Debit card and other “electronic fund transfer” transactions are governed by the Electronic Funds Transfer Act (EFTA) and the Federal Reserve Board’s accompanying Regulation E. These rules provide that transactions involving regularly recurring billing—such as continuity programs, automatically renewing monthly memberships, etc.—require signed, written authorization by the consumer if payment is to be made by debit card rather than credit card.
In its Staff Commentary interpreting these rules, the Federal Reserve has stated that while the signed, written authorization requirement could be satisfied through the use of electronic records and electronic signatures in accordance with the E-Sign Act, a tape recording of a telephone conversation with a consumer who agreed to recurring debits from his or her account in connection with a particular transaction would not constitute signed, written authorization.
As telemarketing transactions are typically completed over the phone without a signed written agreement with a consumer, the Federal Reserve’s position essentially meant that telemarketers were precluded from knowingly accepting debit cards for transactions involving ongoing, recurring payments. There was a safe harbor, however, which provided that so long as the telemarketer had reasonable procedures in place to ensure that debit cards were not accepted, it would not be in violation of EFTA and Regulation E in the event that a debit card was accepted and billed as a result of a bona fide error.
Historically, this was not a particular challenge for telemarketers, as debit card usage was less widespread and it was difficult to determine from the card’s appearance whether it was a debit or credit card. Thus, it was generally considered “reasonable” to assume that the card provided during a telemarketing transaction was a credit card, not a debit card. In recent years, however, the use of debit cards has grown dramatically. In addition, as a result of a settlement in a lawsuit between Visa and MasterCard and various retailers, debit cards are increasingly designated as such on the front of the card, making it easier for consumers and marketers to determine whether the card at issue is a debit card.
In response to these changes, industry members lobbied the Federal Reserve to amend its position on oral recorded consent, arguing that a digital recording of a telemarketing transaction, and a consumer’s consent to be charged via debit card in connection with such transaction, could meet the broad definitions of “electronic record” and “electronic signature” under the E-Sign Act and, thus, be deemed to satisfy the signed, written authorization requirements of EFTA and Regulation E. The Federal Reserve instituted a rulemaking proceeding to consider the issue and, on December 30, 2005, announced a Final Rule in which it removed from its Staff Commentary to Regulation E the express prohibition on oral recorded authorizations for the use of debit cards for recurring billing transactions.
In so doing, the Federal Reserve did not go so far as to indicate that oral recorded authorization was EFTA and Regulation E compliant. Rather, it stated that if a recorded authorization satisfied the requirements of E-Sign then it would be deemed to be a signed, written authorization under EFTA and Regulation E. The Federal Reserve also made clear that, even if the oral recorded authorization met the requirements of E-Sign, the remaining requirements of EFTA and Regulation E applicable to preauthorized debit card transactions would have to be complied with. These include ensuring that the authorization is readily identifiable as such to the consumer, ensuring that the terms of the preauthorized debits are clear and readily understandable to the consumer, and providing a copy of the authorization to the consumer.
With respect to the safe harbor available to telemarketers who do not knowingly accept debit cards but charge one in error, the Final Rule provides further guidance regarding the “reasonable procedures” that should be implemented to avoid the inadvertent acceptance of debit cards. While the Federal Reserve has indicated that what is reasonable will vary with the circumstances, the procedures should include some interaction with the consumer specifically designed to elicit information about whether a debit card is involved. For example, asking the consumer whether the card to be used is a debit or credit card would constitute a reasonable procedure.
Significance: While the Federal Reserve’s new rule is not an express endorsement of the use of oral recorded authorization for debit card transactions involving recurring payments, it does at least allow for that possibility. Marketers engaged in recurring billing transactions over the telephone should consult with counsel to determine whether their offers can be structured in such a way as to satisfy the requirements of E-Sign, EFTA, and Regulation E or, alternatively, to ascertain whether they have procedures in place reasonably adapted to avoid the inadvertent acceptance of debit cards for such transactions.