To Reverse or Not to Reverse: Handling Duplicate Credits for the Same Error
Written by Jennifer Aguilar, Regulatory Compliance Counsel
The error resolution procedures in Regulation E and Regulation Z are a constant thorn in the side of any compliance officer. While no credit union wants to hold its member liable for transactions they didn’t make, the time and effort it takes to investigate an unauthorized transaction claim can be extremely costly to a credit union’s bottom line. The proliferation of online shopping and a fraudster’s ability to charge transactions to a member’s account without getting their physical card make it even more challenging to investigate these claims.
The regulations also do not prohibit members from making a claim through both the credit union and the merchant that processed the transaction. When both the credit union and the merchant determine the transaction was unauthorized, the member may end up getting two credits for the same unauthorized transaction. So, this means the credit union can simply reverse its credit, right? Well, not so fast . . .
We blogged in the past that Regulation E does not provide an avenue for reversing a credit once the credit union has completed its investigation and finalized such credit. Credit unions may have to go down other avenues to get its credit back, such asking the member to return the money or making an unjust enrichment claim. Thankfully, Regulation Z does provide an avenue for reversing a credit under its error resolution procedures for credit card transactions.
Section 1026.13(c)(2) imposes a two billing cycle deadline for investigating and resolving an unauthorized transaction claim. The commentary to this section explains that if a credit union later discovers the member received a credit from another source, nothing in the rule prohibits the credit union from reversing its credit. Here is the example from the commentary that illustrates how this works:
For example, assume that a consumer asserts a billing error with respect to a $100 transaction and that the creditor posts a $100 credit to the consumer’s account to correct that error during the [two billing cycle] time period… However, following that time period, a merchant or other person honoring the credit card issues a $100 credit to the consumer to correct the same error. In these circumstances, §1026.13(c)(2) does not prohibit the creditor from reversing its $100 credit once the $100 credit from the merchant or other person has posted to the consumer’s account.
As long as the credit union properly investigated and resolved the claim within the two billing cycle deadline, it has met its obligations under section 1026.13. It may reverse a duplicate credit after the deadline has passed. The preamble to the final rule clarifies this is true even if the second credit is received after the credit union’s investigation has been completed. The preamble explains that merchants often have additional time to investigate claims under the card network rules so they may not issue their credit until after Regulation Z’s deadline. To avoid the scenario where the member gets a windfall for the unauthorized transaction, credit unions should be able to reverse their credits.
When reversing a credit, the commentary explains the total amount of the remaining credit must at least equal the amount of the error. The commentary also requires credit unions to ensure the member is not charged any fees or charges as a result of the reversal. The rule does not impose a specific time period by which the credit union must reverse its credit nor does the rule require credit unions to provide advance notice before reversing the credit. However, depending on the facts involved, a credit union may want to consider informing the member of the reversal and the reason.