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Compulsory Use Under Regulation E

Compulsory Use Under Regulation E. Opportunities and Obstacles in Creating an Affordable Loan Product December 6, 2006. Electronic Fund Transfer Act § 913. No person may – Condition the extension of credit to a consumer on such consumer’s repayment by means of preauthorized EFTs; or

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Compulsory Use Under Regulation E

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  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 consumer’s 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. … [I]t 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 Commission’s 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 consumer’s 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 consumer’s repayment by preauthorized EFTs, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer’s 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

  9. Final thoughts • Lenders may not condition extensions of credit on repayment by preauthorized debits, unless cost incentive provided • Requirement to obtain a consumer’s 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

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