Regulation E and the Debit of Provisional Credit

The following article originally appeared on May 4, 2022, in Sterling Compliance’s Sterling Navigator newsletter.

A bank was criticized recently by its federal examiner for not properly notifying the consumer when it debited a provisional payment concerning a Regulation E unauthorized payment transaction.

The bank disagreed. It had disclosed the debit in the consumer’s periodic statement and believed that this was perfectly understandable. That may have been so, but the federal examiner’s criticism was correct.

Under Regulation E, if a consumer files a written notice of error and the bank requires more than ten business days to determine whether an error occurred, the bank can take a longer time, provided it provisionally credits the amount in dispute to the consumer’s account. The consumer must be notified within two business days of the provisional crediting and given full access to the funds during the investigation. 12 CFR §1005.11(c)(1),(2)(i).

If the bank determines that no error occurred, it must provide the consumer with a written report of the results within three business days of closing its investigation. It can debit the provisional payment, but when it does so, it must also do the following:

  • Notify the consumer of the date and amount of the debiting; and
  • Notify the consumer that the bank will honor checks, drafts or similar instruments payable to third parties and preauthorized transfers from the consumer's account (without charge to the consumer as a result of an overdraft) for five business days after the notification. 12 CFR §1005.11(d)(i).

In the alternative, the bank can notify the consumer that the consumer's account will be debited five business days from the transmittal of the notification, specifying the calendar date on which the debiting will occur. Official Interpretations, ¶1005.11(d)(2) – 1.

The consumer might have understood from the debit entry in the periodic statement what the debit was about, but Regulation E is a consumer-friendly regulation. It requires a specific notice of a specific action at a specific time. Anything other than that will not comply with the regulatory requirements.

Source: Sterling Compliance

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