United States: The CFPB Issues Warning And Guidance On Obtaining Consumer Authorization For Preauthorized Electronic Funds Transfers That Confirms A Recording Of A Consumer's Oral Authorization Can Satisfy Regulation E's Requirements

On November 24, 2015, the Consumer Financial Protection Bureau (CFPB) issued a Compliance Bulletin (2015-06), warning companies that they must ensure that consumer authorization is obtained before automatically debiting a consumer's account and that required notifications to consumers must clearly describe the terms of the preauthorized electronic funds transfers (EFTs).

Importantly, for the first time a federal regulator has publicly confirmed that companies can comply with the requirements of the Electronic Funds Transfer Act (EFTA) and Regulation E (Reg. E) by obtaining a consumer's authorization for preauthorized EFTs through the recording of a telephone conversation, which can qualify as an electronic signature under the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. 7001, et seq. (E Sign Act). This issue of oral authorization of EFTs has caused much debate, perplexed members of the financial services industry, and given rise to numerous national class actions. The CFPB explicitly states in the Bulletin that Reg. E "does not specify that entities must provide a writing to consumers when obtaining the authorization," and the restriction in the E-Sign Act on the use of oral recordings as electronic records "does not apply when obtaining a consumer's authorization for preauthorized EFTs." Companies can now find a safe harbor in this Bulletin, but should take steps to ensure their compliance management system satisfies all the requirements for preauthorized EFTs contained in the EFTA, Reg. E, and E-Sign Act, in particular recording and retaining telephone recordings in compliance with federal and state laws and making certain a copy of the terms of the authorization is provided to the consumer.

The CFPB's Compliance Bulletin Regarding the Requirements for Consumer Authorizations for Preauthorized EFTs

The CFPB issued the Compliance Bulletin "to remind entities of their obligations under" the EFTA and Reg. E when obtaining consumer authorizations for preauthorized EFTs from a consumer's account. The Bulletin notes the CFPB "has observed that some entities may not fully comply with the requirements imposed by" EFTA and Reg. E, or "may be uncertain of their obligations" and "the intersections between" Reg. E and the E-Sign Act.

The Bulletin appears to be the CFPB's summary of the current law, and includes references to relevant findings in examinations conducted by Supervision.

Background on the EFTA, Regulation E, and the E-Sign Act

In 1996, the Board of Governors of the Federal Reserve System issued Reg E. pursuant to the EFTA. Rulemaking authority under the EFTA transferred to the CFPB effective July 21, 2011, pursuant to the Consumer Financial Protection Act of 2010, Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.

EFTs are defined broadly and generally include any transfer of funds 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.

In accordance with §1693e of the EFTA, § 205.10(b) of Reg. E provides that "[p]reauthorized electronic fund transfers from a consumer's account may be authorized only by a writing signed or similarly authenticated by the consumer." Supplement I to Part 205 contains the Official Staff Interpretations of Reg. E, and in its commentary to Paragraph 10(b) of Reg. E, the Staff stated:

The similarly authenticated standard permits signed, written authorizations to be provided electronically. The writing and signature requirements of this section are satisfied by complying with the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. 7001 et seq., which defines electronic records and electronic signatures. Examples of electronic signatures include, but are not limited to, digital signatures and security codes. ... The authorization process should evidence the consumer's identity and assent to the authorization. The person that obtains the authorization must provide a copy of the terms of the authorization to the consumer either electronically or in paper form. ....

12 C.F.R. Part 205, Supp. 1, ¶10(b)5.

The E-Sign Act provides that electronic records and electronic signatures have the same validity as paper documents and handwritten signatures. If the EFTA calls for a writing to be made in connection with a transaction, the writing can be satisfied by an electronic record. If the EFTA requires a writing to be "signed or similarly authenticated," the requirement can be satisfied through an electronic signature.

The E-Sign Act defines an "electronic signature" as "an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record." An electronic record is defined as "a contract or other record created, generated, sent, communicated, received, or stored by electronic means." While the E-Sign Act provides that an audiotape recording of an oral communication does not qualify as an "electronic record," it has no such caveat with respect to whether an audiotape recording qualifies as an "electronic signature." Thus, the E-Sign Act has been interpreted to mean that nothing prevents the creation of an electronic signature through a recording of an oral communication.

Section 1693e(a) of the EFTA provides that "a copy of such authorization shall be provided to the consumer when made." Section 1005.10(b) of Reg. E. provides that "[t]he person that obtains the authorization shall provide a copy to the consumer." However, the Official Staff Interpretations of Reg. E in Supplement I to Part 205 contain the following Staff commentary to Paragraph 10(b): "The person that obtains the authorization must provide a copy of the terms of the authorization to the consumer either electronically or in paper form."

Consumer Authorizations in Compliance with EFTA and Regulation E

There is good news in this Bulletin as it explains the CFPB's expectations for how entities obtaining consumer authorizations for preauthorized EFTs can comply with relevant law, and it clarifies the obligations of entities obtaining customer authorization for preauthorized EFTs.

To comply with EFTA and Reg. E requirements, all EFTs must be authorized by the customer in writing or similarly authenticated — in either paper or electronic form, as specified by the E-Sign Act — and the customer must be provided with a copy of the authorization terms that includes the amount and timing of the recurring EFTs from her account. The Bulletin also states that consumer authorization can be given over the phone if the customer provides authentication by using a code or PIN entered on the phone's keypad, or if an oral authorization is recorded in compliance with relevant State laws, retained by the requesting company (Reg. E imposes a two-year retention requirement), and follows the requirements of the E-Sign Act to ensure the consumer intends to sign the record.

Providing a Copy of the Terms of the Authorization to the Consumer

EFTA and Reg. E require persons obtaining an authorization for a preauthorized EFTs must provide a copy of the terms of the authorization to the consumer when it is made, in paper form or electronically.

The Bulletin notes that "two of the most significant terms of an authorization are the timing and amount of the recurring transfers from the consumer's account." The Bulletin explains: "In at least one examination, CFPB examiners observed that one or more companies provided consumers a notice of terms for preauthorized EFTs from a consumer's account. Supervision determined that these notices of terms did not satisfy Reg. E, because the notices did not disclose important authorization terms such as the recurring nature of the preauthorized EFTs, or the amount and timing of all the payments to which the consumer agreed."

Thus, it is vital that the recurring nature of the preauthorized EFTs, as well as the amount and timing of all the payments to which the consumer agreed, be clearly disclosed in any notice to a consumer containing the terms of the authorization.

The Bulletin also recognizes that there is "an alternative to providing a copy of the authorization after its execution," another indication that a consumer's authorization can be obtained through a voice recording. Instead, a company can comply with its obligations "to provide the consumer a copy of the authorization by using a confirmation form. For instance, a company may provide a consumer with two copies of a preauthorization form, and ask the consumer to sign and return one and to retain the second copy. However, a company does not satisfy Regulation E by only making a copy of the authorization available upon request in lieu of providing the copy."

CFPB's Action Letters for Consumers to Manage and Stop Preauthorized EFTs

In addition to the Bulletin, the CFPB posted a new entry on its blog entitled "You have protections when it comes to automatic debit payments from your account." This blog post includes suggestions for consumers when dealing with automatic debit payments and includes four sample letters a consumer can use in connection with managing and stopping preauthorized EFTs:

  • A sample letter to send to a company or merchant to revoke the consumer's permission to auto debit the account
  • A sample letter to send to a bank or credit union to provide notice that the consumer revoked a company's authorization to automatically debit the account
  • A sample stop payment order to instruct a bank or credit union to stop allowing the company to take payments from the consumer's account
  • A sample letter to a bank or credit union providing notice of an unauthorized debit from a consumer's account

Key Takeaways

Companies accepting payments through preauthorized EFTs can glean a number of takeaways from this Bulletin. First, all entities obtaining preauthorized EFTs from consumers should take immediate steps to ensure their policies, procedures and training is in full compliance with this Bulletin. Entities already accepting oral authorizations for preauthorized EFTs, as well as those contemplating it, can use the issuance of this Bulletin as an opportunity to assess the risks associated with this method of accepting consumer payments. Second, first party and debt collectors can find comfort in their attempts to secure agreements from consumers during a telephone call to make recurring payments, but they should be aware that the CFPB's noted its expectation that "when practical, the CFPB encourages entities obtaining consumer authorizations for preauthorized EFTs to provide the copy of the authorization to the consumer before the first preauthorized EFT is initiated." Finally, the CFPB and other regulators continues their focus on consumer payments, including the CFPB tightening regulations around payday lending and other installment loans, as well as the interactions of vendors (like payment processors) with consumers that involve a consumer granting direct access to her bank account so that funds can be debited directly.

The Troutman Sanders' Consumer Financial Services Law Monitor blog offers timely updates regarding the financial services industry to inform you of recent changes in the law, upcoming regulatory deadlines and significant judicial opinions that may impact your business. To view the blog, click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
David N. Anthony
Keith J. Barnett
Alan D. Wingfield
Ethan G. Ostroff
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.