I. INTRODUCTION
On May 6, 2004, the Office of Comptroller of the Currency (OCC) issued an advisory letter (AL 2004-6) regarding regulatory expectations for payroll card systems which a number of financial institutions are offering in addition to other pre-paid payment services. While the OCC acknowledges that payroll card systems provide benefits to consumers, the agency also recognizes that such systems may also present significant consumer risks, and therefore, a national bank should addressseveral issues before offering payroll card products.
“Unsettled” regulatory issues include when FDIC deposit insurance is available to cardholders, whether Regulation E applies, whether § 326 of the Patriot Act (verification of new customers) applies and whetherRegulation CC (Availability of Funds) applies. Another issue involves nonbank firms offering a payroll card product that require bank participants to gain access to the payments systems (e.g., should a nonbank become insolvent, an increased risk to its cardholders and the financial institution would be present).
II. OCC GUIDANCE
Awaiting further regulatory guidance on the application of laws and regulations to payroll card systems, a financial institution may decide to comply with the substance of laws and regulations that may be applicable in order to protect itself against reputation and compliance risks by addressing the follow issues that may accompany establishment of payroll card systems:
Financial institutions are also urged to follow the OCC’s “Guidance on Unfair and Deceptive Acts or Practices” (AL 2002-3; March 22, 2002) in that the consequences of engaging in practices that are unfair or deceptive may include litigation, agency enforcement actions and harm to the institution’s reputation. Banks engaged in payroll systems involving nonbank third parties also should fully comply with the OCC Bulletin 2001-47 (Nov. 1, 2001) guidance on third-party relationships in their payroll card systems.
III. COVERAGE UNDER REGULATION E
A. Introduction
The Federal Reserve Board has issued an interim final rule that adopts requirements for payroll cards. The regulation covers payroll card accounts established for the purpose of providing salary, wages, or other employee compensation on a recurring basis. Institutions that provide payroll cards will be required to provide periodic statements and new account opening disclosures to payroll card holders. Compliance with the Regulation E payroll card provisions became mandatory on July 1, 2007.
B. Application of Regulation E Requirements
Payroll cards will be subject to Regulation E if a payroll account is operated or managed by the employer, a third-party payroll processor, or a depository institution. In addition, the regulation will apply regardless of whether the funds are held in individual employee accounts or in a pooled account with some form of “subaccounting” maintained by the institution or a third-party processor. Regulation E will not apply to gift cards or other stored value cards that are not payroll cards.
1. Periodic Statements
The interim final rule requires financial institutions to provide periodic statements to payroll card holders, but is flexible in allowing institutions to provide cardholders with a traditional periodic statement or to (a) provide account balance information via a local or toll-free telephone line; (b) make available to the consumer an electronic list of account transactions (e.g., via a Website); or (c) provide a 60-day written history upon the consumer’s oral or written request.
2. Initial Disclosures
Institutions that do not provide traditional periodic statements must provide cardholders with additional disclosures. Such disclosures must explain the consumer’s right to obtain a written history of account transactions upon request, including a telephone number to call to request an account history. Initial disclosures must describe the error resolution rights associated with payroll cards. In addition, financial institutions must provide an annual notice describing error-resolution rights.
The Federal Reserve Board has provided model language to help institutions meet the disclosure requirement. Institutions using the model language will be protected from liability by a safe harbor as long the language accurately reflects the institution’s electronic funds transfer services.
3. Limitations on Liability
The interim final rule addresses the limitations on liability and error resolution procedures for institutions that elect not to provide paper periodic statements. The rule establishes two potential triggers for beginning the 60-day period that limits an institution’s liability for unauthorized electronic funds transfers.
The triggers depend on when and how the consumer has obtained a history of account transactions. If the consumer requested a written history of account transactions, the 60-day period begins on the date the institution sends the written account history. If transaction information is obtained by the consumer electronically, the 60-day period begins on the date the account is electronically accessed by the consumer. A consumer is not deemed to have electronically accessed an account simply by visiting an Internet site where account information can be retrieved. Rather, electronic access begins once a consumer enters a user identification code or password or otherwise complies with a security procedure that issues to verify the consumer’s identity.