We would suggest that evidence of abuse is needed before we frustrate EFT development through a stop payment or a reversibility requirement. Concerning unsolicited cards, the U.S. League opposes the bill's prohibition on the distribution of cards. At a minimum, we would recommend that a depository institution be permitted to send cards to its existing customers. We are concerned that small institutions will be severely limited in their marketing opportunities, and competition will consequently be inhibited, if a general ban is enacted. Mr. Chairman, this concludes our testimony on S. 2065. While I realize that many of our comments are critical of provisions of your legislation as drafted, I would emphasize again that we welcome this congressional interest and oversight of the emerging field of electronic fund transfers. We have appreciated your courtesy in listening to our testimony and hope that our suggestions will aid the subcommittee in its important work. [Complete statement follows:] STATEMENT OF ROY G. GREEN ON BEHALF OF THE U.S. LEAGUE OF SAVINGS ASSOCIATIONS Mr. Chairman, my name is Roy G. Green. I am President of Fidelity Federal Savings and Loan Association of Jacksonville, Florida and appear today as a member of the Board of Directors and Legislative Committee of the U.S. League of Savings Associations.1 I am accompanied by Lamar Brantley of Chicago, Illinois, Assistant Director of the League's Funds Transfer Research Department. I wish to note, Mr. Chairman, that I am also serving on the National Commission on Electronic Fund Transfers. Though my testimony in no way represents the official views of the Commission-which, I understand will present its report to your Committee and the Congress later this fall-I have been privileged to participate in extensive discussions of many of the issues raised by your bill, S. 2065. As other witnesses have discussed, the developing EFT area promises many benefits for the American public. Direct deposit is improving the security and convenience of Government benefit checks and paychecks to workers, and remote EFT terminals-such as automated teller machines and terminals in supermarkets-expand the hours of the day and the number of locations where customers can conduct their financial business. Retailers have the potential for verifying instantaneously a customer's ability to pay for purchases-reducing the overhead which adds to the prices paid by all customers-while financial institutions cut operational costs and ultimately pass the savings along to their depositors and borrowers. Public acceptance of what technology can achieve, of course, is another matter. Consumers are understandably wary of changing familiar patterns of dealing with employers, Government agencies, retailers and financial institutions. Despite the rapid growth of consumer credit, we must not lose sight of the fact that the bulk of everyday transactions still takes place in currency and coin, and to a lesser degree by paper check. The rosy predictions of a few years ago of a "checkless society," in my judgment are unfounded. All the familiar payment alternatives-cash, check, credit card-will be with us for the foreseeable future. Financial institutions themselves have mirrored the reluctance of the public in changing the services they provide. Fortunately, the willingness of the Treasury Department to undertake direct deposit programs and the carefully monitored remote service unit experiments permitted by the Federal Home Loan Bank Board have encouraged savings and loan associations to familiarize themselves with some 'The United States League of Savings Associations (formerly the United States Savings and Loan League) has a membership of 4,400 savings and loan associations, representing over 98% of the assets of the savings and loan business. League membership includes all types of associations-Federal and state-chartered, insured and uninsured, stock and mutual. The principal officers are: John Hardin, President, Rock Hill, South Carolina; Stuart Davis, Vice President, Beverly Hills, California; Lloyd Bowles, Legislative Chairman, Dallas, Texas; Norman Strunk, Executive Vice President, Chicago, Illinois; Arthur Edgeworth, Director-Washington Operations; and Glen Troop, Legislative Director. League headquarters are at 111 E. Wacker Drive, Chicago, Illinois 60601; and the Washington Office is located at 1709 New York Avenue, NW., Washington, D.C. 20006; Telephone: (202) 785-9150. of the possibilities of EFT for serving our customers. But the volume of EFT activity remains miniscule at our thrift and home finance institutions, and this cautious approach to EFT by the financial community is likely to continue. Before proceeding, Mr. Chairman, we would like to commend you and this Subcommittee for undertaking this review of EFT developments. We recognize, as you do, that electronic transfers do not fit neatly into existing statutes and judicial decisions governing paper-based payment mechanisms and their accompanying requirements and liabilities. But with EFT still in its infancy, we would recommend a cautious approach to imposing any detailed statutory pattern or EFT activities. We wonder what might have happened if, for example, Henry Ford had been required in 1920 to outfit his Model T with emission controls, air bags and catalytic converters; certainly the pace of inexpensive personal transportation would have been slowed. While I won't claim too much for that analogy, providers of EFT services should not be unduly stifled at this early developmental stage by a comprehensive set of laws. Despite what others may testify, there is no question that today's EFT marketplace is highly competitive. After all, there are over 40,000 depository institutions in this country. Vigorous competition promises significant consumer benefits as Americans acquaint themselves with EFT services. I would now like to turn to some specific provisions of S. 2065, as introduced. DOCUMENTATION One of the major objectives of EFT is to reduce the need for generating and handling paper. Thus we suggest that the Congress exercise care in specifying how and when transactions are documented so that the present payment system is not replaced by a new electronic one with even more costly and unnecessary paperwork burdens. On examination, there are a number of desirable features about Section 806 and 807 of S. 2065. We support the concept of periodic descriptive statements, and the "negative notice" alternative where direct deposit or pre-authorized transfers are involved. We would question, however, the desirability of explicit written renewal semiannually in the case of preauthorized transfers from accounts. Our experience with preauthorized mortgage loan payments from savings or bank checking accounts does not demonstrate a need for such semiannual authorization. The requirement of written documentation at time of electronic transfer or within five days does present some problems in certain situations. The description of any goods or services purchased must be provided by the financial institution under Section 806(a), but obviously this information is under the exclusive control of the merchant. The merchant is in the best position to provide any receipt or purchase information. Further, the bill language implies a terminal with an alphabetic as well as a numeric code. This exceeds the capability of many terminals now in experimental use throughout the country. We would also note that this section appears to cover telephone bill-payment arrangements, where the consumer has previously received goods or services and is instructing the institution at the end of the month to debit the account and pay the bills. In such circumstances, it is unnecessarily duplicative to repeat a description of goods and services. As a final point, we would note that the language requiring an audit trail "number" may be unnecessarily rigid as a technical matter, since the audit trail might be accomplished in a variety of ways. (Generally speaking, we would advise that the Subcommittee avoid legislating design features for EFT systems.) LIABILITY FOR UNAUTHORIZED TRANSFERS Section 810 limits consumer liability to $25 where unauthorized transfer of funds occurs. The approach is obviously borrowed from consumer credit card liability found elsewhere in the Consumer Credit Protection Act, yet we would note that there are significant differences where debit (withdrawal) transfers occur. A credit card issuer, when extending the credit privilege, can limit exposure by establishing a ceiling on the line of credit offered, while the debit card user is tapping his or her funds on deposit a situation essentially beyond the institution's control. Another control available in credit card situations-the merchant's ability to ask for additional indentification-is not necessarily present when a debit card user withdraws funds at an automated machine. Thus, while consumer liability limits may have an instant appeal, and, indeed, exposure limits may become a marketing factor for some issuers of debit cards, we would question whether the statutory $25 limit is needed at this preliminary stage of debit card development. It would seem preferable to permit some sharing of risk between institutions and customers where unauthorized use occurs. As you may be aware, the National Commission has resolved this issue by recommending a negligence standard, with examples of negli gent behavior clearly defined. Thus, if the unauthorized use occurs through no fault of the legitimate cardholder, the institution becomes exposed to liability. This approach deserves careful consideration by the Congress. STOP PAYMENT-REVERSIBILITY S. 2065 also attempts to address another perceived hurdle to EFT acceptance-the consumer's ability to change his or her mind following purchase-by providing a reversal privilege for three days following transfer. Of course, such an opportunity exists in the paper check system through the familiar stop payment order. It is important to note that resolution of disputes between consumer and merchant remains with the direct parties to the transaction when payment is by check or cash-and-carry. However, Section 108 interposes the depository institution in the process-since the institution is left holding the bag where no funds remain in the consumer's account, or possibly (but less likely), the seller has departed. Conceptually, the point-of-sale EFT transaction fits more closely with the cash-and-carry option available to the public and we suggest the remedies available to consumers should resemble those present in such a situation. Certainly, the new liability created by Section 808 will retard severely the willingness of providers to enter into point-ofsale arrangements, since sales will not be "final" for three days. From the consumer's standpoint, Section 108 also diminishes the likelihood that a merchant will automatically accept the EFT card as the means of payment; the appeal of this "guaranteed acceptance" should not be underestimated. Again, we would suggest that evidence of abuse is needed before we frustrate EFT development through a "reversibility" requirement. We would note also that there may be other options in bill payment, such as "value-dating" found in Europe, which could develop in the marketplace to provide the consumer with quick recourse following acceptance of goods or services. ERROR RESOLUTION The U.S. League has no problem with the overall thrust of Section 809 providing for correction of errors, though we would recommend more flexibility in the various time limits prescribed. For example, it may be difficult to adequately investigate an alleged error within three business days if it has been close to 45 days since the occurrence of the mistake. The language also provides for correction of occurrences more distant than 45 days, though it sets no outside limit on when an instituion may be asked to investigate errors. We would suggest that one year would be a reasonable suspense date for required resolution of errors as provided by Section 809. UNSOLICITED CARDS The bill generally prohibits distribution of EFT cards unless requested. The U.S. League opposes this section. At a minimum, we would recommend that a depository institution be permitted to send cards to its existing customers. We are also concerned that smaller institutions will be severely limited in their marketing opportunities, and competition will consequently be inhibited, if a general ban is enacted. There is an operational difference between the exercise of credit and EFT debit cards which is important to understand when discussing the potential for abuse in this area. The EFT debit card requires an additional personal identification code when it is used for a purchase. The receipt of the card thus does not by iteself create a risk of liability for the consumer. Based on experience to date, EFT card issuers only provide the identification number needed to activate the card after a positive response from the consumer receiving a debit card. While we recognize that some persons will consider receipt of an EFT card a nuisance, we feel this inconvenience is outweighed by the need for free entry of new institutions and competition to provide EFT services. RELATION TO STATE LAWS Section 822 repeats an approach to the interplay of Federal and State law seen previously in Senate language in the Home Mortgage Disclosure Act, the Real Estate Settlements Procedure Act, and other "consumer related" legislation. It would permit State law and regulation to govern the operations of Federallychartered financial institutions where "the protection such (State) law affords and consumer is greater than the protection afforded by this title." We have objected strenuously in the past to this approach. First of all, the "greater than" language is a vague standard for regulatory officials to attempt to apply. But, more significantly, such State preemption strikes at the heart of our dual chartering system of financial institutions. If implemented, it would mean a duplicate examination at 99-379 O-78-15 Federal savings and loan associations for example. We fail to understand why the Congress would wish to surrender its plenary authority over the functions of Federally-chartered S&Ls, credit unions and national banks to State regulatory officials. Thus, we recommend deletion of the second sentence of Section 822. COVERAGE The basic provisions of S. 2065-documentation, reversibility, error, resolution, etc. are directed to "financial institutions", defined as depository institutions and "any other person who, directly or indirectly, holds an account belonging to a consumer." The Subcommittee should, by appropriate report language or otherwise, clarify whether this definition encompasses such institutions as insurance companies, finance companies, utilities, brokerage firms, retail chains, and other entities which may enter the EFT arena through preauthorized transfers, debit cards or other mechanisms. Clearly, the providers of EFT services extend beyond Federal and State-chartered depository institutions, and any statutory pattern of consumer protection should encompass all classes of providers. Section 803 also limits the definition of consumer to "a natural person." We would recommend that corporate accountholders and partnerships receive the same treatment afforded individuals. Mr. Chairman, this concludes our testimony on S. 2065. While I realize that many of our comments are critical of provisions of your legislation as drafted, I would emphasize again that we welcome this Congressional interest and oversight of the emerging field of electronic fund transfers. We have appreciated your courtesy in listening to our testimony and hope that our suggestions will aid the Subcommittee in its important work. Senator RIEGLE. Thank you, Mr. Green. I think that what I will do, if you have no objection, Senator Proxmire, is hear all four witnesses and then proceed with questions. Mr. Ruf, are you prepared to go next? STATEMENT OF J. FREDERIC RUF, VICE PRESIDENT, MARSHALL & ISLEY BANK, MILWAUKEE, WISCONSIN My name is J. Frederic Ruf. I am a Vice President of the For the past two and one half years, I have been actively involved in the legal and legislative development of EFT systems within the State of Wisconsin, as well as the technical design of the TYME (Take Your Money Everywhere) system. During this developmental period, members of the financial community, leaders of consumer groups and the Wisconsin Commissioners of Banking and Savings and Loans worked together closely to develop a legal and regulatory framework for the operation of EFT systems within the state. They were designed to allow for the continued technical change and development of our EFT systems and to provide effective recognition of appropriate consumer concerns about these systems. For example, Wisconsin regulations require: (1) descriptive statements, (2) monthly statements of accounts experiencing EFT activity, (3) a $50.00 liability limit for unauthorized use, (4) right to charge back purchases of goods or services over $50.00 for three business days, (5) prohibition on the issuance of unsolicited debit cards, (6) system assurance of confidentiality, (7) advance written disclosure of card usage rules, (8) written receipts for transactions at the point of purchase, (9) continuing advance notice to regulators of system expansion, and (10) review of system operations. Since the application of such legal and regulatory protections are presently only applicable to customers utilizing EFT systems within the State of Wisconsin, I am very pleased to see that S. 2065 appropriately addresses these very fundamental issues and thereby expands the basic safeguards provided in Wisconsin to all other states. While many of my associates within the financial industry may consider cooperative efforts with consumer groups and regulators to be unusual and, in fact, even unnatural, it seemed quite proper and appropriate to those of us developing the TYME system. We felt, and continue to feel that cooperative efforts between the interested parties are essential to the development of any new product |