an EFT to collect 
the fee.
    The effective date of the final rule is January 1, 2007. As 
provided in the August 2006 interim rule, to facilitate compliance and 
minimize the implementation costs, the final rule provides a one-year 
delayed compliance date, until January 1, 2008, for the requirement to 
disclose the amount of the returned item fee (or an explanation of how 
the fee is determined) on the copy of the notice (or substantially 
similar notice) provided to the consumer in connection with a POS 
transaction.

IV. Section-by-Section Analysis

Section 205.3 Coverage

3(a) General
    Section 205.3(a) is being adopted as set forth in the August 2006 
interim rule to incorporate a revision that was inadvertently omitted 
from the January 2006 final rule. See 71 FR 1,638 (January 10, 2006). 
Specifically, Sec.  205.3(a) is revised, pursuant to the Board's 
authority under Sections 904(c) and 904(d)(1) of the EFTA, to clarify 
that the requirement in Sec.  205.3(b)(3) to obtain a consumer's 
authorization to collect a fee for a returned EFT or check via an EFT 
to the consumer's account applies to any person. See 71 FR at 1,645-46. 
As further discussed under Sec.  205.3(b)(3), this amendment clarifies 
that the requirement to obtain the consumer's authorization applies to 
the person seeking to collect the returned item fee electronically and 
not to the consumer's account-holding institution. No commenters 
objected to this clarification.
3(b) Electronic Fund Transfer

Electronic Check Conversion

    Under the January 2006 final rule, merchants and other payees in 
electronic check conversion (ECK) transactions are required to obtain 
the consumer's authorization for the one-time transfer.\1\ Generally, 
authorization for the ECK transaction is obtained when the payee 
provides a notice to the consumer that information from the consumer's 
check received as payment may be used to initiate 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. See Sec.  205.3(b)(2); 71 FR at 1,640-41. Model 
language was provided in the January 2006 final rule to facilitate 
compliance. See Model Clause A-6.
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    \1\ In an ECK transaction, a merchant or other payee takes 
information from a consumer's check to initiate a one-time EFT from 
the consumer's account.
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    The August 2006 interim rule clarified that the notice given to the 
consumer at the time of the transaction must be substantially similar 
to the notice posted at POS, but need not be an exact copy of the 
posted notice. The clarification allows a payee in an ECK transaction 
to modify the text of the notice given to the consumer to make the 
notice more meaningful to the consumer. For example, the payee could 
change the text from ``You authorize us to use information from your 
check * * * '' to ``I authorize you to use information from my check * 
* * .'' Industry commenters supported the revision, and it is adopted 
in the final rule.

Collection of Returned Item Fees Through an Electronic Fund Transfer

Persons Subject to the Requirement
    An EFT from a consumer's account to collect a fee for the return of 
an EFT or a check is covered by Regulation E and must be authorized by 
the consumer. Under Sec.  205.3(b)(3) of the January 2006 final rule, a 
consumer authorizes the electronic collection of a fee for a returned 
EFT or check when the consumer receives notice of the intent to collect 
the fee from the consumer's account by EFT, along with a disclosure of 
the amount of the fee, and goes forward with the underlying 
transaction. See 71 FR at 1,645-46. Although Sec.  205.3(b)(3) was 
intended to apply to the person electronically collecting a fee for a 
returned item, the rule did not specifically indicate the party that 
was required to provide the notice.
    Under Sec.  205.3(b)(3)(i) of the August 2006 interim rule, the 
obligation to provide notice to obtain the consumer's authorization 
applies to the person that initiates an EFT to collect the fee, which 
typically would be a merchant or other payee. However, in some cases 
this may be a third party, either on behalf of the payee as the payee's 
service provider or after it has acquired the right to the payment from 
the payee. Thus, if the person that initiates collection of the fee by 
an EFT failed to obtain a consumer's authorization, the person 
collecting the fee, and not the consumer's account-holding financial 
institution, has violated the regulation.
    All commenters addressing this provision agreed with the Board's 
clarification that the notice and authorization requirement applies to 
the person initiating an EFT to collect the fee, and the final rule 
reflects this approach. However, because an EFT or check may be 
returned for reasons other than insufficient or uncollected funds in a 
consumer's account, the rule has been revised to apply the consumer 
authorization requirement more generally to any fees collected 
electronically when an EFT or check has been returned unpaid. For 
example, a check may be returned if the check does not bear the 
consumer's signature. In addition, the reference in Sec.  
205.3(b)(3)(i) of the August 2006 interim rule referring to the return 
of an unpaid item ``to that person'' has been deleted to acknowledge 
that in some cases, the person collecting the fee will not necessarily 
be the merchant or other payee, but may instead be a third party. The 
commentary to the final rule clarifies that the requirement in Sec.  
205.3(b)(3) to obtain a consumer's authorization to collect a fee for a 
returned item is not intended to apply to the consumer's account-
holding financial institution when it assesses a separate fee against 
the consumer's account for returning a check or EFT unpaid or for 
paying an overdraft. See comment 3(b)(3)-1.
Notice Requirements--General

Authorization Requirements

    Both the January 2006 final rule and the August 2006 interim rule 
provided that to obtain a consumer's authorization to collect a fee for 
an item that is returned unpaid due to insufficient or uncollected 
funds in the consumer's account, notice must first be provided of the 
intent to electronically collect that fee, and such notice also must 
state the amount of the fee. See Sec.  205.3(b)(3)(i); 71 FR 1,645-46. 
Consumers are deemed to authorize the electronic collection of the fee 
if the consumer goes forward with the underlying transaction after 
receiving such notice. Payees in accounts receivable conversion (ARC) 
transactions will typically provide

[[Page 69433]]

written notice on a billing statement or invoice. See 71 FR at 1,646; 
71 FR at 51,453. As further discussed below in Sec.  205.3(b)(3)(ii), 
for one-time transactions 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. The August 2006 interim rule also provided 
guidance regarding how the amount of the fee can be disclosed if it may 
vary from transaction to transaction. The final rule substantially 
adopts these provisions of the interim rule, with some modifications to 
the regulation and commentary text to cover fees for returned items 
generally, and to clarify how the requirement applies in practice.
    Consumer groups objected to the notion that a consumer authorizes 
the electronic collection of a fee for a returned item solely by 
receiving notice of the payee's intent to do so and going through with 
the underlying transaction. In their view, a consumer may intend to 
enter into an underlying check conversion transaction, but is not 
likely to anticipate having the item returned. Consequently, consumer 
groups argue that the consumer cannot be said to intend to authorize a 
debit to collect fees associated with the return of the underlying 
item. Consumer groups were particularly concerned that the Board's rule 
would facilitate the ability of Internet payday lenders to 
electronically access consumers' accounts at any time without 
restriction simply by including a clause in the on-line loan agreement 
providing for such debits.
    Under the final rule, a consumer may authorize a subsequent 
electronic collection of a returned item fee when the consumer receives 
notice (or notice is posted in the case of POS transactions) indicating 
that possibility at the time of the underlying transaction. See also 
comment 3(b)(3)-4, discussed below, addressing how notice may be 
provided when the person collecting the returned item fee is not the 
merchant or other payee to whom the consumer provides payment. The 
Board believes that a notice provided to consumers (or posted on 
signage) before a consumer selects a payment method will adequately 
apprise consumers of the possibility that a fee may be debited from 
their accounts in the event an item is returned unpaid. The prior 
notice allows the consumer to make an informed decision about whether 
to proceed with a particular payment method (e.g., a check conversion 
transaction) or to pay by other means.
    The final rule does not address whether a person has a substantive 
right to collect a returned item fee--that is a matter of state or 
other law. The Board further notes that other federal or state laws, 
such as the Fair Debt Collection Practices Act, as well as payment 
system rules may impose additional substantive requirements. In 
addition, the Board also understands that in some cases, a payee may 
seek to collect more than one returned item fee in connection with a 
single underlying item that has been returned unpaid more than once. 
Although Regulation E does not prohibit the collection of more than one 
fee for a single underlying item if appropriate notice is provided to 
the consumer, such a practice may nevertheless be impermissible under 
certain state laws, and could potentially raise concerns about unfair 
or deceptive practices.
    A few industry commenters raised concerns about the statement in 
the supplementary information for the August 2006 interim rule that a 
separate notice to obtain the consumer's authorization must be provided 
each time a payee seeks to collect an insufficient funds fee for a 
returned item. In particular, these commenters expressed concern that 
this statement could be interpreted to require separate consumer 
authorizations for each fee collected electronically even when the 
consumer has agreed to preauthorized transfers for the underlying 
transactions under Sec.  205.10(b). For example, a consumer authorizing 
monthly debits under Sec.  205.10(b) may also agree to the electronic 
collection of returned item fees in connection with those debits under 
the terms of the same agreement. The Board did not intend to suggest 
that Regulation E requires separate consumer authorizations for each 
returned item fee collected electronically when the consumer has agreed 
to preauthorized transfers for the underlying transactions. The Board 
notes, however that, as is the case for all disclosures under 
Regulation E, the notice regarding the person's intent to collect 
returned item fees electronically must be clear and readily 
understandable to the consumer. See Sec.  205.4(a). Moreover, if the 
consumer later revokes his or her authorization under the agreement, 
the payee must terminate all subsequent debits under that 
authorization. See Sec.  205.10(c); comment 10(c)-2.

Disclosure of Returned Item Fees

    The final rule also adopts the provision in the August 2006 interim 
rule in Sec.  205.3(b)(3)(i) permitting the person collecting a fee for 
a returned EFT or check to provide an explanation of how the fee is 
determined if the amount of the fee may vary based on the amount of the 
underlying transaction or other factors. The August 2006 interim rule 
recognized that state laws governing the maximum fee that may be 
collected for items returned unpaid are not uniform. For example, in 
some states, the fee may vary based on the transaction amount or the 
amount of time the obligation is outstanding. Thus, persons that intend 
to collect the maximum amount permitted by state law may be unable to 
disclose a specific dollar amount on a notice that would be given to 
all consumers. For example, a payee at POS would be unable to post a 
notice disclosing a specific fee amount if the fee will vary depending 
on the amount of the underlying transaction.
    Industry commenters generally supported the flexibility provided by 
Sec.  205.3(b)(3)(i), but a few commenters asserted that the rule 
continues to impose unnecessary burden on businesses operating in 
multiple states. The commenters noted that even when the amount of the 
fee is fixed under an applicable state law, payees would have to modify 
their notice in each state. Moreover, the rule could potentially result 
in lengthy explanations about how to calculate the fee which would not 
necessarily enhance consumer understanding. A trade association of 
finance and treasury professionals asserted that consumers would 
receive adequate disclosure so long as they are provided a general 
statement that the fee will not exceed the maximum amount permitted by 
applicable state law. The Board believes, however, that merely 
disclosing that a fee will be collected in an amount that is in 
accordance with state law would not provide consumers with sufficient 
detail about the fee because consumers are unlikely to be familiar with 
the limits established under the state law governing the individual 
transaction. The vagueness of such a disclosure would thus make it 
difficult for consumers to later reconcile any debits to collect the 
fee with information on their periodic statements. Accordingly, the 
Board is adopting Sec.  205.3(b)(3)(i) as set forth in the August 2006 
interim rule to require disclosure of the fee (or an explanation of how 
that fee is determined where the fee amount may vary from transaction 
to transaction). Thus, the rule would require for example, a merchant 
or other payee that does business in two different states, one of which 
allows a maximum returned item fee of $25, and the other allowing a 
maximum fee of $35, to disclose the specific fee that would be 
collected electronically in each state.
    Comment 3(b)(3)-2 is adopted largely as proposed and provides an 
example of

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how the rule would apply when a person seeks to collect a returned item 
fee electronically in connection with an ARC transaction. The comment 
has been revised in the final rule to clarify that the term ``ARC 
transaction'' may also cover situations where a consumer makes an in-
person payment for an invoice at the payee's physical location (e.g., 
when a consumer goes to a bank branch to make a loan payment at a 
teller window) or leaves the payment in a dropbox, instead of mailing 
the payment to the payee. These circumstances would thus not be subject 
to the notice requirements for POS transactions under Sec.  
205.3(b)(3)(ii).
    To facilitate compliance, Model Clause A-8 of Appendix A in the 
final rule includes model language that payees may use to disclose 
their intent to collect a fee for an EFT or check returned unpaid 
electronically and the amount of the fee. The model language is 
modified from the wording used in the August 2006 interim rule to apply 
to all types of returned item fees and to reflect that in some cases 
the person collecting the fee may not be the merchant or other payee to 
whom the consumer has provided payment. One commenter expressed concern 
that state law may require the person collecting the fee to use 
specific wording for such notices, which might be inconsistent with the 
Board's model language. While use of the model language would provide a 
safe harbor for persons seeking to collect returned item fees 
electronically, the regulation does not mandate use of the model 
language. Thus, a person may comply with the rule without using the 
Board's model language so long as that person apprises the consumer 
that the fee will be collected electronically and states the amount of 
the fee (or how the fee is determined).
Notice Requirements--POS Transactions

Forms of Notice

    Under the August 2006 interim rule, payees at POS must post notice 
of their intent to electronically collect a fee for a returned EFT or 
check (along with the amount of the fee) in a prominent and conspicuous 
location, and a copy of the notice, or substantially similar notice, 
must be provided to the consumer at the time of the transaction, such 
as on the sales receipt. See Sec.  205.3(b)(3)(ii). If the amount of 
the fee to be collected electronically can be determined at the time of 
the transaction, the notice provided to the consumer must state the 
specific amount of the fee. The final rule generally adopts the 
approach set forth in the interim rule in Sec.  205.3(b)(3)(ii), but 
allows a payee to mail a notice to a consumer's address as an 
alternative to providing a consumer a retainable notice at the time of 
the transaction.
    One large retailer urged the Board to allow payees to choose a 
single method for notifying consumers about the fee, either posting a 
notice at POS or providing consumers with such notice via a receipt. 
This retailer stated that the costs of providing both forms of notice 
to consumers at POS would be a significant barrier to wider industry 
adoption of ACH payment methods and, moreover, that the information 
provided in the notices was irrelevant to the vast majority of 
consumers who do not have checks returned. A vendor of check processing 
services commented that some merchants do not convert checks received 
at POS but may nevertheless collect fees electronically if an item is 
returned unpaid. According to this commenter, merchants that do not 
convert checks are unlikely to upgrade their registers to provide 
consumers with receipts containing the required disclosures. As a 
result, the commenter stated that the interim rule would prevent these 
merchants from being able to collect such fees by means of an EFT, a 
process that is considerably more efficient than other traditional 
collection methods, such as processing a demand draft (or remotely 
created check). This commenter suggested that the Board allow merchants 
to send a notice to the consumer after the transaction occurs but 
before any debit to the consumer's account to collect the insufficient 
funds fee. Because a very high percentage of checks are paid when 
presented, the commenter noted that the notice would thus only have to 
be mailed to the small number of consumers for whom the notice would be 
relevant, i.e., those who have their checks or other items returned.
    The final rule adopts Sec.  205.3(b)(3)(ii) largely as set forth in 
the interim rule with a minor change to the rule text to refer to the 
person ``initiating an EFT'' to collect the insufficient funds fee for 
consistency with the general rule in Sec.  205.3(b)(3)(i). In addition, 
Sec.  205.3(b)(3)(ii) has been revised to allow a person collecting 
returned item fees electronically to subsequently send a copy of the 
posted notice (or a substantially similar notice) to consumers instead 
of providing a notice at the time of the transaction. Persons 
collecting the fee would still be required to post notice of their 
intent to collect fees for returned items and a disclosure of the 
amount of the fee (or a description of how that fee is determined). The 
revised rule, however, permits persons that may not be able to provide 
notices at the time of the transaction (for example, because they do 
not have registers or terminals capable of printing receipts or of 
providing the required notices) the flexibility to collect any 
resulting returned item fees electronically. The flexibility provided 
in the revised rule would also be available for persons who, for 
operational or other reasons, choose not to provide notices at the time 
of the transaction. The Board believes that the purpose served by the 
notice given to the consumer, that is, to provide a source of 
information about the fee that the consumer can refer to later (e.g., 
if necessary to reconcile with entries on a periodic statement), can 
also be accomplished by permitting the payee to mail the notice at a 
later time. This alternative has the added benefit of providing notice 
only to those consumers for whom the notice is particularly relevant. 
Persons electing to mail notices to a consumer's address must send the 
notice as soon as reasonably practicable after the person initiates an 
EFT to collect the fee from the consumer's account. Thus, given the 
notice's intended purpose of providing the consumer information about 
the debit, the final rule does not require the notice to be sent prior 
to the initiation of the EFT to collect the fee. If, however, the 
person does not provide a consumer with a notice at the time of the 
transaction and is unable to mail a notice because, for example, the 
consumer's check does not bear the consumer's address, the person would 
violate the rule. Similarly, in a debit card transaction where the 
consumer's address typically would not be collected, the person 
collecting the returned item fee would violate the rule if it does not 
provide the consumer a copy of the notice regarding the fee, or a 
substantially similar notice, either at the time of the transaction or 
in a subsequent mailing.
    Comment 3(b)(3)-4 is added in the final rule to address the 
situation where the merchant or other payee to whom the underlying 
payment is made is not the same person that collects a returned item 
fee electronically if the payment is returned. Because the obligation 
to obtain the consumer's authorization for the EFT debit falls on the 
person collecting the fee in this manner, comment 3(b)(3)-4 states that 
the person initiating the EFT to the consumer's account to collect the 
fee may provide the requisite notices under Sec.  205.3(b)(3) through a 
third party, such as a merchant. For example, the person electronically 
collecting a returned item

[[Page 69435]]

fee could have the merchant at POS post the required signage and 
provide a retainable copy of the notice to the consumer on the person's 
behalf.

Disclosure of Returned Item Fee for POS Transactions

    Under Sec.  205.3(b)(3)(ii) of the August 2006 interim rule, if the 
dollar amount of the fee can be calculated at the time of the 
transaction, the copy of the notice (or substantially similar notice) 
provided to the consumer at the time of the transaction must state that 
dollar amount, rather than an explanation of how that fee is 
determined. This provision is adopted generally as set forth in the 
August 2006 interim rule. Persons that elect to send notices to a 
consumer's address are required to state the amount of the fee being 
collected at the time the notice is mailed. Comment 3(b)(3)-3 
illustrates, by way of example, how a person would disclose the amount 
of any fees assessed for a returned item in connection with a POS 
transaction.
    Industry commenters continued to raise concerns about the costs of 
reprogramming terminals at POS to provide the amount of the fee on the 
notice provided to the consumer at the time of the transaction and 
urged the Board to delete the requirement. The Board believes the one-
year delayed compliance date, discussed below, should significantly 
reduce the implementation costs and has retained the requirement to 
disclose the fee on the retainable notice in the final rule. Moreover, 
the alternative described above permitting the person collecting the 
fee to send a notice by mail after the transaction should further 
reduce the costs of compliance.
Delayed Compliance Date for Fee Disclosures Provided to Consumers at 
POS Terminals
    The Board provided a one-year delayed compliance date for the 
requirement to disclose the amount of the fee on the notice given to 
the consumer to minimize the expense associated with reprogramming 
terminals by the January 1, 2007 compliance date. No commenters 
objected to the delayed compliance date and it is adopted as proposed. 
The delayed compliance date applies whether the retainable notice is 
provided at the time of the transaction or subsequently sent to the 
consumer.
    One industry commenter also suggested extending the delayed 
compliance date to other requirements of the August 2006 interim rule. 
Given that payees will already have had approximately one year to 
implement the other requirements, and because those requirements do not 
present the same programming issues as the disclosure of the amount of 
the fee on the notice given to consumers, the January 1, 2007 
compliance date is retained. Accordingly, this delayed compliance 
provision is limited solely to the disclosure on the retainable notice 
given to the consumer regarding the amount of the returned item fee 
that may be collected and does not apply to the requirement to disclose 
the payee's intent to electronically collect the fee on that notice. 
The delayed compliance date also does not apply to the requirement to 
provide the amount of the fee, or an explanation of how the fee is 
determined, on the posted notice.

V. Final Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
generally requires an agency to perform an assessment of the impact a 
rule is expected to have on small entities. However, under section 
605(b) of the RFA, 5 U.S.C. 605(b), the regulatory flexibility analysis 
otherwise required under section 604 of the RFA is not required if an 
agency certifies that the rule will not have a significant economic 
impact on a substantial number of small entities, and provides a 
statement providing the factual basis for such certification. Based on 
its analysis and for the reasons stated below, the Board certifies that 
the final rule will not have a significant economic impact on a 
substantial number of small entities.
    1. Statement of the need for, and objectives of, the final rule. 
The EFTA was enacted to provide a basic framework establishing the 
rights, liabilities, and responsibilities of participants in electronic 
fund transfer systems. The primary objective of the EFTA is the 
provision of individual consumer rights. 15 U.S.C. 1693. The EFTA 
authorizes the Board to prescribe regulations to carry out the purpose 
and provisions of the statute. 15 U.S.C. 1693b(a). The Act expressly 
states that the Board's regulations may contain ``such classifications, 
differentiations, or other provisions, * * * as, in the judgment of the 
Board, are necessary or proper to effectuate the purposes of [the Act], 
to prevent circumvention or evasion [of the Act], or to facilitate 
compliance [with the Act].'' 15 U.S.C. 1693b(c). The Act also states 
that ``[i]f electronic fund transfer 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 act] are made applicable to such persons and services.'' 15 U.S.C. 
1693b(d). The Board believes that the revisions to Regulation E 
discussed below are within Congress's broad grant of authority to the 
Board to adopt provisions that carry out the purposes of the statute.
    The Board is revising Regulation E to clarify that a person that 
intends to collect a fee for a returned EFT or check by means of an EFT 
from a consumer's account must obtain the consumer's authorization. 
Authorization is obtained when the person collecting the fee 
electronically provides a written notice (or posts the notice in the 
case of a POS transaction) of the intent to collect the fee 
electronically, along with a disclosure of the dollar amount of the 
fee, and the consumer goes forward with the underlying transaction 
after receiving that notice. This requirement would allow consumers to 
receive prior notice of a person's intent to electronically collect a 
returned item fee and enable the Board to promote consistency in the 
notice provided to consumers.
    In response to industry requests for flexibility with respect to 
the requirement to provide consumers with a copy of the notice posted 
at POS informing them of the person's intent to electronically collect 
a returned item fee, the final rule states that persons may provide a 
notice that is substantially similar to the posted notice. A parallel 
revision is made with respect to the electronic check conversion 
requirements at POS. Accordingly, payees may provide consumers with a 
notice that is substantially similar to the notice posted at POS 
informing consumers that the payee may convert checks received as 
payment to EFTs.
    In addition, to address state laws that, for example, permit a fee 
for returned items to be imposed based on a percentage of the 
underlying transaction (rather than a flat fee regardless of the 
transaction amount), the final rule permits persons collecting the fee 
to disclose a description of how the fee will be determined in lieu of 
an actual dollar amount. However, if the dollar amount of the fee can 
be calculated at the time the notice is given to the consumer, this 
amount must be stated on the version of the notice provided to the 
consumer. In response to concerns about the costs of implementing 
systems to provide a copy of the posted notice or substantially similar 
notice to the consumer at the time of a POS transaction with the dollar 
amount of the fee, or an explanation of how such

[[Page 69436]]

fee would be calculated if the fee may vary based on the underlying 
transaction amount or other factors, the final rule permits persons to 
send such notice to a consumer's address at a later time.
    2. Issues raised by comments in response to the initial regulatory 
flexibility analysis. In accordance with section 603(a) of the RFA, the 
Board conducted an initial regulatory flexibility analysis in 
connection with the September 2004 proposal (69 FR 55,996 (September 
17, 2004)). In accordance with section 604(a) of the RFA, the Board 
also conducted a final regulatory flexibility analysis in connection 
with its January 2006 final rule (71 FR 1,638 (January 10, 2006)) and 
with its August 2006 interim rule (71 FR 51,451 (August 30, 2006)). The 
Board did not receive any comments on any of these regulatory 
flexibility analyses specifically with respect to the disclosure of a 
person's intent to electronically collect a returned item fee. However, 
one commenter, a major provider of check processing services, in 
response to the September 2004 proposal, noted that in general any 
changes to the authorization language provided to consumers in 
electronic check conversion transactions at POS locations would entail 
re-programming of the terminals typically used to provide notices and 
obtain the consumer's authorization. In response to the August 2006 
interim rule, three commenters, including the same provider of check 
processing services, asserted that it will be costly to reprogram POS 
terminals to state the amount of the returned item fee that would be 
collected electronically.
    3. Small entities affected by the final rule. Persons that initiate 
one-time EFTs from a consumer's account to electronically collect a fee 
for items returned unpaid will be required under the regulation to 
obtain the consumer's authorization for the transfer. The person that 
initiates the EFT to debit the consumer's account for the fee must 
provide written notice of the intent to collect the fees electronically 
and disclose the dollar amount of the fee. For ARC transactions, notice 
will likely be provided on a billing statement or invoice. At POS, 
notice must be provided by posted signage, and a copy of the notice or 
a substantially similar notice must be given to the consumer either at 
the time of the transaction or sent at a later time.
    The Board believes many small businesses that electronically 
collect fees for returned items are currently providing written notices 
regarding the intent to collect such fees electronically, either on 
posted signage or on a transaction receipt at POS, and possibly both. 
Similarly, the Board believes that payees are providing written notices 
in ARC transactions because payment system rules currently require 
written notices. Therefore, small entities affected by this final rule 
are unlikely to have to craft entirely new notices as a result of this 
rule. Although they will have to review, and likely revise, their 
existing notices, including reprogramming the terminals used to 
generate these notices, the Board does not expect that the burden 
associated with these tasks will be significant. To further facilitate 
compliance, the Board provided model language for the notice 
requirement in this final rule. In addition, the final rule extends for 
one year, the compliance date for the requirement to disclose the 
dollar amount of the returned item fee on the retainable notice 
provided to the consumer to allow additional time for any necessary 
programming changes. For fees collected in connection with returned 
items in a POS transaction, the final rule also permits the person 
collecting the fee to mail a copy of the notice regarding electronic 
collection of fees for returned items at a later time as an alternative 
to providing a copy of such notice at the time of the underlying 
transaction. Therefore, small entities that do not currently have 
systems in place to provide the notice at the time of the transaction 
need not invest in new systems at POS to comply with the rule.
    4. Other federal rules. The Board has not identified any federal 
rules that duplicate, overlap, or conflict with the final revisions to 
Regulation E.

VI. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the rule 
under the authority delegated to the Board by the Office of Management 
and Budget (OMB). The final rule contains requirements subject to the 
PRA. The collection of information that is required by this rule is 
found in 12 CFR 205.3(b)(3). The Federal Reserve may not conduct or 
sponsor, and an organization is not required to respond to, this 
information collection unless the information collection displays a 
currently valid OMB control number. The OMB control number is 7100-
0200. This information is required to provide benefits for consumers 
and is mandatory (15 U.S.C. 1693 et seq.). The respondents/
recordkeepers are for-profit financial institutions, including small 
businesses. Institutions are required to retain records for 24 months.
    All persons, such as merchants and other payees, that may collect a 
returned item fee via an EFT from the consumer's account potentially 
are affected by this collection of information, because these persons 
will be required to obtain a consumer's authorization for the 
electronic transfer under Sec.  205.3(b)(3).
    Burden with respect to the requirement to provide notice to the 
consumer for the purpose of obtaining the consumer's authorization for 
the electronic collection of fees for returned items was previously 
estimated in the January 2006 final rule (Docket No. R-1210 and R-
1234), and reported in accordance with those estimates in documents 
filed with OMB. Under the Board's prior analysis, the total burden 
under Regulation E, including but not limited to the burden of 
obtaining a consumer's authorization to collect a returned item fee 
electronically as a result of the January 2006 final rule as further 
amended by this final rule, is 1,252,684 hours. The burden estimate 
comprises the total paperwork burden for all persons subject to the 
regulation and is not limited to the burden for the 1,289 respondents 
regulated by the Federal Reserve that are required to comply with 
Regulation E.
    Because the records would be maintained by the institutions and the 
notices are not provided to the Federal Reserve, no issue of 
confidentiality arises under the Freedom of Information Act.

Text of Final Revisions

    Comments are numbered to comply with Federal Register publication 
rules.

List of Subjects in 12 CFR Part 205

    Consumer protection, Electronic fund transfers, Federal Reserve 
System, Reporting and recordkeeping requirements.


0
For the reasons set forth in the preamble, the interim final rule 
amending 12 CFR part 205 and the Official Staff Commentary which was 
published at 71 FR 51451 on August 30, 2006, is adopted as a final rule 
with the following changes:

PART 205--ELECTRONIC FUND TRANSFERS (REGULATION E)

0
1. The authority citation for part 205 continues to read as follows:

    Authority: 15 U.S.C. 1693b.

0
2. In Sec.  205.3, paragraphs (a) and (b)(2)(ii) are republished, and 
(b)(3) is revised as follows:

[[Page 69437]]

Sec.  205.3  Coverage.

    (a) General. This part applies to any electronic fund transfer that 
authorizes a financial institution to debit or credit a consumer's 
account. Generally, this part applies to financial institutions. For 
purposes of Sec. Sec.  205.3(b)(2) and (b)(3), 205.10(b), (d), and (e) 
and 205.13, this part applies to any person.
    (b) Electronic fund transfer. * * *
    (2) Electronic fund transfer using information from a check. * * *
    (ii) The person initiating an electronic fund transfer using the 
consumer's check as a source of information for the transfer must 
provide a notice that the transaction will or may be processed as an 
electronic fund transfer, and obtain a consumer's authorization for 
each transfer. A consumer authorizes a one-time electronic fund 
transfer (in providing a check to a merchant or other payee for the 
MICR encoding, that is, the routing number of the financial 
institution, the consumer's account number and the serial number) when 
the consumer receives notice and goes forward with the underlying 
transaction. For point-of-sale transfers, the notice must be posted in 
a prominent and conspicuous location, and a copy thereof, or a 
substantially similar notice, must be provided to the consumer at the 
time of the transaction.
* * * * *
    (3) Collection of returned item fees via electronic fund transfer. 
(i) General. The person initiating an electronic fund transfer to 
collect a fee for the return of an electronic fund transfer or a check 
that is unpaid, including due to insufficient or uncollected funds in 
the consumer's account, must obtain the consumer's authorization for 
each transfer. A consumer authorizes a one-time electronic fund 
transfer from his or her account to pay the fee for the returned item 
or transfer if the person collecting the fee provides notice to the 
consumer stating that the person may electronically collect the fee, 
and the consumer goes forward with the underlying transaction. The 
notice must state that the fee will be collected by means of an 
electronic fund transfer from the consumer's account if the payment is 
returned unpaid and must disclose the dollar amount of the fee. If the 
fee may vary due to the amount of the transaction or due to other 
factors, then, except as otherwise provided in paragraph (b)(3)(ii) of 
this section, the person collecting the fee may disclose, in place of 
the dollar amount of the fee, an explanation of how the fee will be 
determined.
    (ii) Point-of-sale transactions. If a fee for an electronic fund 
transfer or check returned unpaid may be collected electronically in 
connection with a point-of-sale transaction, the person initiating an 
electronic fund transfer to collect the fee must post the notice 
described in paragraph (b)(3)(i) of this section in a prominent and 
conspicuous location. The person also must either provide the consumer 
with a copy of the posted notice (or a substantially similar notice) at 
the time of the transaction, or mail the copy (or a substantially 
similar notice) to the consumer's address as soon as reasonably 
practicable after the person initiates the electronic fund transfer to 
collect the fee. If the amount of the fee may vary due to the amount of 
the transaction or due to other factors, the posted notice may explain 
how the fee will be determined, but the notice provided to the consumer 
must state the dollar amount of the fee if the amount can be calculated 
at the time the notice is provided or mailed to the consumer.
    (iii) Delayed compliance date for fee disclosure. Through December 
31, 2007, the notice required to be provided to consumers under 
paragraph (b)(3)(ii) of this section in connection with a point-of-sale 
transaction, whether given to the consumer at the time of the 
transaction or subsequently mailed to the consumer, need not include 
either the dollar amount of any fee collected electronically for a 
check or electronic fund transfer returned unpaid or an explanation of 
how the amount of the fee will be determined.
* * * * *

0
3. In Appendix A to Part 205, in Section A-8, the heading ``Model 
Clause for Electronic Collection of Insufficient Funds Fees'' is 
revised as ``Model Clause for Electronic Collection of Returned Item 
Fees'', and the text of the paragraph is revised.

Appendix A to Part 205--Model Disclosure Clauses and Forms

* * * * *

A-8 MODEL CLAUSE FOR ELECTRONIC COLLECTION OF RETURNED ITEM FEES (Sec.  
205.3(b)(3))

    If your payment is returned unpaid, you authorize [us/ name of 
person collecting the fee electronically] to make a one-time electronic 
fund transfer from your account to collect a fee of [$----]. [If your 
payment is returned unpaid, you authorize [us/ name of person 
collecting the fee electronically] to make a one-time electronic fund 
transfer from your account to collect a fee. The fee will be determined 
[by]/ [as follows]: [----------------].]

0
4. In Supplement I to Part 205, under Section 205.3--Coverage, the 
heading ``Paragraph 3(b)(3)--Collection of Insufficient Funds Fees via 
Electronic Fund Transfer'' is revised as ``Paragraph 3(b)(3)--
Collection of Returned Item Fees via Electronic Fund Transfer'', 
paragraphs 1. through 3. are revised, and paragraph 4. is added.

SUPPLEMENT I TO PART 205--OFFICIAL STAFF INTERPRETATIONS

* * * * *
Section 205.3--Coverage
* * * * *
    3(b) Electronic Fund Transfer
* * * * *
    Paragraph 3(b)(3)--Collection of Returned Item Fees via Electronic 
Fund Transfer
    1. Fees imposed by account-holding institution. The requirement to 
obtain a consumer's authorization to collect a fee via EFT for the 
return of an EFT or check unpaid applies only to the person that 
intends to initiate an EFT to collect the returned item fee from the 
consumer's account. The authorization requirement does not apply to any 
fees assessed by the consumer's account-holding financial institution 
when it returns the unpaid underlying EFT or check or pays the amount 
of an overdraft.
    2. Accounts receivable transactions. In an accounts receivable 
(ARC) transaction where a consumer sends in a payment for amounts owed 
(or makes an in-person payment at a biller's physical location, such as 
when a consumer makes a loan payment at a bank branch or places a 
payment in a dropbox), a person seeking to electronically collect a fee 
for items returned unpaid must obtain the consumer's authorization to 
collect the fee in this manner. A consumer authorizes a person to 
electronically collect a returned item fee when the consumer receives 
notice, typically on an invoice or statement, that the person may 
collect the fee through an EFT to the consumer's account, and the 
consumer goes forward with the underlying transaction by providing 
payment. The notice must also state the dollar amount of the fee. 
However, an explanation of how that fee will be determined may be 
provided in place of the dollar amount of the fee if the fee may vary 
due to the amount of the transaction or due to other factors, such as 
the number of days the underlying transaction is left outstanding. For 
example, if a state law permits a maximum fee of $30 or 10% of the 
underlying transaction, whichever is greater, the person collecting the 
fee may explain how the fee is determined,

[[Page 69438]]

rather than state a specific dollar amount for the fee.
    3. Disclosure of dollar amount of fee for POS transactions. The 
notice provided to the consumer in connection with a POS transaction 
under Sec.  205.3(b)(3)(ii) must state the amount of the fee for a 
returned item if the dollar amount of the fee can be calculated at the 
time the notice is provided or mailed. For example, if notice is 
provided to the consumer at the time of the transaction, if the 
applicable state law sets a maximum fee that may be collected for a 
returned item based on the amount of the underlying transaction (such 
as where the amount of the fee is expressed as a percentage of the 
underlying transaction), the person collecting the fee must state the 
actual dollar amount of the fee on the notice provided to the consumer. 
Alternatively, if the amount of the fee to be collected cannot be 
calculated at the time of the transaction (for example, where the 
amount of the fee will depend on the number of days a debt continues to 
be owed), the person collecting the fee may provide a description of 
how the fee will be determined on both the posted notice as well as on 
the notice provided at the time of the transaction. However, if the 
person collecting the fee elects to send the consumer notice after the 
person has initiated an EFT to collect the fee, that notice must state 
the amount of the fee to be collected.
    4. Third party providing notice. The person initiating an EFT to a 
consumer's account to electronically collect a fee for an item returned 
unpaid may obtain the authorization and provide the notices required 
under Sec.  205.3(b)(3) through third parties, such as merchants.
* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, November 27, 2006.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. E6-20300 Filed 11-30-06; 8:45 am]
BILLING CODE 6210-01-P