Regulation E and the Nacha Operating Rules each have a 60-day period that applies to unauthorized payments. But in complying with both Reg E and the Nacha Rules, understanding the differences in these periods is important.
Regulation E specifies how and when a consumer can be held liable for unauthorized charges.
“The way it works under Reg E is a consumer is supposed to be looking at their bank statements, and if they notice unauthorized transactions, they should report them to their financial institution,” said Jeanette Hait Blanco, Nacha General Counsel.
Reg E states that, “A consumer must report an unauthorized electronic fund transfer that appears on a periodic statement within 60 days of the financial institution’s transmittal of the statement to avoid liability for subsequent transfers.”
Blanco offered the example of a $50 charge for an unauthorized gym membership deducted Jan. 7. The transaction appeared on the statement sent to the consumer on Jan. 31. Under Reg E, a consumer would have 60 days from Jan. 31 to notify their bank or credit union in order to avoid having liability for transactions after that 60-day period.
But suppose a consumer ignores their monthly statements until July 5, at which point they open the stack of envelopes to discover unauthorized $50 gym transactions on Jan. 7, Feb. 7, March 7, April 7, May 7, and June 7. Then what?
“Under Reg E, the bank can say, ‘You had a duty to look at your statements. The January statement was sent on Jan. 31. Sixty days from that is March 31. After March 31 is your responsibility,’” Blanco explained. Under this scenario, the bank would be liable to the consumer for $150, covering the transactions made in January, February, and March. The consumer would have liability for the transactions in April, May, and June (another $150), as they occurred after March 31.
The 60-day period in the Nacha Rules is different. This 60-day period determines which transactions can be recovered by the financial institutions in the ACH Network.
Using the same scenario, but under the Nacha Rules, the consumer’s bank is the Receiving Depository Financial Institution (RDFI) and the gym’s bank is the Originating Depository Financial Institution (ODFI). When the consumer calls on July 5 to dispute those six months of gym charges, “Under the Nacha Rules, the 60-day period is from the settlement date of each payment. So, the consumer’s bank can return any of the debits that are still within such a 60-day period,” Blanco said. In the gym example, this covers the debits on June 7 and May 7, totaling $100.
With recurring transactions such as in this example, where the amount is the same each month, Blanco said it’s easy to understand the confusion between Reg E and the Nacha Rules. “But they’re different,” she said, adding it’s important for banks and credit unions to understand how each works.
If those two 60-day periods are not confusing enough, Reg E imposes yet another obligation on RDFIs to act within 60 days.
If a consumer provides a financial institution with written or oral notice of an error within 60 days of when a periodic statement is sent, Reg E requires FIs to promptly investigate that claim, provide provisional or final credit to the consumer within certain time periods, inform the consumer of the credit, correct the error within one business day of determining there was an error, and report the results to the consumer within three business days after completing its investigation.
RDFIs must keep all three 60-day periods in mind when handling consumer claims of unauthorized transactions:
- Nacha’s 60-day return rule, which allows an RDFI to return transactions that settled within the last 60 days.
- Regulation E’s 60-day rule to determine the allocation of liability for unauthorized transactions. A consumer can be liable only for unauthorized transfers that occur after the close of the 60-day period that begins when the statement containing the first unauthorized transaction was transmitted to the consumer.
- Regulation E’s 60-day period that requires a financial institution to investigate claims of error and handle them in a certain manner, provided the consumer reported the error within 60 days of when the statement reflecting the transaction was sent.
Failure to comply with either of the 60-day periods prescribed by Reg E can result in the Consumer Financial Protection Bureau (CFPB) finding violations when they examine a financial institution.
In fact, in its “Supervisory Highlights” issued in June, CFPB noted it “continues to find violations” of the Electronic Fund Transfer Act (EFTA) and Reg E. Among the examples it cited: “Relying on incorrect dates to assess the timeliness of an EFT error notice.” And the CFPB offered some advice for financial institutions.
“An effective compliance strategy for institutions includes evaluation of their practices, including through transaction testing, monitoring, and review of their policies and procedures,” the report stated. “This will help ensure compliance with applicable Federal consumer financial laws and stop any practices that were previously identified as violations.”