VIDEO: Reg E Provisional Credit Violations

In this Compliance Clip (video), Adam discusses provisional credit under Regulation E and highlights common error resolution issues identified by Federal Reserve examiners. He explores what financial institutions need to consider when an investigation extends beyond the initial timeframe and when provisional credit is provided to consumers.

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Video Transcript

The following is a transcript of this video.

This Compliance Clip is going to talk about provisional credit and some common violations related to provisional credit. This, of course, is a Reg E topic.

What we have is that the Federal Reserve recently issued its current version of the Consumer Compliance Outlook. And in there, they listed a number of top Regulation E error resolution requirements violations. And so I saw this, and I thought this would be good to include as a Compliance Clip.

Examiners cited financial institutions for violating 1005.11(c)(2)(i) of Regulation E, which requires a financial institution to provide provisional credit for the amount of the alleged error within 10 business days of receiving an error notice if the institution could not complete its investigation within 10 business days. Now, examiners also cited institutions that provisionally credit accounts but failed to provide consumers with full access and use of the funds during the investigation.

Regulation E has some procedures for resolving errors, and so the way this works is consumers have rights under Regulation E. Regulation E is very consumer-friendly. And if they suspect that there's been fraud on their account related to an electronic funds transfer that's determined to be an error, they're allowed to submit a dispute. And in submitting that dispute, financial institutions have a lot of complicated requirements.

For example, they have 10 days to complete an investigation, but if they can't complete the investigation, they have to provide provisional credit. They can extend that investigation up to 45 days or 90 days, depending on the type of transaction. Once they resolve it, they have to send notice to the customer, let the customer know it's been resolved. They have to provide notices, sometimes within two days, sometimes within three. Some requirements are calendar days, others are business days, and it's actually a pretty complicated process for financial institutions to manage.

And the reason that I'm bringing this up is one of the complicated pieces that financial institutions have missed, and the Federal Reserve is pointing out that they're still missing this. This has been a traditional concern over the decades, but we're still seeing issues related to this. That some financial institutions are not providing provisional credit for the amount of the alleged error within 10 business days of receiving an error if the institution could not complete its investigation within 10 business days.

So, the way this works is when a consumer provides a dispute, that's a dispute of an error, which an error is defined as a number of things in Regulation E, and we don't have time to get into that, but it's basically a potentially fraudulent transaction on an electronic funds transfer. If they present an error, the financial institution must promptly investigate the error. And that ipromptly investigate, whether it's verbally or in writing, they must promptly investigate the error. And they have 10 days to resolve this error and to resolve this dispute and complete their investigation.

Now, sometimes it can be completed within 10 days. Other times, they need more time. And if they need more time, what the financial institution has to do is they can extend it to 45 or 90 days, depending on the type of transaction. Now, they don't have to provide provisional credit if they've disclosed it properly, told the customer they have to provide something in writing at the 10 business day mark, and the customer does not provide it, a financial institution doesn't have to give provisional credit in that specific case. But that's pretty rare. So you would have to have disclosed it properly and told the customer that you need it in writing. If they don't give it to you in writing, then you don't have to give provisional credit.

However, what you do have to do is start your investigation promptly. And if they give it to you in writing, or you didn't disclose it or tell them, then you have to give them provisional credit to extend your investigation beyond the 10 business days. So, if you're going to extend it beyond the 10 business days to 45 or 90 days, depending on the type of transaction, then you have to give this provisional credit.

What is provisional credit? Provisional credit is basically the amount of the dispute that the customer can use during your investigation because they're allowed to use these funds like they're theirs, like it's their own, so that they can continue to conduct their financial business while you're taking a long time to resolve the error. And so, if you've extended it beyond 10 business days, you have to give this provisional credit.

Now, some financial institutions have not given that provisional credit. They have said, “Look, we just don't want to give it to you, or we take longer than 10 days because of whatever reason.” Again, the only reason you cannot get provisional credit is if you've disclosed that they have to give it to you in writing. If you've told them they have to give it to you in writing, and then they don't give it to you in writing, then you wouldn't have to get provisional credit

Personally, I don't like to do that because when we tell our staff, do this here, but not this here, but do this here and not this there, there are often errors. So, the way I like to manage things is to tell staff to do this every time. So, I like to manage it by saying, give provisional credit if we're going to extend our investigation beyond 10 business days. And so, this is a common error the Federal Reserve is pointing out.

And they also found institutions that are provisionally crediting accounts but not giving them full access. So they're giving them credit, but then putting a hold on the account and not allowing them to use the full amount. And that's a violation of Reg E because Reg E says that those funds must be available to them to process it.

Now, why did these errors happen in the financial institutions the Federal Reserve found?

Well, they said that financial institutions and third-party vendors that assist in this process lacked effective procedures and controls to ensure provisional credits were properly provided and made available to consumers.

As far as risk mitigation, the Federal Reserve tells us that compliance departments could meet with any vendors that are doing this and managing this process for you to review Regulation E requirements to ensure that when the system provides provisional credit, the consumer has full access to the funds.

So it seems to me that this is a common error now that's being related to when financial institutions are outsourcing the provisional credit process to a third party. So if you're outsourcing the provisional credit process of your error resolution disputes to a third party, make sure that they're following Regulation E because the examiners are finding that some third-party vendors are not doing what they're supposed to be doing.

Now, that's it for this Compliance Clip.