CUNA Comment Letter
Study of Regulations Regarding the Online Delivery of Financial Services
August 20, 2001
Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th and C Streets, NW
Washington, D.C. 20551
Re: Docket No. R-1105; Study of Banking Regulations Regarding the Online Delivery of Financial Services
Dear Ms. Johnson:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on the Federal Reserve Board's (Board) study regarding how the Board's regulations may be adapted to online banking and lending. As a national trade association, CUNA represents more than 90 percent of the nations 10,600 state and federal credit unions. This letter was developed under the auspices of CUNAs Payment Systems Subcommittee, chaired by Mr. Terry West, President and CEO of Jax Navy Federal Credit Union, Jacksonville, Florida.
Summary of CUNA's Position
- The Board should revise its definition of an acceptable electronic address, so that the financial institution may choose the appropriate technology for communication with consumers instead of being required to use traditional e-mail.
- The Board should revise its rules to allow persons to open online deposit accounts and loans, even if they do not accept electronic disclosures and choose to receive paper disclosures later. Currently, a consumer cannot open an account or loan unless he or she agrees to receive the disclosure beforehand.
- The Board should eliminate the requirement in the interim rules that financial institutions must notify the consumer that a disclosure is available on a web site for retrieval because this is a unique burden on online transactions that does not apply to comparable offline transactions.
- The Board should revise Regulation D (Reserve Requirements of Depository Institutions) to include exemptions so that its restrictions do not discourage consumers from conducting online transactions.
- The Board's regulations and definitions regarding time constraints should be consistent for online and offline transactions.
- The use of geographic definitions and guidelines in the Board's regulations may require updating on a case-by-case basis.
- The Board should revise its new supervisory policies regarding the selection of IT business partners. Currently, these policies impose unreasonable burdens on the design or adaptation of online technologies.
- At this time, CUNA is unaware of any inconsistencies between federal and state laws or regulations that impede financial electronic commerce.
- The Board has stated its plans to consult with other federal banking agencies regarding this report, but does not mention which agencies will be included. CUNA urges the Board to specifically consult with the National Credit Union Administration (NCUA).
On May 21, 2001, the Board published a proposal to conduct a study and prepare a report about its banking regulations with respect to the online delivery of financial services. This report was mandated by Section 729 of the Gramm-Leach-Bliley Act (the GLB Act or Act), and it requires a study of banking regulations regarding the online delivery of financial services. As a result, the Board is reviewing its regulations that relate to delivery of financial services to assess their suitability for transactions that are conducted through the Internet. To assist in conducting this study and writing the related report, the Board requests comments from the financial industry.
The Board recently requested comment on five interim final rules to establish uniform standards for the electronic delivery of notices to consumers, namely: Regulations B (Equal Credit Opportunity), E (Electronic Fund Transfers), M (Consumer Leasing), Z (Truth in Lending), and DD (Truth in Savings). In conjunction with its comment request for those rules, the Board also requested comment on whether other legislative or regulatory changes are needed to adapt current requirements to online banking and lending. In particular, the Board has requested comments on revising its regulations to facilitate electronic delivery of financial products and services to individual consumers, such as the provisions regarding periodic statements under Regulations E, Z, and DD.
CUNA would like to reemphasize that these interim rules should not define an electronic address as one "that is not limited to receiving communication transmitted solely by the creditor." This definition imposes burdens on financial institutions because it requires the financial institutions to use traditional e-mail and would seem to preclude the use of communication through home banking intranet systems. This technological requirement restricts the ability of these institutions and their consumers to utilize electronic commerce.
In particular, the Board's definition of an electronic address seems to contradict certain provisions within the Electronic Signatures in Global and National Commerce Act (E-Sign Act). Specifically, this narrow definition of electronic address is not found in either the E-Sign Act or the Uniform Electronic Transactions Act, which is the model for state law. In fact, certain provisions within the E-Sign Act seem to mandate a broader, more inclusive definition. Specifically, the E-Sign Act states that a federal agency will not adopt a regulation unless the federal agency finds that:
- there is a substantial justification for the regulation, order, or guidance (See section 104(b)(2)(c)(ii) (I));
- it will not impose unreasonable costs on the acceptance and use of electronic records (See section 104(b)(2)(c)(ii) (II)); and
- it will not require the implementation or application of specific technology (See section 104(b)(2)(c)(iii)).
The current definition of electronic address fails on all three fronts. The Board has not provided a substantial justification for this narrow definition, which is not within the E-Sign Act. The Board's decision will impose unreasonable costs on the industry because financial institutions will not be able to rely on their own communication technology to communicate electronically; they will have to rely on traditional e-mail. And, to make traditional e-mail safe, financial institutions will have to spend money to secure it. Finally, the definition specifically raises traditional e-mail above other types of technologies by making it the only proscribed method for electronic communication of financial information. By doing this, the Board gives "greater legal status" to a specific technology, in the way that the E-Sign Act prohibits. (See section 104(b)(2)(c)(iii)).
CUNA is very concerned about the Board's preference for traditional e-mail because this method is a particularly vulnerable method for conducting financial transactions. Much of traditional e-mail is not secure or safe for transmitting personal financial information over the Internet. For example, traditional e-mail can be easily intercepted and read. In order to prevent abuse of this information, financial institutions would have to incur costs to buy and upgrade computer systems that would encrypt the information to ensure consumer confidentiality and security.
The requirement for traditional e-mail may also discourage and inconvenience some consumers of financial services. For instance, some consumers who do not already have traditional e-mail may be forced to buy the service or to rely on paper transactions when they would prefer not to.
In addition, the Board should revise its interim rules to allow persons to immediately open online deposit accounts and loans, even if they do not accept electronic disclosures and choose to receive paper disclosures later. The current rules require a financial institution to obtain a consumer's consent to receive electronic disclosures before an Internet account application may be considered. The financial institution cannot open a savings account or consummate a loan online until disclosures are provided. If a consumer wishes to receive paper disclosures, then he or she cannot open an account over the Internet because they have not received the required disclosures beforehand.
CUNA asks that the Board use exemption authority provided within the E-Sign Act to exempt this consumer consent requirement. The E-Sign Act allows a federal agency to:
exempt without condition a specified category or type of record from the requirements relating to consent . . . if such exemption is necessary to eliminate a substantial burden on electronic commerce and will not increase the material risk of harm to consumers. (Section 104 (d))
The exemption is warranted because requiring the electronic disclosure to be provided beforehand is a burden on electronic commerce. Under the interim rules, if a consumer does not agree to receive disclosures electronically, the financial institution cannot open a savings account or a loan online until the disclosures are otherwise provided. This makes the rule burdensome on consumers who would choose to receive paper disclosures afterward because they cannot conduct business.
Furthermore, CUNA believes that the Board has precedent under the Truth in Savings Act (TISA) and Truth in Lending Act (TILA) that would allow the Board to permit financial institutions to open an account even if the initial account disclosure for an Internet account is provided later. These respective statutes allow the delivery of disclosures afterward for transactions that are not conducted in person. For example, if a person is not present at the financial institution, then TISA allows a financial institution to accept an account from the depositor as long as the financial institution mails the disclosure within 10 days after the initial deposit (See 12 USC 4305(b)). Moreover, TILA allows a loan by mail or phone to be conducted even if the person is not present to receive disclosures, as long as the disclosures are delivered before the due date of the first payment. TILA states:
If a creditor receives a request for a loan by mail or telephone without personal solicitation and the terms of financing, including the annual percentage rate for representative amounts of credit, are set forth in the creditor's printed material distributed to the public, or in the contract or loan or other printed material delivered to the obligor, then the disclosures required under subsection (a) may be made at any time not later than the date the first payment is due. (15 USC 1638(d)).
And, the Board has already interpreted TILA more broadly to allow loans over the facsimile machine, even if those disclosures are not received until the due date of the first payment. (See Regulation Z section 226.17(g)). In light of the exceptions within the statutes and in the Board's regulations, CUNA asks that you extend the exception to online account openers and borrowers, so that their transactions can be conducted with the same ease provided to consumers using telephones and facsimile machines.
CUNA asks that the Board eliminate the requirement in the interim rules that financial institutions notify consumers that disclosures on the web are available for retrieval because this is a unique burden on online transactions. In its interim rules, the Board mandates that if a financial institution posts a disclosure to its web site, it must notify the consumer that the disclosure is available for retrieval. Regulation E (Official Staff Commentary section 205.9(b)) permits consumers to pick up their statements at locations at a financial institution without requiring a financial institution to send a notice that their statements are available.
CUNA supports the Board's announcement of August 3, 2001, that delayed the mandatory compliance date (previously October 1, 2001) for the interim final rules and requests that the Board make further changes before a new compliance date is established. The Federal Reserve has stated that its decision came in response to comments that the proposed interim final rules raised operational issues about how consumers should be notified. Federal Reserve staff has also stated that the Federal Reserve is looking for ways to provide more flexibility, so that financial institutions do not have to use traditional e-mail. For the reasons mentioned above, we support the Federal Reserve's resolve to reconsider its stance on traditional e-mail. However, CUNA also asks that the Federal Reserve take this opportunity to do further review and implement the exceptions and exemptions mentioned above so that the interim rules do not hinder the use of online financial services in other ways.
There are restrictions within Regulation D (Reserve Requirements of Depository Institutions) that limit the ability of consumers to conduct online financial service transactions. Regulation D limits the number of transactions from savings accounts so those credit union members with share accounts are restricted to six preauthorized or automatic withdrawals or transfers from that account (See section 204.2(d)(2)). However, unlimited withdrawals or account transfers to accounts of the same person are permitted when, "these transfers or withdrawals are made by mail, messenger, automated teller machine, or in person or when such withdrawals are made by telephone (via check mailed to the depositor)" (Section 204.2(d)(2)). Consumers that can conduct unlimited withdrawals at an automated teller machine should not be limited to six if they choose to go online. Credit unions and their members have commented that this limitation on the use of online banking to make transfers and withdrawals from one's share account is a detriment to providing and using online services. Members are being prohibited by the regulation from fully utilizing the Internet to perform transactions.
Regulation D should be amended so that consumers are allowed to make unlimited withdrawals for themselves or transfers among their own accounts online. This would allow consumers to utilize online services in the manner that they choose.
The Board also requested comments on how time should be evaluated in light of the online environment. The banking regulations of the Board make liberal use of the terms "business day" and "banking day" as days based on a traditional work day with limited hours. The Board should maintain the basis for these definitions because most financial institutions rely on these work schedules and the rules for offline transactions and online transactions should remain consistent. The terms for business day and banking day should not be reevaluated in terms of creating a 24 hour, seven days a week, work schedule because that is not the way financial institutions operate and the entities that financial institutions depend on, such as the Federal Reserve Banks, do not maintain that schedule. As a result, regulations should not be changed to accommodate a schedule that does not exist, when it would be costly for financial institutions to hire the staff and equipment to maintain that around-the-clock schedule.
The Board also requested comments on whether regulations should be modified to recognize that traditional boundaries of geography have changed as a result of the Internet. The Board would need to conduct a case-by-case analysis. In some circumstances, these geographic factors should be supplemented with some other criteria that are more Internet friendly. For example, it may no longer be appropriate for regulators to use geographical proximity to a physical facility as a rigid factor in analyzing if a financial institution is able to adequately serve a particular group of consumers.
The Board also requested comments on burdensome policies. The Board's new policies regarding the selection of IT business partners does impose unreasonable burdens on the design or adaptation of online technologies. The new regulations require more due diligence and extensive information collection. These requirements are particularly burdensome since many IT firms are relatively new.
The Board requested comments on possible inconsistencies in federal and state laws and regulations that may impede financial electronic commerce. CUNA is not aware of any inconsistencies between federal and state laws or regulations that impede financial electronic commerce.
The Board has stated its plans to consult with other federal banking agencies regarding this report, but does not mention which agencies will be included. CUNA urges the Board to specifically consult with the NCUA. Changes to the Board's regulations affect credit unions, and NCUA is required by law to pattern some of its provisions after those of the Board. For instance, NCUA promulgates a similar version of Regulation DD. Thus, inclusion of NCUA would ensure a consistency in approach that would be beneficial to credit unions and their members.
Although the Board is currently drafting the Check Truncation Act, this Act should have implications for online financial services. CUNA will submit comments on this proposal in the future.
CUNA has submitted comments for the interim rules and we request that those comments, along with the comments in this letter, should be considered for the GLB Act study and report. If you have any further questions, please contact Associate General Counsel and Senior Vice President Mary Dunn or me at (202) 682-4200. Thank you for your consideration of our views.
Michelle Q. Profit
Assistant General Counsel