Comment Letter to Federal Banking Regulators, on Unauthorized Debits by Payday Lenders
[Download PDF (with exhibits) and statement]
September 29, 2014
The Honorable Janet L. Yellen, Chairwoman
Board of Governors of the Federal Reserve System
20th Street and Constitution Ave., NW Washington DC 20551
The Honorable Richard Cordray, Director
Consumer Financial Protection Bureau
1700 G Street NW Washington, DC 20552
The Honorable Tom Curry, Comptroller
Office of the Comptroller of the Currency
250 E Street SW Washington, DC 20219
The Honorable Martin Gruenberg, Chairman
Federal Deposit Insurance Corporation
550 17th Street Northwest
Washington, DC 20429
The Honorable Debbie Matz, Chairwoman
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428
Jan Estep, President and Chief Executive Officer
NACHA — The Electronic Payments Association
13450 Sunrise Valley Drive, Suite 100
Herndon, VA 20171
Re: RDFIs’ responsibilities to consumers regarding stop-payment orders, unauthorized charges, related fees, and orders to close accounts
Dear Chairwoman Yellen, Director Cordray, Comptroller Curry, Chairman Gruenberg, Chairwoman Matz and President Estep:
The undersigned groups write to ask you to take steps to address systematic problems that consumers have with their financial institutions when the consumer attempts to stop preauthorized and other payments, to prevent or reverse unlawful or unauthorized charges, or to close their account. These problems often arise in the context of preauthorized payments for payday loans or for goods or services that require recurring payments, such as gym memberships or online clubs. People have often found that their financial institution fails to honor requests to stop payment of recurring payments; has inadequate systems for implementing stop-payment
orders and preventing evasions of those orders; charges inappropriate or multiple fees; and refuses to permit consumers to close their accounts.
We recognize that many of these problems begin with problematic origination practices by payees, and also with insufficient monitoring by payment processors and originating depository financial institutions (ODFIs). We appreciate the efforts that your agencies have undertaken to address origination issues and urge you to bolster those efforts.
But we also believe that receiving depository financial institutions (RDFIs) can, and legally must, do more to help people control the security of their deposit accounts. RDFIs also can and should do more to assist ODFIs and regulators in addressing inappropriate origination practices.
Our organizations have done extensive work to protect people from predatory lending by payday lenders, and it is in this context that we have seen many of the problems. But the practices that we describe have also harmed people in many other situations.
Payday Loans: Background
Payday loans are extremely costly loans carrying huge fees that translate into triple-digit APRs, typically in the 400%-800% range. Fifteen states have banned all payday lending. Several others regulate the terms of payday loans, and others permit only storefront payday lending and ban internet loans. Nearly every state, even if it permits both storefront and internet payday lending, requires that nonbank lenders carry state licenses.
As scrutiny of payday loans increases, many payday lenders are starting to offer longer term installment loans. These loans also come with high rates and insufficient underwriting for ability to pay. Some are not amortizing, with initial periodic interest-only payments that do not reduce the amount owed. Borrowers may not realize that, despite their payments, they are not making progress on repaying their loans. These loans rely on similar repayment mechanisms and have similar problems.
Internet lenders, which would find it difficult to accept a traditional paper check, typically instruct the borrower to provide the name of her financial institution, her account number, and an “ACH authorization,” which authorizes the lender to deposit the loan funds into and debit its fees from the borrower’s account via the automated clearing house (ACH) system. The payday lender deposits the loan funds into the borrower’s account by initiating an ACH credit entry via its financial institution, the ODFI. (Many internet payday lenders initiate ACH entries indirectly, through third-party payment processors.) The RDFI then directs the loan funds to the borrower’s account. At the end of the loan term, the payday lender initiates an ACH debit entry, again via the ODFI, upon which the RDFI debits the lender’s fees from the borrower’s account and forwards the funds to the ODFI.
Alternatively, or as a backup mechanism in the event that the person revokes the ACH authorization, internet payday lenders often include in the fine print of their contracts purported authorization to create a remotely created check (RCC) or remotely created payment order (RCPO). The Federal Trade Commission has proposed banning RCCs and RCPOs in transactions covered by the Telemarketing Sales Rule, but the FTC’s TSR authority does not extend to purely internet transactions. We have urged the Federal Reserve Board to completely ban RCCs and RCPOs in consumer transactions. Still others process payments through debit card networks, a practice currently under investigation by the New York Attorney General, VISA and MasterCard.
People who take out internet payday loans may believe that they have authorized only a single debit to repay the loan in full. However, automatic loan renewals may be built into the fine print terms of the loan agreement.
As a result, payday loan borrowers may be hit with numerous unexpected, ongoing debits against their account. Besides being deceptive, these automatic renewals may violate the Electronic Fund Transfer Act’s ban on requiring repayment of a loan by preauthorized electronic fund transfers.
Many payday loan borrowers live paycheck to paycheck, and often do not have enough funds in their accounts to cover the payday lenders’ exorbitant fees. Payday lenders do little to no underwriting to determine a borrower’s ability to repay, and rely on being able to collect on the loan through the payment mechanism.
RDFI Problems Presented by Payday Loans
Consumers face several difficulties with their financial institutions when they find themselves caught in the trap of a payday loan.
Overdraft and NSF Fees
Typically, if the borrower’s account lacks the funds to cover a payment, the RDFI either debits the account anyway, causing an overdraft in that amount, or rejects the item. The RDFI then charges the borrower either an overdraft fee or a nonsufficient funds (NSF) fee.
If the item is returned unpaid, the payday lender may resubmit the request again and again, triggering a returned item fee each time. The resulting cascade of RDFI fees quickly creates a high negative balance on the borrower’s account. Even if the payday lender complies with NACHA reinitiation limits governing ACH debits and submits the payment three times in total, the consumer can still suffer over $100 in NSF fees for a single item. For checks, some state payday laws may limit the number of NSF fees that can be charged but not the number of NSF fees that the bank may charge if a check is presented multiple times. The UCC has no specific limits on the number of times a check may be re-presented, and NSF fees can balloon completely out of control. Payday lenders may also not respect NACHA or state law limits.
People often seek to stop payment of a check, RCC, RCPO or ACH debit for one or both of the following reasons. First, the consumer may lack the funds to repay the loan and wish to exercise his right to stop payment in order to avoid overdraft or NSF fees. Second, the loan may be illegal or fraudulent – i.e., because its terms violate state law, the lender is unlicensed, or the consumer did not knowingly authorize recurring debits.
Financial institutions have generally adequate systems for stopping traditional paper checks. But people often have an extremely difficult time stopping ACH transactions, RCCs or RCPOs. The common payday lender practice of taking more than one type of authorization means that consumers wishing to stop future debits may need to do so multiple times via multiple avenues – assuming that the consumer even understands the various means that the lender may use to debit the account.
Advocates around the country routinely hear from people whose financial institution refused their repeated requests to stop recurring payments to payday lenders. The financial institution often claims that there is nothing it can do to stop the debits or that the consumer is required to stop the payment by going through the lender and revoking authorization for the debit. While Regulation E permits financial institutions to require written confirmation from the customer that authorization has been revoked, the law is clear that the financial institution must enter the initial stop-payment order based on an oral request. Regulation E rights may not be waived by a contrary procedure in the account agreement.
Some RDFIs tell people that they must make a separate stop-payment request for each of the lenders’ preauthorized debits. Or the RDFI may enter a stop-payment order for only a single item, which is ineffective against future payments.
People also have been told that they must provide the exact amount of the lender’s debit request in their stop-payment request, and that if the amounts differ by even a dollar, the financial institution cannot stop payment. Yet in the case of a preauthorized ACH or a remotely created check, a consumer who does not understand the automatic rollover feature on the loan may not know how much the next payment will be. In addition, if the person stops payment of a renewal fee for a payday loan, the loan agreement often gives the lender the right to initiate a debit for the entire principal, but the borrower may not know that the larger debit is coming.
Some payday loan contracts authorize the lender to initiate one or more withdrawals from the borrower’s account, which can result in multiple withdrawals in varying amounts for a single loan payment, making it impossible for the borrower to identify the exact dollar amount of a given withdrawal. Even when the consumer knows the expected payment amount, payday lenders have been known to manipulate the amount of a payment in order to evade a stop
payment order. They may add or subtract a few cents from the payment, or split the payment into multiple, smaller payments. For example, this story was posted on the internet:
[The internet payday lender] wouldn’t stop taking payments on their end even after I asked them to stop. So I had to do a stop payment at my bank. However even after I did the stop payment, they withdrew money from my checking account by making the amount they were withdrawing 2 cents less than the stop payment amount which was a red flag there.
Payday lenders may also change the form of a payment to evade stop-payment orders. If a person identifies a payment as an ACH payment and the RDFI institutes an ACH stop-payment order, the lender may instead process the payment as an RCC or RCPO. The person has no idea what the check number is, or even that the check has been generated. The RDFI’s systems for stopping payment of check items and ACH items may not be linked.
RDFIs impose high stop-payment fees that frustrate people’s right to stop payment. High fees weaken the effectiveness of a stop-payment order if the fee is a substantial percentage of the payment that the consumer is trying to stop. For example, a consumer might have to pay a stop payment fee as high as $35 to stop a $50 payday loan renewal fee.
As noted above, some financial institutions require consumers to place a series of orders to stop recurring payments. Each of those orders can incur a separate stop-payment fee.
Fees Related to Unauthorized Charges
In many cases, consumers are incurring stop payment, NSF or overdraft fees as a result of debits – or attempted debits – that are illegal or otherwise unauthorized. Online payday lenders may have violated Regulation E by conditioning credit on preauthorized electronic fund transfers, or may not have obtained clear and readily understandable authorization for recurring debits. Payday lenders also debit accounts in states where the loans are illegal or unlicensed and any purported authorization is thus void.
Unauthorized charges should be blocked or reversed without charge. But if a consumer is attempting to block future unauthorized charges as opposed to reversing one that already occurred, financial institutions often charge stop-payment fees. Consumers also may not know to contest the payments as unauthorized and may simply ask that the payments be stopped. Even if the consumer says that the payment is illegal and unauthorized, the bank may still charge a stop- payment fee.
Inability to Reverse Unauthorized Charges
Consumers often have difficulty reversing unauthorized charges. Recent cases brought by the FTC and the CFPB showed that banks were unwilling to take the consumer’s word that a payday loan payment was unauthorized, even in circumstances where the consumer had never agreed to a loan or had any direct dealings with the phony lender. We are aware of other cases in which the bank refused to respond to an account holder’s assertion that a claim was unauthorized, resulting in serious harm.
In other cases, even if the consumer purported to authorize the charge, that authorization may be invalid, either because the loan is illegal or because the lender violated Regulation E by requiring preauthorized payments as a condition of the loans. But banks may refuse to reverse the payment.
When consumers cannot stop or reverse unauthorized payments, they may be forced to close their accounts. But, as discussed below, that may be difficult as well.
Attempts to Close the Account
Because of the lack of cooperation by many RDFIs and the creativity of payday lenders in evading stop-payment orders, our organizations often advise people to simply close their account if the account has been overtaken by a lender. Sometimes this is effective, but other times the RDFI refuses, on the ground that there are transactions pending or the account is overdrawn and must be brought positive before it can be closed. Meanwhile, the RDFI may allow the payday lenders to continue submitting repeated debit requests, charging the accountholder hundreds, and sometimes thousands, of dollars in overdraft and NSF fees.
Even after a consumer successfully closes the account, in some cases the RDFI will do a “soft close,” which permits the account to be re-opened to process an incoming debit. Some RDFIs have then pursued consumers not only for the negative balance but for overdraft fees that were also charged to the account.
Insufficient Attention to Problematic Originators
Illegal online payday lenders continue to debit people’s accounts even when the lenders’ unlawful practices should have placed them on watch lists maintained to prevent inappropriate origination practices. While ODFIs are in the best position to monitor patterns of misuse of ACH debits, RCCs and RCPOs, RDFIs also have a role to play in flagging problematic originators when the ODFI has not done so. We recognize that progress has been made in stopping some entities from originating unlawful payments. But problems persist.
In summary, we see consumers facing difficulties with RDFIs that:
- Refuse to stop payment of preauthorized payments.
- Fail to effectively stop items that lack a check number or precise amount.
- Do not have systems in place to enable a consumer to stop a payment that changes form, from a check item to an ACH entry or vice versa, or where the payee has manipulated the amount to evade a stop-payment order.
- Charge multiple NSF fees for the same item.
- Charge high stop-payment fees that effectively eliminate or frustrate the right to stop payment of smaller payments.
- Require multiple stop-payment fees or repeat stop-payment orders to stop a series of preauthorized payments from the same entity.
- Charge stop-payment fees even to prevent payment of items that are unauthorized.
- Refuse to comply with an accountholder’s directive to close an account if the balance is negative, or if debits or credits are pending.
Some of these problems stem from failure to following existing rules, improper training or inadequate systems to implement basic consumer protection rights. Others are a result of older systems and insufficient clarity in rules that have failed to keep pace with new payment developments and the creativity of scammers.
Example: Baptiste v. Chase
The problems that consumers face when they ask their financial institution for help with stopping payments and closing an account are profoundly illustrated in a 2012 federal lawsuit brought by New Economy Project against JPMorgan Chase Bank on behalf of two low-income women in New York, Sabrina Baptiste and Ivy Brodsky. Internet lenders had made payday loans to both women and then repeatedly debited their bank accounts, draining them of funds. Chase has since agreed to make changes to its practices, but we have seen examples of very similar problems at other financial institutions.
Despite the fact that it is illegal to extend payday loans to New York residents, Chase refused the women’s repeated requests to stop the lenders from debiting their accounts, and then charged them repeated overdraft or returned item fees. Chase also refused their requests to close their accounts, claiming that it could not close the accounts if transactions were pending or if the accounts carried a negative balance.
In Ms. Baptiste’s case, Chase charged her more than $800 in overdraft fees and illegally seized more than $600 in child support benefits belonging to her minor child to cover the fees. In Ms. Brodsky’s case, Chase charged her more than $1,500 in overdraft and returned item fees after it permitted internet payday lenders to attempt to debit her account 55 times over a two-month period.
Only after it had allowed huge overdraft fees to accumulate did Chase finally close the women’s accounts. Chase then attempted to collect the overdraft fees, and reported both women to ChexSystems.
Ms. Baptiste and Ms. Brodsky eventually sued Chase. As discussed below, a settlement was reached, in conjunction with which Chase agreed to make substantial changes to its policies. However, the problems go beyond Chase, and we have seen similar problems involving other financial institutions.
Examples beyond Payday Loans
Consumers have similar difficulties with their RDFIs when businesses other than payday lenders are involved. A growing number of businesses either require consumers to preauthorize recurring payments or hide authorization for recurring payments or add-on products in the fine print that consumers may not notice. Stopping these payments can be difficult even if the original payment was fully authorized for a legitimate service.
The FTC has brought a number of cases against online merchants that deceptively enroll consumers in membership clubs and other add-on services:
16 Baptiste v. JPMorgan Chase Bank, N.A., No. 12-cv-04889 (E.D.N.Y. filed Oct. 1, 2012).
- FTN Promotions, Inc., which did business as Suntasia Inc., and several other entities, debited consumers’ bank accounts for tens of millions of dollars for fees for membership clubs that consumers did not knowingly authorize.
- Elite Debit, Inc. and scores of other companies doing business under the IWorks name charged consumers more than $275 million for “trial” memberships for bogus government-grant and money-making schemes.
We have heard reports of consumers who have difficulty in stopping preauthorized payments in various contexts, including gyms, online games, and other goods and services. These two reports came from separate legal services programs:
- From Florida: “We have just had a call from a disabled senior who signed up for Direct TV in the course of an unsolicited home visit (lots of pressure – installation the same day, etc.). When she called to cancel, she was advised of the cancellation fee ($450) which Direct TV planned to debit from her checking account. Her only source of income is SSI.”
- From Massachusetts: “The client purchased a pair of hearing aids over a year ago for $6,000 – more than she could really afford, but they were not covered by her health insurance and she felt desperate for a remedy. The company – Miracle Ear – took payment by deducting $100 a month directly from the client’s bank account. The hearing aids have never worked effectively …After dealing with this for about a year, the client got a second opinion from an ear specialist, who said that her hearing loss was too severe to be effectively remedied by the product she was sold. She sought to return the original hearing aids, but was told she could not do so …Miracle Ear is still deducting the monthly $100 fee from the client’s bank. The client is on a limited income; she receives only Social Security Disability.”
In some of these situations, the consumer has difficulty stopping an ongoing payment. In others, the consumer is surprised when a cancellation fee or other out-of-the ordinary charge is deducted from the account based on authorization in the fine print. Consumers typically do not know how to challenge these charges as unauthorized.
Legal Obligations of RDFIs
Several laws govern the RDFIs’ responsibilities regarding consumers’ payments. Some of these laws are clear but are not being followed. In other situations, RDFIs could benefit from more detailed rules or guidance to ensure that consumers’ rights and the sanctity of their accounts are protected.
The UCC gives consumers the right to stop payment of checks for any reason or no reason at all. That right applies to remotely created checks. To stop a payment, the consumer must identify the check with “reasonable certainty.” But if the RDFI requires more information than the consumer has supplied, it must notify the consumer.
There are no specific limits in the UCC for the number of times a check (or remotely created check) can be re-presented against a consumer’s account, but it should be viewed as unfair to charge multiple NSF fees for a single item when the consumer has no control over how many times it is submitted. If the consumer’s purported authorization of an RCC is part of an illegal contract or is otherwise invalid, or if the consumer has revoked authorization, any subsequent RCC is essentially a forged check, is not properly payable, and must be re-credited by the financial institution.
The Electronic Fund Transfer Act (EFTA) gives consumers the right to stop payment of preauthorized electronic fund transfers (PEFTs). PEFTs are defined as electronic fund transfers (EFTs) that recur at substantially regular intervals. The EFTA right does not directly apply to single-payment debits that do not recur. But both courts and the FTC have found that a series of rollover payments on single payment loans can fit that definition.
NACHA rules require RDFIs to stop payment not only of recurring ACH transactions but also of most single-entry ACH transactions if the consumer gives the RDFI sufficient notice. NACHA rules are typically incorporated into account agreements and thus become a contract law obligation. Whether or not specifically incorporated, compliance with NACHA rules when handling ACH transactions should also be deemed covered by the implied covenant of good faith and fair dealing. Noncompliance would be an unfair, deceptive and abusive practice.
Upon receipt of a stop-payment order for a recurring transaction, Regulation E (as well as NACHA rules) requires that the financial institution “block all future payments for the particular debit.” The institution may not wait for the payee to terminate its automatic debits.
Under both Regulation E and NACHA rules, a consumer may initiate a stop-payment order by an oral request. The RDFI may ask the consumer to follow up with a written request and to confirm that the consumer has revoked the payee’s authorization. The initial stop-payment order may expire in 14 days if the consumer does not follow up with the requested information. But the RDFI may not refuse to honor the initial oral stop-payment order pending receipt of that information. Indeed, the requirement that financial institutions stop payments would be superfluous if consumers could, or were required to, effectively stop payments with the payee directly.
The UCC, EFTA and NACHA rules do not specifically address stop-payment fees. But fees that are so high as to inhibit the right to stop payment should be viewed as violating that right. Such fees are also potentially unfair, deceptive or abusive.
NACHA rules prohibit RDFIs from initiating an ACH transaction after the consumer has instituted a stop-payment order governing either the ACH transaction or a check on which it is based. Thus, any subsequent attempted ACH debits are unauthorized and should be subject to the EFTA’s error resolution and unauthorized transaction provisions.
If the payee instead creates an RCC after the consumer revokes authorization for an ACH debit, the UCC does not specifically address this situation. But the resulting RCC should be viewed as unauthorized or unfair, deceptive or abusive just as it would be in the reverse situation.
If a payee alters the amount of a payment in an attempt to evade a stop-payment order, the new payment should also be considered unauthorized. An ACH transaction that is processed for a different amount from that authorized by the consumer, especially if it evades a stop-payment order, should be deemed a violation of both Regulation E and NACHA authorization requirements and should be viewed as an unauthorized charge. A remotely created check that is processed in a different amount in order to evade a stop-payment order may also be subject to Regulation E, or it could also be treated as a forged check or, less likely, as an altered check.
If a purported authorization for an ACH payment is invalid, then the payment is unauthorized. As long as challenged within 60 days, the payment – and any associated overdraft or NSF fees – should be reversed without charge under the Regulation E error resolution rules.
Under the UCC, a customer may “close the account by an order to the bank ….” The official comment elaborates that “stopping payment or closing an account is a service which depositors expect and are entitled to receive from banks notwithstanding its difficulty, inconvenience and expense. The inevitable occasional losses through failure to stop or close should be borne by the banks as a cost of the business of banking.” An order to close an account is effectively an order not to honor subsequent items, and future checks should not be properly payable.
A Starting Point: The Baptiste v. Chase Settlement
In March 2013, after coverage in The New York Times of Chase’s and other major banks’ facilitation of internet payday loans, including in states where they are illegal, Chase announced some changes in policy. For instance, Chase announced that it would charge only one returned- item fee for any item returned more than once in a 30-day period, even if a payday lender or other payee presented the same item multiple times because the customer’s account lacked sufficient funds. Chase said that it would also make it easier for its customers to close their bank accounts even if there were pending charges, provide further training to its employees on its existing stop payment policy, and report potential misuse of the ACH network to the NACHA.
In June 2013, New Economy Project reached a settlement of its lawsuit against Chase. In conjunction with the settlement, Chase provided a letter to New Economy Project outlining additional changes that it was or would be making. Most significantly, Chase affirmed that accountholders have the right to stop all payments to payday lenders and other payees via a single stop payment request, and outlined the procedures it had implemented to make it easier for accountholders to do so. (See copy of letter, attached hereto as Exhibit A.) Chase also stated that later that year, it expected “to implement technology allowing consumers to initiate account closing and restrict future transactions…even if the account has a negative balance or pending transactions” and that it “will not charge Returned Item, Insufficient Fund, or Extended Overdraft fees to an account once account closing has been initiated.” (See Ex. A.)
In late 2013, Chase revised its standard disclosures to reflect some aspects of the changes outlined in its June 2013 letter. For example, Chase now advises accountholders that they may instruct Chase to block all payments to a particular payee, and that they may restrict their accounts against all future withdrawals, even if transactions are pending or the account is overdrawn. (See copy of Chase’s deposit account agreement notices, attached hereto as Exhibit B.)
Changes Directed at RDFIs
Chase’s example, though incomplete, provides a useful starting point for practice changes that regulators should require all financial institutions to adopt. Some of these changes may be accomplished through supervision, additional guidance, and enforcement. Others may be achieved by enacting rules under the EFTA, Regulation CC or the CFPB’s authority to prevent unfair, deceptive or abusive practices.
Specifically, we urge regulators to:
1) Require RDFIs to comply fully and effectively with an accountholder’s request to stop payment of any item if the person provides sufficient notice, whether that item is a check, an RCC, an RCPO or an EFT. A single oral or written stop-payment request should be effective to stop payment on all preauthorized or repeating transfers to a particular payee. The stop-payment order should remain in effect for at least 18 months, or until the transfer(s) is/are no longer occurring.
2) Provide guidance on effective measures to stop payment of items that cannot be
identified by check number or precise amount, and provide model stop-payment forms to implement those measures.
3) Provide model forms that RDFIs may provide to accountholders to assist them in revoking authorization for a payment with the payee, but make clear that use of the form is not a precondition to stopping payment.
4) Permit RDFIs to charge only one returned-item fee for any item returned more than once in a 30-day period, even if a payee presents the same item multiple times because an account lacked sufficient funds. We understand that the current practice at many RDFIs is to charge one fee per presentment, but it would protect consumers from uncontrollable fees and level the playing field if there were a clear rule for everyone limiting such fees.
5) Permit RDFIs to charge only one stop-payment fee per stop-payment order (unless the payment is unauthorized), even if the order is intended to stop recurring payments.
6) Limit stop-payment fees. For small payments, the fee should be no more than half the amount of the payment or $5, whichever is greater. Fees for other payments should be capped at an amount that is reasonable.
7) Require RDFIs to waive stop-payment fees if the payment that an accountholder is attempting to stop is unauthorized.
8) Ensure that banks are not rejecting consumers’ unauthorized-payment claims without justification. Advise banks that a payment should be reversed if the purported authorization is invalid, and examine samples of unauthorized-payment claims that were rejected by banks
9) Require RDFIs to forego or reverse any overdraft or NSF fees incurred as a result of an unauthorized item (check or EFT), including when the check or item directly overdraws the account and also when it depletes the account and causes a subsequent item to bounce or overdraw the account.
10) Require RDFIs to permit accountholders to close their account at any time for any reason, even if transactions are pending or the account is overdrawn.
11) Provide guidance to RDFIs as to how to deal with pending debits and credits if someone asks to close an account, while requiring RDFIs to reject any subsequent items after the person has requested that her account be closed.
12) Provide model forms that RDFIs should provide to accountholders who have asked to close their account to aid in identification of other preauthorized payments for which the consumer will need to revoke authorizations or that the consumer can re-direct to a new account.
13) Prohibit RDFIs from charging any NSF, overdraft or extended overdraft fees to an account once the accountholder requests that it be closed.
14) Provide model disclosures that fully inform accountholders of the above practices, and require RDFIs to fully train their employees on the above practices.
15) Advise accountholders of their right to stop payments to payees, to revoke authorizations, and to contest unauthorized charges.
16) Encourage RDFIs to reach out to consumers if the RDFI detects unusual account activity and to advise consumers of their right to stop payments to payees, to revoke authorizations, and to contest unauthorized charges. Regulators should also consider ways to help financial institutions develop age-friendly banking services that help seniors avoid scams.
17) Require RDFIs to make greater efforts to report potential problems to NACHA, the
CFPB, the Federal Reserve Board, and the appropriate regulator.
Changes Directed at Payees
Although this letter focuses on consumers’ interactions with their financial institution, the problems start at the payee/originator level. Beyond efforts by ODFIs to monitor the payments they process, it would be helpful to have more clarity in and enforcement of consumer protection rules governing authorization requirements for payments taken out of consumers’ accounts and the right to revoke authorization for those payments.
Currently, there is little detail in Regulation E on authorization requirements for recurring electronic payments and virtually none for single entry payments. Regulation E requires that all disclosures be clear and readily understandable, and the regulation defines unauthorized transfers, but more guidance on specific rules for authorizations would be helpful. Similarly, Regulation E implies a right to revoke authorization, and has been interpreted by some courts to afford such a right, but the right to revoke and procedures for doing so could be made clearer.
Online lenders also regularly circumvent the Regulation E ban on conditioning credit on payment by preauthorized electronic fund transfer. Lenders use coercive and manipulative practices to induce consumer agreement, such as conditioning the immediate processing of the loan application and the deposit of funds on the ability to process payments through the ACH network. The Regulation E ban on compulsory use also does not clearly apply to remotely created checks even when processed electronically.
NACHA rules provide more detail about authorization requirements and the right to revoke authorization for ACH transactions. But NACHA rules are not directly enforceable by consumers and the rights they afford are largely unknown.
Finally, the rules that govern authorization of remotely created checks and remotely created payment orders or a right to revoke authorization are opaque. Those payment devices, which have been subject to substantial abuse, should be banned in consumer transactions. Until a ban can be implemented, Regulation E rights and responsibilities should be extended to cover the devices.
Detailed proposals for clarifying and enforcing the obligations of payees that originate debits from consumer accounts are beyond the scope of this letter. But we flag those issues here as an important topic for ongoing discussion.
We would welcome the opportunity to further discuss these matters. Please do not hesitate to contact Susan Shin with New Economy Project, email@example.com, (212) 680-5100, or Lauren Saunders with the National Consumer Law Center, firstname.lastname@example.org, (202) 595-7845, if you have any questions.
Alabama Appleseed Center for Law & Justice
Americans for Financial Reform
Arizona Community Action Association
Arizona Consumers Council
Arkansans Against Abusive Payday Lending
Center for Responsible Lending
Coalition of Religious Communities (Utah) Connecticut Association for Human Services Consumer Action
Consumer Federation of America
Empire Justice Center
Florida Alliance for Consumer Protection Jacksonville Area Legal Aid, Inc. Kentucky Equal Justice Center
Maryland Consumer Rights Coalition
National Consumer Law Center (on behalf of its low income clients) National People’s Action
NeighborWorks Blackstone River Valley
New Economy Project (New York) North Carolina Justice Center Reinvestment Partners
Rhode Island Payday Lending Reform Coalition South Carolina Appleseed Legal Justice Center Texas Appleseed
Virginia Citizens Consumer Council Virginia Poverty Law Center Woodstock Institute