13. What is the “Electronic Funds Transfer Act”?
The Electronic Funds Transfer Act (EFTA) was passed with the purpose of regulating the practice of transferring funds electronically. More specifically, the EFTA applies to electronic transfers of money between two separate institutions. It does not apply to automatic account transfers within the same financial institution. The EFTA is administered by the Federal Reserve Board.
• Example: The EFTA does not apply to an automatic monthly account deductions to be deposited into the consumer’s saving account in that same financial institution. It does not apply to automatic transfers from accounts held by a financial institution to a consumer’s account with that institution, such as where there is an automatic payment for a mortgage held by Big Bank from the consumer’s bank account at Big Bank. Rather, it does not apply to cards with a stated value on the face of the card, such as gift cards.
The EFTA protects a consumer for lost, stolen, or misused debit cards. These protections are similar to the protection afforded under the FCBA. Responsibility for loss in such situations is allocated between the transferring financial institution and the consumer. A consumer’s liability in such a case is limited to $50 if the consumer follows the appropriate procedure. The consumer must report the misuse of a debit card within 2 days of learning of the misuse. If the consumer fails to report a misuse within 2 days of learning of it, her potential liability moves up to $500. If she fails to report a misuse for more than 60 days, the EFTA does not place any limits on the consumer’s responsibility for losses. The EFTA prohibits creditors from requiring that a consumer repay a debt via electronic funds transfer. Lastly, any state law or contract that subjects a customer to greater liability than that mention above is preempted by the EFTA.
• Note: The EFTA does not give the consumer the right to stop payment on an electronic transfer.
Responsibility of Financial Institution
If a consumer’s card is lost or stolen, the financial institution must provide her with notice of her potential liability. It must also provide a method for reporting the lost or stolen card and provide instructions on resolving the issue. If a consumer reports an erroneous fund transfer, the financial institution must investigate the error and resolve it within 45 days (or 90 days in limited circumstances). If the financial institution takes more than 10 days (20 days for new accounts) to complete the investigation into the transfer error, it must re-credit the customer’s account for the amount in question. In any event, the financial institution must notify the customer of the results of investigation. If there is a confirmed error, the financial institution must correct it or make re-credit to the consumer’s account final. If there is no error, the financial institution must explain in writing the reason or justification for the transfer. It must also notify the customer that any temporary re-credit to the customer’s account will be deducted from the account.
• Note: The customer has the right to ask for copies of any documents relied upon in the investigation.
• Discussion: How do you feel about the EFTA placing the risk of loss for lost, stolen, or misused debit cards on the financial institution? Can you think of arguments for and against this allocation? What do you think is the purpose of allowing for escalating liability of the cardholder? Do you think the investigation and resolution responsibilities of the financial institution are adequate? Why or why not?
• Practice Question: Irene is going on vacation. Immediately before her trip, she notices some strange charges to her bank account. She also realizes that she cannot find her debit card. She decides not to worry about it and continues on her trip. When she returns, she reviews her bank statement there are dozens of unexplained charges. If she now reports the unexplained charges, what are her responsibilities? What are the responsibilities of the bank in this situation?