Compliance Blog

Regulation E Error Resolution Requirements: Recent Exam Findings

Happy Holidays

A couple weeks ago, the Federal Reserve’s examination staff hosted a webinar covering exam findings related to Regulation E error resolution. As you all may be aware, error resolution challenges, particularly with mobile payment apps, have been on my mind quite a bit lately. In a blog earlier this month, I shared some challenges I’ve heard credit unions are having with resolving these types of error claims. NAFCU met again with the CFPB recently to share more about these challenges and we continue to work with their staff on a potential solution. While we have discussed many error resolution issues with the CFPB, two issues we’ve identified also came up in the Federal Reserve’s exam findings and were discussed in the webinar.

Burden of Proof. As anyone who has watched an episode of the many crime or legal tv shows knows, suspected criminals are all innocent until proven guilty. As a result, it is up to the prosecution to demonstrate that the suspect committed the crime rather than being up to the suspect to show they didn’t commit the crime. While this may seem like nitpicky lawyer talk, it is a rather important distinction as it identifies which party has the burden of proving certain facts are true. In this case, the prosecution must collect enough evidence to convince a judge or jury that the suspect really did commit the crime.

A similar distinction exists when investigating claims involving unauthorized EFTs: the transaction is unauthorized until proven authorized. Section 1693g(b) of the Electronic Funds Transfer Act (EFTA) explains “the burden of proof is upon the financial institution to show that the electronic fund transfer was authorized.” In other words, when a member claims a transaction is unauthorized, the credit union assumes that fact is true and must collect enough evidence to prove otherwise. In effect, the credit union sits in the role of the prosecution and must prove the member really did authorize the transaction. If the credit union cannot prove this, it would be required to find the transaction was unauthorized.

Duplicate Credits. Another common issue that arises with unauthorized EFTs is what to do when the member receives funds from a third party for the error. This usually comes up because the member disputed the transaction directly with the merchant in addition to filing a claim with the credit union. If the merchant resolves the claim and refunds the member before the credit union completes its investigation, nothing in the rule prohibits credit unions from finding there is nothing further for the credit union to do.

However, if the merchant refunds the member after the credit union has provided final credit for the error, credit unions often ask whether they may reverse the final credit. According to the Federal Reserve examination staff, reversing the credit is not permitted under the EFTA. As it is not exactly a fair outcome for the member to receive two credits for the same error, the examination staff did indicate credit unions may ask the member to reimburse the credit union, but it cannot require the member to do so by reversing the credit on its own. While the natural reaction may be to then wait the full investigation time period under Regulation E to complete an investigation, keep in mind that section 1005.11(c)(1) requires credit unions to “investigate promptly.”

As more errors tend to be asserted around this time of year, credit unions may find it to be a good time to review their practices. Talking with call center and investigation staff may also be useful to ensure all procedures are being conducted as expected. For more on the Federal Reserve’s error resolution examination findings, you can view the full webinar and related handouts here.

Programming Note: In observance of the Christmas holiday, NAFCU's offices will be closed Tuesday and Wednesday. We'll reopen on Thursday and be back to blogging on Friday. We wish you all a safe and wonderful holiday!

About the Author

Jennifer Aguilar, NCCO, Senior Regulatory Compliance Counsel, NAFCU

Jennifer Aguilar, NCCO, Regulatory Compliance CounselJennifer Aguilar, NCCO, joined NAFCU as regulatory compliance counsel in February 2017 and was named Senior Regulatory Compliance Counsel in March 2019. In this role, Aguilar helps credit unions with a variety of compliance issues.

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