Regulatory Agencies Outline Regulation E Pitfalls

As consumers expect an increasingly digital banking experience, the importance of Regulation E continues to grow. That regulation – which covers everything from debit card transactions to ACH and Peer-to-Peer (P2P) transfers – comes with a host of compliance requirements, as well as the potential for civil liability if the rules are not followed. In particular, the Regulation E rules regarding error resolution have grown more prevalent for compliance professionals in recent years, amid a surge in fraud and claims of account takeovers. Compliance with the error resolution rules is vital for credit unions of all sizes.

Luckily, the federal regulators have provided guidance on common Regulation E compliance violations and ways to prevent them. In January 2024, the Federal Reserve published its fourth 2023 issue of the Consumer Compliance Outlook, which dives into this topic. While the Federal Reserve does not have supervisory authority over credit unions, it does examine banks, who are subject to the same Reg E requirements as credit unions. The topic of Regulation E compliance has also been addressed in the Consumer Financial Protection Bureau’s (CFPB) Supervisory Highlights publications and other guidance, as referenced below.  

Failure to promptly investigate.

According to the Federal Reserve, some banks did not “promptly investigate” an alleged error, as required in section 1005.11(c) of Regulation E. This was due to the banks’ failure to recognize when they had received a notice of error, failure to know how to initiate an investigation, and failure to correctly identify all disputed transactions.

Credit unions may want to keep in mind that a “notice of error” under section 1005.11(b) – which triggers the requirement to investigate promptly – can be either written or oral, which means that oral statements to a member services representative, or even to an AI chatbot, can constitute a notice of error and trigger the requirement to investigate an alleged error.

Additionally, the requirement to investigate promptly requires a credit union to begin investigating without delay. For example, while a credit union that has received an oral notice of error can request that the member provide written confirmation of the notice, the staff commentary to Regulation E notes that a credit union is not permitted to delay the investigation while waiting for that written confirmation. Additionally, the CFPB has noted that credit unions cannot condition the start of the investigation on the filing of a police report, submitting an affidavit or contact with the merchant

Failure to provide provisional credit

Section 1005.11(c) requires a financial institution to conclude investigations within 10 business days of receiving a notice of error (or 20 business days for new accounts). However, the regulation permits the institution to extend that deadline to 45 calendar days (or 90 calendar days under certain circumstances) if the institution provides provisional credit within the 10 business day timeframe and notifies the consumer within two business days of providing the credit. Additionally, the regulation requires an institution to give the consumer “full access” to the provisional credit funds.

In the Consumer Compliance Outlook article mentioned above, the Federal Reserve noted that some banks failed to provide the provisional credit when extending the investigation beyond 10 business days. Additionally, other banks which did provide the credit failed to grant “full access” to the funds. The CFPB has previously identified similar violations in its Summer 2021 edition of Supervisory Highlights

Credit unions may want to keep in mind that provisional credit is required to extend the timeframe of the investigation unless certain circumstances apply (such as the consumer’s failure to comply with the credit union’s request for written confirmation of an oral notice of error). Additionally, a credit union is required to provide “full access” to the provisional credit funds, which means that the regulation does not permit credit unions to place a hold on the disputed amount or otherwise limit the member’s use of those funds while the investigation occurs.

Adequacy of the investigation & Burden of Proof

The Federal Reserve also noted that some banks did not conduct an adequate investigation under Regulation E. When conducting an investigation, regulation E notes that a reasonable investigation will involve “a financial institution’s review of its own records…”

According to the article, previous agency guidance has stated: “[a] financial institution cannot deny a consumer’s claim of an error without conducting a reasonable investigation, unless it corrects the error as alleged by the consumer.”  In other words, an institution is only allowed to end the investigation prematurely if it is resolving the error in the consumer’s favor. Finding against the consumer may only occur after the institution has conducted a “reasonable” investigation. Finally, the Federal Reserve notes that when the member has alleged an unauthorized electronic fund transfer has occurred, the institution bears the burden of proving that the transaction was authorized – in other words, Regulation E is incredibly pro-consumer and will default to resolving errors in the consumer’s favor in many cases.

Agency Recommendations

The Federal Reserve recommends several steps institutions can take to help ensure Regulation E compliance:

  • Procedures. Adopt “sufficiently detailed error resolution procedures” so that staff know what process to follow and how to comply. This might include instructions for gathering information when a notice of error is received, instructions for conducting a thorough investigation, how to document the investigative process, and how to engage with consumers;
  •  Training. The Federal Reserve recommends periodic training on Regulation E requirements as an “important tool” to help “proactively prevent or minimize violations.”
  • Compliance Monitoring. The Federal Reserve recommends conducting periodic reviews of notices of error and completed investigations to “ensure that staff are adhering to established procedures and deadlines.” Interestingly, the Federal Reserve suggests that a high percentage of investigations resolved in the credit union’s favor could be an indication of a compliance issue that warrants reviewing a sample of investigations for compliance with Regulation E.
  • Review Consumer Complaints. As always, consumer complaints are the “canary in the coalmine” that can serve as an indication of more systemic compliance issues. Credit unions may want to review consumer complaints relating to Regulation E investigations, as it is possible those complaints could notify the credit union of legitimate deficiencies in its regulation E compliance processes.
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