Electronic Fund Transfers

Rules

FEDERAL RESERVE SYSTEM

12 CFR Part 205

[Regulation E; Docket No. R-0919]

Electronic Fund Transfers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board is publishing for comment proposed amendments to

Regulation E, which implements the Electronic Fund Transfer Act. The

proposed amendments relate to: the use of electronic communication in

home-banking services for providing disclosures and other

documentation; error resolution requirements for new accounts; and the

treatment of stored-value cards (imposing modified Regulation E

requirements on stored-value products in systems that track individual

transactions, cards, or consumers; providing an exemption for cards on

which a maximum value of $100 can be stored; and providing that other

stored-value cards are not covered by Regulation E).

DATES: Comments must be received on or before August 1, 1996.

ADDRESSES: Comments should refer to Docket No. R-0919 and be mailed to

William W. Wiles, Secretary, Board of Governors of the Federal Reserve

System, Washington, DC 20551. They may also be delivered to the guard

station in the Eccles Building Courtyard on 20th Street, NW (between

Constitution Avenue and C Street) between 8:45 a.m. and 5:15 p.m.

weekdays. Except as provided in the Board's rules regarding the

availability of information (12 CFR 261.8), comments will be available

for inspection and copying by members of the public in the Freedom of

Information Office, Room MP-500 of the Martin Building, between 9:00

a.m. and 5:00 p.m. weekdays.

20th Street, NW (between

Constitution Avenue and C Street) between 8:45 a.m. and 5:15 p.m.

weekdays. Except as provided in the Board's rules regarding the

availability of information (12 CFR 261.8), comments will be available

for inspection and copying by members of the public in the Freedom of

Information Office, Room MP-500 of the Martin Building, between 9:00

a.m. and 5:00 p.m. weekdays.

FOR FURTHER INFORMATION CONTACT: Regarding the proposed amendments on

electronic communication, Michael Hentrel, Staff Attorney, and

regarding the other proposed amendments, Jane Gell, Natalie Taylor, or

Kyung Cho-Miller, Staff Attorneys, Division of Consumer and Community

Affairs, at (202) 452-2412 or (202) 452-3667. For the hearing impaired

only, Telecommunications Device for the Deaf (TDD), Dorothea Thompson,

at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

The Electronic Fund Transfer Act (EFTA) (15 U.S.C. 1693), enacted

in 1978, provides a basic framework establishing the rights,

liabilities, and responsibilities of participants in electronic fund

transfer (EFT) systems. The Federal Reserve Board was given rulewriting

authority to issue implementing regulations. Types of transfers covered

by the act and regulation include transfers initiated through an

automated teller machine (ATM), point-of-sale (POS) terminal, automated

clearinghouse, telephone bill-payment system, or home banking program.

The act and Regulation E (12 CFR Part 205) provide rules that govern

these and other EFTs. The rules prescribe restrictions on the

unsolicited issuance of ATM cards and other access devices; disclosure

of terms and conditions of an EFT service; documentation of EFTs by

means of terminal receipts and periodic statements; limitations on

consumer liability for unauthorized transfers; procedures for error

resolution; and certain rights related to preauthorized EFTs

hese and other EFTs. The rules prescribe restrictions on the

unsolicited issuance of ATM cards and other access devices; disclosure

of terms and conditions of an EFT service; documentation of EFTs by

means of terminal receipts and periodic statements; limitations on

consumer liability for unauthorized transfers; procedures for error

resolution; and certain rights related to preauthorized EFTs.

In 1994 the Board issued for public comment a proposed revision of

Regulation E under the Board's Regulatory Planning and Review program.

(The Board has taken final action on the proposal; a revised regulation

and revised staff commentary are published in today's Federal

Register.) As part of that process, and based in part on the public

comments received, the Board identified areas that offer an opportunity

for further burden reduction without undercutting consumer protection.

One such area involves the use of electronic communication between

consumers and financial institutions--for example, by personal computer

and modem--in place of paper documents. The proposed revision published

in 1994 included a provision that allowed electronic communication in

place of paper for authorization of recurring electronic debits. The

Board now proposes to permit electronic text messages to substitute for

paper under Regulation E generally. The proposed revision also

solicited comment generally on coverage of prepaid cards and other

stored-value products under Regulation E. To resolve issues raised

during and following the public comment period, the Board undertook an

analysis of stored-value products and their treatment under Regulation

E. The Board now proposes amendments under which many stored-value

products would be exempt, and others would be covered under limited

requirements.

II. Proposed Regulatory Revisions

r

stored-value products under Regulation E. To resolve issues raised

during and following the public comment period, the Board undertook an

analysis of stored-value products and their treatment under Regulation

E. The Board now proposes amendments under which many stored-value

products would be exempt, and others would be covered under limited

requirements.

II. Proposed Regulatory Revisions

The following discussion covers the proposed amendments to

Regulation E in the order of the sections of the regulation that would

be affected--first addressing electronic communication, then error

resolution for new accounts, and finally stored-value products.

Electronic Communication--Section 205.4(c)

Financial institutions offer a wide variety of ``home banking''

services ranging from account inquiries, verifications, and fund

transfers between accounts, to bill payment and full account

management; and they are using various forms of electronic

communication to deliver these services. Telephones and personal

computers are the most common means of access to home banking services.

Telephones with digital screens (``screen phones''), equipped with bar

code or magnetic stripe readers, allow consumers to enter transactions

off-line, then send the information to the financial institution on-

line. Financial institutions may offer consumers specialized software

that allows the user to access bank information via personal computer;

oftentimes this software is integrated with other on-line services.

These EFT services use electronic communication as a fast, convenient,

and sometimes less costly means of communication with the consumer.

Electronic communication, for purposes of this discussion, means an

electronically transmitted text message between a financial institution

and a consumer's home computer or other electronic device possessed by

the consumer

ed with other on-line services.

These EFT services use electronic communication as a fast, convenient,

and sometimes less costly means of communication with the consumer.

Electronic communication, for purposes of this discussion, means an

electronically transmitted text message between a financial institution

and a consumer's home computer or other electronic device possessed by

the consumer.

Under Regulation E, certain disclosures (such as initial

disclosures and periodic statements) must be provided to consumers (1)

in writing, (2) in a clear and readily understandable form, and (3) in

a form that the consumer may keep. In the context of home banking and

similar services, financial institutions have asked whether they may

satisfy these requirements by providing the information electronically,

for example, through a consumer's personal computer.

Are Electronic Communications ``Writings''

Many Regulation E disclosures must be provided to consumers in

writing. A writing, up to the present, has typically been presumed to

mean a paper document. Information that is produced,

stored, or communicated by computer too is generally considered to be a

writing, at least where text is involved. Indeed, in many office

environments in the United States today, documents are produced,

edited, revised, and communicated to others within the organization by

the use of computers and electronic mail, and these documents are

considered written documents when kept in electronic form as well as

when printed on paper. Similarly, under other laws that call for

information to be in writing, information in electronic form is

considered to be ``written.''

Communications by telephone (including voicemail systems) are

typically characterized as oral communication as they do not have the

feature generally associated with a writing--visual text

uments when kept in electronic form as well as

when printed on paper. Similarly, under other laws that call for

information to be in writing, information in electronic form is

considered to be ``written.''

Communications by telephone (including voicemail systems) are

typically characterized as oral communication as they do not have the

feature generally associated with a writing--visual text. Therefore,

pursuant to its authority under section 904(c) of the EFTA, the Board

proposes to permit financial institutions to use an electronic

communication where the regulation calls for information to be provided

in writing, but to limit the scope of the term ``electronic

communication'' to a communication in a form that can be displayed as

visual text. An example would be an electronic message that the

receiver could display on a screen (including a computer monitor or a

screen phone).

Clear and Readily Understandable Form

Regulation E requires financial institutions to provide required

information in a clear and readily understandable form. Some means of

displaying an electronic communication appear to meet this standard;

for example, a personal computer monitor should allow the consumer to

read the text of a disclosure. Others may not have this capability; a

screen phone, for example, may display only a few lines of text at a

time, making it difficult for a consumer to review initial disclosures

or a periodic statement, where it may be necessary to move back and

forth between various parts of the document. The Board believes that

the requirement for clear and readily understandable disclosures

applies fully to electronic communications. The Board requests specific

comments on the likelihood and extent of compliance problems that could

be caused by this requirement, as well as suggestions for resolving

such problems.

Retainability

The act and regulation establish a retainability requirement

nt. The Board believes that

the requirement for clear and readily understandable disclosures

applies fully to electronic communications. The Board requests specific

comments on the likelihood and extent of compliance problems that could

be caused by this requirement, as well as suggestions for resolving

such problems.

Retainability

The act and regulation establish a retainability requirement. In

general, if information must be provided in writing, Regulation E

requires that the information must be in a form that the consumer may

retain.

Consumers with home banking systems will most likely have the

ability to download information, print it out, and store it on a

computer disk for later retrieval. The responsibility to provide EFTA

information in a retainable form belongs to the financial institution.

Still, the Board recognizes that to satisfy the retainability

requirement for electronic communications, financial institutions will

have to rely on the consumer's having the capability to download data.

The Board believes that where a consumer has agreed to receive

information electronically, the financial institution should be deemed

to satisfy the retention requirement by making information available

for downloading, provided some consumer safeguards are established. In

the event of printer malfunctions and other unforeseen computer

problems, for instance, the consumer may be precluded from effectively

retaining an electronic message received from a financial institution.

The Board proposes to amend Regulation E to provide that if a

financial institution uses electronic communication to send information

that is required to be in writing, the consumer may request a paper

copy of the information within one year after receipt of the electronic

communication. Commenters are asked to address whether this is an

appropriate time period, and if not, to offer suggestions for an

alternative

amend Regulation E to provide that if a

financial institution uses electronic communication to send information

that is required to be in writing, the consumer may request a paper

copy of the information within one year after receipt of the electronic

communication. Commenters are asked to address whether this is an

appropriate time period, and if not, to offer suggestions for an

alternative.

The Board also solicits comment on possible alternatives to

providing a paper copy upon request to consumers. One such means might

be for a financial institution to maintain the information in data

storage and re-send the information electronically to a consumer whose

computer facilities were temporarily inoperable.

Some electronic messages from a consumer to an institution trigger

the need for a response from the institution. For example, an oral or

written notice of error from a consumer requires the institution to

investigate and resolve the error within a specified period. Some

financial institutions have indicated that in accepting electronic

communications from consumers, they may want to require paper

verifications, for their own and the consumer's protection. For

example, Regulation E provides that a consumer may stop payment of a

preauthorized electronic fund transfer by notifying the institution

orally or in writing, and that the institution may require written

confirmation of an oral stop-payment order. If an institution accepts

an electronic stop-payment order, the institution might want to require

confirmation of the order in paper form, to make sure that a

preauthorized payment is not dishonored by mistake.

The Board believes that (as in the case of an oral communication)

if the consumer sends an electronic communication to the institution,

the institution could require a confirmation from the consumer in paper

form. Comment is requested, however, on whether and how the regulation

should address this point

er in paper form, to make sure that a

preauthorized payment is not dishonored by mistake.

The Board believes that (as in the case of an oral communication)

if the consumer sends an electronic communication to the institution,

the institution could require a confirmation from the consumer in paper

form. Comment is requested, however, on whether and how the regulation

should address this point.

Electronic communication between financial institutions and

consumers could also be used in contexts other than home banking. For

example, a consumer who possesses a modem-equipped personal computer

may wish to send and receive information required by Regulation E about

an EFT service used by the consumer, such as debit card access to the

consumer's account. The proposal covers this situation. The Board

solicits comment on whether the regulation should, as proposed, permit

electronic communication to substitute for paper disclosures and other

required paper messages for EFT services other than home banking, or

should limit electronic communication to home-banking services.

Error Resolution for New Accounts--Section 205.11

Regulation E requires a financial institution to investigate and

resolve a consumer's claim of error within specified time limits. An

institution generally is expected to resolve the alleged error within

ten business days after receiving a notice of error. If the institution

needs more time, it must provisionally credit the consumer's account

and resolve the error no later than 45 calendar days after receiving

the notice.

In the course of commenting on the Board's 1994 proposal to revise

Regulation E, some institutions requested that the Board use its

exception authority under the statute either (1) to exempt new accounts

from the requirement to provisionally credit the account by the tenth

business day or (2) to extend the time period for resolving errors.

Commenters expressed concern about individuals who open a new

account with the intent to defraud

994 proposal to revise

Regulation E, some institutions requested that the Board use its

exception authority under the statute either (1) to exempt new accounts

from the requirement to provisionally credit the account by the tenth

business day or (2) to extend the time period for resolving errors.

Commenters expressed concern about individuals who open a new

account with the intent to defraud. Such individuals may open an

account, immediately withdraw all or a large amount of the funds

through ATMs, and file a claim with the financial institution disputing

the ATM transactions. Often they receive provisional credit because of

the financial institution's inability to

research the claim (such as by obtaining photographic evidence from ATM

cameras) within ten business days. At that point, the individual

immediately withdraws the funds that were provisionally credited and

abandons the account. Commenters believe that having more time to

investigate errors involving new accounts would enable institutions to

limit their losses and control this type of fraud.

Some commenters pointed to the Board's exception for new accounts

under Regulation CC, which implements the Expedited Funds Availability

Act. There, the regulation extends the time within which an institution

is required to make funds available to a customer for new accounts.

Regulation CC defines a new account as an account during the first 30

calendar days after the first deposit to the account is made.

The Board proposes to amend Regulation E, pursuant to its section

904(c) authority to provide for adjustments and exceptions in the

regulation, to extend the time periods for resolving errors that

involve new accounts. The proposal would allow 20 business days for

resolving an error before an institution is required to provisionally

credit, and an outside limit of 90 calendar days for resolving the

claim

poses to amend Regulation E, pursuant to its section

904(c) authority to provide for adjustments and exceptions in the

regulation, to extend the time periods for resolving errors that

involve new accounts. The proposal would allow 20 business days for

resolving an error before an institution is required to provisionally

credit, and an outside limit of 90 calendar days for resolving the

claim. Comment is solicited on the proposed extensions of time, on the

30-day definition for new accounts, and on whether consumer protections

relating to error resolution would be adversely affected.

Stored-Value Systems--Section 205.16

Over the past few years the financial services industry has shown

increasing interest in providing ``stored-value cards'' (also referred

to as prepaid or value-added cards) to consumers. These cards maintain,

typically in a computer chip or magnetic stripe, a ``stored value'' of

funds available to the consumer for access primarily at retail

locations. The balance recorded on the card is debited at a merchant's

POS terminal when the consumer makes a purchase.

Products that could be characterized broadly as ``stored-value''

cover a wide range. In their simplest form, stored-value systems are

targeted at low-value uses (public transit, pay telephones, or

photocopiers, for example); the amount that can be stored on the card

is limited; and the card is disposed of once its value has been used

up. These cards typically have a single type of use, and only one card

issuer and one entity (likely to be the same as the issuer) that

accepts the card as payment for goods or services.

More sophisticated systems can involve large transactions and

permit consumers to store value in the hundreds of dollars on a card.

The cards may have multiple uses, and there may be multiple card

issuers and multiple card-accepting merchants. The cards may allow the

consumer to obtain cash from ATMs instead of, or in addition to, making

purchases

s the card as payment for goods or services.

More sophisticated systems can involve large transactions and

permit consumers to store value in the hundreds of dollars on a card.

The cards may have multiple uses, and there may be multiple card

issuers and multiple card-accepting merchants. The cards may allow the

consumer to obtain cash from ATMs instead of, or in addition to, making

purchases. At least one system (now in the pilot stage) would enable

the consumer to transfer stored-value balances to another person's

card. Some systems would provide access to funds in foreign currencies.

Cards tend to be reloadable, allowing the consumer to load value onto

the card, for example, by withdrawing funds from an account at a

depository institution through a teller, via an ATM, or, potentially,

via a specially-equipped telephone. Some systems are designed as stand-

alone products. In other cases, stored-value features may be added to

debit or credit cards. Some of these more sophisticated stored-value

systems are in operation as pilot programs or are under development by

financial institutions or associations of institutions.

Colleges and universities are increasingly adding a stored-value

feature to student identification cards, so that students can make

purchases at campus locations such as cafeterias, bookstores, and

vending machines. In some cases, the educational institution is both

the issuer and the only card-accepting entity; in others, the card is

also accepted by off-campus merchants. In addition to the stored-value

features that some student card systems may have, these systems may

operate with student asset accounts maintained by the university or by

a depository institution on behalf of the university; these accounts

are covered by Regulation E.

There are significant differences among proposed systems in the

manner that they handle balances and transaction data. Some systems

operate off-line, with transaction approval and data retention

occurring only at the merchant level

e with student asset accounts maintained by the university or by

a depository institution on behalf of the university; these accounts

are covered by Regulation E.

There are significant differences among proposed systems in the

manner that they handle balances and transaction data. Some systems

operate off-line, with transaction approval and data retention

occurring only at the merchant level. The balance of available funds

may be stored only on the card itself as transactions occur, and

transactions neither require nor receive authorization from a central

database. The data for a given transaction are kept at the merchant

location, and are not forwarded to the central data facility. Only the

aggregate amount for a batch of transactions is transmitted by the

merchant (usually daily) so that the merchant can receive appropriate

credit from a financial institution. In other off-line systems, the

dollar value remaining on the card is stored both on the card and in a

central data facility. Data for individual transactions are transmitted

to the central data facility, typically at the end of each business

day, and maintained there. Still other systems operate on-line, and

transactions are authorized by communication between a terminal and a

central database.

Status of Stored-Value Cards Under the EFTA

In 1994, the Board issued proposed revisions to Regulation E under

the Board's Regulatory Planning and Review program. At that time, the

Board generally requested comment on whether, and the extent to which,

the regulation should apply to stored-value cards. The Board made clear

that a transaction involving such cards is covered by Regulation E when

the transaction accesses a consumer's account (such as when value is

``loaded'' onto the card from the consumer's deposit account via an

ATM)

and Review program. At that time, the

Board generally requested comment on whether, and the extent to which,

the regulation should apply to stored-value cards. The Board made clear

that a transaction involving such cards is covered by Regulation E when

the transaction accesses a consumer's account (such as when value is

``loaded'' onto the card from the consumer's deposit account via an

ATM). Among the commenters that addressed this issue, many asked the

Board to provide an exemption from Regulation E for stored-value cards

and other stored-value products so as not to hinder their development

or, alternatively, to modify the requirements applicable to them.

Legislation introduced and still pending in the Congress would

exempt stored-value cards and other stored-value products from the EFTA

and Regulation E. (H.R. 2520, 104th Cong., 1st Sess., Sec. 443; S. 650,

104th Cong., 1st Sess., Sec. 601 (1995).) The Board has suggested in

congressional testimony that, while certain provisions of Regulation E

should not apply, it would be appropriate to first examine basic issues

raised by these new payments systems before legislating a blanket

exemption from the EFTA. The Board mentioned terminal receipts and

periodic statements as examples of requirements that should not apply,

but suggested that consumers might benefit from receiving initial

disclosures (such as disclosure of a consumer's risk for unauthorized

transactions), a requirement that would likely entail minimal added

expense for card issuers.

Coverage Issue

Coverage of stored-value systems under the EFTA and Regulation E

depends on whether a stored-value transaction involves an EFT from a

consumer's asset account. The act defines an ``electronic fund

transfer'' as a transfer of funds initiated through electronic means

(such as an electronic terminal or a computer) that results in a debit

or credit to an account. Stored-value transactions involve a transfer

of funds and are carried out through

nd Regulation E

depends on whether a stored-value transaction involves an EFT from a

consumer's asset account. The act defines an ``electronic fund

transfer'' as a transfer of funds initiated through electronic means

(such as an electronic terminal or a computer) that results in a debit

or credit to an account. Stored-value transactions involve a transfer

of funds and are carried out through

electronic means--namely, terminals in retail locations that read the

magnetic strip or chip embedded in the card.

The act defines ``account'' as a demand deposit, savings, or other

``asset account''--as described in regulations of the Board--that is

established primarily for personal, family, or household purposes.

Asset accounts are not limited to traditional checking and other

deposit accounts. For example, the term includes a consumer's money

market mutual fund or other securities account held by a broker-dealer.

The Board also interprets the term ``account'' to include accounts

established by government agencies under electronic benefit transfer

(EBT) programs (59 FR 10678, March 7, 1994).

The legislative history of the act provides guidance as to the

Board's regulatory authority under the EFTA for determining issues of

coverage. Senate Banking Committee reports noted that the ``definitions

of `financial institution' and `account' are deliberately broad so as

to assure that all persons who offer equivalent EFT services involving

any type of asset account are subject to the same standards and

consumers owning such accounts are assured of uniform protection.'' (S.

Rep. No. 915, 95th Cong., 2d Sess

g issues of

coverage. Senate Banking Committee reports noted that the ``definitions

of `financial institution' and `account' are deliberately broad so as

to assure that all persons who offer equivalent EFT services involving

any type of asset account are subject to the same standards and

consumers owning such accounts are assured of uniform protection.'' (S.

Rep. No. 915, 95th Cong., 2d Sess. 9 (1978).) This concept is captured

in section 904(d) of the EFTA, which provides that if EFT services

``are made available to consumers by a person other than a financial

institution holding a consumer's account, the Board shall by regulation

assure that the disclosures, protections, responsibilities, and

remedies created by this title are made applicable to such persons and

services.''

Further, section 904(c) provides that the rules issued by the Board

``may contain such classifications, differentiations, or other

provisions * * * as in the judgment of the Board are necessary or

proper to effectuate the purposes of this title, [or] to prevent

circumvention or evasion thereof. * * *'' Senate Banking Committee

reports on two separate bills, in discussing section 904(c), stated

that ``since no one can foresee EFT developments in the future,

regulations would keep pace with new services and assure that the act's

basic protections continue to apply.'' (S. Rep. No. 915, 95th Cong., 2d

Sess. 10 (1978).)

Types of Stored-Value Systems

In some stored-value systems, the balance of funds available is

recorded on the card, but is also maintained at a central data facility

at a bank or elsewhere. The systems operate off-line; there is no

authorization of transactions by communication with a database at a

financial institution or elsewhere. Transaction data are periodically

transmitted to and maintained by a data facility

stems

In some stored-value systems, the balance of funds available is

recorded on the card, but is also maintained at a central data facility

at a bank or elsewhere. The systems operate off-line; there is no

authorization of transactions by communication with a database at a

financial institution or elsewhere. Transaction data are periodically

transmitted to and maintained by a data facility. As in the case of the

traditional consumer deposit account accessed by a debit card, in these

stored-value card systems a consumer has the right to draw upon funds

held by an institution. The maintenance of a record of value and of

transactions for a given card apart from the card itself--so that

transactions are traceable to the individual card--strongly parallels

the functioning of a deposit account. The Board believes that the facts

support a finding that such systems involve an account for purposes of

the EFTA. These systems are referred to below as ``off-line accountable

stored-value systems.''

In another type of stored-value system that also operates off-line,

the record of value is maintained only on the card itself, and not in a

central database. Transaction data for debits to the card's ``stored

value'' are recorded on the card and captured at merchant terminals

(where they are maintained for a limited period of time). Only the

aggregate amount of transactions for a given period is transmitted by

the merchant to a financial institution or other entity so that the

merchant can receive credit. Given the lack of a centrally maintained,

ongoing record of individual card balances or of transaction data in

these systems, it is more difficult to conclude that an ``account''

exists for purposes of Regulation E. These systems will be referred to

below as ``off-line unaccountable stored-value systems.''

A third type of stored-value system operates in a manner that is

the functional equivalent of using a debit card to access a traditional

deposit account

dual card balances or of transaction data in

these systems, it is more difficult to conclude that an ``account''

exists for purposes of Regulation E. These systems will be referred to

below as ``off-line unaccountable stored-value systems.''

A third type of stored-value system operates in a manner that is

the functional equivalent of using a debit card to access a traditional

deposit account. Notably, this type of system involves on-line access

to a database for purposes of transaction authorization and data

capture. That is, when the card is used at an ATM or a POS terminal,

the transaction is authorized by means of on-line communication with

the data facility, where the transaction data are stored (including

information such as merchant identification, amount, date, and card

number). The balance of funds available to the consumer is not recorded

on the card itself, as in off-line stored-value systems; instead, the

balance information is maintained in the data facility. Two

distinctions between these systems and traditional deposit accounts

accessed by debit card are (1) the value associated with a card is

limited to the amount that the cardholder has chosen to make accessible

through the card (as opposed to a deposit account accessed by debit

card, where the entire account is accessible and funds available may

fluctuate); and (2) the value associated with the card is accessible

only through use of the card itself (in contrast to deposit accounts

accessible by debit card, which typically may be accessed through

various means, including check, withdrawal slip, ACH, or telephone bill

payment).

The Board believes these systems--which are referred to as ``on-

line stored-value systems''--meet the definition of a consumer asset

account, and thus are covered by Regulation E, based on their on-line

operation and extensive data capture and retention. As discussed below,

however, the Board also believes it is appropriate to propose modifying

the rules applicable to these systems

payment).

The Board believes these systems--which are referred to as ``on-

line stored-value systems''--meet the definition of a consumer asset

account, and thus are covered by Regulation E, based on their on-line

operation and extensive data capture and retention. As discussed below,

however, the Board also believes it is appropriate to propose modifying

the rules applicable to these systems.

Modifications and Exceptions for Various Types of Stored-Value Systems

The discussion that follows is organized to address separately each

of the three types of systems described above--off-line accountable

stored-value systems, off-line unaccountable stored-value systems, and

on-line stored-value systems. The Board notes that, in all three types

of systems, a transaction in which a stored-value card is used to

access a consumer's deposit account, such as ``reloading'' the card by

drawing on the consumer's checking account at an ATM, is covered by

Regulation E and subject to all Regulation E requirements. The

discussion below, therefore, relates to transactions in which value

stored on a card is drawn down to obtain cash or purchase goods or

services.

A. Off-line ``Accountable'' Stored-Value Systems

To the extent that off-line accountable stored-value systems are

similar to systems involving debit cards and traditional deposit

accounts, parallel consumer protections under Regulation E may be

appropriate. If these stored-value systems were to be covered by all

requirements of Regulation E, however, their further development could

be seriously slowed or even halted in some cases. The following

discussion presents an analysis of the major provisions of Regulation

E, including the compliance burdens to financial institutions and the

benefits to consumers associated with each.

1. Restrictions on unsolicited issuance of access devices

be covered by all

requirements of Regulation E, however, their further development could

be seriously slowed or even halted in some cases. The following

discussion presents an analysis of the major provisions of Regulation

E, including the compliance burdens to financial institutions and the

benefits to consumers associated with each.

1. Restrictions on unsolicited issuance of access devices.

Generally Regulation E prohibits issuing a debit card, personal

identification number (PIN), or other ``access device'' to a consumer

(for example, by mail) unless the consumer has requested the device,

orally or in writing. The purpose is to avoid making

consumers' accounts accessible by a means that consumers may not want

and that may subject them to added risk, and to reduce the likelihood

of unauthorized transactions from interception of cards. There is a

qualified exception, for an access device that is not ``validated''

(meaning usable) at the time of issuance and that the issuer will

validate only upon request by the consumer and verification of the

consumer's identity.

As a practical matter, most providers of stored-value products will

likely issue stored-value cards only to consumers who request them.

Some may choose to promote their product by targeting populations and

sending unsolicited cards with small amounts of ``free money'' on the

card. Such a practice would not appear to harm consumers, since there

would be no access to the consumer's own deposit-account funds.

Application of the unsolicited issuance rules to off-line

accountable stored-value cards (aside from those that could access a

consumer's existing deposit account, where the rules already apply)

appears unnecessary for consumer protection. The Board proposes to

exclude off-line accountable stored-value cards from the Regulation E

rules on unsolicited issuance, but solicits specific comment on whether

there is any practical need for the rules to apply.

2. Initial disclosures

ards (aside from those that could access a

consumer's existing deposit account, where the rules already apply)

appears unnecessary for consumer protection. The Board proposes to

exclude off-line accountable stored-value cards from the Regulation E

rules on unsolicited issuance, but solicits specific comment on whether

there is any practical need for the rules to apply.

2. Initial disclosures. Regulation E requires that at the time a

financial institution and a consumer enter into an agreement for an EFT

service, the institution must disclose certain terms and conditions.

Items to be disclosed include a summary of the consumer's liability for

unauthorized transfers, error-resolution procedures, any limits on the

frequency or dollar amount of transfers, and any fees or charges for

individual transfers or for the service.

Without the disclosure of terms and conditions, consumers might

regard off-line accountable stored-value products as comparable to

debit or credit cards, and thus might expect similar rights and

remedies to apply. This could be particularly likely if the stored-

value feature were made part of the consumer's debit or credit card, or

if a consumer could use the card for transactions in the same locations

where debit or credit card transactions take place.

Financial institutions that provide stored-value products may

disclose certain information voluntarily; however, the disclosures that

they opt to give could vary considerably. Requiring disclosures under

Regulation E would ensure that uniform information is given to

consumers. Such disclosures would be useful in alerting consumers to

important features of these new services, such as transaction charges

and risk of loss for lost or stolen cards.

Providing initial disclosures would probably not impose significant

compliance costs. The disclosures can be given along with the card or

other account-opening material in a preprinted format; they need not be

individually customized for each account

seful in alerting consumers to

important features of these new services, such as transaction charges

and risk of loss for lost or stolen cards.

Providing initial disclosures would probably not impose significant

compliance costs. The disclosures can be given along with the card or

other account-opening material in a preprinted format; they need not be

individually customized for each account. Accordingly, the Board

proposes to amend Regulation E to require initial disclosures for off-

line accountable stored-value systems.

The proposed amendment would not include all the items generally

required to be disclosed under Regulation E, but only those that appear

relevant to off-line accountable stored-value systems. These include

the disclosures of consumer liability for unauthorized transactions;

the types of transfers available; transaction charges, if any; and

error resolution procedures available to the consumer, if any. The

disclosure of consumer liability for unauthorized transactions would

expressly state that the consumer bears the full risk of loss (if such

is the case), or would state any limits on liability that might be

adopted by agreement with the consumer.

3. Change-in-terms notices. Under Regulation E, if terms or

conditions required to be disclosed (such as limits on transfers, or

transaction fees) were to change from those initially in effect, the

institution must generally notify the consumer at least 21 days before

the effective date of the change.

Whether change-in-terms notices are relevant for off-line

accountable stored-value products depends on whether contract terms

applicable to the card are likely to change. If there are increases in

transaction charges, for instance, it is reasonable for consumers to be

informed of the increase before it takes effect

notify the consumer at least 21 days before

the effective date of the change.

Whether change-in-terms notices are relevant for off-line

accountable stored-value products depends on whether contract terms

applicable to the card are likely to change. If there are increases in

transaction charges, for instance, it is reasonable for consumers to be

informed of the increase before it takes effect. (It appears that,

currently at least, charges are not imposed on stored-value

transactions.) But issuers of some of these products may not expect to

have an ongoing relationship with the consumer, and thus may not

typically obtain an address at the time the consumer purchases the

card. In some cases, stored-value cards are freely transferrable; even

if the card issuer has the address of the original cardholder, the

issuer may not have the address of a subsequent holder. If the value

stored on the card is likely to be used within a short period, it is

also probable that new transaction charges would not be imposed or

charges increased during its lifetime.

The Board believes that the potential costs of having to comply

with the change-in-terms notice requirement outweighs the consumer

protections that would be afforded by such notices and proposes to

exempt off-line accountable stored-value systems from this requirement.

The Board specifically solicits comment on whether there might be

circumstances in which the notice requirement should apply.

4. Transaction receipts and periodic statements. For an EFT

initiated at an ATM or a POS terminal, Regulation E requires that a

transaction receipt be made available to a consumer. The receipt must

show the date, amount, type of transaction and account, card or account

number, terminal location, and name of any third party (such as a

merchant) involved in the transfer

quirement should apply.

4. Transaction receipts and periodic statements. For an EFT

initiated at an ATM or a POS terminal, Regulation E requires that a

transaction receipt be made available to a consumer. The receipt must

show the date, amount, type of transaction and account, card or account

number, terminal location, and name of any third party (such as a

merchant) involved in the transfer. The regulation also requires

periodic account statements, generally monthly, that detail largely the

same information as on terminal receipts and provide other information

such as opening and closing account balances and fees or charges

assessed during the statement period. These receipts and periodic

statements allow consumers to verify account activity and to detect

unauthorized transactions and errors, so that they can be reported and

resolved.

For off-line accountable stored-value products, documentation

requirements could present compliance difficulties and considerable

costs, while providing only limited benefits to consumers. In some

cases, receipts may be given whether or not required by Regulation E. A

retailer that accepts debit cards must provide receipts under

Regulation E for debit card transactions, and therefore might provide

receipts for stored-value card transactions as well. But if the card

can be used at places not equipped with printers (such as vending

machines), to require receipts would necessitate a retrofitting of

terminals and would impose ongoing compliance costs. Moreover, for

small or commonly-made transactions, many consumers may not want or

need a receipt.

The requirement for periodic statements too may present compliance

problems for some off-line accountable stored-value systems. In some of

these systems, transaction data are collected in centralized data

facilities, not by the card-issuing financial institutions. Given that

lack of data, providing periodic statements would be costly and could

impede the development of stored-value products

The requirement for periodic statements too may present compliance

problems for some off-line accountable stored-value systems. In some of

these systems, transaction data are collected in centralized data

facilities, not by the card-issuing financial institutions. Given that

lack of data, providing periodic statements would be costly and could

impede the development of stored-value products. Moreover, as in the

case of receipts, for small or commonly-made transactions on these

cards, consumers may not need or want documentation on a periodic

statement.

The Board believes that the consumer benefits of terminal receipts

and periodic statements--in the context of stored-value transactions--

may be somewhat limited and be outweighed by the compliance costs.

Consequently, the Board proposes to exempt off-line accountable stored-

value systems from these requirements.

5. Limitations on consumer liability for unauthorized transfers.

Regulation E generally limits a consumer's losses for unauthorized EFT

debits to a maximum of $50. If the consumer fails to notify the

financial institution of the loss or theft of a debit card or other

``access device'' within two business days of learning of the loss or

theft, the consumer's potential liability rises to $500. If the

consumer fails to notify the institution of unauthorized transfers

appearing on a periodic statement within 60 days after the institution

sent the statement, the consumer's liability for any further

unauthorized transfers is unlimited.

Absent Regulation E's limits on liability, stored-value cardholders

bear the entire risk unless the issuer opts to assume some part of it

(or offers insurance to consumers against losses). If the regulatory

liability limits applied, the risk would be imposed on the issuer,

because these systems operate off-line and will not typically require

PIN-protection or any other means of identifying the consumer

ulation E's limits on liability, stored-value cardholders

bear the entire risk unless the issuer opts to assume some part of it

(or offers insurance to consumers against losses). If the regulatory

liability limits applied, the risk would be imposed on the issuer,

because these systems operate off-line and will not typically require

PIN-protection or any other means of identifying the consumer. Without

PIN-protection there is an almost certain likelihood that lost or

stolen cards could and would be used.

Some off-line accountable systems could conceivably store negative

files at merchant POS terminals for blocking unauthorized transactions.

Thus, they might be able to prevent unauthorized use, assuming a

consumer promptly reported loss or theft of the card. But many systems

do not have this capability. In addition, even for those that could,

the cost of transmitting negative files to terminals frequently enough

to effectively block unauthorized transactions could be prohibitive.

Arguably, the lack of PIN-protection in these systems may lead

consumers to be more careful in handling the cards. Consumers might act

more prudently if initial disclosures were provided, explaining the

risk. In addition, if loss does occur, the amount stored on the card

may be substantially less than would typically be at risk with the loss

or theft of a traditional debit card, where the deposit account may

serve several purposes (as a repository for savings or for paying

bills, for instance), and thus may tend to have a larger account

balance.

In light of these factors, the Board proposes to exempt off-line

accountable stored-value cards from the liability provisions. Under the

proposal, the initial disclosures given to consumers would summarize

the full extent of their risk.

6. Error resolution procedures

purposes (as a repository for savings or for paying

bills, for instance), and thus may tend to have a larger account

balance.

In light of these factors, the Board proposes to exempt off-line

accountable stored-value cards from the liability provisions. Under the

proposal, the initial disclosures given to consumers would summarize

the full extent of their risk.

6. Error resolution procedures. Regulation E requires financial

institutions to investigate and resolve claims of error made by

consumers within specified times--generally, no later than ten business

days after receiving the consumer's notice of error; or 45 days after

the notice if the institution provisionally credits the consumer's

account, in the amount of the claimed error, within ten business days.

A summary of these procedures is given to consumers with the initial

disclosures, and consumers also receive an annual notice as a reminder.

``Error'' includes an unauthorized electronic debit, a transaction in

an incorrect amount, and failure to provide required identification of

transactions.

Prompt resolution of errors is an important consumer protection,

but the detailed procedures prescribed by the act and regulation pose a

potentially difficult compliance problem for off-line accountable

stored-value systems. Investigation and resolution of errors in

accordance with Regulation E would be complicated and costly.

After weighing the potential costs against the consumer's need for

these protections, the Board proposes to exempt off-line accountable

stored-value systems from application of the error resolution

procedures and also from the related requirement to mail an annual

notice describing them. Initial disclosures would inform consumers that

they bear the full risk of loss in case of lost or stolen cards, if

that is the case, and would summarize any error resolution procedures

available.

The Board requests specific comment on whether, alternatively, some

minimal error resolution procedures should be required

lso from the related requirement to mail an annual

notice describing them. Initial disclosures would inform consumers that

they bear the full risk of loss in case of lost or stolen cards, if

that is the case, and would summarize any error resolution procedures

available.

The Board requests specific comment on whether, alternatively, some

minimal error resolution procedures should be required. For example, an

error within the financial institution's control, such as one resulting

from a malfunctioning card, may not be unduly difficult to correct.

Commenters are also asked to address whether, if no error resolution

requirements are imposed, the initial disclosures should include a

statement that there are no error resolution procedures available to

the consumer.

7. De minimis exclusion. In addition to the modifications presented

above, the Board proposes a de minimis exclusion for off-line

accountable stored-value systems based on the maximum balance that can

be stored on the card or other device. For a stored-value product

limited to a relatively small amount of funds, the amount at risk would

be sufficiently minimal that application of even modified Regulation E

protections appears unnecessary. This provision would apply to off-line

accountable devices that are limited to a maximum of $100 at a given

time; such devices would be completely exempt from Regulation E.

B. Off-line ``Unaccountable'' Stored-Value Systems

As described above, off-line unaccountable stored-value systems are

those in which the card balances and transaction data are maintained

only on the card itself. Transaction data may be maintained for a

limited time at merchant terminals, but are not captured or maintained

by the issuer or a central database. Photocopier cards and farecards

for the mass transit systems in some cities are examples of such cards.

Under the proposed amendments, off-line unaccountable stored-value

systems would not be covered by Regulation E

ined

only on the card itself. Transaction data may be maintained for a

limited time at merchant terminals, but are not captured or maintained

by the issuer or a central database. Photocopier cards and farecards

for the mass transit systems in some cities are examples of such cards.

Under the proposed amendments, off-line unaccountable stored-value

systems would not be covered by Regulation E. The proposed amendments

do not provide an explicit exemption; instead, the definitions of

systems that would be covered under the proposal do not capture off-

line unaccountable systems.

Most off-line unaccountable systems currently involve small dollar

amounts and a single use, such as paying transit fares. Other proposed

systems, however, could involve substantially larger transaction

amounts and maximum card values, and could have multiple uses. These

features may make such a system more comparable to traditional debit

cards than the small-value cards, in terms of potential uses by

consumers. This being the case, the Board could consider whether to

exercise its authority under the EFTA (to provide uniform protections

for all equivalent consumer EFT services) by proposing to bring off-

line unaccountable systems within the coverage of the act. If the

requirements applicable to off-line unaccountable stored-value systems

were the same as those that the Board is proposing with regard to off-

line accountable systems--initial disclosures, with an exemption for

card values of $100 or less--compliance would not be particularly

costly or difficult. Since the concern about consumer protection would

exist primarily for systems that store substantial amounts on a card,

any proposal could be framed in terms of covering only those cards with

a maximum value of more than a certain amount.

Although some off-line stored-value systems that permit larger

maximum card values may fall within the

iance would not be particularly

costly or difficult. Since the concern about consumer protection would

exist primarily for systems that store substantial amounts on a card,

any proposal could be framed in terms of covering only those cards with

a maximum value of more than a certain amount.

Although some off-line stored-value systems that permit larger

maximum card values may fall within the

unaccountable category, it is not clear that such systems would operate

in this manner at all times and with respect to all transactions. As

systems are further developed, they could evolve into systems that

capture and maintain some transactions in a location other than on

cards and at merchant terminals. If so, the Board believes such systems

could be characterized as off-line accountable, rather than off-line

unaccountable, systems, and thus would be subject to the same set of

rules.

There is some risk that the application of Regulation E to off-line

accountable stored-value systems, but not to off-line unaccountable

systems, could act as an incentive for developers of stored-value

systems to structure systems as unaccountable in order to avoid being

covered under the regulation. It is not desirable to have system design

be guided by regulatory rather than economic considerations. However,

the requirements applicable to off-line accountable systems--initial

disclosures--are so minimal when compared to other factors that could

affect system design (for example, the transaction data collected in

accountable systems may be useful for various purposes including fraud

detection and marketing) that it seems unlikely the potential for

coverage by Regulation E would have much impact.

On balance, the Board believes that it is preferable to state that

off-line unaccountable cards are not covered by Regulation E

that could

affect system design (for example, the transaction data collected in

accountable systems may be useful for various purposes including fraud

detection and marketing) that it seems unlikely the potential for

coverage by Regulation E would have much impact.

On balance, the Board believes that it is preferable to state that

off-line unaccountable cards are not covered by Regulation E. The Board

solicits specific comment, however, on whether the distinction between

off-line accountable and off-line unaccountable systems (especially

high-value ones) reaches the right result, in light of the

considerations discussed above, and accordingly on whether the Board

should consider coverage of off-line unaccountable systems, under very

limited requirements such as initial disclosures. The Board also

solicits comment on whether, if Regulation E coverage were extended to

off-line unaccountable systems, it would be preferable in defining the

scope of coverage to focus on the value capable of being stored, on

whether the system has multiple uses, or on both of these features.

C. ``On-line'' Stored-Value Systems

The third type of stored-value system in some respects resembles

off-line accountable stored-value systems, and in others resembles

traditional deposit accounts accessed by debit cards. As in off-line

accountable stored-value systems, data about individual card balances

and transactions (including merchant identification, amount, date, and

card number) are collected and maintained at centralized locations; and

the value associated with a card is limited to an amount that the

consumer chooses, not a fluctuating balance in the consumer's checking

or savings account.

As in traditional deposit accounts accessed by debit cards, these

stored-value systems operate on-line. When a card is used at an ATM or

a POS terminal, the transaction is authorized by means of on-line

communication with a financial institution or central data facility

is limited to an amount that the

consumer chooses, not a fluctuating balance in the consumer's checking

or savings account.

As in traditional deposit accounts accessed by debit cards, these

stored-value systems operate on-line. When a card is used at an ATM or

a POS terminal, the transaction is authorized by means of on-line

communication with a financial institution or central data facility.

The balance of funds available to the consumer is not recorded on the

card itself, as in off-line stored-value systems; instead, the balance

information is maintained only at the data facility. In this respect

too, an on-line stored-value system is the functional equivalent of a

deposit account accessed by a debit card, and thus can be viewed as

representing a consumer asset account for Regulation E purposes,

subject to coverage by the regulation.

In general, compliance with Regulation E requirements does not

appear to be a significant problem. For example, because these systems

operate on-line, they are designed to block unauthorized access, and

compliance with the limitations on consumer liability for unauthorized

transactions should not be more burdensome than for a traditional

deposit account accessed by debit card. However, a few exceptions from

particular provisions of Regulation E may be appropriate, as presented

below.

1. Exceptions for periodic statements and annual error resolution

notices. Regulation E requires statements that detail account activity.

In some on-line stored-value systems, cards are not reloadable, but

instead are meant to be discarded after the funds associated with the

card are drawn down to zero. For example, a consumer may purchase a

card for use on a trip of a few weeks, and draw down all value tied to

the card within that time. In such cases, the potentially short-term

nature of the product and the lack of an ongoing account relationship

may make periodic statements unnecessary

ceives a receipt for each transaction, periodic statements may not be

needed even if the relationship between the consumer and the issuer is

ongoing. If the consumer needed to check on recent account

transactions, the consumer could request the issuer to provide an

account history.

There may be less reason to exempt reloadable on-line cards from

the annual error resolution notice requirement. If a card issuer has an

ongoing relationship with the consumer, sending the annual notice does

not seem burdensome. However, extending the exemption to both

requirements--periodic statements and the annual error notice--

regardless of whether a card is reloadable, would avoid making the

proposed rule overly complex.

Accordingly, the Board proposes to provide that on-line stored-

value systems are not subject to (1) the periodic statement

requirement, but may instead provide the account balance and

transaction history to the cardholder upon request; or (2) the

requirement for an annual reminder of error resolution procedures. The

Board solicits comment on whether the proposed modifications should be

different for on-line stored-value cards that are reloadable.

2. Change-in-terms notices. Under Regulation E, if terms or

conditions required to be disclosed (such as limits on transfers, or

transaction fees) were to change from those initially in effect, the

institution must generally notify the consumer at least 21 days before

the effective date of the change.

For the reasons discussed in connection with off-line accountable

stored-value products, the Board believes that the change-in-terms

notice requirements need not apply to on-line accountable stored-value

products and, accordingly, proposes to exempt them from this

requirement. Specific comment is solicited on whether there

he consumer at least 21 days before

the effective date of the change.

For the reasons discussed in connection with off-line accountable

stored-value products, the Board believes that the change-in-terms

notice requirements need not apply to on-line accountable stored-value

products and, accordingly, proposes to exempt them from this

requirement. Specific comment is solicited on whether there

might be circumstances in which the notice requirement should apply.

3. De minimis exclusion. Some on-line stored-value systems may make

relatively small amounts accessible through use of the card. For

example, a number of prepaid telephone card systems apparently operate

on-line. As in the case of off-line accountable stored-value systems,

if the amount associated with a consumer's card is limited to a

relatively small amount, application of Regulation E protections such

as the limitation on the consumer's liability for unauthorized

transactions seems less important. And if transaction amounts are on

average quite small (as is likely to be true if the maximum amount on a

card is low), the cost impact of Regulation E compliance would be

proportionately greater than for systems involving large transactions.

For these reasons, the Board proposes to exempt on-line stored-value

systems completely from coverage under Regulation E if the maximum

amount that can be associated with a card is limited to $100.

Computer Network Payment Products

Parallel to the development of stored-value card products, there

has been an increasing interest in other products that might adopt

stored-value concepts. Systems are being proposed, for example, for

making payments over computer networks, such as the Internet. In these

cases, a balance of funds could be accessed via a consumer's personal

computer, and transferred or used in purchases via a computer network.

As in the case of card-based products, there is a range of network

payment products in operation or under development

ored-value concepts. Systems are being proposed, for example, for

making payments over computer networks, such as the Internet. In these

cases, a balance of funds could be accessed via a consumer's personal

computer, and transferred or used in purchases via a computer network.

As in the case of card-based products, there is a range of network

payment products in operation or under development.

Some of these network payment products involve on-line access to a

consumer account in a financial institution, and thus are fully subject

to Regulation E. Other products may involve various procedures for

authorizing and carrying out transactions, and may or may not be

subject to the regulation. The Board requests specific comment on the

extent to which the Board should consider proposing that Regulation E

apply to various types of network payment products. In general, the

Board believes that the same principles should apply to network payment

products as to stored-value card products in analyzing coverage under

Regulation E. For example, the Board might consider applying a de

minimis exemption to network payment products in the same way the Board

is proposing for stored-value card products.

Summary of Proposed Amendments for Stored-Value Systems

To summarize, with respect to stored-value systems, the Board

proposes to amend Regulation E to:

(1) Exempt completely from Regulation E off-line unaccountable

stored-value systems;

(2) Exempt completely from Regulation E both off-line accountable

stored-value systems and on-line stored-value systems if the maximum

amount that can be stored on or associated with a card at any given

time is $100 or less;

(3) Establish modified requirements for coverage of off-line

accountable stored-value systems, applying only the requirements

relating to initial disclosures; and

tems;

(2) Exempt completely from Regulation E both off-line accountable

stored-value systems and on-line stored-value systems if the maximum

amount that can be stored on or associated with a card at any given

time is $100 or less;

(3) Establish modified requirements for coverage of off-line

accountable stored-value systems, applying only the requirements

relating to initial disclosures; and

(4) Modify the requirements applicable to on-line stored-value

systems, under which such systems would not be subject to (a) the

periodic statement requirement, if an account balance and a summary of

recent transactions is provided upon request; (b) the annual error

resolution notice requirement; or (c) change-in-terms notices.

III. Form of Comment Letters

Comment letters should refer to Docket No. R-0919. The Board

requests that, when possible, comments be prepared using a standard

courier typeface with a type size of 10 or 12 characters per inch. This

will enable the Board to convert the text into machine-readable form

through electronic scanning, and will facilitate automated retrieval of

comments for review. Comments may also be submitted on computer

diskettes, using either the 3.5'' or 5.25'' size, in any DOS-compatible

format. Comments on computer diskettes must be accompanied by a paper

version.

IV. Regulatory Flexibility Analysis

In accordance with section 603 of the Regulatory Flexibility Act

and section 904(a)(2) of the EFTA, the Board's Division of Research and

Statistics has prepared an economic impact statement on the proposed

regulation. A copy of the analysis may be requested from Publications

Services, Board of Governors of the Federal Reserve System, Washington,

DC 20551, or by telephone at (202) 452-3245.

V. Paperwork Reduction Act

n 603 of the Regulatory Flexibility Act

and section 904(a)(2) of the EFTA, the Board's Division of Research and

Statistics has prepared an economic impact statement on the proposed

regulation. A copy of the analysis may be requested from Publications

Services, Board of Governors of the Federal Reserve System, Washington,

DC 20551, or by telephone at (202) 452-3245.

V. Paperwork Reduction Act

In accordance with section 3506 of the Paperwork Reduction Act of

1995 (44 U.S.C. Ch. 35; 5 CFR 1320 Appendix A.1), the Board reviewed

the proposed rule under the authority delegated to the Board by the

Office of Management and Budget. Comments on the collection of

information should be sent to the Office of Management and Budget,

Paperwork Reduction Project (7100-0200), Washington, DC 20503, with

copies of such comments to be sent to Mary M. McLaughlin, Federal

Reserve Board Clearance Officer, Division of Research and Statistics,

Mail Stop 97, Board of Governors of the Federal Reserve System,

Washington, DC 20551.

The collection of information requirements in this proposed

regulation are found in 12 CFR Part 205. This information would be

mandatory (15 USC 1693 et seq.) to ensure adequate disclosure of basic

terms, costs, and rights relating to electronic fund transfer (EFT)

services affecting consumers using certain stored-value cards or home-

banking services and consumers exercising their error resolution rights

under Regulation E. The respondents/recordkeepers are for-profit

financial institutions, including small businesses. Regulation E

applies to all types of financial institutions, not just state member

banks. However, under Paperwork Reduction Act regulations, the Federal

Reserve accounts for the burden of the paperwork associated with the

regulation only for state member banks. Other agencies account for the

Regulation E paperwork burden on their respective constituencies

tutions, including small businesses. Regulation E

applies to all types of financial institutions, not just state member

banks. However, under Paperwork Reduction Act regulations, the Federal

Reserve accounts for the burden of the paperwork associated with the

regulation only for state member banks. Other agencies account for the

Regulation E paperwork burden on their respective constituencies.

The Federal Reserve has no data on which to estimate the burden the

proposed requirements would impose on state member banks. With regard

to stored-value cards, there are as yet no such systems in full

operation in the United States, and only a few stored-value card pilot

projects. It is difficult to predict how many state member banks will

choose to offer these products and how many cards will be issued to

consumers. However, because the proposed amendments include a number of

exemptions for stored-value products from Regulation E requirements,

the proposed amendments could have the effect of reducing paperwork

burden, compared to what the burden would be without the amendments in

place.

The proposed amendments on the use of electronic communication in

home banking would likely reduce the paperwork burden of financial

institutions. Institutions offering home banking programs would be able

to use electronic communication to provide disclosures, periodic

statements, and other information required by Regulation E rather than

having to print and mail the information in paper form.

The proposed amendment relating to error resolution for new

accounts may reduce paperwork burden, because institutions may be able

to complete

. Institutions offering home banking programs would be able

to use electronic communication to provide disclosures, periodic

statements, and other information required by Regulation E rather than

having to print and mail the information in paper form.

The proposed amendment relating to error resolution for new

accounts may reduce paperwork burden, because institutions may be able

to complete

error investigations within the longer time allowed under the proposal

(20 business days), rather than have to provisionally credit consumer's

accounts within ten business days and provide related notices to the

consumer, as is required currently under Regulation E.

The Federal Reserve requests comments from issuers, especially

state member banks, that will help to estimate the number and burden of

the various disclosures that would be made in the first year this

regulation is effective. Comments are invited on: (a) the cost of

compliance; (b) ways to enhance the quality, utility, and clarity of

the information to be disclosed; and (c) ways to minimize the burden of

disclosure on respondents, including through the use of automated

disclosure techniques or other forms of information technology.

List of Subjects in 12 CFR Part 205

Consumer protection, Electronic fund transfers, Federal Reserve

System, Reporting and recordkeeping requirements.

Text of Proposed Revisions

Certain conventions have been used to highlight the proposed

changes to Regulation E. New language is shown inside bold-faced

arrows, while language that would be removed is set off with brackets.

Pursuant to the authority granted in sections 904 (a), (c), and (d)

of the Electronic Fund Transfer Act, 15 U.S.C. 1693b (a), (c), and (d),

and for the reasons set forth in the preamble, the Board proposes to

amend 12 CFR Part 205 as set forth below:

PART 205--ELECTRONIC FUND TRANSFERS (REGULATION E)

1. The authority citation for Part 205 would be revised to read as

follows:

Authority: 15 U.S.C. 1693-1693r.

hority granted in sections 904 (a), (c), and (d)

of the Electronic Fund Transfer Act, 15 U.S.C. 1693b (a), (c), and (d),

and for the reasons set forth in the preamble, the Board proposes to

amend 12 CFR Part 205 as set forth below:

PART 205--ELECTRONIC FUND TRANSFERS (REGULATION E)

1. The authority citation for Part 205 would be revised to read as

follows:

Authority: 15 U.S.C. 1693-1693r.

2. Section 205.4 would be amended by adding paragraph (c) to read

as follows:

Sec. 205.4 General disclosure requirements; jointly offered services.

* * * * *

(c) Electronic communication. (1) Definition. For

purposes of this part, the term electronic communication means an

electronically transmitted text message between a consumer and a

financial institution; in the case of a communication to the consumer,

the message shall allow text to be displayed on equipment in the

consumer's possession such as a modem-equipped personal computer or

screen telephone.

(2) Communication between financial institution and consumer. (i)

By agreement between a financial institution and a consumer, either may

send to the other by electronic communication any information required

by this part to be provided orally or in writing. Information required

by this part to be in writing and sent to a consumer by electronic

communication shall be clear and readily understandable and shall be

provided in a manner that would allow a consumer to retain the

information.

(ii) If this part specifies that information be provided to the

consumer in writing, the consumer may request a paper copy of the

information up to one year after receiving the electronic

communication.

* * * * *

3. Section 205.11 would be amended by revising paragraph (c)(3), to

read as follows:

Sec. 205.11 Procedures for resolving errors.

* * * * *

a consumer to retain the

information.

(ii) If this part specifies that information be provided to the

consumer in writing, the consumer may request a paper copy of the

information up to one year after receiving the electronic

communication.

* * * * *

3. Section 205.11 would be amended by revising paragraph (c)(3), to

read as follows:

Sec. 205.11 Procedures for resolving errors.

* * * * *

(c) Time limits and extent of investigation. * * *

* * * * *

(3) Extension of time periods. The applicable time periods in this

paragraph (c)(3) are 20 business days in place of 10 business days, and

90 days in place of 45 days, if a notice of error involves an

electronic fund transfer that:

(i) Was not initiated within a state; [or]

(ii) Resulted from a point-of-sale debit card transaction;

or

(iii) Involves a new account during the first 30 calendar days

after the first deposit to the account is made.

* * * * *

4. A new section 205.16 would be added, to read as follows:

Sec. 205.16 Certain stored-value services.

(a) General. The rules in this section apply to stored-value

accounts as defined in paragraph (b) of this section.

(b) Definitions. For purposes of this section, the following

definitions apply:

(1) Off-line stored-value account means a balance of funds recorded

on a card that a consumer may use at electronic terminals to obtain

cash or purchase goods or services, where the record of such balance is

also maintained on a separate database, apart from the card, and where

on-line authorization of transactions is not required to access the

funds. Off-line stored-value accounts are subject to the requirements

in paragraph (d) of this section.

ds recorded

on a card that a consumer may use at electronic terminals to obtain

cash or purchase goods or services, where the record of such balance is

also maintained on a separate database, apart from the card, and where

on-line authorization of transactions is not required to access the

funds. Off-line stored-value accounts are subject to the requirements

in paragraph (d) of this section.

(2) On-line stored-value account means a balance of funds that may

be accessed only through the use of a card that a consumer may use at

electronic terminals to obtain cash or purchase goods or services,

where the record of such balance is maintained on a separate database,

and not on the card, and where on-line authorization of transactions is

required to access the funds. On-line stored-value accounts are subject

to the requirements in paragraph (e) of this section.

(3) Financial institution includes any person that, directly or

indirectly, holds an on-line or off-line stored-value account, or that

issues a card to a consumer for use in obtaining cash or purchasing

goods or services by accessing such an account.

(c) $100 exemption. A stored-value account, as defined in

paragraphs (b) (1) and (2) of this section, is exempt from the

requirements of this part if the maximum amount that may be in the

account at any given time is $100 or less.

(d) Modified requirements for off-line stored-value accounts;

initial disclosures. Stored-value accounts as defined in paragraph

ces by accessing such an account.

(c) $100 exemption. A stored-value account, as defined in

paragraphs (b) (1) and (2) of this section, is exempt from the

requirements of this part if the maximum amount that may be in the

account at any given time is $100 or less.

(d) Modified requirements for off-line stored-value accounts;

initial disclosures. Stored-value accounts as defined in paragraph

(b)(1) of this section are subject only to the following initial

disclosure requirements of this part, as applicable:

(1) Liability of consumer. A summary of the consumer's liability,

under state or other applicable law or agreement, for unauthorized

transfers.

(2) Types of transfers; limitations. The type of electronic fund

transfers that the consumer may make and any limitations on the

frequency and the dollar amount of transfers.

(3) Fees. Any fees imposed by the financial institution for

electronic fund transfers or for the right to make transfers.

(4) Error resolution. A summary of the financial institution's

procedures for resolving errors concerning electronic fund transfers,

including the telephone number and address of the person or office to

be notified in the event of an error.

(e) Modified requirements for on-line stored-value accounts.

Stored-value accounts as defined in paragraph (b)(2) of this section

are subject to the requirements of this part, with the following

modifications:

(1) Exceptions; change-in-terms notice; error resolution notice.

The account is exempt from the requirements of Sec. 205.8.

(2) Alternative to periodic statement. A financial institution need

not furnish the periodic statement required by Sec. 205.9(b) if the

financial institution makes available to the consumer:

are subject to the requirements of this part, with the following

modifications:

(1) Exceptions; change-in-terms notice; error resolution notice.

The account is exempt from the requirements of Sec. 205.8.

(2) Alternative to periodic statement. A financial institution need

not furnish the periodic statement required by Sec. 205.9(b) if the

financial institution makes available to the consumer:

(i) The consumer's account balance, through a readily available

telephone line and at a terminal; and

(ii) A written history of the consumer's account transactions that

is provided promptly in response to an oral or written request and that

covers at least 60 days preceding the date of a request by the

consumer.

(3) Additional modifications. A financial institution that does not

furnish periodic statements, in accordance with paragraph (e)(2) of

this section, shall comply with the following special rules:

(i) Initial disclosures. The financial institution shall modify the

disclosures under Sec. 205.7 by disclosing:

(A) Account balance. The means by which the consumer may obtain

information concerning the account balance, including a telephone

number. This disclosure may be made by providing a notice substantially

similar to the notice in paragraph A-6 of Appendix A of this part.

(B) Written account history. A summary of the consumer's right to

receive a written account history upon request, in place of the

periodic-statement disclosure required by section 205.7(b)(6), and the

telephone number to call to request an account history. This disclosure

may be made by providing a notice substantially similar to the notice

in paragraph A-6 of Appendix A of this part.

(C) Error resolution. A notice concerning error resolution that is

substantially similar to the notice contained in paragraph A-6 of

Appendix A of this part.

sclosure required by section 205.7(b)(6), and the

telephone number to call to request an account history. This disclosure

may be made by providing a notice substantially similar to the notice

in paragraph A-6 of Appendix A of this part.

(C) Error resolution. A notice concerning error resolution that is

substantially similar to the notice contained in paragraph A-6 of

Appendix A of this part.

(ii) Limitations on liability. For purposes of Sec. 205.6(b)(3),

regarding a 60-day period for reporting any unauthorized transfer that

appears on a periodic statement, the 60-day period shall begin with the

transmittal of a written account history provided to the consumer under

paragraph (e)(2) of this section.

(iii) Error resolution. The financial institution shall comply with

the requirements of section 205.11 in response to an oral or written

notice of an error from the consumer that is received no later than 60

days after the consumer obtains the written account history, under

paragraph (e)(2) of this section, in which the error is first

reflected.

5. Appendix A would be amended by adding an entry to the table of

contents at the beginning of the appendix and by adding a new paragraph

A-6, to read as follows:

Appendix A to Part 205--Model Disclosure Clauses and Forms

Table of Contents

* * * * *

A-6--Model Forms for On-Line Stored-Value Card Services

(Sec. 205.16(e)(3))

* * * * *

A-6--Model Forms for On-Line Stored-Value Card Services

(Sec. 205.16(e)(3))

d be amended by adding an entry to the table of

contents at the beginning of the appendix and by adding a new paragraph

A-6, to read as follows:

Appendix A to Part 205--Model Disclosure Clauses and Forms

Table of Contents

* * * * *

A-6--Model Forms for On-Line Stored-Value Card Services

(Sec. 205.16(e)(3))

* * * * *

A-6--Model Forms for On-Line Stored-Value Card Services

(Sec. 205.16(e)(3))

(1) Disclosure of information about obtaining account balances

and account histories in on-line stored-value card service

(Sec. 205.16(e)(3)(i) (A) and (B))

You may find out about the balance remaining on your card by

calling [telephone number]. You can also learn your remaining

balance [by making a balance inquiry at an ATM] [on the receipt you

get when withdrawing cash from an ATM] [on the receipt you get when

making a purchase].

You also have the right to get a written summary of transactions

made with your card for the 60 days preceding your request by

calling [telephone number].

(2) Disclosure of error resolution procedures in on-line stored-

value card service (Sec. 205.16(e)(3)(i)(C))

In Case of Errors of Questions About Your Card Transactions

Telephone us at [telephone number] or Write us at [address] as soon

as you can, if you think an error has occurred involving a

transaction made with your card. We must hear from you no later than

60 days after you receive a written summary of transactions (which

you can request from us), showing the error. You will need to tell

us:

Your name and card number.

Why you believe there is an error, and the dollar

amount involved.

Approximately when the error took place.

If you tell us orally, we may require that you send us your

complaint or question in writing within 10 business days. We will

generally complete our investigation within 10 business days and

correct any error promptly. In some cases, an investigation may take

longer, but you will have the use of the funds in question after the

10 business days

olved.

Approximately when the error took place.

If you tell us orally, we may require that you send us your

complaint or question in writing within 10 business days. We will

generally complete our investigation within 10 business days and

correct any error promptly. In some cases, an investigation may take

longer, but you will have the use of the funds in question after the

10 business days. However, if we ask you to put your complaint or

question in writing and we do not receive it within 10 business

days, we may not credit the funds in question back to the card

during the investigation.

If we decide that there was no error, we will send you a written

explanation within three business days after we finish our

investigation. You may ask for copies of the documents that we used

in our investigation.

If you need more information about our error resolution

procedures, call us at [telephone number] [the telephone number

shown above].

By order of the Board of Governors of the Federal Reserve

System, April 19, 1996.

William W. Wiles,

Secretary of the Board.

[FR Doc. 96-10181 Filed 5-1-96; 8:45 a.m.]

BILLING CODE 6210-01-P