CFPB Issues Compliance Bulletin on Preauthorized Electronic Payments; Oral Recordings Acceptable

This week the Consumer Financial Protection Bureau (CFPB) issued a Compliance Bulletin (Bulletin 2015-06) concerning the Electronic Fund Transfer Act (EFTA) and Regulation E requirements for obtaining a consumer’s authorization for preauthorized electronic fund transfers (EFT). The Bulletin also outlines the CFPB’s compliance expectations.

The CFPB issued the Compliance Bulletin to remind entities of their obligations under the Electronic Fund Transfer Act (EFTA) and Regulation E when obtaining consumer authorizations for preauthorized electronic fund transfers (EFTs) from a consumer’s account. The Bulletin makes note of CFPB observations that some entities may not fully comply with the requirements imposed by EFTA and Regulation E or may be uncertain of their obligations under EFTA and Regulation E, as well as the intersections between Regulation E and the Electronic Signatures in Global and National Commerce Act (E-Sign Act).

The Bulletin summarizes the current law, highlights relevant supervisory findings, and articulates the CFPB’s expectations for entities obtaining consumer authorizations for preauthorized EFTs to help them ensure their compliance with Federal consumer financial law. The following are highlights from the Bulletin.

Consumer Authorizations in Compliance with EFTA and Regulation E

The CFPB notes that Regulation E requires that preauthorized EFTs from a consumer’s account be authorized “only by a writing signed or similarly authenticated by the consumer.” A copy of the authorization must also be provided to the consumer.

Consumer authorizations can be provided in paper form or electronically. Writing and signature requirements are satisfied by complying with the E-Sign Act which defines electronic records and electronic signatures. Regulation E does not prohibit companies from obtaining signed, written authorizations from consumers over the phone if the E-Sign Act requirements for electronic records and signatures are met.

An electronic signature is “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 “a contract or other record created, generated, sent, communicated, received, or stored by electronic means.”

The Bulletin notes: “In at least one examination, Supervision has concluded that one or more entities did not violate EFTA or Regulation E merely because they obtained by telephone consumer authorizations that were signed or similarly authenticated by the consumer orally.  Regulation E may be satisfied if a consumer authorizes preauthorized EFTs by entering a code into their telephone keypad, or, Supervision concluded, the company records, and retains the consumer’s oral authorization, provided in both cases the consumer intends to sign the record as required by the E-Sign Act.” The Bulletin also mentions that any telephone recording must be in compliance with State laws.

Providing a Copy of the Authorization to the Consumer

Regulation E requires persons that obtain authorizations for preauthorized EFTs to provide a copy of the terms of the authorization to the consumer. The copy of the terms of the authorization must be provided in paper form or electronically. However, the Bulletin states that two of the most significant terms of any authorization are the timing and amount of the recurring transfers from the consumer’s account. Thus, the recurring nature of the preauthorized EFTs, or the amount and timing of all the payments to which the consumer agreed must be clearly disclosed in any notice to a consumer.

A company can comply with the Regulation E requirement 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.

The bulletin was accompanied by the CFPB’s publication You have protections when it comes to automatic debit payments from your account. Contained in that publication are suggestions for consumers when dealing with automatic debit payments. It also includes four sample letters a consumer can use in connection with preauthorized EFTs. The sample letters are:

• Revoking authorization given to a company or merchant for preauthorized EFTs
• Providing notice to a bank or credit union that the consumer has revoked a company’s or merchant’s authorization for preauthorized EFTs
• Issuing a “stop payment order” to a bank or credit union to stop payment of one or more preauthorized EFTs
• Notifying a bank or credit union of an unauthorized debit from a consumer’s account

insideARM Perspective

As the bulletin makes clear, the document is a summary of existing requirements under the law and findings the Bureau made while exercising its supervisory authority. It is a non-binding general statement of policy. That being said, this is significant as it is a document the CFPB expects industry to study and follow.

• There is no question that for the debt collection industry, the opportunity to secure authorization for a payment from a consumer during a collection call is extremely important. The CFPB guidance seems to clearly articulate that oral recordings could satisfy Regulation E.
• Although experts in the industry have opined that oral recordings obtained over the phone may authorize preauthorized electronic fund transfers under Regulation E provided that the recordings also comply with the E-Sign Act, the Bulletin provides additional support for the practice. This document can now be used by vendors and shared with clients to support an agency’s authorization process.
• Footnote 20 to the Bulletin should be reviewed closely. The CFPB states in footnote 20 that section 7001(c)(1) of the E-Sign Act may not apply when obtaining a consumer’s authorization for preauthorized electronic fund transfers. There has been some debate within the industry as to whether 7001(c)(1) needs to be satisfied…the CFPB suggests it may not.
• When providing a copy of the authorization to the consumer, the CFPB is focused on the timing and amount of the recurring transfers from the consumer’s account.