November 2011 Legal Briefs

By Mary Beth Guard 

• Updated flood guidance
• OCC Reg E booklet revised
• Farewell to paper savings bonds
• Enforcement actions
• Examiners Can Be Too Soft
• The Big “Why” – Part 2
   EFTA
       

Updated Flood Guidance

The Interagency Questions and Answers Regarding Flood Insurance provide invaluable guidance on some of the thorniest issues in flood compliance.  Those Q&As were revised extensively in 2009.  On October 16, 2011, they were updated with two new questions and answers, one relating to insurable value (Q&A 9) and one relating to force placement (Q&A 61).  At the same time, the agencies withdrew  one question and answer regarding insurable value(Q&A 10) and they are proposing revisions to a previous answer and asking for comments on proposed significant, substantive changes to the answers to two questions relating to force placement of flood insurance.

The effective date of the revised Q&As is October 17, 2011.  The comment deadline for the proposed Q&As is December 1, 2011.

Insurable Value
The first finalized revision relates to tying insurable valuable to replacement cost value (RCV). 
By way of background, generally the amount of insurance required is the LESSER OF the outstanding principal balance  of the designated loan OR the maximum amount of insurance available under the National Flood Insurance Program (NFIP).
So, first one must determine the maximum amount of insurance available under the NFIP.  That maximum amount is:
  the lesser of the maximum limit of coverage available for the particular type of property under the Act (when we refer to “the Act” here we mean  the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as revised by the Reform Act)
OR
 the overall value of the property securing the designated  loan minus the value of the land on which the property is located.’

The Agencies refer to  the “overall value of the property minus the value of the land” as the “insurable value.”  That’s the same terminology used by FEMA.  From there, it gets murky.

In the old proposed Q&A 9, to help assist lenders in determining the insurable value of a property for flood insurance purposes, they referred to FEMA guidelines and provided that the full insurable value of a building is the same as 100 percent replacement cost value (RCV)  of the insured building. The proposal said lenders could determine RCV of a building by considering permissible methods, such as the RCV used in a hazard insurance policy (recognizing that replacement cost for flood insurance will include the foundation), an appraisal based on a cost-value (not market-value) approach before depreciation deductions, and/or a construction cost calculation.
The problem with that proposed Q&A was that it simply was not always workable.  Lenders told the agencies that they couldn’t always obtain RCV in many instances, particularly where the subject property was nonresidential.  In the event of an actual flood loss, the borrower on a nonresidential property loan would only be able to recover actual cash value (the cost to replace an insured item of property at the time of loss, less the value of its physical depreciation), so the borrower would be over-insured.

Under the final Q&A 9, here’s the bottom line:
 insurable value for certain residential or condo properties should continue to be written to replacement cost value.
For flood insurance on nonresidential buildings, lenders need to watch out for any situation where the insured will be paying for coverage that exceeds what the NFIP will pay in the event of a loss.  On nonresidential properties – and even on some residential properties, where the insurance loss payout is normally based on actual cash value, insurance policies written at RCV may require an insured to pay for coverage that significantly exceeds the amount the NFIP would pay in the event of a loss.    (To astute lenders, having a borrower pay for more coverage than they were actually getting smelled like the basis for an unfair or deceptive acts or practices claim!) 

Here are the types of over-insured situations you need to watch out for:
 On some nonresidential buildings used for ranching, farming, or industrial purposes, if the buildings were destroyed or damaged by flood, the borrower either would not replace them or would replace them with a structure more closely aligned to the function the building is providing at the time of the flood.  In those instances, the payouts from the NFIP could be well below RCV.
 In any case where the physical depreciation of a nonresidential building is very high, the actual cash value payout would likely be very low.  That would create an even larger gap in the amount of insurance purchased and the potential payout, so requiring flood insurance equal to RCV in those instances could lead to over-insurance for such property.

You don’t want the borrower to pay to be over-insured.  On the other hand, the regulators caution against using a value that results in the borrower being under-insured.  What you are urged to do in determining the amount of insurance to require is to  consider the extent of recovery allowed under the applicable NFIP policy. 
The final version of the answer to question 9 provides that, in calculating the required amount of insurance, the lender and borrower (either by themselves or in consultation with the flood insurance provider or other appropriate professional) may choose from a variety of approaches or methods to establish a reasonable valuation.

It is permissible to:
  use an appraisal based on a cost-value (not market-value) approach,
 use  a construction-cost calculation,
 use  the insurable value used in a hazard insurance policy (recognizing that the insurable value for flood insurance purposes may differ from the coverage provided by the hazard insurance and that adjustments may be necessary (since, for example, most hazard policies do not cover foundations)
 user any other reasonable approach, so long as it can be supported.
Keep in mind that when calculating the minimum amount of insurance required to be purchased, the insurable value is only relevant to the extent that it is lower than either the outstanding principal balance of the loan or the maximum amount of insurance available under the NFIP.

Q&A 10 is withdrawn.  It contained specific exceptions to insurable value that are deemed unnecessary in light of the newly flexible Q&A  9 detailed above.  If you have the complete set of Q&As printed out and in a binder somewhere, go mark a big X over this one and make a note on #9 about the revisions just discussed.  Plus, annotate Q&A 61 as described below.

Force Placement
Three sets of proposed Q&As address force placement of flood insurance (60, 61, and 62).   The regulators have now finalized Q&A 61 with some minor tweaks.  Q&As 60 and 62, on the other hand, are still in the proposed stage and the Agencies are proposing to revise them and are requesting comments on the revisions.  They’re also proposing to revise Q&A 57 to make it harmonious with proposed Q&As 60 and 62.  Got it?  In other words, revised finalized 61 is firm guidance.  Proposed 57, 60, and 62 are still in the proposed Q&As.

The big issues with force placement are:
1.  When does the 45-day notice period begin?
2. Can the lender charge  a borrower for the cost of flood insurance coverage during the 45-day notice period?  and
3. How soon after the end of the notice period should a lender purchase a flood insurance policy when the borrower has failed to purchase an appropriate policy?

These questions lie at the intersection of compliance and safety and soundness.   If you allow the property securing the loan to become uninsured, you have a safety and soundness problem.  If you procure insurance in the wrong way, you could have a compliance violation.  They now “get” that, so they are attempting to provide guidance, but the whole picture won’t be clear until the remaining proposed Q&As are finalized, so get out your keyboard and write a comment on the proposals if you want to have a say-so.

Here is the scoop on the part that is now final, Q&A 61.   It deals with how soon lenders have to force place insurance after the end of the 45-day notice period.

As you know, under the flood regulations, the lender or its servicer is required to purchase insurance on the borrower’s behalf if the borrower fails to obtain flood insurance within 45 days after notification that the policy has lapsed or is in the incorrect amount.   The finalized Q&A 61 indicates that since  the lender is already aware during the 45-day notice period that it may be required to force place insurance, you should have procedures in place to allow force placement to commence when the 45-day notice period has expired.  If the borrower doesn’t respond any delay in force placing flood insurance should be brief and you need to be ready to provide a reasonable explanation for even a brief delay.

They declined to set an arbitrary number of days after the end of the 45-day notice period as a “`safe harbor”’ for completion of the force placement process.  You need to get the insurance in place immediately.  They do recognize that the process of force placing flood insurance may not always occur immediately on the 46th day. If there is a brief delay in force placing the required insurance, the lender should be able to provide a reasonable explanation for the delay.  Woe is you if the delay is longer than “brief.”

Proposed Q&As
The proposed revised Q&As 60, 62, and 57 deal with other force placed issues, including the following:
 When should the force-placement notice be sent?
 When may the lender charge a borrower for the cost of flood insurance during the 45-day notice period?

Under proposed revised Q&A 60,  the Agencies are trying to reconcile the statute’s requirement that a lender send the borrower notice of inadequate or lapsed flood insurance with the purpose of the statute to facilitate a lender or servicer’s ability to ensure continuous flood insurance coverage. To do so, they are proposing that Q&A 60 be revised to read as follows:
  “60. When should a lender send the force placement notice to the borrower?
  Answer: To ensure that adequate flood insurance coverage is maintained throughout the term of the loan, a lender or its servicer must notify a borrower whenever flood insurance on the collateral has expired or is less than the amount required for the property. The lender must send this notice upon making a determination that the flood insurance coverage is inadequate or has expired, such as upon receipt of the notice of cancellation or expiration from the insurance provider or as a result of an internal flood policy monitoring system. Notice is also required when a lender learns that a property requires flood insurance coverage because it is in an SFHA as a result of a flood map change (which is occurring in many communities as a result of FEMA’s map modernization program). To avoid the expiration of insurance, the Agencies recommend that the lender also advise the borrower when flood insurance on the collateral is about to expire.”

Proposed Q&A 62 deals with the issue of whether a borrower may ever be charged for the cost of flood insurance that provides coverage for the 45-day force-placement notice period.

The big issue is that the property needs to be insured.  When it comes to hazard insurance, as an example, the loan documents certainly give the lender the right to force place and charge the borrower for it and the language in most loan agreements would be broad enough to authorize that with flood insurance, too, but the law and rules provide an impediment as currently written.

Under the proposed revision to Q&A 62,  a lender or its servicer would be allowed to charge a borrower for insurance coverage for any part of the 45-day notice period in which no adequate borrower-purchased flood insurance coverage is in effect if the borrower has given the lender or its servicer the express authority to charge the borrower for such coverage as a contractual condition of the loan being made.

Here is an important condition, however:  Any policy obtained by a lender or its servicer, the premium of which is charged to the borrower pursuant to a contractual right, should be equivalent in coverage and exclusions to an NFIP policy and cover the interests of both the borrower and the lender.  The proposal encourages lenders to explain their force-placement policies to borrowers (including their policy on charging for force-placement coverage for the 45-day period and the timing of that charge).  Lenders and servicers are also encouraged to escrow flood insurance premiums.  (Of course, if flood insurance is required and an escrow is set up for the escrowing of other insurance payments or for taxes, you have to escrow for the flood insurance premiums, too.  It’s not an option.)
The hope of the Agencies is that following the recommendations in proposed Q&A 62 could result in significantly less force placement of flood insurance, which would be a good thing for all parties involved. 

Many institutions don’t currently do escrows and avoid making Higher-priced Mortgage Loans under Regulation Z for just that reason.  The fact is, if you’re going to stay in the mortgage lending business, the likelihood is that you’re going to have to start doing escrows because once rules are finalized to implement Section 1461 of the Dodd-Frank Act, escrows will be required on all dwelling-secured loans covered by Reg Z.  – not just HPMLs and not just those secured by a primary residence.

Here is the text of the revised proposed Q&A 62:
“62. When may a lender or its servicer charge a borrower for the cost of insurance that covers collateral during the 45-day notice period?
Answer: A lender or its servicer may charge a borrower for insurance coverage for any part of the 45-day notice period in which no adequate borrower-purchased flood insurance coverage is in effect, if the borrower has given the lender or its service  the express authority to charge the borrower for such coverage as a contractual condition of the loan being made. Any policy that is obtained by a lender or its servicer, the premium of which is charged to the borrower pursuant to a contractual right, should be equivalent in coverage and exclusions to an NFIP policy and cover the interests of both the borrower and the lender.      The Agencies encourage institutions to explain their force-placement policies to borrowers (including their policy on charging for force-placement coverage for the 45-day period and the timing of that charge) and encourage lenders and servicers to escrow flood insurance premiums. Following these recommendations could result in less force placement of flood insurance. Further, Regulation Z requires lenders to establish an escrow account for the payment of property taxes and mortgage-related insurance required by the lender, including flood insurance, for all “higher priced” first-lien mortgage loans.“

You have until December 1, 2011 to tell them what you think of the proposed revisions.  Sound off!
 

OCC Reg E Booklet Revised

Over the past couple of years there have been numerous revisions to Regulation E.  Notable changes include the prohibition against  assessment of overdraft fees for ATM transactions and one-time debit card transactions that overdraw a consumer’s account unless the consumer has affirmatively consented to the fees, as well as extensive new restrictions on, and requirements for, prepaid cards.  The OCC has issued a new booklet entitled "Electronic Fund Transfer Act–Regulation E" in the Comptroller’s Handbook. This booklet updates examination procedures and incorporates recent changes the Board of Governors of the Federal Reserve made to Regulation E regarding overdraft services and gift cards.

The booklet also addresses changes made to Regulation E that simplify and clarify requirements regarding e-communication and the relationship of the regulation to the Electronic Signatures in Global and National Commerce Act (ESIGN).

As the Postal Service struggles and the cost of mail goes up, it’s a good time to revisit the issue of electronic communication with customers.

Farewell to Paper Savings Bonds

Rotary dial telephones.  Film cameras.  Cursive writing.  Blackboards.  They’re all going the way of the dinosaurs, and so are paper savings bonds.  To reduce program costs, enhance customer service, and “minimize environmental impact,” the Treasury Department is discontinuing the over-the-counter sales of paper savings bonds, including sales through financial institutions and mail-in orders.  The effective date is January 1, 2012.  It affects Series EE, HH and I.

This has been a long time coming.  The first electronic (book-entry) form savings bonds were made available through the TreasuryDirect system in 2002.  Savings bonds themselves are not going away.  They will simply only be available electronically.

As for the scores of savings bonds already in existence in paper form, the ability to hold or redeem them is not affected.

Enforcement Actions

We haven’t done a statistical analysis, but it sure seems like the number of enforcement actions being taken against banks and institution-affiliated parties is increasing.   FDIC announced 56 administrative enforcement actions taken against banks and individuals in September, 2011 alone.

There typically isn’t enough detail in these published orders to suit my taste.  How can we learn from the mistakes of others if we don’t get a description of where they went wrong?  There are a few interesting tidbits, however.  Here are the ones that stuck out in my mind from the September crop.  I’ve left out the flood penalties, because you would just yawn and roll your eyes, but they keep comin’, people, so be sure your ducks are on a row with flood compliance.  Now, on to the more interesting cases.

Commercial Real Estate Loan Problems
Florida Citizens Bank, Gainesville, FL – The Notice of Charges alleges the Bank has an excessive amount of loans to borrowers with common risk characteristics or sensitivities to economic, financial, or business developments (“concentrations”). Specifically, the Bank has an excessive concentration of commercial real estate (“CRE”), particularly speculative construction and development loans, which has elevated risk to an unacceptable level.  As of 3/31/11, total CRE loans represented 536 percent of the bank’s total risk-based capital.  Excluding owner-occupied, the CRE loans represented 247 percent of the bank’s total risk-based capital.

ADC Loans
Two insiders of First Bank of Beverly Hills, Calabasas, California (which is in receivership) are the subject of a proceeding to ban them from banking.  They got into trouble through acquisition, development, and construction (ADC) lending by failing to ensure the Bank was properly staffed with people with the knowledge and experience necessary to properly underwrite ADC loans.

UDAP and the Overdraft Program
GreenBank in Greeneville, Tennessee consented to the payment of a civil money penalty stemming from allegations the Bank violated the prohibition against unfair and deceptive acts or practices found in Section 5 of the Federal Trade Commission Act (15 U.S.C. § 45(a)(l)) and Regulation E of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 205, in the Bank’s marketing and implementation of its overdraft program.  There is no detail about what the bank did – but it cost them a penalty of $132,000.

Compliance Management
Northwest Savings Bank, Warren, Pennsylvania consented to an Order for Restitution, and Order to Pay in the amount of $325,000.00.   The order stresses the need for full board participation in the oversight of the bank’s compliance management system, as well as oversight to management’s supervision of all the bank’s compliance-related activities.  The bank has been ordered to development a comprehensive written compliance program.
Effective monitoring procedures to ensure compliance with consumer laws, best practices (like the overdraft guidance) and adherence to internal policies and procedures is also required.  The regulators want ongoing reviews of:
 applicable departments, branches and Bank ;
 disclosures and calculations for various loan and deposit products;
 document filing and retention procedures; marketing and advertising; and
 an internal compliance communication system that provides Bank personnel appropriate updates regarding revisions to Consumer Laws.

Do you have policies and procedures for such reviews in place in your own bank?
They also hammered in continuous training – including for senior management and the board, and staffing up in the compliance area with experienced people.

Here are two sentences in the order that should warm the cockles of any compliance officer’s heart.  (What are cockles, anyway?)  “The Board shall ensure that the Bank’s Compliance Officer receives adequate ongoing training and sufficient time and resources, including staff assistance, to effectively oversee, coordinate, and implement the [compliance management system].  The Compliance Officer shall have sufficient authority and independence to implement policies and procedures, cross departmental lines, access all areas of the Bank’s operations, and effectuate corrective action.”

The need for a strong compliance audit function was also stressed, as was the need for the bank to adopt and implement systems and controls to ensure proper management of third-party risk.

There is a lot more in this particular order (it’s much more detailed than most).  Where does the restitution come in?  The Bank is required to make restitution in amounts specified by the FDIC in the form of reimbursement to depositors and former depositors (collectively “Eligible Depositor”) to be identified by the Bank and the FDIC, and alleged by the FDIC as having not been paid the amount of interest that was described in Bank disclosures. The Bank shall maintain copies of each restitution check, or other acceptable form of reimbursement, for review by the FDIC at its next examination of the Bank. The total amount of restitution paid by the Bank shall not exceed $375,000.

The bank has to basically confess all when it sends the check, because the order says that the restitution described by this paragraph shall be issued along with, or concurrently with, a letter by the Bank, and approved by the Regional Director, describing the method of calculation and form of reimbursement made to that particular

Eligible Depositor.
On top of the restitution, because of the alleged violations of Section 5 of the FTC Act (unfair or deceptive acts or practices), a CMP of $325,000 was assessed against the bank – making the entire tab $700,000, and that doesn’t include attorney’s fees, and I’m sure there were some!  Ouch.  Read it and learn.

Reg E – Error Resolution
This was perhaps the most interesting one to me.  The bank consented to the payment of a civil money penalty of $82,500 stemming from allegations that the bank violated the prohibition against deceptive acts or practices in Section 5 of the FTC Act.  What did it do?  FDIC says the Bank established and followed procedures for the resolution of errors involving the use of automated teller machines and/or debit cards, and payment transactions serviced through its automated clearing house that were contrary to the Bank’s disclosures concerning error resolution for these products and in violation of Regulation E.

Next time you’re tempted to take the easy route and adopt any type of compliance procedures developed by someone else, think about this enforcement action and how expensive such a mistake could be!

Worthless Clicks
Save yourself the bother of clicking on each one of the many final Removal and Prohibition Orders.  Virtually all of them are just 3 or 4 pages long, depending upon the font, and just use boilerplate language such as the following:
“Respondent has engaged or participated in violations of law or regulations, unsafe or unsound banking practices, and/or breaches of fiduciary duty while an institution-affiliated party of Such and Such BANK, ("Bank");
(b) by reason of such violations of law or regulation, unsafe or unsound banking practices, and/or breaches of fiduciary duty, the Bank has suffered financial loss or other damage and/or Respondent received financial gain or other benefit.”

Worthwhile Clicks
If management wants to know what the examiner expectations are regarding safe and sound lending practices, go through the Consent Orders issued pursuant to 12 U.S.C. Section 1818(b) and compile a copy and paste document with some of the highlights.  Typically, those orders  are around 16 pages long, most of them relate to lending-related practices, and they contain laundry lists of steps to take.

  Here is an example of one small piece:
“As of the effective date of this ORDER, the Board shall increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all of the Bank’s activities, consistent with the role and expertise commonly expected for directors of banks of comparable size. This participation shall include meetings to be held no less frequently than monthly at which, at a minimum, the following areas shall be reviewed and approved: reports of income and expenses; new, overdue, renewal, insider, charged off, and recovered loans; investment activity; adoption or modification of operating policies; individual committee reports; audit reports; internal control reviews including management’s responses; and compliance with this ORDER. Board meeting minutes shall document these reviews and approvals, including the names of any dissenting directors.”

I wonder how often that board was meeting and what it was doing when it did.

Examiners Can Be Too Soft
Mention the subject of your bank’s next or even last examination and you may feel your pulse quicken and your blood pressure go up a few points.   These days, with the downturn in the economy being reflected in the performance of some of your loans, you may feel the examiners are being harsher in their criticisms, pickier in their complaints, and harder to deal with.

Let me give you a little perspective.  Have you noticed the number of Georgia banks that have failed?  California, Florida, Las Vegas banks – those are easy to understand because of what we know about the real estate prices.  But Georgia?  What in the world?

My first thought was that the economy there must simply be horrible and the banks suffered as a result.  Then we noticed a telling fact:  Of the 22 Georgia banks closed thus far in 2011, only one of them was a national bank; the other 21 had state charters.  Going back even further, of the 77 (!) Georgia banks closed since 1/1/2008, 67 were state-chartered.

I have no idea what the history is and far be it from me to cast aspersions on the Georgia Banking Department, but it caused me to pause and wonder “What if the Georgia state-chartered banks got into trouble because their examiners weren’t critical enough?  What if the examiners failed to call banks on the carpet for risky practices, allowing them to spiral out of control until their doom was certain?”

I’ve been a regulator – and it was during the “bad old days” of the 80s in Oklahoma.   Ronald Regan once said “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’"  The fact is, regulators and bankers all want the same thing – a sound, profitable banking industry.  The goal of examiners truly should be (and, I believe, is) to help.

The next time you feel their help is a little painful, hum the tune “Georgia on my mind” and wonder if some of those Peach State banks could have been saved if the examinations had been more painful at an earlier point in time.
I’m just sayin’.

The Big “Why” – Part 2

In the last edition of Legal Briefs, I started a series I call The Big “Why” – a series of articles to explain my view of  the reason a particular law or regulatory requirement exists.    Last time, I covered SCRA, EFAA, BSA, ECOA and HMDA.  In this edition, let’s talk about the Electronic Fund Transfers Act, which is implemented by the Federal Reserve’s Regulation E, which will now fall under the purview of the new Bureau of Consumer Financial Protection Laws and regulations can shape behavior.  They can make something scary or acceptable.  They can incentivize someone to change habits, to adopt new procedures, or they can prevent a person from wanting to do something.  Reg E is a great example of how.

The purpose of the EFTA and Reg E is to protect individual consumers engaging in electronic fund transfer.  The law and reg (which I will collectively refer to as Reg E establishes the basic rights, liabilities, and responsibilities of EFT consumers of financial institutions that offer these services.

So, the first thing you realize is that it is consumer protection.  Congress believed that individuals, not business customers, needed some extra structure and protection.

The next thing you have to understand is what an electronic fund transfer (EFT) is.  The term electronic fund transfer means any transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer’s account.  It covers ATM transactions, direct deposits, debit card transactions, ACH debits, point-of-sale transfers, computer-initiated transactions, even telephone transfers.

Over the years, Reg E has continued to expand to address new subjects as technology and bank practices have changed.  For now, let’s take a walk down memory lane and look first at the early days of Reg E.

It’s the early 1970s.  Automated Teller Machines are new.  The few banks that have them typically have placed them inside the bank lobby, so a customer has a choice of whether to go stand in the teller loan where friendly Sally can ask about the grandkids, or face a cold machine with the fear that they might hit the one wrong button that will wipe out their account.  Or start thermonuclear war.  It isn’t difficult to imagine the machines sitting idle most of the time.

But they had potential.  If customers could learn to embrace ATMs, they would not only shorten teller lines and eventually reduce the cost of servicing a customer’s need for a quick withdrawal or balance inquiry – they could also pave the way for true 24/7 access to the customer’s account.  Once the ATM machine could truly exist outside the bank lobby, it could be anywhere, allowing the customer to get a little extra cash at the mall, drive-through an ATM in the wee hours of the morning before eating the Fourth Meal at Taco Bell, or grab cash in the early morning hours in preparation for a trip out of town.

The biggest barrier to customer use of ATMs was fear of technology.  “What if . . .?”  “What if I tell the machine to give me $100, but it only spits out $20?”  “What if I lose my card?”  “What if someone steals my card and withdraws all my money?”  Customers worried that they would make an irremediable error or the machine would malfunction and they would be harmed.

Reg E seeks to allay those fears through a well-designed set of protections.  Let’s look at the first five.
1.  Section 205.5 protects against a situation where a bank issues an ATM card (which is a form of “access device,” a specially defined term in the rule) without the customer’s knowledge or consent.  Customers feared banks would be mailing them ATM cards without their knowledge, they would get stolen out of the mailbox, and thieves would plunder their accounts.  Reg E prevents that nightmare.  A bank can only issue an ATM card either in response to an oral or written request for it, in renewal of, or substitution for, a card the customer already had.  If the customer doesn’t solicit the card, the bank can only issue one if it’s invalidated and it comes with disclosures as well as a clear explanation that it is not validated – and the customer is informed about how to get rid of it if they don’t want it.  The customer then has to make an oral or written request if they wish to validate it and the bank has to use a reasonable means to verify the customer’s identity at that point.  Under the Reg, an ATM card (or debit card) should end up only in the hands of consumers who wish to have them.

2.  The second protection comes through disclosures which help to inform the consumer about what he needs to know about the card.  There are initial disclosures which must be given under 205.7 of Reg E.  They must be provided at the time a consumer contracts for an electronic fund transfer service or before the first electronic fund transfer is made involving the consumer’s account.  Take a moment and read through your Reg E disclosure to see how it accomplishes this objective. 

3. Customers also need to be made aware of any changes that might negatively impact them with respect to EFTs.     Let’s say Fred uses the ATM to make a $10 withdrawal every day.  He gets charged a fee of $.50, but he’s okay with that.  If the bank decides to kick that fee up to $2.00, you can imagine the consequences to Fred if he doesn’t find out about it first.  If he gets advance notice, he can alter his ATM habits, perhaps deciding to make withdrawals once a week, rather than once a day.  If he doesn’t know, he may end up short on funds at the end of the month because of all the $2.00 dings.  That’s why Reg E, in Section 205.8 requires prior notice of any change in terms.  It says a bank must mail or deliver a written notice to the consumer at least 21 days before the effective date of a change in its EFT terms or conditions if it would result in increased fees for the consumer, increased liability for the consumer, fewer types of available EFTs, or stricter limitations on the frequency or dollar amount of transfers.  That allows plenty of time, in most instances, for the consumer to actually see the disclosure, even with vacations, before the change takes effect and to make adjustments accordingly.

4. One of the key parts of Reg E is the error resolution part.  If there is an error with an EFT – whether it’s an unauthorized transaction or a machine malfunction or whatever, the regulation sets forth explicit timelines for the bank to deal with it.  It does strike a balance, however.  It puts some duties on the consumer to discover the problem and notify the bank about it.  The quicker the customer spots the error and notifies the institution, the more protected the customer is.  It’s like Congress was standing in the shoes of the bank when it wrote the law and was saying to the customer “Work with me on this, okay?”  To ensure the customer understands what the customer needs to do, the initial disclosure contains information about what to do in case of errors.  And because the whole account opening process might be one big blurb, the regulation provides for annual error resolution notices to be provided, too.  Go take a look at your annual error resolution notice.  It is probably fashioned after Modem Form A-3 and it spells out in plain English the need for the customer to review his statement (and/or ATM receipt) and notify the bank quickly if the customer thinks his statement or receipt is wrong.

5. Yes, ATM receipts are required.  Sort of.  The practical reality is that some folks weren’t taking them, so now the machine can ask “Do you want a receipt?”  Section 205.9 provides the requirements.  It is reassuring for a technophobic customer to be able to see that the receipt confirms what the customer thought happened.

Next edition – more on Reg E’s Big Why.