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
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.