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Comptroller of the Currency
Administrator of National Banks

Washington, D. C. 20219

October 21, 1977

Dear Mr. Chairman:

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I am pleased to respond to your request for our comments on S. 2065, entitled Electronic Fund Transfer Consumer Protection Act, which is a proposed amendment to the Consumer Credit Protection Act. As you know I have been in office a relatively short time and have been involved in other pressing matters, so I have not been able to give full and thoughtful consideration to these complex issues. Moreover, it is the general view of the Administration that the adoption of legislation of this character is somewhat premature.

Financial institutions have been developing EFT systems and the state of the art continues to evolve rapidly. Recognizing that consumer interests should be protected in this environment, and in response to requests from national banks for guidance in these matters, the Comptroller's Office issued EFTS Guidelines in April, 1976, in the absence of legislation. These Guidelines, which are currently being revised in light of new developments and further understanding of the matter, are intended to provide guidance in the areas of consumer rights and security. The use of guidelines and other administrative actions by bank regulators provide a flexible tool to deal with a swiftly changing environment.

This Office is represented on the National Commission on Electronic Fund Transfers, but our views do not necessarily reflect those of the Commission. As you know, the EFT Commission was created by Congress to recommend appropriate administrative and legislative action in connection with the possible development of public or private electronic transfer systems. The effect that EFT will have on the consumer and what safeguards will be required in the development of EFT systems have been central concerns of the Commission and will be a major part of the Commission's final report.

The work of the Commission's Consumer Committee (on which my representative serves as Chairman) will address all the topics included in S. 2065, as well as other matters of consumer interest. In the Administration's view, Congress should have the benefit of the Commission's report and recommendations and the extensive public discussion that will undoubtedly ensue, before enacting legislation in this area.

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I believe it is desirable that legislation be enacted to establish the rights and responsibilities of consumers and the providers of services in EFT. However, since there will quite likely be a substantial body of federal statutory law enacted concerning EFT, it may be more desirable that consumer protection legislation in this area be made a title of separate EFT legislation, rather than part of the Consumer Credit Protection Act. Although there will be some credit implications in EFT, the analogy between debit cards and credit cards has been overdrawn. In EFT financial institutions will be acting primarily as financial intermediaries rather than extenders of credit. Most of the consumer protections afforded by S. 2065 are concerned with the consumer's rights as a user of new payment mechanism rather than as a borrower.

Section 805 would provide for clear and meaningful disclosures to be made to the consumer before usage of the account. The OCC supports these basic concepts. The bill provides that these disclosures be made semiannually. However, while this requirement is certain to increase operating costs, it is unlikely that the customer will be made any more aware of his rights and responsibilities than he was at the opening of the account, when the understanding of these terms is most important.

Section 806 is concerned with the documentation of transfers and would require a receipt or similar document with each electronic transfer. It is open to question whether a record of a transaction need be provided if it is initiated at a place other than the point of sale or other EFT terminal. For example, in telephone billpaying, the cost to the institution of providing a record of the transaction, a cost which will eventually be passed on to the consumer, may be an undue burden. If the consumer demand for such a receipt, in addition to regular monthly statements, is substantial, the marketplace will accommodate. A negative notice, such as provided for in Section 806 (c) for preauthorized credits, may provide satisfactory notice for certain debit transactions.

In this regard one point must be stressed. EFT promises considerable savings and increased consumer convenience. EFT systems are electronic information transmission and processing systems. As such, they promise to reduce societal costs of creating, handling, and storing paper documents. Moreover, it is generally agreed that the marketplace, in attempting to promote EFT payment services to the consuming public, will provide the necessary paper documentation.

I agree with the revocation provisions of preauthorized transfers contained in Section 807. However, I also believe that requiring an explicit written renewal semiannually will not only unnecessarily increase paperwork burdens, but will also possibly confuse or annoy the consumer and interrupt a service he desires if he is unable or inadvertantly fails to ratify a new agreement. think that an ongoing agreement subject to revocation would provide satisfactory protection.

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Section 808 concerns reversal of transfers and would provide the consumer with the right of reversibility of any electronic fund transfer within three business days after the transfer. If a reversibility feature is considered desirable, Congress should also consider an alternative means of accomplishing this goal; i.e., value dating, whereby a transaction does not become final until three days later.

However, in considering any proposal to legislate a right of stop payment or reversibility, Congress may wish to consider that one of the primary consumer advantages of point-of-sale debit transactions is the immediate acceptability of the debit card without any further type of credit or background check beyond simple computer verification. As a practical matter the advantages of an EFT system are dependent upon ground rules encouraging wide acceptance. Further, because EFT is intended to serve only as an alternative means of payment, the customer would retain the ability to use other means of payment which still carry the right to stop payment, such as a check. Recognizing the pros and cons of each side of this issue, on balance, I think the wiser approach is to treat debit transactions in a fashion similar to cash transactions in this initial legislative phase.

Section 809 would provide for error resolution procedures and is of vital concern, for it addresses one of the primary concerns the public has in its acceptance of EFT. Therefore, I endorse the basic procedures which this section establishes. I appreciate the difficulty in determining appropriate time periods for error resolution. Institutions may have operational difficulties in resolving such matters within three days, especially when transactions have occurred through other institutions. On the other hand, a customer who has been deprived of funds because of an institution's error should have those funds restored within as short a time as possible. Perhaps there could be an additional provision that funds be returned to the customer's account but that pending further investigation the institution may establish that there was no error in the original transaction.

Section 810 would establish a maximum cardholder liability of $25 resulting from the unauthorized use of EFT cards. Liability for unauthorized use is one of the most controversial issues associated with EFT. Those who support the concept of a predetermined dollar limit on liability see an overriding benefit in establishing a clear understanding between the parties at the outset as to the customer's maximum exposure irrespective of any negligence. On the other side are those who believe that a customer who was not negligent should bear no liability whatsoever for unauthorized use, but should bear responsibility for clearly defined negligent acts. Both sides make persuasive and equitable arguments. In fact, as you know, there is no clear consensus among consumer groups or financial institutions as to which method provides the greater consumer protection.

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I generally agree with the provisions of Section 811 concerning the liability of financial institutions. As long as there are certain risks associated with EFT, financial institutions are in a better position to assume these risks than are consumers. Section 812 raises a basic question concerning the marketability of debit cards. I would suggest that an unsolicited distribution of debit cards can be developed without exposing the consumer to any liability. Card issuers would be able to distribute either unsolicited authorization codes or unsolicited debit cards (but not both), provided that the customer is not liable in any way until he accepts the card as would be the case under Section 810. Each distribution should be accompanied by a full disclosure of the recipient's rights and liabilities and a contract for the recipient to sign indicating his acceptance of the card. After the card issuer receives the cardholder's signed contract, it could then send the customer the missing element needed to gain access to the account. The card issuer would bear all liability for any loss attributable to unauthorized use prior to the date the contract was signed.

The Comptroller's EFTS Guidelines also establish certain security provisions regarding the physical distribution of debit cards. Our reasoning parallels that underlying the recommendation of the Federal Reserve Board in its 1976 Annual Report to Congress on Truth in Lending that Congress reconsider the statutory prohibition against unsolicited credit cards. According to the Board, such a prohibition poses "marketing hurdles that have hindered the entry of new competition into the credit card field." As with section 811, sections 813 and 814 would provide consumers with significant protections concerning suspended obligations and compulsory use of EFTS. I agree that these provisions of the bill are in the consumer's best interest.

Section 815 concerns exemptions of wages from attachment and represents an innovative solution to a complicated problem. However, as a practical matter such a protection should be extended to all consumer deposits and not just EFT deposits. Not only would it probably be operationally difficult for financial institutions to distinguish between EFT deposits and other deposits, but this is a protection that should be afforded all deposit customers. Therefore it would appear more desirable to amend the garnishment provisions of the Consumer Credit Protection Act contained in 15 U.S.C. 1671, et seq.

Section 816 would attempt to provide consumer safeguards in the areas of privacy and security by holding institutions to a fiduciary duty. Fiduciary standards are generally applied in the laws relating to trusts and often have an imprecise definition. These standards sometimes conflict with existing commercial

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practices. I would suggest that the bill include specific measures that prescribe permissible and prohibited activities by financial institutions regarding privacy and security of

customer accounts.

I address my final comments to sections 822 and 823 which deal with state laws and state regulation. EFT systems are expected to be operating regionally and nationally. In any event, they do and will continue to operate without regard to state boundaries, particularly in metropolitan areas that encompass more than one state. Therefore, it would be desirable to have a uniform body of law under which financial institutions can operate. This would also enable consumers to exercise their rights in a uniform manner without regard to state laws that may differ at different places of usage. I suggest that this can be most easily obtained by the enactment of preemptive federal legislation.

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In conclusion, I believe S. 2065 is an impressive effort to establish basic consumer protections in the EFT environment. heartily endorse the concept of legislation in this area, and, without question, the upcoming report of the EFT Commission will aid the Committee immeasurably in creating the soundest possible statute.

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