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Federal Reserve Bank OF DALLAS ROBERT D. M C T E E R , J R . DALLAS, TEXAS P R E S ID E N T A N D C H IE F E X E C U T I V E O F F I C E R Decem ber 28 1994 7 5 2 6 5 -5 9 0 6 Notice 94-118 TO: The Chief Executive Officer of each m em ber bank and others concerned in the Eleventh Federal Reserve District SUBJECT Interim Rule and Request for Public Comment on Final Amendments to Regulation E (Electronic Fund Transfers) DETAILS The Board of Governors of the Federal Reserve System has adopted an interim rule to Regulation E (Electronic Fund Transfers) that will give financial institutions more flexibility in identifying consumer accounts on receipts at autom ated teller machines (ATMs). As am ended by the interim rule, which took effect Decem ber 1, 1994, the regulation will no longer require that terminal receipts uniquely identify the consumer’s account or card. This change will allow institutions to truncate the number on the receipt and help protect consumers and financial institutions against fraudulent fund withdrawals. Comment is solicited on the interim rule, which the Board will adopt in final form following the close of the comment period. The Board must receive comments by January 31, 1995. Comments should be addressed to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C. 20551. All comments should refer to Docket No. R-0859. ATTACHMENT A copy of the Board’s notice (Federal Reserve System Docket No. R-0859) is attached. For additional copies, bankers and others are encouraged to use one o f the following toll-free numbers in contacting the Federal Reserve Bank o f Dallas: Dallas O ffice (800) 333 -4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; H ouston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San A ntonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) MORE INFORMATION F or more information, please contact Eugene Coy at (214) 922-6201. For additional copies of this Bank’s notice, please contact the Public Affairs D epartm ent at (214) 922-5254. Sincerely yours, FEDERAL RESERVE SYSTEM 12 CFR Part 205 [Regulation E; Docket No. R-0859] Electronic Fund Transfers AGENCY: ACTION: Board o f Governors of the Federal Reserve System. Interim rule with request for comments. SU M M A R Y : The Board is publishing for public comment an interim rule amending Regulation E (Electronic Fund Transfers). The amendment eliminates the requirement that an electronic terminal receipt disclose a number or code that uniquely identifies the consumer, the consum er's account, or the access device. This requirement currently poses a significant security risk for consumers and financial institutions by making information accessible to criminals that they then use to withdraw funds from consumers' accounts. The Board has adopted an interim rule that deletes the requirement for a unique identification, thus enabling institutions to truncate card or account numbers. The Board seeks public comment on the interim rule, which the Board will adopt in final following the close of the comment period. D ATES: The interim rule effective on December 1, 1994; comments must be received on or before February 1, 1995. A D D R ESSES: Comments should refer to Docket No. R-0859 and be sent to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, Washington, D .C . 20551. They may also be delivered to Room B-2222 of the Eccles Building between 8:45 a.m . and 5:15 p.m . weekdays, or to the guard station in the Eccles Building courtyard on 20th Street, N .W . (between Constitution Avenue and C Street) at any time. Comments received will be available for inspection in Room MP-500 of the Martin Building between 9:00 a.m . and 5:00 p.m . weekdays, except as provided in 12 CFR 261.8 o f the B oard's rules regarding availability o f information. F O R F U R T H E R IN F O R M A T IO N C O N T A C T : Jane Jensen Gell or Kyung Cho-Miller, Staff Attorneys, Division o f Consumer and Community Affairs, Board o f Governors o f the Federal Reserve System, Washington, DC 20551, at (202) 452-2412 or (202) 452-3667. For the hearing impaired only, contact Dorothea Thompson, Telecommunications Device for the D eaf (TDD), at (202) 452-3544. SUPPLEMENTARY INFORMATION: I. Background The B oard’s Regulation E implements the Electronic Fund Transfer Act (EFTA). The EFTA provides a basic framework establishing the rights, liabilities, and responsibilities o f participants in electronic fund transfer (EFT) systems. Types o f transfers covered by the act and regulation include transfers initiated through an automated teller machine (ATM), point-of-sale terminal, automated clearinghouse, telephone bill-payment system, or home banking program. Regulation E establishes restrictions on the unsolicited issuance o f ATM cards and other access devices; requires disclosure o f terms and conditions o f an EFT service; calls for documentation of EFTs through terminal receipts and periodic account statements; provides limitations on consumer liability for unauthorized transfers; and establishes procedures for error resolution. II. Summary of Amendment Section 205.9 -- Documentation of Transfers Paragraph (a) -- Receipts at electronic terminals Under the EFTA , when a consumer initiates an E FT at an electronic terminal, the financial institution must make a written receipt available to the consumer. The receipt must identify in some way the consum er's account with the financial institution from or to which funds are transferred. U nder the Board's Regulation E, institutions can comply with this identification requirement by including a number or code on the receipt that identifies the access device used to initiate the transfer, the consumer initiating the transaction, or the consum er's accounts. To ensure adequate identification, the Board's regulation specifies that the number or code should be "unique." This identification requirement was adopted in 1979, and over the years many financial institutions have met the requirement by disclosing consumers' card or account numbers on the receipt; until recently, doing so did not appear to represent a security risk for financial institutions. Now, a large number of institutions are reporting that the requirement for a unique identification poses a significant security risk for consumers and financial institutions. These institutions, together with trade associations, have asked that the Board revise the rule to prevent ATM fraud by persons who observe— and often videotape— a consumer entering a personal identification number (PIN) on the ATM keypad. These persons retrieve terminal receipts that have been discarded at ATM locations to obtain the consum er's account or ATM card number. They then manufacture a counterfeit ATM card and use the combination o f PIN and card withdraw funds from the consum er's account. One estimate places the industry losses at an annual cost between 25 and 40 million dollars, and climbing; others believe this estimate is understated. Data verifying the extent o f institutions' fraud losses due to this problem are publicly unavailable because the data are proprietary in nature. But several large financial institutions indicate they have sustained losses o f as much as a million dollars in one week. Institutions say that truncating the consum er's account or card number on the receipt would help to counter the problem. Under the current receipt provision in Regulation E, however, they cannot readily do so because o f the likelihood that the identification number on the receipt no longer would be "unique" among the institution's customers. Institutions have considered other ways to reduce risk, including retrofitting terminals to uniquely identify a consumer by a means other than a card or account number. Another approach would be for the terminal to give customers the option not to receive a receipt, for customers who might otherwise tend to discard their receipts at the ATM. While these approaches could help reduce fraud, they would be extremely costly to implement. Educational efforts to encourage consumers not to discard their receipts at the ATM site generally have been unsuccessful. The interim rule eliminates the requirement for a unique number or code, and thus allows institutions to truncate the account or card number disclosed on ATM receipts. With a truncated number, it becomes less feasible for a criminal to duplicate a card with an account number that matches the consumer's PIN. For the consum er's purposes, the printed number would continue to provide enough information for the consumer (and the financial institution) to identify the transaction. The Board believes that the change will not substantially diminish consumer protections. The purpose o f the receipt requirement is to allow consumers to verify transactions. Under the amendment, the receipt will still provide sufficient information to allow the consumer to identify transfers: the date o f the transfer; the amount o f the transfer; the type o f transfer and type o f account; the location of the terminal; and identification o f any third party to or from which funds are transferred. Using this information, a consumer could match each transaction on the periodic statement with the receipt received at the time the transaction took place. In addition, a consumer would have the necessary information to identify and resolve errors in documentation. Ordinarily the Board publishes proposed rules for a public comment period before their adoption. In the present case, the Board believes the situation represents a serious fraud problem for consumers and financial institutions, and that it is important to act expeditiously in amending the current rule. The Board believes also that the amendment being adopted will reduce fraud without compromising consumers' ability to identify their EF T transactions at ATMs. Delay in the adoption o f this amendment would cause continued losses to consumers and financial institutions, which is contrary to the public interest. Furtherm ore, the amendment relieves the restriction that the account number be "unique," and does not require institutions to take any action to implement the amended regulation. Modification o f the identification number on the receipt is discretionary to the institution. Thus, the Board finds that good cause exists for the adoption of an interim rule without prior comment, pursuant to - 4- the Administrative Procedure Act (5 U .S .C . 553(b)(3)(B)). Accordingly, the Board is adopting an interim rule that takes effect immediately, and publishing that interim rule for public comment for a 60-day period, after which the Board will adopt a final rule that takes into account any comment that may be received. The revision to Regulation E set forth below does not expressly refer to truncation o f the account number. The Board notes, however, that it plans to codify the permissibility o f truncation in the Official Staff Commentary to Regulation E, following the Board's final action on this interim rule. (This revision of Regulation E supersedes a proposed change under the regulatory review project that was published for comment earlier this year (59 FR 10684, M arch 7, 1994).) III. Form of Comment Letters Comment letters should refer to Docket No. R- 0859. The Board requests that, when possible, comments be prepared using a standard ’’Courier" typeface with a type size of 10 or 12 characters per inch. This will enable the Board to convert the text into machinereadable form through electronic scanning, and will facilitate automated retrieval o f comments for review. Comments may also be submitted on computer diskettes, using either the 3.5" or 5.25" size, in any IBM-compatible DOS-based format. Comments on computer diskettes must be accompanied by a hard copy version. IV. Regulatory Flexibility Analysis and Paperwork Reduction Act The amendment to Regulation E will provide more flexibility to financial institutions in complying with the E F T Act requirements for identifying a transaction on receipts provided at electronic terminals. In accordance with section 3507 o f the Paperwork Reduction Ac o f 1980 (44 U .S .C .35; 5 CFR 1320.13), the revision will be reviewed by the Board under the authority delegated to the Board by the Office o f Management and Budget after consideration o f com ment received during the public comment period. Nevertheless, given that the amendment provides for more flexibility in complying with the law, the Board believes there is a negligible impact on the paperwork burden for state member banks and institutions supervised by other agencies. List of Subjects in 12 CFR Part 205 Consumer protection, Electronic fund transfers, Federal Reserve System, Reporting and recordkeeping requirements. F o r the reasons set forth in the preamble, the Board proposes to amend 12 C FR part 205 as set forth below: (Certain conventions have been used to highlight the proposed changes to the regulation. Language that would be removed is set off with brackets.) PART 203 - ELECTRONIC FUND TRANSFERS (REGULATION E) 1. The authority citation for part 205 continues to read as follows: AUTHORITY: 12 U .S .C . 1693. 2. Section 205.9 is amended by revising paragraph (a)(4), to read as follows: § 205.9 Documentation of transfers (a) * * * * * (4) A number or code that [uniquely] identifies the consumer initiating the transfer, the consumer's account(s), or the access device used to initiate the transfer. * * >< * By order o f the Board of Governors of the Federal Reserve System, November 28, 1994. (signed) W i l li am W. Wiles William W. Wiles Secretary o f the Board