Full text of Federal Reserve Bank of New York Circulars : 8619. Amendment to Regulation E - Electronic Fund Transfers

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FED ER AL RESERVE BANK
O F N EW YORK

L

Circular No. 8 6 1 9 "1
August 8, 1979 J

AMENDMENT TO REGULATION E — ELECTRONIC FUND TRANSFERS
W ritten Notice of Loss of EFT Card Effective When Mailed or Otherwise Transmitted

To A ll Banking Institutions, and Others Concerned,
in the Second Federal Reserve District:

The Board of Governors of the Federal Reserve System has adopted an amendment to its
Regulation E, “Electronic Fund Transfers,” that makes written notice of loss or theft of an elec­
tronic fund transfer card effective when the consumer mails or otherwise transmits the notice.
Following is the text of the Board’s announcement:
The object of the amendment to Regulation E—which implements the Electronic Fund Transfer Act—
is to assist consumers in limiting their potential loss due to unauthorized use of an EFT card to not more
than $50. The amendment seeks to avoid exposure of the consumer to greater loss due to delays in the mail
or other delays in delivery of written notice.
Regulation E also provides that notice can be given orally, by telephone or in person.
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 may 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 unau­
thorized use of an EFT card.

Enclosed is a copy of the Regulation E amendment, which has been adopted as proposed in
May. The amendment is effective September 10, 1979. Questions regarding Regulation E may be
directed to our Consumer Affairs Division (Tel. No. 212-791-5919).




T homas M. T im l e n ,
F ir s t V ic e P r e s id e n t.

Board of Governors of the Federal Reserve System
ELECTRONIC FUND TRANSFERS

AM ENDM ENT TO REGULATION E
(effective September io, 1979 )
W ritten Notification of Loss or Theft of Access Device
AGENCY: Board of Governors of the Federal
Reserve System.
ACTION: Final rule.
SU M M ARY: The Board is adopting an
amendment of § 205.5(c) of Regulation E,
which implements the Electronic Fund Trans­
fer Act, to provide that written notice of loss
or theft of an access device or possible unau­
thorized electronic fund transfers is effective
at the time the consumer mails or otherwise
sends the notice to the financial institution.
The regulation now provides that written no­
tice is effective upon receipt of the notice by
the financial institution (or upon expiration of
the time normally required for transmission,
if earlier). An analysis of the economic impact
of the amendment is included as item (3) of
the supplementary information.
EFFECTIVE DATE: September 10, 1979.
FOR FURTHER INFORMATION CON­
TACT: Regarding the regulation: Lynne B.
Barr, Senior Attorney, Division of Consumer
Affairs, Board of Governors of the Federal Re­
serve System, Washington, D.C. 20551 (202452-2412). 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).
SUPPLEM ENTARY IN F O R M A T I O N :
( 1 ) Proposed Amendment; Summary of Cotnments. On March 21, 1979, the Board adopted
sections of Regulation E (Electronic Fund
Transfers) to implement §§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 trans­
fers. Generally, a consumer’s liability for such

transfers is limited to $50 if the consumer noti­
fies the financial institution within 2 business
days of learning of the loss or theft of the ac­
cess device, and to $500 if notification occurs
after 2 business days. Liability can be unlimit­
ed, however, 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) implements § 909(a) of the
Act. which states that notice to a financial
institution of loss or theft of an EFT access
device or possible unauthorized transfers is con­
sidered given when the consumer takes such
steps as are reasonably necessary to provide the
institution with the pertinent information. The
Act contemplates written or oral notice. The
Board, when adopting the regulation, added a
sentence which provides that written notifica­
tion is effective upon receipt of the notice by
the financial institution, or upon expiration of
the time normally required for transmission,
whichever is earlier.
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 notifica­
tion is the quickest and most efficient means of
telling an institution of a lost or stolen EFT
card. To encourage such notification, the
Board’s model disclosure clause emphasizes the
advisability of telephone notification.
The Board received a number of comments
on the "receipt rule” after its adoption. These
comments pointed out that the liability structure
of the EFT Act and Regulation E operates in
a manner that may increase a consumer’s li­
ability significantly when the consumer notifies
the institution in writing of the possibility of
unauthorized transfers. A notice mailed by the

F o r this Regulation to be complete, retain :
1) Regulation E pamphlet, effective M arch 30, 1979, as amended August 1, 1979.
2 ) This slip sheet.
[Enc. Cir. No. 8619]




PRINTED IN NEW YORK

Many comments mentioned the unreliability
of the postal system as one reason why the pro­
posal should not be adopted. A large number
of commenters cited the difficulty of establish­
ing the time at which a consumer posted a
written notice to determine the point at which
liability would shift from the consumer to
the financial institution. Financial institutions
stated that they have procedures to identify
when mail is received, such as date-stamping
incoming correspondence, so that the same
proof problem does not exist with the present
receipt rule.
Modifications of the proposal were suggested
by a number of commenters. The recommended
changes included (a) requiring oral notification
instead of permitting either written or oral noti­
fication, (b) requiring written notification to be
sent by registered or certified mail, and (c) per­
mitting institutions that maintain 24-hour, tollfree telephone reporting systems to apply a re­
ceipt rule for written notification, while institu­
tions that do not maintain such systems would
be bound by a mailbox rule.
The Board had solicited comment on what
percentage of notifications of loss, theft or un­
authorized use are oral. The estimates supplied
by commenters were very high; they ranged
from 75 to 100 per cent, with most in the 90
to 95 per cent range. These estimates cor­
respond to the Board’s belief that the majority
of consumers notify their institutions of loss
or theft either in person or by telephone.
(2)
Amendment of $20j.j(c). The Board
has decided to adopt the amendment as pro­
posed. Thus, written notice of loss or theft
of an access device or possible unauthorized
transfers will be effective at the time the con­
sumer deposits the notice in the mail or other­
wise transmits it to the financial institution.
The Board believes that telephone or per­
sonal notification of loss or theft is the most
desirable method and should be actively en­
couraged by financial institutions. However,
requiring telephone notice would be incon­
sistent with the statute, which permits writ­
ten as well as oral notice. As to the other
modifications suggested by the commenters,
requiring written notification to be sent by
registered mail would alleviate the problems
of proof that a mailbox rule presents, but
would not result in earlier notification and
would be an added inconvenience and cost
for consumers. The recommendation that in­
stitutions providing toll-free access for re­
porting be permitted to use a receipt rule
would be. according to comments, an unwar­
ranted burden on small financial institutions
that would find the cost of such systems pro­
hibitive in relation to their losses.

consumer immediately upon learning of the loss
or theft of the card may not be received by the
financial institution within 2 business days. The
consumer would thus be subject to the $500 li­
ability limit (instead of the $50 limit imposed
if notice is received within 2 business days).
This is in contrast to the operation of a similar
receipt rule in Truth in Lending, where a delay
in receiving written notice would not increase
a consumer,'s liability above the $50 statutory
maximum.
As a result of these comments and the
Board’s concern over this escalating liability,
the Board proposed to amend § 205.5(c) to
provide that written notice of loss or theft of
an access device or possible unauthorized trans­
fers is effective when the consumer deposits
the notice in the mail or transmits it by any
other usual means to the financial institution
(44 FR 30690, May 29, 1979).
The Board proposed this “mailbox rule’’ in
order to give interested parties an opportunity
to comment on the merits and costs of the pro­
posed change. The Board received 128 com­
ments on the proposal; 14 favored adoption in
the form proposed, and the rest of the commenters were either completely opposed or sug­
gested modification of the proposal in some
way.
The comments in favor of the proposal stated
that the losses which occur during the trans­
mission period of written notice are more easi­
ly borne by financial institutions than by in­
dividual consumers. These commenters felt that
the escalating liability structure of the Act jus­
tifies the shift of liability for losses to financial
institutions. Other commenters stated that a
mailbox rule would encourage the development
of more secure EFT systems.
The comments in opposition to the proposal
stated that a mailbox rule will result in in­
creased losses to financial institutions, and that
such losses would eventually be borne bv con­
sumers in the form of increased costs for EFT
services. Some commenters felt that the pro­
posed rule would discourage telephone notifica­
tion and would actively encourage consumer
fraud by providing a means by which a con­
sumer who forgot to report or had delayed re­
porting could avoid the higher liability limit.
Under the proposal, it would be possible for a
consumer to state that a written notice had
been transmitted (thereby cutting off the con­
sumer's liability) when such a notice had been
delayed or had not been sent. However, under
the present rule, a consumer could avoid the
higher limit by stating that the loss or theft of
the access device had just been discovered.




2

Public comments offered no empirical evi­
dence demonstrating a need for a change in
the existing rule, which considers notice to be
given when received by the financial institu­
tion. However, a consumer using the mails to
transmit written notice would be likely to fall
into the $500 liability limit category before the
notice was received by the financial institution,
and losses due to fraud would be expected to
increase while the notice was in the mail, so
that choosing to give written notice could ex­
pose a consumer to substantial liability under
the existing rule.
Besides uniformity of treatment with respect
to the Act’s notice deadlines, consumers will
benefit from the amendment in two additional
ways. First, loss exposure will no longer de­
pend on the speed or accuracy of mail delivery,
factors largely out of a consumer’s control.
Second, loss exposure will not be affected by
a consumer’s inability to notify a financial in­
stitution by telephone. Other factors held equal,
the revised rule can be expected to reduce ag­
gregate losses by consumers. It will also re­
duce the likelihood of “catastrophic” individual
losses that might have occurred under the re­
ceipt rule if a low-wealth, low-income consumer
chose to give written notice and became subject
to the $500 liability limit because of the finan­
cial institution’s not having received the notice
within 2 days. In making the $50 liability limit
more widely applicable, the amendment makes
EFT cards more like credit cards, a result that
may promote consumer acceptance of EFT
cards as a payments mechanism and lead to
greater efficiency in the payments system as
a whole.
For financial institutions, the amendment
means that loss exposure will depend on how
many consumers elect to give written notice
by mail, the consumer’s choice of mailing loca­
tion, and the speed and accuracy of mail de­
livery, factors an institution cannot control. To
the extent that the amendment removes some
incentive for prompt reporting of loss, theft or
suspected unauthorized use, total EFT fraud
losses can be expected to increase. Consumers
choosing written notice will have more time to
transmit notice without losing the protection of
the liability limit. Many commenters pointed
out that fraudulent transfers are most likely to
occur in the two-day period immediately fol­
lowing loss or theft of an access device, so that,
if the amendment leads to relatively fewer
prompt notifications by telephone, financial in­
stitutions will suffer greater losses before no­
tices are received and access to affected ac­
counts can be blocked. Furthermore, litigation
costs would be increased by the difficulty of
proving when a notice was mailed.

The effect of the mailbox rule will be to
shift from the individual consumer to the fi­
nancial institution (and ultimately to all the
institution's customers) the losses over $50
that occur during the period between posting
written notice and receipt of such notice. The
Board believes this appropriate in light of
the liability structure of the Act.
The Board believes that the provision in
§ 909(a) which states that notice is considered
given when “such steps have been taken as
may be reasonably required in the ordinary
course of business to provide the financial in­
stitution with the pertinent information” can
be interpreted by the Board under its authori­
ty in § 904 of the Act to support the adoption
of a mailbox rule.
The Board is of the opinion that the con­
sumer benefit to be gained by the adoption of
a mailbox rule will outweigh the effect of shift­
ing liability to financial institutions for losses
from unauthorized transfers during the trans­
mission period of a written notice.
(3) Economic Impact Analysis. Section 904
(a)(2) of the Act requires the Board to pre­
pare an analysis of the economic impact of
the regulation issued by the Board to imple­
ment the Act. The following economic analysis
accompanies revised § 205.5(c), which imple­
ments, in part, § 909 of the Act.1
The regulation is to be amended so that
written notice of loss or theft of an access de­
vice or possible unauthorized electronic fund
transfers shall be considered given when trans­
mitted by a consumer to a financial institution.
Both costs and benefits are associated with this
change. Those consumers who elect to give
written notice, either because of personal pre­
ference or because other means are unavailable
to them, will be protected from liability for
any unauthorized transfers made after notice
has been transmitted. This ensures uniform ap­
plication of the Act’s two-day $50 liability limit
protection to consumers regardless of how no­
tice is given and constitutes a benefit to con­
sumers.
1 The analysis must consider the costs and benefits
of the proposed regulation to suppliers and users of
E FT services, the effects of the proposed regulation
on competition in the provision of electronic fund
transfer services among large and small financial in­
stitutions, and the effects of the proposed regulation
on the availability of E FT services to different classes
of consumers, particularly low-income consumers. The
analysis presented here is to be read in conjunction
with the economic impact analysis that accompanied
the Board’s Regulation E at 44 FR 18474, March 28,
1979.




3

1693b), the Board amends paragraph (c) of 12
CFR § 205.5 (Regulation E), by deleting the
third sentence and substituting the following
sentence, to read as follows:

The amendment, in providing an additional
consumer protection, might remove some in­
centive for prompt reporting of loss, theft, or
suspected unauthorized use. The costs of re­
lated fraud losses to financial institutions and
the payments system will be passed on to con­
sumers in some degree through higher EFT
prices or reduced levels of EFT services. Ad­
ditional costs resulting from the amendment are
expected to be small relative to the volume of
EFT transactions. The long-run effect of the
amendment on the evolution of EFT and the
payments system cannot be predicted, however,
and will merit future study.

SECTION 205.5 — LIABILITY OF
CONSUMER FOR UNAUTHORIZED
TRANSFERS
*

T ex t of A m en d m en t

(4)
Pursuant to the authority granted in
Pub. L. 95-630 (to be codified in 15 U.S.C.




4

*

*

(c)
* * * N otice in w ritin g is considered
given at th e tim e th e consum er deposits th e
no tice in th e m ail o r delivers th e no tice fo r
tran sm issio n by any o th e r u su al m eans to th e
financial in stitu tio n . * * *