By Kenneth Benton, Senior Consumer Regulations Specialist, Federal Reserve Bank of Philadelphia
The World Bank estimated that the global market for foreign remittance transfers, in which consumers electronically transfer funds to persons in another country, exceeded $440 billion in 2010.1 The United States ranked as the top transmitter in 2009, sending $48.3 billion in transfers.2 Many states have money transmitter laws and conduct examinations of transmitters through their state banking departments, but until the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), no federal consumer protection law directly regulated foreign remittance transfers.
During congressional hearings conducted before the Dodd-Frank Act was enacted, witnesses testified about consumer protection issues related to foreign remittance transfers. According to a report of the Senate Committee on Banking, Housing, and Urban Affairs, “[i]mmigrants send substantial portions of their earnings to family members abroad. These senders of remittance transfers are not currently provided with adequate protections under federal or state law. They face significant problems with their remittance transfers, including being overcharged or not having the funds reach intended recipients.”3 The hearings suggested the need for reliable and standard disclosures, especially for the amount of the transfer the recipient would receive.4
In response to these concerns, Congress amended the Electronic Fund Transfer Act (EFTA) in section 1073 of the Dodd-Frank Act to add new EFTA section 919,5 which creates four new compliance requirements for foreign remittance transfers. Section 919:
In May 2011, the Federal Reserve Board (Board) published a rulemaking proposal to amend Regulation E and its Official Staff Commentary (Commentary) to implement section 919’s requirements.6 Because the Dodd-Frank Act transferred rulemaking authority for the EFTA from the Board to the Consumer Financial Protection Bureau (CFPB), effective July 21, 2011, the CFPB inherited the responsibility for completing the rulemaking.
In February 2012, the CFPB published the final rule, which largely adopted the Board’s proposal.7 The rule becomes effective February 7, 2013, and is codified as new subpart B to Regulation E, 12 C.F.R. §§1005.30-1005.36. The CFPB simultaneously issued a related rulemaking proposal to make changes to the final rule concerning transfers scheduled in advance and the definition of a remittance transfer provider, for which the CFPB solicited comments.8 The CFPB published a final rule for the concurrent proposal on August 20, 2012.9 This article reviews the final rules for foreign remittance transfers.
Before discussing the final rules, it is helpful to review several new definitions created in the February 2012 final rule:
The final rule applies to providers, who are defined as persons providing remittance transfers to consumers in the normal course of business. To facilitate compliance, the CFPB established a bright-line safe harbor to determine when an institution makes transfers in the normal course of business. Specifically, the rule provides that a person who made 100 or fewer remittance transfers in the previous calendar year and continues to make 100 or fewer remittance transfers in the current year is deemed to not be providing remittance transfers in the normal course of business.11
The CFPB also established a transition period for providers who made fewer than 100 transfers in the previous year and then make over 100 in the current year. In that circumstance, once the provider exceeds 100 transfers in the current year and is determined to provide remittance transfers in the normal course of business, the provider has a reasonable period of up to six months to comply with the remittance transfer requirements in subpart B of Regulation E. See §1005.30(f)(2)(ii). The provider is not subject to subpart B compliance requirements for any remittance transfers made during the transition period. To facilitate compliance, Comment 30(f)-2.iv provides an example of the safe harbor and transition period.
While the bright-line rule creates a safe harbor, it does not preclude the possibility of a provider conducting more than 100 transfers per year without triggering a determination that it does so in the normal course of business. The Commentary provides further guidance on the meaning of “the normal course of business” with a facts and circumstances test:
Whether a person provides remittance transfers in the normal course of business depends on the facts and circumstances, including the total number and frequency of remittance transfers sent by the provider. For example, if a financial institution generally does not make international consumer wire transfers available to customers, but sends a couple of international consumer wire transfers in a given year as an accommodation for a customer, the institution does not provide remittance transfers in the normal course of business. In contrast, if a financial institution makes international consumer wire transfers generally available to customers (whether described in the institution’s deposit account agreement, or in practice) and makes transfers many times per month, the institution provides remittance transfers in the normal course of business.12
Providers who conduct more than 100 transfers per year but believe they are still exempt from the regulation should review the facts and circumstances test carefully to verify their eligibility for the exemption.
When a sender requests a remittance transfer, the provider must deliver prepayment disclosures listing critical terms of the transaction and, if the consumer continues with the transaction after receiving the disclosures, a post-payment receipt that repeats the prepayment disclosures and includes additional information such as error resolution rights. The rule also includes an option to provide a combined disclosure prior to payment, in lieu of the prepayment disclosure and receipt.
When a sender requests a remittance transfer, the provider must make seven disclosures (as applicable) in a retainable form before payment is made.13 But if the transaction is conducted orally or entirely by mobile telephone via mobile application or text message, the prepayment disclosures may be provided orally, by mobile application, or by text message, provided that the right of cancellation (discussed later in the article) is also disclosed either orally or by mobile application or text message.14
The seven prepayment disclosures must be made using the following terms (or substantially similar terms):15
Disclosures 1-3 show the sender the total cost of the transaction in the sender’s currency (the amount the sender is transmitting plus any fees and taxes), while disclosures 5-7 show the breakdown of the net amount the recipient receives (the amount the sender transmitted less any applicable fees or taxes) in the currency in which the funds will be received. The exchange rate in Disclosure 4 is required to enable the sender to understand the conversion from the sender’s currency to the recipient’s currency. To facilitate compliance, Model Form A-30 shows a prepayment disclosure with all of the required terms. Model Form A-33 is similar except it does not show an exchange rate because it is based on a dollar-to-dollar transfer.
If a consumer continues with the transfer after receiving the prepayment disclosures, a receipt must be provided (generally when payment is made) that includes all of the prepayment disclosures and the following additional disclosures (using the following terms or substantially similar terms), as applicable:16
For transactions conducted by telephone, either orally or via mobile application or text message, the receipt may be mailed or delivered to the sender no later than one business day after payment. However, for telephone transactions, if payment was made by transferring funds from the sender’s account held by the provider, the receipt may be provided on or with the next regularly scheduled periodic statement for that account or within 30 days after payment if no periodic statement is provided.
Model Form A-31 shows a receipt based on the same transaction used in the Model Form A-30 prepayment disclosure. Model Form A-34 is similar except it does not show an exchange rate because it is based on a dollar-to-dollar transfer.
To reduce the compliance burden, the final rule includes an option for providers to combine the prepayment disclosures and the receipt.17 If a provider selects this option, it must provide the combined disclosure prior to payment. If the sender proceeds with the transaction after receiving the combined disclosure,the provider must deliver written or electronic proof of payment when the transaction is paid. The proof of payment may appear on the combined disclosure or a separate piece of paper.18
When disclosures are provided in a retainable form, providers have two compliance options for the languages used for the disclosures. The first option is to provide the disclosure in English and each of the foreign languages principally used by the provider to advertise, solicit, or market remittance transfers at the office at which a sender conducts a transaction or asserts an error.19 For example, if the provider’s office contains advertisements for remittance transfers in English, Spanish, and Vietnamese, providers could make disclosures in all three languages.
The second language disclosure option is to provide the disclosures in English and (if applicable) the foreign language primarily used by the sender to conduct business with the provider.20 For example, if the sender requests the transfer in Spanish, providers could provide the disclosures in English and Spanish. But if the sender requests the transfer in English, only disclosures in English are required.21 The Commentary for §1005.31(g) provides additional guidance on the language requirements, including a detailed discussion of the factors relevant to determining the language or languages a provider principally uses to advertise, solicit, or market remittance transfer services and the language primarily used by the sender with the remittance transfer provider to conduct the transaction or assert an error. For example, if a sender requests remittance transfer information from a provider in English about sending a remittance transfer to a person in Mexico, and the provider and the sender begin communicating in Spanish, Spanish is the language primarily used to conduct the transaction.22 To facilitate compliance, some of the model forms show disclosures printed in Spanish.23
Disclosures must be accurate when the sender makes a payment.24 However, because providers may not always be able to determine all of the transaction terms with certainty, the final rule permits the use of estimates for certain terms in two circumstances.
First, providers that are either an insured depository institution or a credit union may rely on estimates that are reasonably accurate when the exact amounts cannot be determined for reasons beyond their control.25 This exception applies only to the disclosures for the exchange rate, taxes and fees imposed by other persons, the transfer amount (if taxes or fees are imposed by someone else), and the total amount transferred to the recipient. See 12 C.F.R. §1005.32(a)(1). The transfer must also be sent from the sender’s account with the depository institution or credit union. The exception is temporary and scheduled to sunset on July 21, 2015; however, Congress authorized the CFPB to extend it by rule for five additional years if necessary to allow depository institutions and credit unions to continue offering foreign remittance transfers.26
The Commentary for §1005.32(a)(1) provides guidance and examples for determining whether disclosures are within the institution’s control and whether estimates may be used under this exception. For example, if the exchange rate is determined when the funds are deposited in the recipient’s account, and the institution does not have a correspondent relationship with the recipient’s institution, estimates of the exchange rate are permitted.27 Institutions should review the Commentary carefully to determine if they may rely on estimates for any of the required disclosed terms for which estimates are permitted.
This exception is important for the many depository institutions and credit unions that make foreign remittance transfers using open-network systems such as wire transfers or international ACH. In an open-network system, the provider usually does not have a relationship with all of the intermediaries involved in completing the transaction. As a result, it may be difficult for an open-network provider to disclose certain terms, such as the fees imposed by an intermediary or the taxes imposed in the recipient’s country.
This contrasts with a closed-network system, in which the provider has relationships with the other intermediaries involved in the transaction. For example, a Western Union remittance transfer initiated in the United States will likely be sent to the local Western Union office in the recipient’s country. In a closed-network system, the provider can ascertain some of the transaction terms that must be disclosed from the other intermediaries with which it has a relationship.
The second exception is permanent and applies to all providers. It permits estimates under two circumstances: 1) if a remittance transfer provider cannot determine the exact amounts when disclosure is required because of a recipient nation’s laws; or 2) the methods by which transfers are made to a recipient nation do not permit providers to know the amount of currency to be received.28 The latter circumstance based on transfer methods will apply only to international ACH on terms negotiated between the United States government and the recipient country’s government, where the exchange rate is set by the central bank of the recipient country or other governmental authority on the business day after the provider has sent the remittance transfer.29 The Commentary for §1005.32 provides helpful guidance for determining if either of the two exceptions applies.
To facilitate compliance, the CFPB published a list of safe-harbor countries that qualify for the second exception. A provider can still use estimates for a country not on the list if the provider determined that the requirements of §1005.32(b)(1)(i) apply to the designated recipient’s country, but the provider would not obtain a safe harbor.30
It is important to note that if a provider relies on estimates, it must comply with the requirements in §1005.32(c) regarding the methodology to be used in calculating estimates for the exchange rate, the transfer amount in the recipient’s currency, other fees and taxes, and the amount of currency the designated recipient will receive. The Commentary for §1005.32(c) provides further guidance on the methodology for calculating estimates. In addition, all estimates must be labeled as “Estimated” or a substantially similar term in close proximity to the disclosure. For example, a provider could label a disclosure as “Estimated Transfer Amount” or “Total to Recipient (Est.).” See Comment 31(d)-1.
Because Congress created specific error resolution procedures for remittance transfers, the error resolution procedures in §1005.11 generally do not apply to remittance transfer providers. Instead, remittance transfer providers are generally governed by §1005.33 for error resolution purposes, with certain exceptions.
The following issues are subject to error resolution procedures:
The Commentary provides additional guidance on errors. For example, if a designated recipient receives less than the amount the provider disclosed to the sender because the provider and the provider’s agent in the foreign country used different exchange rates, an error has occurred.31 Similarly, if the amount the designated recipient receives is less than the disclosed amount because of local taxes in the recipient’s country or fees assessed by the provider’s agent in the foreign country that were not disclosed, an error has occurred.32 However, discrepancies resulting from the use of estimates do not qualify as errors unless the provider failed to use the methodology for making estimates in §1005.32(c).33
The Commentary clarifies the exception to the definition of error when providers fail to make funds available on the date specified on the receipt or combined disclosure because of extraordinary circumstances outside the provider’s control that could not have been reasonably anticipated. The Commentary cites as examples “war or civil unrest, natural disaster, garnishment or attachment of the funds after the transfer is sent, and government actions or restrictions that could not have been reasonably anticipated by the remittance transfer provider, such as the imposition of foreign currency controls.”34
The Commentary also clarifies the exception to the definition of error when an incorrect amount is received because of extraordinary circumstances outside the provider’s control that could not have been reasonably anticipated. The Commentary provides the following examples: “war or civil unrest, natural disaster, garnishment or attachment of some of the funds after the transfer is sent, and government actions or restrictions that could not have been reasonably anticipated by the remittance transfer provider, such as the imposition of foreign currency controls or foreign taxes unknown at the time the receipt or combined disclosure is provided.”35
The final rule also identifies sender requests that do not qualify as errors triggering error resolution procedures:
If a provider determines that an error occurred, the sender must be offered the option of obtaining a refund or making the funds necessary to resolve the error available to the recipient. In addition, if the error involves a failure to make funds available on the date specified on the receipt or combined disclosure, the remittance transfer provider must also refund any fees and (to the extent not prohibited by law) taxes imposed for the remittance transfer unless the sender provided incorrect or insufficient information to the remittance transfer provider.36
If a financial institution receives an error notice involving an incorrect electronic fund transfer from the sender’s account held by the institution and used to fund a remittance transfer, it must investigate under the Regulation E error procedures in §1005.11, provided the institution was not the remittance transfer provider.37 However, if the institution is also the provider for the transaction, the §1005.33 procedures apply.38
If a provider completes an investigation that fully complies with the requirements of §1005.33, and the sender reasserts the error, the provider is not obligated to reinvestigate unless the error is asserted again after the provider responded to a sender’s request for documentation or for additional information or clarification concerning a remittance transfer.39
If a sender alleges an unauthorized electronic fund transfer for payment of a remittance transfer, the error resolution procedures in §§1005.6 and 1005.11 apply to the account-holding institution. For an alleged unauthorized use of a credit account to pay for a remittance transfer, the creditor must use the error resolution provisions in Regulation Z, 12 C.F.R. §1026.12(b), if applicable, and §1026.13.
Providers must establish policies and procedures to comply with the requirements of the remittance transfer regulations and retain records of senders’ error notices and documentation and the provider’s responses for at least two years.40
A sender generally has 30 minutes after payment to cancel the transaction, provided the recipient has not yet picked up the funds and the provider is able to identify the transaction to be cancelled.41 Once a provider receives a valid cancellation request, it has three business days to refund the total amount of funds the sender provided, including fees and taxes (unless prohibited by law). The provider cannot impose fees for cancelling the transaction.42
Because remittance transfers involve multiple parties and countries, Congress was concerned about the consumer’s ability to redress errors caused by parties acting on behalf of a provider and included a provision in EFTA section 919(f) that makes providers liable for the acts of their agents, authorized delegates, or affiliates. The final rule implements this requirement in §1005.35 of Regulation E, under which a provider is liable for any violation of subpart B of Regulation E when an agent or authorized delegate acts on behalf of the provider. EFTA section 919(f) also provides that a regulator enforcing compliance with these requirements may consider, when taking action against the provider, the extent to which the provider has policies and procedures in place, including procedures to exercise oversight of agents or authorized delegates acting on behalf of the provider.43
The compliance requirements for transfers scheduled in advance are slightly different with respect to the use of estimates and cancellation. When a sender requests a single transfer or the first in a series of recurring transfers to occur at least five business days before a future transfer date, the provider may use estimates for certain terms in the prepayment disclosures and the receipt provided at the time of payment.44 If a provider gives the consumer disclosures that include estimates under this exception, a second receipt with accurate figures must be provided generally no later than one business day after the transfer has been made.45
For each subsequent transfer in a series of recurring transfers, the provider need not deliver a prepayment disclosure. However, if certain information has changed with respect to what was disclosed with the first preauthorized remittance transfer, the provider must deliver a receipt within a reasonable period before the date of the transfer.46 If estimates were provided or an updated receipt was unnecessary, the provider must deliver an accurate receipt no later than one business day after the transfer.47
With respect to the cancellation requirements, when transfers are scheduled at least three business days before transfer, senders may cancel the transfer if the provider receives the request at least three business days before the scheduled transfer. For single transfers scheduled at least three business days in advance or the first transfer in a series of preauthorized remittance transfers, the date of the transfer must be disclosed on the receipt.48 For subsequent transfers, senders must also be informed of future transfer dates.49
To implement the final rule, financial institutions will have to update their policies and procedures, training, and computer systems. Given the complexity of the changes, it is important that financial institutions start the process early and rigorously test their systems for compliance. Specific issues should be discussed with the CFPB and your primary regulator.
February 7, 2012 Federal Register notice for the final rule.
July 10, 2012 Federal Register notice for a technical correction.
August 20, 2012 Federal Register second final rule.
October 16, 2012 CFPB Webinar on remittance transfers rule.
Complete Issue (3.44 MB, 20 pages)
Kenneth Benton, Editor
FEDERAL RESERVE SYSTEM
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