Recent amendments to the Federal Reserve's Regulation E may impact how, when and what businesses communicate to consumer customers about electronic check conversion. Beyond establishing the rights, responsibilities and liabilities covering electronic funds transfers (EFTs), Reg E now requires businesses to inform consumers that:

• The consumer's paper check payments may be converted to Automated Clearing House (ACH) debits.
• Conversion could occur as early as the day payments are received.
• Checks will not be returned by the consumer's bank.

The amendment became effective in February 2006, and the mandatory compliance deadline is January 1, 2007. Additional related revisions provide guidance on preauthorized transfers from consumer accounts, error resolution and disclosures at automated teller machines (ATMs).

Check Conversion Notifications
In an electronic check conversion, a payee scans a consumer-provided check to capture its associated routing, account and serial numbers—located in its magnetic ink character recognition (MICR) line. The payee uses this data and the check's dollar amount to initiate a one-time EFT from the consumer's account.

At the point of sale, notification that such conversion could occur must be posted prominently and be provided to consumers if they request it at the time of the transaction (e.g., on a receipt). For back-office transactions like accounts receivable check conversion (ARC), notices must appear in advance of conversion, generally on billing statements or invoices.

"Merchants have had the ability to elicit verbal approval from consumers at the point of sale to convert checks into electronic debits," says Patrick Collins, President of The Collins Group, a Minnesota-based management consulting practice. "However, it's impossible to obtain similar approval from consumers who mail checks to a company or a lockbox. The Reg E revision addresses this gray area by providing clarity and direction about what must be communicated and when."

The Fed offers model language that corporations can use to ensure their communications meet these new requirements. (See "Appendix A," beginning on page 48). Collins urges companies' legal staffs and compliance departments to review these model clauses and the final Reg E ruling to identify any changes they must make.

Payroll Cards
In a separate action, the Fed amended Reg E to define payroll cards as "accounts" and address some statement and information disclosure concerns via an interim final rule effective July 1, 2007.

"Because they're being called 'accounts,' payroll cards will mimic regular bank accounts for the purpose of Reg E terminology," Collins explains. "However, this doesn't carry over into any other criteria such as FDIC coverage or compliance-type issues."

The rule also grants payroll card providers some flexibility in how they provide account transaction information to cardholders, which can include telephone-, ATM- or Internet-initiated requests by consumers. Paper statements are still available upon written request.

To benefit from this newly provided flexibility, corporations must communicate important disclosures and information about when, where and how cardholders can access their statements at the account's inception.

"The burden to provide this information rests with whoever determines the dollar amount owed particular employees—regardless of whether funds are held in individual employee accounts or in a pooled account with some form of sub-accounting maintained by a depository institution or third party," Collins says. "Ultimately, the employer needs to make sure this information is made available in the proper fashion."

Finally, the revision guides cardholder disputes over fraudulent or incorrect transactions. The 60-day window allotted consumers to fight erroneous charges under Reg E still applies. The clock simply starts ticking either when cardholders initiate requests for statement details electronically or by telephone, or when card providers distribute paper account statements.

The interim rule covers recurring payroll accounts only and not one-time payments such as petty cash or travel per-diem cards, or products like gift cards and other stored-value or prepaid cards. However, if cards are intended to be replenished, they fall under this ruling, Collins says.

"Stay tuned. Other types of cards could eventually fall under this regulation," he says.