ABA Regulatory and Compliance Inbox: when an un-submitted stop-payment request still matters to banks

What if the consumer never requested that the bank stop payment but submits a claim that the transaction is unauthorized?

By Leslie Callaway, CRCM, CAFP; Mark Kruhm, CRCM, CAFP; and Rhonda Castaneda, CRCM

Q: I understand that under §1005.10(c)(1) of Regulation E (Electronic Fund Transfer Act), a bank must stop payment on a recurring preauthorization electronic fund transfer if the consumer notifies the bank orally or in writing at least three business days before the scheduled date of the transfer. However, what if the consumer never requested that the bank stop payment but submits a claim that the transaction is unauthorized on the basis that it notified the merchant of the payment cancellation? May the bank treat the claim as a “merchant dispute” that the consumer must resolve directly with the merchant?

A: No, the bank should treat the claim as an error under §1005.11. Under §1005.11(a)(ii), an error includes “an incorrect electronic fund transfer to or from the consumer’s account,” which is the consumer’s claim in this case. In addition, if the consumer indicates that all future transactions are cancelled, the bank must stop future payments. (Answer provided May 2022.)

Q: A few years ago, my bank reported a small business loan per the Community Reinvestment Act regulation. The borrower now wishes to make a large curtailment against the outstanding balance and re-amortize the loan. Would this create another reportable loan?

A: Quite possibly. See §_.42(a)-5 in the Interagency Questions and Answers Regarding Community Reinvestment, which states: “An institution should collect information about small business and small farm loans that it refinances or renews as loan originations.” Presuming that the existing loan obligation or note is satisfied and a new note is written to effect the change (a refinance) and that it continues to meet the definition of a reportable small business loan, the refinance is a new reportable loan transaction. (Answer provided July 2022.)

Q: My bank is currently exempt from the federal requirement [the prudential regulators have identical regulations but different citations]to escrow flood insurance premiums because its assets are under $1 billion. However, the bank’s assets are quickly approaching that threshold. The small lender exception applies to lenders or servicers with total assets of less than $1 billion who also meet other criteria not relevant here. Is the $1 billion threshold adjusted periodically as thresholds are in other regulations, such as Regulation Z?

A: No, the small lender exception asset dollar threshold $1 billion is not adjusted. As explained in the Supplementary Information to the July, 2015 amendments to the federal regulations regarding loans in areas having special flood hazards, “the $1 billion asset-size threshold for the exception from the escrow requirements is specified in the FDPA [Flood Disaster Protection Act] . . . and the Agencies are therefore adopting the $1 billion asset-size threshold without an annual adjustment, consistent with the FDPA, as amended.” (80 FR 43227) (Answered provided July 2022.)

Q: Is there a record retention requirement for Regulation E opt-In consent forms?

A: Banks need only retain evidence of compliance with the regulatory requirements. Evidence of each individual opt-in is not required. See §1005.13(b)(1): “Any person subject to the Act and this part shall retain evidence of compliance with the requirements imposed by the Act and this part for a period of not less than two years from the date disclosures are required to be made or action is required to be taken.” In addition, Comment 1 to this section provides: “A financial institution need not retain records that it has given disclosures and documentation to each consumer; it need only retain evidence demonstrating that its procedures reasonably ensure the consumers’ receipt of required disclosures and documentation.” (Answer provided July 2022.)

Answers are provided by ABA Regulatory Policy and Compliance team members Leslie T. Callaway, CRCM, CAFP, senior director, compliance outreach and development; Mark Kruhm, CRCM, CAFP, senior compliance analyst; and Rhonda Castaneda, CRCM, senior compliance analyst. Answers do not provide, nor are they substitutes for, professional legal advice.