AN ELECTRONIC HYPOTHETICAL
Sam is shopping at Grocery Mart on a Saturday afternoon. Despite the fact that Sam isn’t sure about his bank account balance, he decides to use a personal check to pay for the groceries. He fills out all necessary information on the check, and hands it to the clerk. The clerk runs the check through a machine and then hands the check back to Sam, along with a receipt. Sam is slightly confused; did he actually pay for the groceries?
A week later, Sam balances his checkbook and realizes that the grocery check has not cleared. Later that same month, he reviews his bank account statement. Sam discovers that although Grocery Mart cashed the check, it also collected an insufficient funds fee (i.e., an “NSF fee”). Clearly, the grocery check bounced the first time Grocery Mart presented it to Sam’s bank. Sam comes to you, his attorney, to ask whether he can file suit against Grocery Mart for debiting his account for an NSF fee.
The above scenario will likely become a recurring reality as more and more stores and vendors begin to convert consumer paper checks into electronic ones. Electronic checks were developed to make the collection of consumer payments more efficient for businesses, while allowing consumers to continue using paper checks as a form of payment. Essentially, a store clerk uses a specialized machine to scan the information from a consumer’s personal check. This information is then used to send an electronic debit to the consumer’s bank account. Finally, the store clerk voids the paper check and gives it back to the consumer for his/her records, along with a receipt of purchase.
With the advent of electronic checks, two bodies of regulations were modified to protect consumers from unauthorized transactions related to electronic check purchases, including the inappropriate assessment of NSF fees. The most significant body of law to consider is the Electronic Fund Transfer Act, which is enforced by a set of rules known as Regulation E.
Regulation E requires a merchant to provide a consumer with written notice that information on a personal check will be used to make a one-time electronic payment from the consumer’s account, in order to for the electronic payment to be authorized. Such notice can take the form of a sign located on business premises, or a written statement handed to the consumer. In addition, at the time the transaction occurs, a consumer must also be given separate notice of any NSF fee that a merchant will collect from the consumer’s account electronically, in order for each such fee to be authorized. Upon receiving the appropriate notice, the consumer authorizes an electronic check transaction by allowing the transaction to be completed.
Another set of regulations requires a more stringent authorization process than Regulation E. The National Automated Clearing House Association Operating Rules (“NACHA Rules”) govern how financial institutions and businesses enter electronic debits or credits to consumer accounts. NACHA holds such power because it controls the Automated Clearing House (“ACH”) Network, a complex network through which electronic transactions are processed. Thus, in order to use the electronic check payment method, businesses must comply with certain provisions of the NACHA Rules.
NACHA requires businesses to give consumers writtennotice prior to initiating each and every electronic debit or credit entry to their banking accounts. Likewise, a consumer must authorize any electronic debit or credit transaction by signing or similarly authenticating the written notice. Thus, consumers must receive written notice prior to conducting an electronic check transaction and before colleting each NSF fee from a consumer’s account. Some vendors and stores include the above notice on the purchase receipt, which the customer signs. To further protect consumers, NACHA provides that a business or financial institution can only re-present a check for payment collection twice, which means a maximum of three NSF fees can be collected.
THE INTERPLAY BETWEEN REGULATION E AND THE NACHA RULES
Let’s go back to the hypothetical scenario. Could Sam, your client, bring a successful civil suit against Grocery Mart for debiting one or more NSF fees against his account? Which regulations would apply, Regulation E or the NACHA Rules? In truth, both sets of regulations apply, but in different ways.
In a civil litigation involving both Regulation E and the NACHA Rules, Sam would be unsuccessful in directly suing a merchant for collecting an NSF fee so long as:
- The merchant gave written notice of
- its electronic check payment method; and
- its ability to collect any fees prior to each collection; and
(2) The consumer allowed the transaction to be completed.
However, there is a way for Sam or any other consumer to recoup damages indirectly for unauthorized electronic checks or NSF fees under NACHA. The NACHA Rules enable a consumer’s bank to file a warranty claim against a merchant and its financial institution for initiating an unauthorized debit. To do so, a consumer must examine his/her monthly banking statements to determine if any errors were made on his/her account. If an error is found, the consumer should contact his/her bank immediately and file a claim.
Accordingly, under Regulation E, the bank must investigate whether it made an error by allowing the debit to occur. If the bank determines that it is not responsible, the bank has the right to request the merchant’s bank to reimburse the unauthorized electronic debit to its consumer’s account.
Please note that the bank will request the consumer to provide a written and signed affidavit, affirming that a particular debit (e.g., electronic check or NSF fee) was unauthorized. Upon such request, the customer should complete and return the affidavit to the bank within 15 days from the date that his/her bank provided the consumer the monthly banking statement containing the unauthorized debit. Upon receiving the affidavit, the consumer’s bank will recredit the consumer’s account for the amount of the unauthorized electronic check entry and the NSF fee and recoup the money from the merchant’s bank.
CONCLUSION: A CHECKLIST FOR CONSUMERS
The Federal Reserve Board (i.e., the creators of Regulation E) recommends the following practices for consumers who patronize a merchant that offers the electronic check payment method:
- Do I understand that the information on my check will be used to make an electronic payment from my account?
- Do I have enough money in my account to cover the payment?
- Did the merchant give me written notice of the electronic check payment method and its ability to collect any NSF fees?
Before you leave the store make sure that:
- the cashier has given you a receipt;
- the amount on the receipt matches the amount of purchase; and
- the cashier has returned a voided paper check to you.
When you receive your monthly account statement from your bank:
- Make sure that the electronic payment amount matches that on your above records.
- If there is a problem, contact your financial institution immediately.
In the event of a dispute with a business, the Federal Reserve Board also suggests filing a complaint about the offending business with the Federal Trade Commission and the Board of Governors of the Federal Reserve System. Ultimately, there are ways for a consumer to recoup monetary losses due to electronic transaction and NSF fees assessed against his/her bank account. However, a consumer would be best served to prevent any unnecessary or unauthorized debits and/or fees by understanding how electronic check transactions work.
This vignette was prepared and written by Sheila deLa Cruz, Esquire, formerly an associate with Troutman Sanders LLP, 1660 International Drive, Suite 600, McLean, Virginia 22102.
Commentary to Regulation E, 12 C.F.R. § 205.3(c)(1) (2005).
Commentary to Regulation E, 12 C.F.R. § 205.3(b)(3) (2005).
NACHA 2005 Operating Rules, Article 2, §§ 2.1.2.
NACHA 2005 Operating Rules, Article 2, § 2.12.
NACHA 2005 Operating Rules, Article 2, §2.2.
Regulation E, 12 C.F.R. § 205.11(c) (2005).
NACHA 2005 Operating Rules, Article 4, §§ 4.4.5.
NACHA 2005 Operating Rules, Article 8, §§ 8.6.2 and 8.6.3.
The Federal Reserve Board, When Is Your Check Not A Check? (2005) at http://www.federalreserve.gov/pubs/checkconv/default.htm.
Send the complaint to: Federal Trade Commission, c/o Consumer Response Center, 600 Pennsylvania Ave., NW, Washington, D.C. 20580. You can also call 877-FTC-HELP. Id.
Id. Send complaint to: Board of Governors of the Federal Reserve System, c/o Division of Consumer and Community Affairs, Washington, D.C. 20551. You can also call 202-452-3693. Id.