Compulsory Use Under Regulation E

1
Compulsory Use Under Regulation E

• Opportunities and Obstacles in Creating an
  Affordable Loan Product
• December 6, 2006

2
Electronic Fund Transfer Act 913

• No person may
• Condition the extension of credit to a consumer
  on such consumers repayment by means of
  preauthorized EFTs or
• Require a consumer to establish an account for
  receipt of EFTs with a particular financial
  institution as a condition of employment or
  receipt of a government benefit.

3
Scope

• Applies to preauthorized electronic fund
  transfers, which are EFTs that are authorized in
  advance to recur at substantially regular
  intervals
• Creditors may require payment by electronic means
  for one-time debits

4
Background

• 1977 National Commission on Electronic Fund
  Transfers Report
• EFT should be a means to expand consumer choice
  among financial services, not to narrow it.
  It is essential that consumers have the ability
  to choose among payment alternatives, and any
  attempts to restrict such choice should be
  prohibited to the extent possible.

5
Background

• EFTA enacted in 1978, and adopted many of the
  Commissions recommendations, including
  compulsory use restrictions in 913.
• Prohibitions are designed to assure that EFT
  develops in an environment of free choice for the
  consumer. A creditor could not condition the
  extension of credit on a consumers agreement to
  repay by automatic EFT payments.
• Section would not prohibit a creditor from
  offering a lower APR to consumers who repay by
  EFT.

6
Regulation E and Commentary

• Statutory prohibition for extensions of credit
  implemented in 205.10(e)(1)
• Credit. No financial institution or other person
  may condition an extension of credit to a
  consumer on the consumers repayment by
  preauthorized EFTs, except for credit extended
  under an overdraft credit plan or extended to
  maintain a specified minimum balance in the
  consumers account.

7
Regulation E and Commentary

• Creditors may, however, offer a cost-related
  incentive, such as a reduced APR, to encourage
  consumers to choose an automatic repayment
  feature, so long as this program is not the only
  loan program offered by the creditor for the type
  of credit involved.
• Consumer must be eligible for both programs.

8
Regulation E and Commentary

• Exception for overdraft checking plans
• Automatic repayment of overdraft plan may be
  required even if the overdraft extension charged
  to an open-end account that can be accessed in
  ways other than by overdraft

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Final thoughts

• Lenders may not condition extensions of credit on
  repayment by preauthorized debits, unless cost
  incentive provided
• Requirement to obtain a consumers signed,
  written authorization would apply for
  preauthorized EFTs
• Creditors may require consumers to repay loans by
  EFT if the consumer must repay the loan in a
  single installment