General Coverage of Regulation E

Regulation E applies to “electronic funds transfers” (EFTs) into or out of “accounts” that are held by “consumers.” To understand the rules of Regulation E, you need a good understanding of each of these terms.

An EFT is a transfer of funds that is initiated electronically—rather than with a paper instrument and which debits or credits an account. “Initiated electronically” means by: electronic terminal, telephone, computer, or magnetic tape. Examples of EFTs are point-of-sale transfers; automated teller machine (ATM) transfers; direct deposits; preauthorized withdrawals; transfers initiated by telephone; and transfers resulting from debit-card transactions, whether or not initiated through an electronic terminal. [12 CFR 1005.3(b)]

“E-check” transactions are also EFTs. An e-check is a regular paper check that the consumer supplies to a payee, usually a retail merchant, who “converts” the check into an electronic funds transfer (EFT). The merchant does this at a point-of-sale (POS) terminal by electronically scanning and capturing the Magnetic Ink Character Recognition (MICR) encoding on the check for the routing, account, and serial numbers, and entering the amount. Other times, the merchant will do the conversion when a check is mailed to the merchant or a lock box. In either case, the person converting the check into an EFT must provide a notice to the consumer that informs the consumer of the conversion. [See Appendix A-6 to Regulation E.]

“WEB code transactions” and “TEL code transactions” are not addressed by Regulation E or the Commentary, but are similar enough to e-checks that they should probably be treated as EFTs. (In fact, the staff of the Federal Reserve Board has said that such transactions are EFTs, but that the e-check rules do not apply to them. See Supplementary Information issued in connection with revised e-check regulations, Federal Register for January 10, 2006, at page 1640.) A WEB code transaction is an EFT authorized by a consumer over the Internet and initiated by a third party through the Automated Clearing House (ACH) network. As part of the transaction, the consumer provides the third party with their account and routing information. A TEL code transaction is similar in nature except that the transfer is authorized over the phone. See the later section in this chapter on the initial disclosure requirements for issues involved with disclosing these types of EFTs on the consumer’s initial disclosure.

Also an EFT is a payment under a bill-payment plan where the consumer initiates the transaction by some electronic means, such as a computer. Payments under such a plan would not be EFTs, however, if the terms of the agreement specifically state that payments will be made by check or other similar paper instrument, and the institution specifies the payees who will be paid by check. [Commentary, 12 CFR 1005.3(b)-1.vi.]

Some transactions that might seem to be EFTs are not. Examples are: (1) payments that do not debit or credit a consumer asset account, such as preauthorized payroll allotments that are made directly to a creditor to repay a credit extension; (2) payments made in currency by a consumer to another person at an electronic terminal; or (3) preauthorized checks drawn by the financial institution on the consumer’s account (such as an interest or other recurring payment to the consumer or another party), even if the check is computer generated; or (4) transactions arising from the electronic collection, presentment, or return of checks through the check collection system, such as through transmission of electronic check images. [Commentary, Section 1005.3(b)(1)(2)(i-iv)]. Also, remittance transfers which do not transfer funds into or out of a consumer account are not electronic funds transfers [Regulation E, Subpart B].

An “account” is a demand deposit or a savings account, or other consumer asset account held directly or indirectly by a financial institution that is established primarily for personal, family, or household purposes. [12 CFR 1005.2(b)(1)] This definition is broad but, as we point out below, the regulation lists a number of accounts and transactions that are exempt from coverage, and this has the effect of narrowing somewhat the range of accounts subject to Regulation E. Furthermore, an account held by a financial institution under a bona fide trust agreement is excluded from the definition of account. [12 CFR 1005.2(b)(2)]

A “payroll card account” is within the definition of “account.”[12 CFR 1005.2(b)(2)] A payroll card account is one into which an employee’s wages or salary are transferred by EFT, and the employee is provided a card with a magnetic stripe that the employee can use to access the account. The employee can use the card at ATMs, for point-of-sale transactions, etc.

A “consumer” is any natural person. [12 CFR 1005.2(e)] Corporations, partnerships, and any other sort of legal entity that is not a natural person are not “consumers” under Regulation E.

So, again, the Regulation applies to “EFTs” to or from “accounts” held by “consumers.” However, some transactions that meet this description, or might seem to meet it, are specifically exempted from coverage by the Regulation. Let’s look at them.

First is any transfer of funds originated by check, draft, or similar paper instrument or any payment made by check, draft, or similar paper instrument at an electronic terminal. [12 CFR 1005.3(c)(1)] Electronic re-presentment of a returned check is not an EFT, however, since the transaction was originated by check. [Commentary, 12 CFR 1005.3(c)(1)-1] Also see the description of e-check transactions above.

Second is any transaction under check guarantee or authorization services. [12 CFR 1005.3(c)(2)] These are services that guarantee payment or authorize acceptance of a check, draft, or similar paper instrument and that do not directly debit or credit a consumer’s account. The debiting of the account does not occur until the check actually arrives at the paying institution, even though there might be a provisional debit to the account at the time the check is written. The provisional debit at the time the check is written does not make the transaction subject to Regulation E. Also, the fact that the consumer presents a card to use the guarantee service does not subject the transaction to Regulation E.

Third are wire transfers. [12 CFR 1005.3(c)(3)] These are transfers made through the Federal Reserve Communications System or other similar network that is used primarily for transfers between financial institutions or between businesses.

Fourth are transfers that are primarily for the purchase or sale of securities or commodities. However, the security or commodity must be: (1) regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission, (2) purchased or sold through a broker-dealer regulated by the Securities and Exchange Commission or through a futures commission merchant regulated by the Commodity Futures Trading Commission, or (3) held in book-entry form by a Federal Reserve Bank or federal agency. [12 CFR 1005.3(c)(4)]

Fifth are certain automatic transfers between accounts within a single financial institution. [12 CFR 1005.3(c)(5)] By “automatic transfers,” we mean transfers that are agreed upon by the institution and the consumer that the institution will initiate without a specific request from the consumer. The automatic transfers that are exempt are automatic transfers between a consumer’s accounts within the institution, such as between a savings and checking account [12 CFR 1005.3(c)(5)(i)]; automatic transfers from a consumer’s account to an account of a member of the consumer’s family held at the same financial institution [12 CFR 1005.3(c)(5)(ii)]; and automatic transfers between a consumer’s account and an account of the financial institution, such as the crediting of interest to an account or the automatic payment of loan installments. [12 CFR 1005.3(c)(5)(iii)]

Sixth are telephone transfers—so long as they are not made under a telephone bill-payment plan or other prearranged plan or agreement that contemplates periodic or recurring transfers. [12 CFR 1005.3(c)(6)] A “plan” includes a written statement available to the public or to account holders that describes a service allowing a consumer to initiate transfers by telephone—for example, a brochure or material included with periodic statements. [Commentary, 12 CFR 1005.3(c)(6)-1]

Seventh are preauthorized transfers (which are EFTs authorized in advance by the consumer to recur at substantially regular intervals) to or from accounts held at small institutions. Small institutions are those with assets of $100 million or less on the preceding December 31. If the assets subsequently total more than $100 million, the exemption terminates one year from the end of the calendar year in which the assets exceeded $100 million. [12 CFR 1005.3(c)(7)] Remember, this exemption for small institutions only applies to preauthorized transfers. Other sorts of EFTs—such as transfers made at ATMs—are still subject to Regulation E even if made to or from accounts at small institutions. This exemption is not a general exemption from Regulation E for small institutions.

Regulation E uses a few other terms that are significant in this chapter that you should be familiar with. An “access device” is a card, a code, or some other means of accessing a consumer’s account in order to initiate EFTs. [12 CFR 1005.2(a)(1)] “Access device” does not, however, include what is commonly called an “e-check,” which is a normal check used at a POS terminal to initiate an EFT. [Commentary, 12 CFR 1005.2(a)-2] An “accepted access device” is one that has been delivered to and accepted by a consumer in a fashion permitted by the rules that we will look at later that restricts the issuance of access devices. [12 CFR 1005.2(a)(2)]

An “electronic terminal” is an electric device—other than a telephone—through which a consumer can initiate an EFT. [12 CFR 1005.2(h)] The most common examples are point-of-sale terminals, automated teller machines (ATMs), and cash-dispensing machines. Such a device can be an electronic terminal even if the consumer can make an EFT without an access device, such as when the terminal is used to convert a check into an EFT. [Commentary, 12 CFR 1005.2(h)-2]

And finally, an “unauthorized electronic funds transfer” is an EFT from a consumer’s account from which the consumer receives no benefit and it is by someone other than the consumer who does not have actual authority to make the transfer. [12 CFR 1005.2(m)] However, if the consumer furnished the person with the access device and did not notify the institution that transfers by this person are no longer authorized, the transfer will not be considered unauthorized. [12 CFR 1005.2(m)(1)] Also, if the transfer is initiated with fraudulent intent by the consumer, or by someone acting in concert with the consumer, or if the financial institution or its employee initiates the transfer, the transfer will not be considered unauthorized. [12 CFR 1005.2(m)(2) and (3)]

Now that we are familiar with the terminology of Regulation E and the general sorts of transactions and accounts to which Regulation E applies, let’s look at the form the disclosures you provide must take.