[Federal Register Volume 62, Number 157 (Thursday, August 14, 1997)]
[Rules and Regulations]
[Pages 43467-43469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21584]


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FEDERAL RESERVE SYSTEM

12 CFR Part 205

[Regulation E; Docket No. R-0959]


Electronic Fund Transfers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is publishing amendments to Regulation E (Electronic 
Fund Transfers). The revisions implement an amendment to the Electronic 
Fund Transfer Act (EFTA), contained in the Personal Responsibility and 
Work Opportunity Reconciliation Act of 1996, that exempts certain 
electronic benefit transfer (EBT) programs from the EFTA. Generally, 
EBT programs involve the issuance of access cards and personal 
identification numbers to recipients of government benefits so that 
they can obtain their benefits through automated teller machines and 
point-of-sale terminals. The Board's amendments to Regulation E exempt 
needs-tested EBT programs that are established or administered by state 
or local government agencies. Federally administered EBT programs and 
state and local employment-related EBT programs (such as state pension 
programs) remain covered by Regulation E subject to modified 
requirements.

EFFECTIVE DATE: September 15, 1997.

FOR FURTHER INFORMATION CONTACT: Jane Jensen Gell, Senior Attorney, 
Division of Consumer and Community Affairs, at (202) 452-3667; for 
users of Telecommunications Device for the Deaf (TDD) only, contact 
Diane Jenkins at (202) 452-3544.

SUPPLEMENTARY INFORMATION:

I. Background

EFT Act and Regulation E

    Regulation E implements the Electronic Fund Transfer Act (EFTA). 
The act and regulation cover any consumer electronic fund transfer 
(EFT) initiated through an automated teller machine (ATM), point-of-
sale (POS) terminal, automated clearinghouse, telephone bill-payment 
system, or home banking program. The act and Regulation E establish 
rules that govern these and other EFTs. The rules restrict the 
unsolicited issuance of ATM cards and other access devices; require 
disclosure of terms and conditions of an EFT service; document EFTs by 
means of terminal receipts and periodic account statements; limit 
consumer liability for unauthorized transfers; and establish procedures 
for error resolution.
    The EFTA is not limited to traditional financial institutions 
holding consumers' accounts. For EFT services made available by 
entities other than an account-holding financial institution, the act 
directs the Board to assure, by regulation, that the provisions of the 
act are made applicable. The regulation also applies to entities that 
issue access devices and enter into agreements with consumers to 
provide EFT services.

Electronic Benefit Transfer Programs

    Electronic benefit transfer (EBT) programs are designed to deliver 
government benefits such as food stamps, supplemental security income 
(SSI), and social security. These systems function much like commercial 
systems for EFT. Eligible recipients receive magnetic-stripe cards and 
personal identification numbers and they access benefits through 
electronic terminals. In the case of cash benefits such as SSI, the 
terminals may include ATMs that are part of existing commercial 
networks; for food stamp benefits, POS terminals in grocery stores are 
typically used.
    EBT offers numerous advantages over paper-based delivery systems, 
both for recipients and for program agencies. For recipients, these 
advantages include faster access to benefits, greater convenience in 
terms of times and locations for obtaining benefits, improved security 
because funds may be accessed as needed, lower costs because recipients 
avoid check-cashing fees, and greater privacy and dignity. For 
agencies, EBT programs offer a system that can more efficiently deliver 
benefits for both state and federal programs by reducing the cost of 
benefit delivery, facilitating the management of program funds, and 
helping to reduce fraud.
    In March 1994, the Board amended Regulation E to bring EBT programs 
expressly within its coverage. 59 FR 10678 (March 7, 1994). The special 
provisions, contained in Sec. 205.15, apply most of the requirements of 
the regulation--including those relating to liability for unauthorized 
transactions and to error resolution--with some modifications. The 
major exception related to providing periodic statements of account 
activity: EBT programs need not provide periodic statements as long as 
(1) account balance information is made available to benefit recipients 
via telephone and electronic terminals and (2) a written account 
history is given upon request.
    The basic premise underlying the Board's 1994 amendments to 
Regulation E was that all consumers using EFT services should receive 
substantially the same protection under the EFTA and Regulation E. To 
enable states to test and implement their EBT programs, the Board 
delayed the date of mandatory compliance to March 1, 1997.

II. Revised Regulatory Provisions

    On August 22, 1996, the Congress enacted amendments to the EFTA as 
part of the Personal Responsibility and Work Opportunity Reconciliation 
Act of 1996, a comprehensive welfare reform law (Pub. L. 104-193, 110 
Stat. 2105). These amendments exempt ``needs-tested'' EBT programs 
established or administered under state or local law. (``Needs-tested'' 
EBT programs generally take a recipient's income or other resources 
into account to determine the appropriate level of benefits.) The 
exemption was enacted by the Congress at the urging of state and local 
officials, who expressed concern about the costs of compliance with the 
EFTA and

[[Page 43468]]

Regulation E. In particular, these officials believed that federal 
provisions limiting a recipient's liability for unauthorized transfers 
could raise serious budgetary problems at the state and local level.
    In January, the Board issued a proposal to implement the exemption 
(62 FR 3242, January 22, 1997). Fifteen comments were received, 
generally in support of the amendments. Some commenters requested 
further clarification on certain technical issues. For example, 
clarification was requested on the treatment of SSI, a needs-tested 
benefit administered by the federal government through the Social 
Security Administration. Under the amendments to the EFTA, SSI benefits 
remain covered by the EFTA and Regulation E.
    For cost efficiencies in the delivery of benefits, EBT programs may 
offer both federal and state benefits through the use of a single card. 
An EBT service provider requested clarification on how Regulation E 
applies when a card accesses benefits under multiple programs, some 
covered by and others exempt from Regulation E (for example, the 
Benefit Security Card<SUP></SUP> offered by the Southern Alliance of 
States). In this program, non-cash benefits (such as food stamps) are 
held in one account and cash benefits are held in a separate account. 
In the cash account, federally administered and state employment-
related benefits (covered by Regulation E) may be pooled with state 
administered or established ``needs-tested'' benefits that are exempt 
from the regulation. Program agencies may allocate the withdrawal of a 
recipient's benefits from the pooled account in any manner they choose.
    All federally administered benefits (and state employment-related 
benefits) accessed by the card from the pooled account must receive the 
protections provided by Regulation E. Agencies must ensure that the 
required disclosures concerning account balances, liability limits, 
error resolution procedures, and account histories clearly state how 
these protections apply with regard to a single card covering exempt 
and non-exempt programs. With regard to liability for unauthorized use, 
liability limits apply to the extent that the loss is charged against 
covered benefits. Similarly, error resolution procedures apply to the 
federally administered benefits (and state employment-related benefits) 
covered under Regulation E. This interpretation will be incorporated in 
the Official Staff Commentary to Regulation E.
    Based on the comments and further analysis, the Board has adopted a 
final rule exempting ``needs-tested'' EBT programs established or 
administered by state or local government agencies. Federally 
administered EBT programs and employment-related programs established 
by federal, state, or local governments (such as state pension 
programs) remain covered by Regulation E, subject to the modified rules 
established by section 205.15.

III. Section-by-Section Analysis of Amendments

Section 205.15--Electronic Fund Transfers of Government Benefits

    Section 205.15 contains the rules that apply to EBT programs as 
defined by the regulation. It provides modified rules on the issuance 
of access devices, periodic statements, initial disclosures, liability 
for unauthorized use, and error resolution notices. Employment-related 
benefit programs established by federal, state, or local governments 
(as well as federally administered programs) remain subject to these 
modified rules.

  15(a) Government agency subject to regulation

15(a)(1)

    The act and regulation define coverage in terms of financial 
institution, a term that applies to entities that provide EFT services 
to consumers whether these entities are banks, other depository 
institutions, or other types of organizations entirely. Paragraph 
(a)(1) specifies when a government agency is a financial institution 
for purposes of the act and regulation. This provision has been revised 
to exclude needs-tested benefits in a program established under state 
or local law or administered by a state or local agency, consistent 
with the 1996 statutory amendments.

15(a)(2)

    The term account is defined generally in Sec. 205.2(b). For 
purposes of EBT programs, account is defined in Sec. 205.15(a)(2) to 
mean an account established by a government agency (or agencies) for 
distributing benefits to a consumer electronically, such as through 
ATMs or POS terminals, whether or not the account is directly held by 
the agency or a bank or other depository institution. For example, an 
account under this section includes the use of a database (containing 
the consumer's name and record of benefit transfers) that is accessed 
for verification purposes before a particular transaction is approved. 
Under the Board's final rule, the definition is revised to exclude 
needs-tested benefits in a program established under state or local law 
or administered by a state or local agency, consistent with the 1996 
amendments to the EFTA. Government benefits that remain covered include 
federally administered benefits such as social security and SSI and 
state and local benefits that are employment-related such as retirement 
and unemployment benefits.

IV. Regulatory Flexibility Analysis

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C. 603), the Board's Office of the Secretary has reviewed the 
amendments to Regulation E. The amendments, which establish an 
exemption for certain EBT programs established or administered by a 
state or local agency, are not expected to have a significant impact on 
small entities.

V. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the final rule 
under the authority delegated to the Board by the Office of Management 
and Budget. The amendments provide an exemption for state-administered 
or state-established electronic benefit transfer programs; the 
amendments are not expected to affect the paperwork burden that the 
regulation imposes on state member banks or on other institutions.
    An agency may not conduct or sponsor, and an organization is not 
required to respond to, this information collection unless it displays 
a currently valid OMB control number. The OMB control number is 7100-
0200. The Board has a continuing interest in the public's opinions of 
the Federal Reserve's collections of information. At any time, comments 
regarding the burden estimate, or any other aspect of this collection 
of information, including suggestions for reducing the burden, may be 
sent to: Secretary, Board of Governors of the Federal Reserve System, 
20th and C Streets, NW., Washington, DC 20551; and to the Office of 
Management and Budget, Paperwork Reduction Project (7100-0200), 
Washington, DC 20503.

List of Subjects in 12 CFR Part 205

    Consumer protection, Electronic fund transfers, Federal Reserve 
System, Reporting and recordkeeping requirements.

    For the reasons set forth in the preamble, the Board amends 12 CFR 
Part 205 as set forth below:

[[Page 43469]]

PART 205--ELECTRONIC FUND TRANSFERS (REGULATION E)

    1. The authority citation for Part 205 is revised to read as 
follows:

    Authority: 15 U.S.C. 1693-1693r.

    2. Section 205.15 is amended by revising paragraph (a) to read as 
follows:


Sec. 205.15  Electronic fund transfer of government benefits.

    (a) Government agency subject to regulation. (1) A government 
agency is deemed to be a financial institution for purposes of the act 
and this part if directly or indirectly it issues an access device to a 
consumer for use in initiating an electronic fund transfer of 
government benefits from an account, other than needs-tested benefits 
in a program established under state or local law or administered by a 
state or local agency. The agency shall comply with all applicable 
requirements of the act and this part, except as provided in this 
section.
    (2) For purposes of this section, the term account means an account 
established by a government agency for distributing government benefits 
to a consumer electronically, such as through automated teller machines 
or point-of-sale terminals, but does not include an account for 
distributing needs-tested benefits in a program established under state 
or local law or administered by a state or local agency.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, August 11, 1997.
William W. Wiles,
Secretary of the Board.
[FR Doc. 97-21584 Filed 8-13-97; 8:45 am]
BILLING CODE 6210-01-P