Bill collectors often refer to them as “reoccurring” payments. Bankers sometimes call them “recurring” or “installment” payments. Consumers might refer to them as “automated” or “automatic” payments. In 1978, Congress gave them a formal legal name when it passed the Electronic Funds Transfer Act, “pre-authorized electronic funds transfers.”
The Act defines a “preauthorized electronic funds transfer” as an
(1) electronic funds transfer which is
(3) in advance
(4) to recur at substantially regular intervals.
These four elements seem simple enough. The hard part for debt collectors is understanding the unique consent requirements associated with preauthorized electronic funds transfers.
Determining whether a transaction is an electronic funds transfer is usually straight forward. Transactions originated by check, draft, or similar paper instruments are not electronic funds transfers. Neither are credit card transactions. (Blessed be the timeless question, “Debit or credit?”) Transactions initiated through electronic terminals, telephones, or computers which debit or credit a consumer’s checking or savings account are electronic funds transfers. This includes transfers resulting from debit card transactions whether or not initiated through an electronic terminal. Examples of electronic funds transfers include swiping your debit card at the grocery store checkout, obtaining cash from an ATM with a debit card, or handing a debit card to the cab driver who uses a manual rolling machine to record the card number on carbon paper. It also includes providing debit card information over the telephone to a person who enters that information into a web site to initiate a withdrawal from a consumer’s checking or savings account. Generally, the Act applies only to “financial institutions.” However, certain portions of the Act apply to “any person,” including the section focused “preauthorized electronic funds transfers.”
Preauthorized electronic funds transfers from a consumer’s account may be authorized “only by a writing signed or similarly authenticated by the consumer.” This language requires a consumer’s authorization for a recurring debit card payment to be “by a writing.” Not just any writing, but a writing which is either signed or similarly authenticated. This requirement focuses on what the consumer must provide to the payee, not what the payee must provide to the consumer. The consumer must give their:
(2) by a writing
(3) which writing is signed or similarly authenticated.
The Act further requires the recipient of the authorization to provide a copy of it to the consumer. Without more, oral authorization from the consumer is not sufficient to meet the statute’s authorization requirement, even if that oral authorization occurred during a recorded telephone call. Oral authorization for the payee to sign the “writing” on behalf of the consumer is also insufficient. The CFPB has interpreted this section of the Act to allow a payee to provide the consumer with two copies of a written preauthorization form and ask the consumer to sign and return one copy and retain the second. The CFPB has also suggested that signed, written authorizations may be provided electronically so long as the requirements of the E-SIGN Act are satisfied (Electronic Signatures in Global and National Commerce).
So where does this leave consumers who want to use their debit card to set up recurring payments to a debt collector to pay their debt? How can debt collectors help consumers provide the type of authorization required by the statute? A simple solution is to send the consumer two copies of a written authorization in the mail requesting one to be signed and returned. However, this solution is not consumer friendly, is costly, and creates burdensome delay for consumers with immediate needs to resolve their debt. A second more convenient and less costly solution may be to direct consumers to a web site where they can create a “writing,” which contains their “authorization,” which they can “sign or similarly authenticate” electronically and retain copies for themselves. Technologically savvy debt collectors are exploring more sophisticated methods of obtaining proper consent via e-mail, text message, and telephone.
Compliance with the Act is important. Congress gave consumers legal remedies for violations similar to the remedies found in other consumer protection laws. Consumers may recover the sum of (1) actual damages (2) up to an additional $1,000, (3) the costs of a civil action, and (4) reasonable attorney fees. The law also gives consumers class action remedies up to the lesser of $500,000 or 1% of the net worth of the violator. Similar to the FDCPA, the Act includes a bona fide error defense. Other defenses include good faith reliance on a rule, regulation or interpretation of CFPB or Federal Reserve Board and the use of any model disclosure form provided by the CFPB or Federal Reserve Board. The Act contains additional defenses and also includes a fee shifting provision back to consumers when unsuccessful actions are brought in back faith or for purposes of harassment. Debt collectors processing thousands of preauthorized electronic funds transfers each year probably find little solace in the Act’s one year statute of limitations.
Wise debt collectors are revisiting their payment processing procedures regularly. They are auditing. They are monitoring. They are preventing processing errors, including the failure to obtain proper authorization, before those errors occur. They are detecting errors. And they are correcting errors if they occur. Don’t let preauthorized electronic funds transfers be a recurring problem for you.
By John Bedard