Consumer Handbook to Credit Protection Laws Electronic Fund Transfers

Electronic Fund Transfers

Example:

On his way home last Friday night, John Jones realized that he had no cash for the weekend. The bank was closed, but John had his bank debit card and the code to use it. He inserted the card into an automated teller machine outside the front door of the bank; then, using a number keypad, he entered his code and pressed the buttons for a withdrawal of $50. John's cash was dispensed automatically from the machine, and his bank account was electronically debited for the $50 cash withdrawal.

John's debit card is just one way to use electronic fund transfer (EFT) systems that allow payment between parties by substituting an electronic signal for cash or checks.

Are we heading for a checkless society? Probably not. But making a dent in the large number of paper checks in the country's banking system is clearly one advantage to electronic banking.

Today, the cost of moving checks through the banking system is estimated to be about $3.00 per check, including the costs of paper, printing, and mailing. Moreover, checks except your own check presented at your own bank take time to cash: time for delivery, endorsement, presentation to another person's bank, and winding through various stations in the check-clearing system. Technology now can lower the costs of the payment mechanism (to about $1.50 per transaction) and make it more efficient and convenient by reducing paperwork.

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EFT in Operation

The national payment mechanism moves money between accounts in a fast, paperless way. These are some examples of EFT systems in operation:

Automated Teller Machines (ATMs). Consumers can do their banking without the assistance of a teller, as John Jones did to get cash, or to make deposits, pay bills, or transfer funds from one account to another electronically. These machines are used with a debit or EFT card and a code, which is often called a personal identification number or “PIN.”

Point-of-Sale (POS) Transactions. Some debit or EFT cards (sometimes referred to as check cards) can be used when shopping to allow the transfer of funds from the consumer's account to the merchant's. To pay for a purchase, the consumer presents an EFT card instead of a check or cash. Money is taken out of the consumer's account and put into the merchant's account electronically.

Preauthorized Transfers. This is a method of automatically depositing to or withdrawing funds from an individual's account, when the account holder authorizes the bank or a third party (such as an employer) to do so. For example, consumers can authorize direct electronic deposit of wages, social security, or dividend payments to their accounts. Or they can authorize financial institutions to make regular, ongoing payments of insurance, mortgage, utility, or other bills.

Telephone Transfers. Consumers can transfer funds from one account to another— from savings to checking, for example—or can order payment of specific bills by phone.

What Law Applies?

THE ELECTRONIC FUND TRANSFER ACT answers several basic questions consumers have about using EFT services.

A check contains information that authorizes a bank to withdraw a certain amount of money from one person's account and pay that amount to another person. Most consumer questions center on the fact that EFT systems transmit the information without the paper:

• What record will I have of my transactions?
• How do I correct errors?
• What if someone steals money from my account?
• What about mail solicitations for debit cards?
• Do I have to use EFT services?

Here are the answers the EFT Act gives to consumer questions about these systems.

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What Record Will I Have of My Transactions?

A cancelled check is permanent proof that a payment has been made. What proof of payment is available with EFT services?

If you use an ATM to withdraw money or make deposits or a POS terminal to pay for a purchase, you can get a written receipt, much like a sales receipt you get with a cash purchase, showing the amount of the transfer, the date it was made, and other information. This receipt is your record of transfers initiated at an electronic terminal.

Your periodic bank statement must also show electronic transfers to and from your account, including those made with debit cards, by a preauthorized arrangement, or under a telephone transfer plan. The statement will also name the party to whom payment has been made and show any fees for EFT services (or the total amount charged for account maintenance) and your opening and closing balances.

How Do I Correct Errors?

The way to report errors is somewhat different with EFT services than it is with credit cards (see the section on correcting credit billing errors). But as with credit cards, financial institutions must investigate and promptly correct any EFT errors that you report.

If you believe there has been an error in an electronic fund transfer relating to your account:

1. Write or call your financial institution immediately if possible, but no later than 60 days from the date the first statement that you think shows an error was mailed to you. Give your name and account number and explain why you believe there is an error, what kind of error, and the dollar amount and date in question. If you call, you may be asked to send this information in writing within 10 business days.

2. The financial institution must promptly investigate an error and resolve it within 45 days. For errors involving new accounts (opened in the last 30 days), POS transactions, and foreign transactions, the institution may take up to 90 days to investigate the error. However, if the financial institution takes longer than 10 business days to complete its investigation, generally it must put back into your account the amount in question while it finishes the investigation. For new accounts, the financial institution may take up to 20 business days to credit your account for the amount you think is in error.

3. The financial institution must notify you of the results of its investigation. If there was an error, the institution must correct it promptly, for example, by making a recredit final. If it finds no error, the financial institution must explain in writing why it believes no error occurred and let you know that it has deducted any amount recredited during the investigation. You may ask for copies of documents relied on in the investigation.

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What about Loss or Theft?

It's important to be aware of the potential risk in using an EFT card, which differs from the risk on a credit card.

On lost or stolen credit cards, your loss is limited to $50 per card (see Lost or Stolen Credit Cards). On an EFT card, your liability for an unauthorized withdrawal can vary:

• Your loss is limited to $50 if you notify the financial institution within two business days after learning of loss or theft of your card or code.
• But you could lose as much as $500 if you do not tell the card issuer within two business days after learning of loss or theft.
• If you do not report an unauthorized transfer that appears on your statement within 60 days after the statement is mailed to you, you risk unlimited loss on transfers made after the 60-day period. That means you could lose all the money in your account plus your maximum overdraft line of credit, if any.

Example:

On Monday, John's debit card and PIN were stolen. On Tuesday, the thief withdrew $250, all the money John had in his checking account. Five days later, the thief withdrew another $500, triggering John's overdraft line of credit. John did not realize his card was stolen until he received his bank statement, showing withdrawals of $750 he did not make. He called the bank right away. John's liability is $50.

Now suppose that when John got his bank statement he didn't look at it and didn't call the bank. Seventy days after the statement was mailed to John, the thief withdrew another $1,000, reaching the limit on John's line of credit. In this case, John would be liable for $1,050 ($50 for transfers before the end of the 60 days; $1,000 for transfers made more than 60 days after the statement was mailed).  

What about Mail Solicitations for Debit Cards?

A financial institution may send you an EFT card that is VALID FOR USE only if you ask for one, or to replace or renew an expiring card. The financial institution must also give you the following information about your rights and responsibilities:

• A notice of your liability in case the card is lost or stolen
• A telephone number for reporting loss or theft of the card or an unauthorized transfer
• A description of its error resolution procedures
• The kinds of electronic fund transfers you may make and any limits on the frequency or dollar amounts of such transfers
• Any charge by the institution for using EFT services
• Your right to receive records of electronic fund transfers
• How to stop payment of a pre-authorized transfer
• The financial institution's liability to you for any failure to make or to stop transfers and
• The conditions under which a financial institution will give information to third parties about your account.

Generally, you must also get advance notice of any change in the account that would increase your costs or liability, or would limit transfers. A financial institution may send you a card that you did not request only if the card is NOT VALID FOR USE. An unsolicited card can be validated only at your request and only after the institution makes sure that you are the person whose name is on the card. It must also be sent with instructions on how to dispose of an unwanted card.

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Do I Have to Use EFT?

The EFT Act forbids a creditor from requiring you to repay a loan or other credit by EFT, except in the case of overdraft checking plans. With some exceptions, your employer or a government agency can require you to receive your salary or a government benefit by electronic transfer. However, you have the right to choose the financial institution that will receive your funds.

Special Questions about Preauthorized Plans

Q. How will I know that a preauthorized deposit has been made?

A. There are various ways in which you may be notified. Notice may be given by your employer (or whoever is sending the funds) that the deposit has been sent to your financial institution. Otherwise, a financial institution may provide notice when it has received the credit or will send you a notice only when it has not received the funds. Financial institutions also have the option of giving you a telephone number you can call to check on a preauthorized deposit.

Q. How do I stop a preauthorized payment?

A. You may stop any preauthorized payment by calling or writing the financial institution, but your order must be received at least three business days before the payment date. Written confirmation of a telephone notice to stop payment may be required. You should also contact the merchant or organization you authorized to debit your account.

Q. If the payments I preauthorize vary in amount from month to month, how will I know how much will be transferred out of my account?

A. You have the right to be notified of all varying payments at least 10 days in advance. Or you may choose to specify a range of amounts and to be told only when a transfer falls outside that range. You may also choose to be told only when a transfer differs by a certain amount from the previous payment to the same company.

Q. Do the EFT Act protections apply to all preauthorized plans?

A. No. They do not apply to automatic transfers from your account to the institution that holds your account or vice versa. For example, they do not apply to automatic payments made on a mortgage held by the financial institution where you have your EFT account. The EFT Act also does not apply to automatic transfers among your accounts at one financial institution.
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