CUNA Regulatory Comment Call


May 20, 2004

Study on Requiring Disclosures for Debit Card Fees
(A MAJOR PROPOSAL)

EXECUTIVE SUMMARY

Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com and to Assistant General Counsel Michelle Profit at mprofit@cuna.com; or mail them to Mary and Michelle c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 2004. You may also access the proposed rule at http://www.federalreserve.gov/boarddocs/press/bcreg/2004/20040518/default.htm.

You may also submit comments directly to the Federal Reserve, identified by Docket No. OP-1196, by any of the following methods:

Please share your comments with CUNA.

DISCUSSION

At the request of members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, the Board is initiating a study of the disclosure of fees imposed by financial institutions that hold a consumer’s account and have issued a debit card to access the account (“account-holding institution”). The Board is specifically studying the fees imposed by such account-holding institutions when consumers engage in debit card purchase transactions with a merchant (or other provider of services), otherwise known as “point-of- sale” or “POS” transactions. The Board has been asked to consider whether existing disclosure requirements are adequate and effective in making consumers aware of the imposition of debit card transaction fees by their financial institution. Further, the Board has been asked to consider the possible benefits of requiring additional disclosures in a consumer’s periodic account activity statement that would inform the consumer of the amount of each fee imposed by the account-holding institution in connection with a debit card transaction during the statement period, as well as information regarding the source and recipient of such fee, along with a summary of the total amount of such fees for the period.

In preparation for the study, the Board solicits comment on whether the existing disclosures required by the Electronic Fund Transfer adequately inform consumers of fees imposed by a financial institution that holds the consumer’s account and has issued a debit card (“account-holding institution”) when the debit card is used to make a purchase from a merchant (or other provider of services). The Board also seeks the public’s views on the need for, and the potential benefits of, requiring additional disclosures in each periodic account activity statement to reflect fees imposed by accounting-holding institutions for debit card use. Lastly, the Board seeks comment on the benefits of requiring disclosure of the amount, source, and recipient of each such fee, as well as a summary of the total amount of such fees for the period and calendar year-to-date.

Point-of-Sale Transactions. When a consumer uses a debit card to make a point-of-sale purchase, the parties to the transaction are typically the consumer, the merchant, the merchant’s bank, and the consumer’s account-holding bank. The consumer presents a debit card to the merchant to make a purchase, or “swipes” the card through the merchant’s POS electronic reader to initiate the process of having the purchase amount debited from the consumer’s checking account. In order to enable the account-holding institution to identify the consumer as provided by current regulation, and authorize the electronic fund transfer, the consumer is asked either to enter a personal identification number (“PIN”), for an “online” debit, or is asked to provide a signature, for an “offline” debit. If the transaction is successfully processed, the consumer will receive the goods or services sought, an account at the consumer’s bank will be debited, and the merchant’s account at the merchant’s bank will be credited.

The differing costs of, and fees generated by PIN based and signature based debit transactions have resulted in account-holding institutions and merchants favoring and promoting different methods of debit transactions. For instance, as a general matter, an account holding bank can receive greater revenue as a result of the interchange fees paid when a consumer chooses a signature based debit transaction. Thus, these card-issuing, account-holding banks encourage the use of offline, signature-based transactions. Merchants, on the other hand, generally prefer that consumers choose online, PIN-based debit transactions in order to reduce their costs-per-transaction by minimizing the interchange fees they may need to pay.

The following summary of current disclosure requirements provides context so that commenters may more fully address the adequacy of existing disclosures.

The Electronic Fund Transfers Act (EFTA), 15 U.S.C. 1693 et. seq., enacted in 1978, sets forth the existing disclosure requirements governing electronic fund transfers (EFTs). The general purpose of the EFTA is to provide a basic framework for establishing the rights, liabilities, and responsibilities and participations in EFT systems. The types of transfers covered by the EFTA include transfers initiated through an automated teller machine, point-of-sale terminal, automated clearinghouse, telephone bill-payment plan or remote banking program. The statute and regulation require the disclosure of terms and conditions of an EFT service; the documentation of electronic transfers by means of terminal receipts and periodic account statements; limitations on consumer liability for unauthorized transfers; procedures for the resolution of errors; and certain rights related to preauthorized ETFs.

The EFTA is implemented by the Board’s Regulation E (12 CFR part 205) and the regulatory requirements are interpreted by the Official Staff Commentary (12 CFR part 205 (Supp. I)). The Official Staff Commentary facilitates compliance and provides protection from civil liability, under § 915 (d)(1) of the act, for financial institutions that act in conformity with it. The commentary is updated periodically, as necessary, to address significant questions that arise.

Generally, the EFTA and Regulation E provide for disclosures to consumers about fees related to EFTs (including POS transactions) at three points in time:

These express statutory requirements are implemented in detail by Regulation E, 12 CFR §§ 205.7(b), 205.9(a) and (b).

Initial Disclosures. Under § 205.7(b), a financial institution must make initial disclosures at the time a consumer contracts for an EFT service, or before the first EFT is made involving the consumer’s account. In addition to other information, these disclosures must state “[a]ny fees imposed by the financial institution for electronic fund transfers or the right to make transfers.” 12 CFR § 205.7(b)(5). As explained in the Official Staff Commentary to this section, the fees addressed by this disclosure requirement are those fees imposed on the consumer by the account-holding institution. See Comment 7(b)(5)-3. Thus, the particular fee than an account-holding institution imposes when its customer engages in a POS debit transaction must be disclosed under this initial disclosure requirement.

Periodic Statement Disclosures. Under § 205.9(b), for each account to or from which EFT can be made, a financial institution must send the consumer a periodic statement, 12 CFR § 205.9(b). This statement must be sent for each monthly cycle in which an EFT has occurred, and must be sent at least quarterly even if no such transfer has occurred. In addition to other information, this statement must set forth “[t] amount of any fees assessed against the account during the statement period for electronic fund transfers, for the right to make transfers, or for account maintenance.”

The Official Staff Commentary to this provision provides additional clarification that is relevant to commenters, the goals of the requested study, and to consumers. The fees to be disclosed in the periodic statement may include fees for EFTs as well as for other, non-electronic services (both fixed and per-item fees). Significantly, these fees may be stated “as a total or may be itemized in part or in full.” See comment 9(b)(3)-1. Thus, for example, if an account holding institution imposes fees on the consumer for an online POS debit transaction, these fees must be disclosed in the periodic statement but may be aggregated with other fees; a per-transaction itemization of each fee imposed by the card-issuing bank for a POS debit transaction is permitted, but not required by the regulations.

Disclosures Contained in Receipts Provided at Electronic Terminals. Under § 205.9(a), financial institutions must make a receipt available to a consumer at the time the consumer initiates an EFT “at an electronic terminal,” which included a POS terminal. § 205.2(h). The Official Staff Commentary expressly provides that “[a]n account holding institution may make terminal receipts available through third parties such as merchants or other financial institutions.” See comment 9(a)-2. Consequently, when a debit card is used at point-of-sale, the merchant provides a terminal receipt that contained the information that the account-holding institution is required to provide to the consumer.

Certain information is required to be provided on the terminal receipt. Section 205.9(a)(1) provides that the amount of the transfer must be stated, along with other information such as the date the transfer in initiated, the type of transfer, the terminal location, and other information. A transaction fee, however, must be disclosed on the receipt, and additionally displayed on or at the terminal, only if the fee is included in the amount of the transfer. If such fee is not included in the transfer amount, the receipt need not state the fee and the display requirements are not triggered.

Thus, by way of example, assume than an account-holding institution charges its customer a $1.00 transaction or PIN-use fee each time the customer uses the institutions debit card for an online POS transaction. If the debit card is used at point-of-sale to purchase a $20 item, and the “amount of the transfer” on the receipt is identified as “$21.00” (that is, the PIN-use fee is included in the amount of the transfer), then the $1.00 fee must be disclosed on the receipt and displayed on or at the terminal, or on the terminal screen. If, however, the “amount of the transfer” is identified only as “$20.00,” the § 205.9(a) receipt requirements impose no such disclosure obligation. The fees imposed by the account-holding institution would still need to be disclosed under the initial disclosures under § 205.7(b) (5), however, and in the periodic statement sent to the consumer (in either aggregated or segregated form along with other fees) under § 205.9(b)(3), both discussed above.

The Board requests comments on the extent to which these existing EFTA and Regulation E disclosures are adequate and effective in making consumers aware of the circumstances under which account holding institutions impose a fee, if applicable, when a consumer uses a debit card to make a purchase at point-of- sale.

QUESTIONS REGARDING THE PROPOSAL

  1. Do the current initial disclosures, the disclosures in periodic statements, or any disclosures on receipts at electronic terminals – either separately, or cumulatively – provide consumers with sufficient information about such point-of-sale fee practices? Currently, the debit fee may be aggregated within the periodic statement and the terminal fee does not have to be disclosed at the POS terminal. Please explain your answer.
















  2. Do you believe additional periodic statement fee disclosures would be beneficial?
















  3. If enhanced disclosures are recommended on a periodic statement, should PIN-use fees be separately disclosed or should such fees be aggregated with other disclosed fees? Please explain.
















  4. If you believe additional periodic statement disclosures would be beneficial should the statement reflect the amount of each fee imposed by the account-holding institution on the consumer in connection with a debit card transaction at POS? Please explain.
















  5. Do you believe that the periodic statement should be required to reflect the source and recipient of any such fee?
















  6. Should the periodic statement be required to reflect a summary of the total amount of such fees for that reporting period and calendar year-to-date?
















  7. Should the receipt at an electronic terminal be required to disclose the fees at all times? A transaction fee must be disclosed on the receipt, and additionally displayed on or at the terminal, only if the fee is included in the amount of the transfer. If such fee is not included in the transfer amount, the receipt need not state the fee and the display requirements are not triggered.
















  8. Should the Board study the difference between debit fees at credit unions and banks?
















  9. Do you have any additional comments on this proposal?
















  10. Please submit your name, address, and phone number.
















Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com