THE LAW OF ELECTRONIC
`
`FUNDS TRANSFER
`
`by
`
`ROBERT C. ZIMMER
`
`and
`
`THERESA A. EINHORN
`
`VOLUME I
`
`Card Services, Inc.
`2100 Pennsylvania Avenue, N.W.
`Suite 600
`Washington , D.C. 20037
`
`eBay et al., Ex.1007, p.1
`
`

`
`Copyright © 1978, Card Services, Inc.
`
`2100 Pennsylvania Ave. , N.W.
`Suite 600
`Washington, D.C. 20037
`
`All Rights Reserved
`
`No part of this publication may be
`reproduced in any form without permission
`from Card Services, Inc.
`
`,
`
`Library of Congress Catalogue No. 79-116476
`
`ABOUT THE AUTHORS
`
`Robert C. Zimmer and Theresa A. Einhorn are lawyers who specialize in financial
`institution, commercial, corporate and antitrust law. In addition to The Law of
`Electronic Funds Transfer, Mr. Zimmer and Ms. Einhorn have publihed several
`articles regarding the financial services industry, in both legal and trade publications.
`They periodically address financial industry lawyers and execu.t.~..-various
`subjects affecting both providers and consumers of financial services.
`
`eBay et al., Ex.1007, p.2
`
`

`
`AUTHORITY OF PROVIDERS
`
`The Comptroller's EFTS Security Guidelines suggested specific procedures designed
`to protect against fraud, including tampering with messages between terminals and
`central computer systems, unauthorized initiations of terminal transactions, fraud
`in connection with distribution of debit cards, unauthorized access to information
`and account funds by bank employees, and loss of A TM funds through burglary.
`The Guidelines warned national banks that security safeguards and operator
`procedures in terminal-based EFT systems would be reviewed during bank
`examination, and where evidence of "imprudent procedures" was disclosed,
`"corrective action would be initiated." 1 s The Comptroller's EFTS Consumer
`Guidelines, as well as the Federal Reserve Board's regulations governing consumer
`rights and liabilities in EFT transactions, are discussed in Chapter 5, Consumer
`Rights and Liabilities, infra.
`
`The Office of the Comptroller of the Currency withdrew its 1976 EFTS Guidelines,
`in view of the fact that national banks' EFT services are subject to the comprehen(cid:173)
`sive provisions of the federal EFT Act (12 U.S.C. §§ 1693-1693r) and the .Federal
`Reserve Board's Regulation E (1 2 C.F.R. Part 205). ' 6
`
`b. Data Processing Services
`
`The offering of EFT services has been accompanied by an expansion in the range of
`national banks' computer operations, and questions have been raised as to the extent
`to which the National Bank Act permits a national bank to provide data processing
`services for others. The controlling question is whether data processing activities(cid:173)
`such as marketing excess computer time or using POS terminals and related equip(cid:173)
`ment to provide information services for the merchant-constitute "incidental
`powers as shall be necessary to carry on the business of banking" under the National
`Bank Act. ''
`
`In 1984, the Office of the Comptroller of the Currency, in a revision of its 1974 rul(cid:173)
`ing on data processing addressed the issue of a national banks' power to offer data
`processing services. ' 8 The new ruling provides that a national bank may use data pro(cid:173)
`cessing equipment and technology to perform for itself and others all services ex(cid:173)
`pressly or incidentally authorized under the laws applicable to national banks. 'q The
`ruling sets forth the Comptroller's opinion that, in general, data processing is a
`technology rather than a service distinct or different from the underlying services to
`which it is being applied. 20 Thus, if the underlying service being provided by the bank
`
`1Comptroller of the Currency, EFTS Guidelines, supra at 17.
`
`'
`
`60ffice of the Comptroller of the Currency, Banking Bulletin No. BB-80-23 (Aug. 15, 1980).
`
`'
`
`" 12 U.S.C. § 24, Seventh.
`
`;'12 C.F.R. § 7.3500.49 Fed. Reg. 111 58 (March 26, 1984).
`
`1949 Fed. Reg . I 1158.
`
`20fd.
`
`6
`
`eBay et al., Ex.1007, p.3
`
`

`
`CONSUMER RIGHTS AND LIABILITIES
`
`Telephone transfers are deemed to be electronic funds transfers only if they occur
`under a written plan or agreement between the consumer and the financial
`instit ution.l9
`
`The following transactions are excluded from the Act's definition of an electronic
`fu nd transfer:
`
`•
`
`•
`
`•
`
`•
`
`•
`
`check guarantee or authorization "which does not directly result
`in a debit or credit to a consumer's account; " 20
`any wire transfer of funds through the Federal Reserve Com(cid:173)
`munications System or similar network used primarily for
`transfers between financia l institutions or between businesses;
`aut omatic transfe rs from a savi ngs account to a demand deposit
`account to cover an overdraft or to maintain an agreed upon
`minimum account balance;21
`transfers initiated by a telephone conversation between a con(cid:173)
`sumer and a financial institution employee, if the transfer is not
`made pursuant to a telephone bill-paying or other prearranged ...
`plan under which period ic or recurring transfers are contem(cid:173)
`plated;21"
`
`any transfer the primary purpose of which is the purchase or sale
`of securities or com modities regulated by the Securities and
`Exchange Commission or the Commodity Futures Trading
`Commission. 2~
`
`19Reg. E. Commentary Q.'s 3-14 through 3-19.
`
`20 Under the Federal Reserve Board's interpretation of the Act . "memo-posting" or putting a
`hold on the consumer's funds in the amount of the guaranteed or authorized check does not
`.. directly result in a debit .. to t he account. and thus. check guarantee/ authorizat ion services
`using such holds are exempt from the Act. ReJ?. E Commentary Q. 3-1.
`
`~ 1 Federal Reserve and F DIC regulations specifically permit s uch automatic transfers from
`savings to checking. 12 C.F. R . §§ 217.5(c)(2) ( Regulation Q): 329.5(c)(2).
`21"ln Kashanchi 1'. Texas Commercial Medical Bank. N.A .. No. 82-2242 (5th Cir. May 2. 1983).
`the court confirmed that the EFT Act does not govern a transfer of funds from a consumer's
`account that is initiated by a phone conversation (even if unauthorized) between a
`.. consumer" and an employee of the financial institution. unless the transfer was made
`purs uant to a prearranged plan under which periodic transfers are contemplated . In
`Ka.thanchi the Plaintiff alleged that a transfe r from her account was instituted by a telephone
`conversation between a bank employee and an unauthorized third party. and argued that the
`transfer was an unauthorized transfer covered by§ 909 of the EFT Act. which would limit her
`loss to $50 (see pp. 68-C to 68-H. infra). She argued that telephone transfers were excluded
`from EFT Act coverage only when the "consumer" was the actual account holder from wh ose
`account the funds were transferred. The court rejected this argument and ruled that it was
`clear from the plain language of the Act that "consumer" was intended to cover all natural
`per~ons. not just specific accountholders.
`
`:~EFT Act § 903(6): 12 C. F .R . § 205.3. T he Federal Reserve Board has explained that under
`arrangements by which a co n~umer uses a debit card to purchase good s or services and funds
`are automatically transferred by a broker from a money market fund to the card issuer for
`payment. the transfer would not be exempt since its primary purpose was not the purchase or
`sale of securities. Reg. E Commentary Q . 3-3.5.
`
`54
`
`eBay et al., Ex.1007, p.4
`
`

`
`CONSUMER RIGHTS AND LIABILITIES
`
`•
`
`•
`
`•
`
`correspondent bank. which sends a computer print-out listing the
`payees and the payment amounts. together with a composite
`check payable to the financial institution. These transfers are
`subject to the Act because they are init iated by electronic means.
`(Q.2- 18)
`
`A creditor obtains authorization from consumers to debit their
`accounts periodically. and the financial institution debits the
`consumers' accounts in accordance with billing information
`contained on magnetic tape provided by the payee. and sends the
`payee a composite check.-T hese tr-ansfers are subject to the Act.
`because they are initiated by electronic means. (Q. 2- 19)
`A consu mer authorizes a company to debit an account auto(cid:173)
`matically for a payment. and the company presents a paper draft
`that ultimately is debited against the consumer's account at the
`financial insti tut io n.-The tra nsfer is not su bject to the Act.
`because it is init iated by a paper draft. It would be an electronic
`fund transfer subject to the Act. however. if the trans fer were via
`an ACH. (Q. 2-20)
`A consumer authorizes the financial institution to make recurring
`payments to another party from the consumer's account. or to
`make recurring interest payments to the consumer. and the
`institution periodically generates an individual check to the payee
`by computer.-No "electronic fu nd transfer" is involved. because
`the transfers· are initiated by check (even though the check is
`• computer-generated). (Q. 2-21)
`
`In some cases. significant operational difficulties have arisen from the application of
`the EFT Act and Reg. E to certain types of transactions. For example. the Federal
`Reserve Board found it necessary to grant a special exempt ion from the Act's receipt
`requirement fo r home banking services.14 Section 906 of the EFT Act requires that a
`receipt be made avai lable to the consumer for all transfers initiated at an electronic
`terminal. Although the Act exempts telephones from the definition of a "terminal. "
`no similar exemption was made by Congress for home terminals.
`
`The receipt requirement threatened to render even experimental hop1e banking
`services prohibitive iy expensive. and would have required that a printet' be placed in
`the consumer's home. T he Federal Reserve Board staff. recognizing this problem.
`granted a limited exemptio n for home banking terminals under the EFT Act and
`Reg. E. The Board's staff explains in its official Reg. E commentary that home
`terminals are analogous to telephones in function. and therefore should be given a
`si mi lar exemption. The relevant portion .of the staff commentary provides as follo ws:
`
`2-23 Q:- Home termina ls. Some fina ncial instit utions offer home
`banking services to their customers. The service will typically involve the
`use. for example. of a home computer terminal or a television set that is
`! 4 Reg. E Commentary Q. 2-23.
`
`© 1988, Card Services. Inc.
`(10/ 88]
`
`57
`
`eBay et al., Ex.1007, p.5
`
`

`
`CONSUMER RIGHTS AND LIABILITIES
`
`provided by a third party (other than the financial institution). This bexception would .
`apply. for example. to preauthorized payments through an ACH .J9
`
`D isclosure must be made in a ·•readily understandable'' written statement which the
`customer can retain. There are no requirements as to type size. number of pages. or
`relative conspicuousness of terms. However. disclosures must include the following:
`
`( l)
`
`(2)
`
`a summary of the .consumer's liability. under the EFT Act and
`Reg. E. for unauthorized electronic fund transfers:
`
`the telephone number and address of the person or office to be
`notified ~hen the consumer believes an unauthorized transfer has
`(or may have) been made;
`
`(3) which days are the financial institut ion's .. business days: "30
`
`(4)
`
`(5)
`
`(6)
`
`(7)
`
`(8)
`
`(9)
`
`the type of transfers that the consumer may make.JOa including
`any limitations on the frequency and dollar amounts of transfers
`(however. details of the limitations need not be disclosed if
`confidential ity is essential to maintain the security of the EFT
`system);
`
`any charges imposed on transfers (even if the per-item charge for
`an electronic t ransfer is t he same as for non-electronic transfers:
`however. does not include stop payment / overdraft/ dishonor or
`similar charges);30b
`
`a summary of the consumer's right to receive documentation of
`transfers;
`
`a summary of the consumer's right to stop payment of a pre(cid:173)
`authorized transfer. and the procedure for initiating a stop(cid:173)
`payment order:
`
`a summary of the financial institution's liabil ity to the consumer
`for its errors and system malfunction under§ 9 to of the EFT Act:
`
`the circumsta nces under which the financial institution. "i n the
`o rdinary course of business." will disclose information to third
`parties (including holding company subsid iaries) concerning the
`consumer's account:
`
`b
`19 Reg. E. Commentary Q. 7-1.
`
`30The definition of .. business day" is relevant. for example. in computing the period of time
`within which the consumer must report loss of his debit card or irregularities in his periodic
`statement. See discussion infra. "liability fo r Unauthorized T ransfers.·· See 12 C.F.R. §
`205.2(d) and Reg. E Commentary Q's 2-6 through 2-9 for the definition of "business day.··
`301 Preauthorized transfers may. but need not. be included. Reg. E. C ommentary Q. 7- 10.
`
`JobJf the account-holding institution belongs to a shared ATM system to which it pays a
`per-t ransaction or similar fee. it must disclose to the customer any fees that it will pass-onto
`the customer. but need not disclose any fees that will be imposed directly on the customer by
`the system or another institution panicipating in the system. Reg. E Commentary Q. 7-15.5.
`
`60
`
`eBay et al., Ex.1007, p.6
`
`

`
`CONSUMER RIGHTS AND LIABILITIES
`
`Similar problems may also arise if the Act is interpreted so as to make receipts giYen
`for cash deposits at an automated teller machine prima facie proof of the amount of
`the deposit. If the ATM deposit is considered to be a transfer to the financial
`institution. the consumer. in a dispute with the financial institution over the amount
`of cash deposited with the ATM. would be able to rely upon the machine-printed
`receipt he received at the time of the deposit. The financial institution. however.
`would not be able to verify the amount actually deposited until funds are collected
`from the machine. The Federal Reserve Board staff has attempted to clarify this
`issue. and the Reg. Commentary provides that Section 906(f) of the EFT Act does
`not apply to receipts given for deposits made at electronic terminals. The
`Commentary explains that in such cases, it does not believe that a "payment" is being
`made to another person within the meaning of Section 906(f). However. the
`Commentary does apply Section 906(f) to payments. such as loan payments. made to
`the account-holding institution. 01
`
`The National Commission on EFT recognized the difficulties created by conferring
`special evidentiary status on all receipts, and concluded that the consumer's need for
`adequate proof of payment would be satisfied by making only periodic statements
`primafacie proof of payment. The Commission also specifically recommended that
`no special status be given to receipts received for cash deposits at an automated teller
`machine. 62
`
`Although there have been no judicial decisions in which the evidentiary rules set
`forth in the EFT Act have been applied, one court-in a case decided prior to the
`effective date of EFT Act provisions governing terminal receipts-gave heavy weight
`to documentation produced by the bank. The Superior Court of the District of
`Columbia rejected a consumer's claim· that she deposited $60.00 in cash at an
`automatic teller machine. The Court explained that the bank had produced "an
`impressive array of documentation'' to demonstrate that the bank had never re.ceived
`the $60.00 deposit and that the machine was in working order at the time. The Court
`also noted that the most probable explanation was that the consumer did not
`properly insert the envelope containing the cash into the ATM. the consumer failed
`to notice that the machine had rejected the envelope. and the envelope fell to the
`ground unobserved.o3
`
`Preauthorized transfers
`
`"?reauthorized transfers" are defined by the EFT Act and Reg. E to include transfers
`authorized in advance to recur at substantially regular intervals. 64 For example. a
`
`61 Reg. E Commentary Q.'s 9-14 and 9-43.
`
`62 NCEFT Final Report at 49. 61. The Commission pointed out that the types and sources of
`some receipts ·•could render their validity 4uestionable." !d. at 49.
`63 Proctor v. Nat'/ Savin~s & Trust Cu .. SC No. 775-80 (Super. Ct. D.C .. unpublished order
`dated Jan. 29, 1980).
`
`64EFT Act§ 903(9); 12 C.F.R. § 205.2(j).
`
`67-A
`
`eBay et al., Ex.1007, p.7
`
`

`
`CONSUMER RIGHTS AND LIABILITIES
`
`consumer may authorize direct depos its of payroll. diYidends. and social security
`benefits to his account and may arrange for payments to be made automatically and
`directly from his account. ?reauthorized payments may be in fixed amounts. such as
`mortgage payments and insurance premiums. or may vary in amount. such as utility
`bills and payments to merchants or credit card issuers. Once ini tial authorization is
`received from the consumer. these payments to or from his account are made
`automatically without further instruction from hi m.
`
`In addition to preauthorizing transfers. a consumer may be able to arrange. from
`ti me to time. to have a transfer made from (or to) his account by electronic means.
`For example. in telephone bill-paying services. the consumer inst ructs the fi nancial
`institution to make each payment. using a prearranged system such as a home
`touch-telephone connection with the financial institution's computer or verbal
`communication with a financial instit ution's employee. Although in such a case the
`procedure to initiate payment is prearranged. the payments are not "preauthorized
`transfers" withi n the meaning of the EFT Act and Reg. E. because each individual
`transfer requires instruction from the consumer.
`
`The EFT Act contains three requirements specifically directed toward preauthorized
`electronic fund transfers as defined by the Act. A financial instituti on must notify the
`consumer in some cases whether a preauthorized debit or credit has been or will be
`made: consumers are given the right to stop payment of preauthorized transfers from
`their accounts. and preauthorized payments from a consumer's account are
`permitted only if authorized in writing by the consumer.6s
`
`Preauthori::ed Transfers
`From A Consumer's Account
`
`?reauthorized transfers from a consumer's account may be authorized by the
`consumer only in writing: and a copy of the authorization must be given to the
`consumer. If the consumer arranges by telephone for a preauthorized transfer from
`his account. the financial institution will be in compliance with the written
`authorization requirement if it subsequently sends the consumer an authorization
`form for his signature and allows the consumer to retain one copy of the form and
`return another copy to the inst itut ion.os"
`An authorization will suffice as lo~g as it states that the institution or payee may
`debit the consumer's account. even though it does not specifically state that
`such debiting will be done by electronic means. If a consumer authorizes a third
`party such as an insurance company to initiate transfers from his account. the
`financial institution would bear no liability under the EFT Act for failure to obtain a
`written authorization and / or give it to the consumer. according to the Reg. E
`Commentary.66 The inst itution. however. must co nsult the customer-institution
`contract and other law governing authority to debit its customer's accounts.
`
`"EFT Act §§ 906(b), 907; 12 C.F.R. § 205.10; E. Commentary Q.'s 10-1 through 10·21.
`65~Reg. E Commentary Q. 10-18.5.
`oo EFT Act§ 907(b).
`
`© 1988, Card Services, Inc.
`[ 10/88)
`
`67-B
`
`eBay et al., Ex.1007, p.8