View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

F ederal

reserve

Ba n k

DALLAS. TEXAS

of

Dallas

75222
C irc u la r No. 79-98
June 4, 1979

PROPOSED AMENDMENT TO REGULATION E

TO ALL BANKS, OTHER CREDITORS,
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System on May 21, 1979,
issued a proposal to amend Regulation E, "Electronic Fund T ra n s fe rs ," to provide
that w ritten notice of loss or theft of an access device or possible unauthorized
electronic fund transfers is effective at the time the consumer mails or otherwise
sends the notice to the financial institution.
Printed on the following pages is a copy of the press release and enclosed
is a copy of the proposed amendment. Interested persons are invited to submit
comments to the Secretary, Board of Governors of the Federal Reserve System,
Washington, D .C . 20551, to be received no later than June 25, 1979. Comments
should be in w ritin g and refer to Docket No. R-224.
Any questions on the proposed amendment should be directed to our
Consumer A ffairs Section of the Bank Supervision and Regulations Department,
Ext. 6171.
Sincerely yours,
Robert H. Boykin
First Vice President
Enclosure

Banks and others are encouraged to use the following incoming W ATS numbers in contacting this Bank:
1-800-492-4403 (intrastate) and 1-800-527-4970 (interstate). For calls placed locally, please use 651 plus
the extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

FEDERAL
p r e s s

RESERVE

r e l e a s e

For immediate release

May 21, 1979

The Federal Reserve Board today proposed a change in its rules
for implementing the Electronic Fund Transfer Act that would make written
notice of loss or theft of an EFT card effective when the consumer mails
or otherwise transmits the notice.
The Board asked for comment by June 25, 1979.
The object of the proposed amendment to Regulation E
implements the EFT Act —

-- which

is to assist consumers who promptly notify the

institution of loss or theft of an EFT card to take advantage of a $50
limit

on potential liability provided by Congress for unauthorized use of

EFT cards.

The proposed amendment seeks to avoid loss of this

protection

due to delays in the mail or other delays in delivery of written notice.
The EFT Act provides that consumer liability is limited to $50 when con­
sumers give notice to financial institutions within two business days of
learning of loss, theft or unauthorized use of an EFT card.
The Board had earlier provided, in publishing Regulation E
March 21, that written notice of loss or theft of an EFT card would be
effective upon receipt of the notice by the financial institution con­
cerned or upon expiration of the normal time for delivery, whichever
is earlier.
Regulation E also provides that notice can be given orally,
by telephone or in person.

-2 -

In proposing revision of the rule for giving written notice,
the Board said that, in adopting its "receipt rule" March 21:
...the Board believed that the great majority of
consumers whose EFT cards are lost or stolen would
notify (the financial institutions that issued their
cards) by telephone or in person, rather than in
writing, in order to minimize potential losses. To
further encourage the more rapid method of telephone
notification, the Board adopted a model disclosure
clause for financial institutions to distribute to
consumers which states that telephoning is the best
way of limiting possible losses.
Nevertheless, despite its continuing belief that telephone
notification is the best means for notification -- and is the means most
likely to be used -- the Board, in view of comment

on its rule for

written notification, believes that the public should have an opportunity
to comment on the merits and costs of the proposed revision making
written notification effective when it is mailed, or otherwise transmitted
(i.e. a "mailbox" rule).
The Board asked particularly for comment on a number of issues,
including the following:
1.

The difficulties that consumers and financial
institutions may encounter in proving when a
written notice is deposited in the mail, or
is otherwise transmitted, especially in light
of the fact that first class mail often no
longer bears dated postmarks.

2.

The effects of shifting to financial institu­
tions liability for losses from unauthorized
transfers during the time when a written
notification is in transit.

3.

What percentage of consumers give notice by
mail to financial institutions of loss or
theft of EFT cards.

-3 -

4.

The amount of and per cent of losses experienced
by financial institutions during the transmission
period of written notices.

5.

How would the efficiency of the payments system
and the growth of EFT be affected by a require­
ment that telephone receiving systems be main­
tained by financial institutions?

The EFT Act, and Regulation E, provide that notice of loss
or theft of an EFT card, or of

unauthorized use of it, is effective

when the consumer has taken such steps as are reasonably necessary to
provide the card issuer with the pertinent information.
The EFT Act provides that a consumer's liability for unauthorized
use of an EFT card is limited to $50 if the consumer notifies

the card

issuer within two business days of learning of loss or theft of the card,
or unauthorized use.

Potential liability rises to $500 if notification

occurs after two business days.

If the consumer fails to notify the

card issuer within 60 days after transmittal of a periodic statement
that shows unauthorized use of the EFT card, the consumer's liability
mav be unlimited for transfers made after the 60 days.
In testimony to the Congress on May 1, 1979, the Board suggested
a single liability limit for unauthorized use of an EFT card, such as is
provided for credit cards under the Truth in Lending Act. The Board said:
Th<J Truth in Lending Act imposes a Elat S50 limit on
the liability of a credit card holder when a card is
lost or stolen... A majority of the Board' Delievea
consumers1 potential exposure under the EFT Act is
too great, although there may be instances in which
the consumer should bear some liability for careless­
ness. The structure of the liability provisions is
unduly complicated, and the benefit to the industry
of escalating liability limits may ultimately be
more illusory than real. The Board favors the Ttuth
in Lending approach of a single liability limit for
unauthorized use.
The Board's proposal is attached.

- 0 -

30690

Extract from
F e d e r a l R e g is te r
VO L. 44, NO. 104
Tuesday, May 29, 1979
pp. 30690 - 30691

to give interested parties an opportunity
to comment on the benefits and costs
associated with the proposed change. A
draft economic impact analysis is
incuded as item (2) of the supplementary
information.
DATE: Comments must be received on or
before ]une 25,1979.
a d d r e s s : Comments should be
addressed to Secretary, Board of
Governors of the Federal Reserve
System, Washington, D.C. 20551 and
should refer to docket number R-224.
FOR FURTHER INFORMATION CONTACT:

Regarding the regulation: Lyrme B. Barr,
Senior Attorney, Division of Consumer
Affairs, Board of Governors of the
Federal Reserve System, Washington,
D.C. 20551 (202-452-2412). Regarding the
economic impact analysis: Frederick J.
Schroeder, Economist, Division of
Research and Statistics, Board of
Governors of the Federal Reserve
System, Washington, D.C. 20551 (202­
452-2584).
SUPPLEMENTARY INFORMATION: (1)

FEDERAL RESERVE SYSTEM
[12 CFR Part 205]

Electronic Fund Transfers
AGENCY: Board of Governors of the

Federal Reserve System.
a c tio n : Proposed rule.
SUMMARY: The Board is publishing for

comment an amendment of § 205.5(c) of
Regulation E (Electronic Fund Transfers)
to provide that written notice of loss or
theft of an access device or possible
unauthorized electronic fund transfers is
effective at the time the consumer mails
or otherwise sends the notice to the
financial institution. The regulation
presently provides that written notice is
effective upon receipt of the notice by
the financial institution (or upon
expiration of the time normally required
for transmission, if earlier). The Board is
publishing the amendment for comment

Proposed Amendment. On March 21,
1979, the Board adopted sections of
Regulation E (Electronic Fund Transfers)
to implement sections 909 and 911 of the
EFT Act (44 FR 18468, March 28,1979).
Section 205.5 of the regulation sets limits
on a consumer’s liability for
unauthorized transfers. Generally, the
consumer's liability for such transfers is
limited to $50 if the consumer notifies
the financial institution within 2
business days of learning of the. loss or
theft of the access device, to $500 if
notification occurs after 2 business days,
and can be unlimited if the consumer
fails to notify the institution within 60
days after transmittal of a periodic
statement that reflects unauthorized
transfers.
Section 205.5(c), Notice to financial
institution, implements a statutory
provision (section 909(a)) by stating that
notice to a financial institution of loss or
theft of an EFT access device or possible
unauthorized transfers is considered
given when the consumer takes such
steps as are reasonably necessary to
provide the institution with the pertinent
information. The Board has provided
that notice may be given by the
consumer in person, by telephone or in
writing. The Board, when adopting the
regulation, added a sentence which
provides that written notification is
effective upon receipt of the notice by

the financial institution, or upon
expiration of the time normally required
for transmission, whichever is earlier.
This “receipt rule” is similar to ojie in
Regulation Z (12 CFR 226.13(e))
implementing identical language in the
Truth in Lending Act. The Board
believed that consumers will usually
notify the institution in person or by
telephone, rather than in writing, in
order to minimize potential losses.
Telephone notification is the quickest
and most efficient means of telling an
institution of a lost or stolen EFT card.
To encourage such notification, the
Board issued a model disclosure clause
for financial institutions to distribute to
consumers stating that telephone
notification is the best way of limiting
losses.
A number of comments have been
received by the Board on the receipt
rule. These comments point out that the
liability structure of the EFT Act and
Regulation E operates in a manner that
may increase a consumer's liability
significantly when the consumer notifies
the institution in writing of the
possibility of unauthorized transfers. A
notice mailed by the consumer
immediately upon learning of the loss or
theft of the card may not be received by
the financial institution within 2
business days and would subject the
consumer to the $500 liability limit
(instead of the $50 limit imposed if
notice is received within 2 business
days). This is in contrast to the
operation of the rule in Truth in Lending,
where a delay in receiving written
notice would not increase a consumer’s
liability above the $50 statutory
maximum.
The Board believes that interested
parties should be given an opportunity
to comment on the merits and costs of
the proposed “mailbox rule.” The Board
therefore proposes to amend § 205.5(c)
to provide that written notice is effective
at the time the consumer deposits the
notice in the mail or transmits the notice
by any other usual means to the
financial institution. Comment is
solicited on the proposal, particularly as
to the following issues:
(a) The difficulties that may be
encountered by consumers and financial
institutions in proving when a written
notice is transmitted, particularly in
light of the fact that first class mail often
no longer beats dated postmarks.

»

30691
(b) The effect of shifting liability to
financial institutions for losses from
unauthorized transfers during the
transmission period of a written notice.
(cl What percentage of consumers
notify institutions by mail of loss or theft
of EFT cards.

calls for overnight delivery if an item is
ZIP coded and mailed first class by 5:00
p.m., if the sending and receiving points
are in the same metropolitan area. It is
estimated that this standard is met
approximately 95 per cent of the time. A
consumer meeting all of the service
(d) The amount and per cent of losses standard conditions cannot be certain of
experienced by institutions during the
delivery within two days and a
transmission period of written notices.
consumer failing to meet even one of the
Hie Board believes that an expedited
conditions would find delivery within
rulemaking procedure for this proposal
two days unlikely.
is necessary in order to protect the
Although corrective action by
public interest, as the comments on the
present regulatory provision suggest that financial institutions would be delayed
if the proposed change encouraged less
unnecessary harm to consumers may
result from imposition of the receipt rule. prompt notification by consumers,
Accordingly, the expanded procedures
consumers would still have an incentive
set forth in the Board’s policy statement
to give prompt notice, by telephone if
of January 15,1979, will not be followed
possible, because their funds are at
in connection with this proceeding.
stake. The Board, in emphasizing the
(2) Economic Impact Analysis.
desirability of telephone notification by
Section 904(a)(2) of the Act requires the
consumers to financial intsitutions,
Board to prepare an analysis of the
believes that most notice delivery
economic impact of the regulation that
problems will be obviated by the
the Board issues to implement the Act.
likelihood that consumers will give
The following economic analysis
notice promptly by telephone. The
accompanies the proposed revision of
proposal may encourage financial
S 205.5(c), which implements, in part,
institutions to set up or improve their
section 909 of the Act.1
systems for receiving telephone
Offered for comment is the proposal
notification. The Board invites comment
that, for purposes of the liability
on these possible effects and requests
provisions of § 205.5 of the regulation,
information on the present and planned
written notice by the consumer to the
extent of telephone notification
financial institution shall be considered
receiving systems. Further, how would
given when notice is put in the mail or
otherwise transmitted. With the existing
the efficiency of the payments system
notice provisions the consumer’s
and the growth of EFT be affected by a
liability exposure would depend on the
requirement that telephone notification
vagaries of mail or other written
receiving systems be maintained by
message delivery. At present it is
financial institution? Finally, the Board
uncertain when notice will be
solicits estimates of the additional costs
considered given and whether the
financial institutions expect to incur
delivery system will validate the
from (a) delayed receipt of consumer
consumer’s actions. The proposed
notifications, (b) additional message
change would give the consumer more
reception activity, including toll-free
time in which to give notice of loss, theft telephone service and message logging
or suspected unauthorized transfer
procedures, and (c) promotional efforts
before a higher liability limit is imposed
to encourage prompt notification.

according to the liability timing
requirements of the Act.
The proposed change would ensure
that the consumer's liability would not
depend on mail delivery times, which
vary by sending point, receiving point
and other factors, such as time of day,
week and year. The Postal Service has
established a service standard which

1The analysis must consider the costs and
benefits o f the proposed regulation to suppliers and
users of EFT services, the effects of the proposed
regulation on competition in the provision of
electronic fund transfer services among large and
small financial institutions, and the effects of the
proposed regulation on the availability o f EFT
services to different classes of consumers,
particularly low-income consumers. The analysis
presented here is to read in conjunction with the
economic impact analysis that accompanied the
Board’s Regulation E a t 44 F R 18474, March 28,1879.

(3) Pursuant to the authority granted
in Pub. L. 95-630 (to be codified in 15
U.S.C. 1093b), the Board proposes to
amend paragraph (c) of 12 CFR 205.5
(Regulation E), by deleting the third
sentence and substituting the following
sentence, to read as follows:
§ 205.5 Liability of consumer for
unauthorized transfers

*

*

*

*

*

(c)
* * ‘ Notice in writing is
considered given at the time the
consumer deposits the notice in the mail
or delivers the notice for transmission
by any other usual to the financial
institution. * * *

By order of the Board of Governors, May
18,1979.
Theodore E. Allison,

Secretary of the Board.
[FR Doe. 70-46606 Fled

bum s

b-26-79.K43 *m)

eooe siio-ova


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102