Dealers might fall under Federal Reserve Boards Regulation E consumer rules

Dealers might fall under Federal Reserve Boards Regulation E consumer rules

Though most auto dealers likely do not engage in activities covered by Regulation E, which governs activities related to electronic fund transfers, the Federal Reserve Board has identified some practices it thinks dealers could potentially engage in and is looking to see if these will be subject to the regulations. These practices include:

Issuing access devices (e.g., debit cards, personal identification numbers [PINS], payroll cards);

Issuing or selling gift cards;

Initiating electronic check conversions;

Preauthorizing electronic fund transfers; or

Operating ATMs.

Generally speaking, Regulation E applies to financial institutions, like banks, that hold consumer asset accounts (e.g., checking or savings accounts). Financial institutions can also be defined, however, as a person or business that issues a device a consumer can use to access an account (i.e., payroll card) or holds a payroll account itself. In addition, certain provisions of Regulation E apply directly to any person that engages in certain activities or transactions, regardless of whether the person is a financial institution. Examples of such transactions include:

selling gift cards

converting check payment to an electronic fund transfer; and

pre-authorized electronic fund transfers.

Regulation E mandates the disclosure of terms and conditions of an electronic fund transfer service; documentation of such services by means of terminal receipts and periodic statements; limitations on consumer liability for unauthorized transfers; procedures for error resolution; certain rights related to preauthorized electronic fund transfers; restrictions on the unsolicited issuance of access devices; and record retention requirements.

Among the questions the FED is looking into as it relates to dealer activities are:

Do auto dealers have ATMs on their premises?

Do they lease space to third parties that operate the ATM, or are dealers ATM operators?

Do auto dealers issue any access devices (e.g., a debit card or PIN) that consumers can use to access an account (i.e., checking or savings accounts), at an ATM, or use at a point of sale?

Under Regulation E, most payroll cards are considered access devices. Payroll cards work similarly to debit cards, and can be used to take money out of an ATM or used at the point of sale. Regulation E applies to any person who issues payroll cards to consumers and agrees to provide electronic fund transfer (EFT) services. Regulation E also applies if an employer holds payroll card accounts. For example, it is possible that auto dealers of sufficient size could decide to offer payroll card accounts to its employees and as a result, fall within the definition of a financial institution by virtue of holding the payroll account.

Do auto dealers offer or issue payroll cards?

Do auto dealers hold payroll accounts?

Do auto dealers offer gift cards, or loyalty award certificates, or promotional cards?

Do auto dealers sell gift cards or certificates on their premises?

An auto dealer that issues or sells a gift card would become subject to certain disclosure requirements and possibly restrictions on the card that it issues or sells.

Do auto dealers convert consumer checks into electronic fund transfers to receive payment more quickly?

Do auto dealers collect returned item fees by electronic fund transfers if, for example, a consumers check is unpaid due to insufficient funds?

Do auto dealers offer their consumers the ability to pre-authorize transfers out of the consumers account (i.e., authorization to permit a re occurring debit to an account)?

A merchant that uses electronic check conversion, collects returned item fees electronically, or offers pre-authorized transfers from a consumers account must obtain the consumers prior authorization and make certain disclosures.

It is unclear at the moment if anything will come of the FEDs investigation. Stay tuned!