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Consumers' Rights under the U.S. Electronic Fund Transfers Act

By Martha L. Arias

Even though it is difficult to believe it nowadays, especially under the current mortgage crisis, U.S. consumers have rights under the Electronic Fund Transfers Act- EFTA.  Title 15 of the United States Code (U.S.C.S) is the basic framework for consumer protection in the electronic fund transfers system. EFTA establishes the rights, liabilities, and responsibilities of the electronic fund transfer participants, e.i., banks, consumers, financial institutions, etc.  The U.S. Congress in its declaration of purpose, 15 U.S.C.S. § 1693, acknowledged that while EFT provided great benefits for consumers, consumer rights and liabilities required clarification.  This article concentrates, in particular, on consumers' rights under the EFTA error resolution process and the electronic malfunction rules. 

The Error Resolution process is established in 15 U.S.C.S § 1693f.  For the purposes of this section, seven errors are considered: (1) unauthorized electronic fund transfer; (2) incorrect electronic fund transfer from or to the consumer's account; (3) the omission from a periodic statement of an electronic fund transfer affecting the consumer"s account which should have been included; (4) a computational error by the financial institution; (5) the consumer's receipt of an incorrect amount of money from an electronic terminal; (6) a consumer's request for additional information or clarification concerning an electronic fund transfer or any documentation required by this subchapter; or (7) any other error described in regulations of the Board.  Error reports may be made orally or in writing.  However, financial institutions may require that report to be in writing, sent within the following 10 business days from the oral notification. Consumer must be aware that if the financial institution requires this writing report, consumers ought to submit it within the 10 statutory days; otherwise, consumers' account will not be re-credited. The financial institution has 10 business days to investigate and solve the error reported by consumers.  Once, the financial institution acknowledges that an error occurred, it must correct it, including re-crediting the respective account, in no more than 1 business day.  Also, in the alternative, financial institutions may re-credit consumer's accounts, including interests, within the following 10 business days from the consumer error notification.  In this event, they have 45 days to investigate and conclude their error process. 

According to U.S.C.S § 1693m, consumers may file individual or class actions against financial institutions that violate consumers' rights under U.S.C. title 15.  Additionally, consumers may recover treble damages if the court finds that (1) the financial institution did not make a good faith investigation of the alleged error; (2) the financial institution did not re-credit consumers' account within the 10 day period; (3) the financial institution knowingly and willfully concluded that the consumers' account was not in error, in willful disregard of the evidence available at the time of the investigation. 

Consumers have rights in case of Electronic Malfunction when conducting electronic fund transfers.  15 U.S.C.S § 1693j states that when a financial institution has agreed to receive payments electronically and the electronic system malfunctions preventing the consumers' fund transfer, the consumer obligation is suspended until the malfunction is corrected and the electronic fund transfer may be completed; unless, the financial institution notifies in writing that payment is expected by means other than electronic transfer. 

Household Fin. Realty Corp. of NY v. Dunlap is a good example of how the New York Supreme Court interpreted the error resolution process and electronic malfunction in mortgages payments.  In this case, plaintiff mortgagee brought a mortgage foreclosure action against defendant mortgagor.  Plaintiff alleged defendant missed six mortgage payments and invoked the acceleration mortgage clause.  Defendant was making his payments through electronic transfers, and had notified plaintiff of the funds being still available in defendant's bank account.  Also, defendant proved that he notified the mortgagee of this error and mortgagee ignored his notifications and took no action to correct them (maybe calls were received by an outsourcing calling center far from the U.S?). Under the EFTA, mortgagor's obligation was suspended due to electronic malfunction and the mortgagee's obligation to fix it.  Also, mortgagee was required to notify mortgagor of the need of payment by other means different than electronic payments.  Yet, this notification did not occur.  Mortgagee argued the "mortgage acceleration" clause constituted such notification under the EFTA.  The NY Supreme Court rejected this argument.  It held that the mortgage acceleration clause did not amount to the required notification under 15 U.S.C.S § 1693f.  Indeed, "since plaintiff's acceleration notice did not constitute such a demand, there was no basis for the acceleration of the mortgage." 

The NY Supreme Court stated that the EFTA purpose was to "assure that mortgages, insurance policies, and other important obligations are not declared in default due to late payment caused by a system breakdown," quoting to Senate Rep No. 95-915, 95th Cong, 2d Sess, at 16, reprinted in 1978 US Code Cong & Admin News, at 9418. 

It is astonishing to see how a financial institution's failure to follow a simple error resolution process for electronic fund transfers lead to a chaotic situation for a homeowner.  The consumer and homeowner in this case, not only suffered the emotional burden of almost losing his house, but he was also required to invest time and money in defending his rights, all the way up to the Supreme Court of New York! 

This is a great example of the seriousness of the communication problems between financial institutions and consumers. Must financial institutions outsource their customer service calls and we, consumers, are not aware who is really answering those calls and whether appropriate training is given to handle what it seems a simple call but it is really the beginning of a statutory corrective process.  

Full post as published by IBLS Internet Law Blog on November 12, 2008 (boomark / email).