Reg E: Credit? Investigate? Both?

It’s fair to say that the error resolution procedures found in § 1005.11 could be a little more detailed or more clearly written, and as a result there would be less confusion than there currently is. It’s a familiar story: your customer contacts you on Wednesday letting the bank know they discovered unauthorized charges on their account two days earlier, on Monday, and would like to dispute these charges. Since the customer contacted the bank within two business days of discovering the error as allowed under § 1005.6, so the bank is looking at most of the liability if the disputed transactions are determined to be errors.

At this point financial institutions will begin their error resolution procedures and begin their investigation. But what is an investigation?  What is the bank required to do? What may the bank do if they choose? Regulation E does not provide a lot of guidance for how to investigate, other than to say a financial institution’s review of its own records satisfies the requirements if the transaction concerns a transfer to or from a third party and there is no agreement between the institution and the third party. Because of the minimal guidance provided in the regulation and commentary, some banks keep investigations in-house, while some use a third-party to handle the investigations.

Third party investigations normally cost the bank some nominal fee, regardless of the outcome of the investigation. Depending on the outcome the bank may be looking at just a loss of the investigation cost, or both a loss of the investigation cost and the cost to provide the customer with a credit for the unauthorized charges.

The two things banks ask at this point are: 1) Can we pass this investigation cost onto the customer? and 2) Can we just give the customer a credit without investigating the matter?

Passing on the cost

It is our interpretation that banks may not pass along the investigation costs to the customer because the bank is required by Regulation E to conduct an investigation if the customer makes disputes a charge. If the bank were to try and impose a fee for this investigation, the customer would not be under any obligation to pay this fee, as the bank is required to investigate and credit the customer’s account, even if no fee is paid. There is also an element of UDAAP, as a question of fairness to the customer in that charging them for investigations could discourage legitimate disputes, knowing if no error is found, the customer would lose both whatever they lost in the transaction as well as the investigation fee.

Credit without investigation

According to the Reg E commentary a financial institution may make a final correction to an account in without investigation but must comply with all other applicable requirements of § 1005.11. It’s unclear exactly what the bank may skip in 1005.11 if there will not be an investigation conducted, as the requirements in 1005.11(c),(d), and (e) would all seem not to apply.  Section (a) is merely a definitions section, so perhaps the remaining part of 1005.11(b) is the only applicable part. However, 1005.11(b) pertains to the requirements of the notice from the customer and not necessarily responsibilities for the bank. The conservative interpretation of this section provides that the bank may provide a credit but that some minimal level of investigation should be done, such as simply reviewing the bank’s records.  For example, the bank could review their records and note the file that the customer’s assertion of error was not contradicted by the bank’s records, and that a notice of a determination of error was communicated to the customer in accordance with 1005.11(d).