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The Board of Governors of the Federal Reserve System (the Board) recently amended Regulation E, the Board's implementing regulation for the Electronic Funds Transfer Act, to expand its coverage to include consumer payroll cards. This article reviews the regulatory requirements for financial institutions offering payroll cards on behalf of employers.
The final rule, which became effective on July 1, 2007, amends the definition of "account" to include payroll card accounts established directly or indirectly by an employer on behalf of a consumer with which electronic fund transfers of the consumer's salary, wages, or other employee compensation are made on a recurring basis. In addition, the final rule adds a new section, 205.18, which imposes specific requirements on financial institutions offering payroll cards.
Payroll cards permit employees to access their wages or other recurring compensation payments using a payment card comparable to a debit card. Typically, an employer, working with a financial institution, provides the employee with a plastic card with a magnetic stripe. This card accesses an account assigned to the individual employee. Each payday, the employer credits the employee's account for the amount of their compensation instead of providing a paper check or making a direct deposit to a checking account. Employees have access to the funds by using the payroll card to make withdrawals from an ATM and to make point-of-sale (POS) purchases. In 2001, Visa and MasterCard began programs to encourage banks to offer Visa and MasterCard payroll cards so employees could use them anywhere those cards are accepted. These programs resulted in a significant increase in the growth of payroll cards.
Payroll cards are often marketed to employers as an effective means of providing wages to employees who lack a traditional banking relationship. Employers benefit because they save money by reducing the costs associated with delivering paper paychecks or pay stubs. Financial institutions benefit because payroll cards are a revenue source and serve as another valuable service offered to business customers and can also lead to expanded banking relationships with unbanked consumers. Unbanked consumers benefit because payroll cards provide a convenient way to access their wages, without incurring check-cashing fees, and can serve as substitutes for traditional transaction accounts at financial institutions. Some payroll cards offer additional features for consumers, such as convenience checks, overdrafts, and electronic bill payment.
Definition of Account
Under the final rule, the definition of "account" in section 205.2(b)(2) is expanded to include payroll cards: "The term includes a â€˜payroll card account' which is an account directly or indirectly established through an employer and to which transfers of the consumer's wages or other compensation are made on a recurring basis, whether the account is operated or managed by the employer, a third-party payroll processor, a depository institution or any other person."
Because the definition specifies recurring payments such as a consumer's wages or other compensation, the rule does not cover a one-time payment on a payroll card, such as a final payment or emergency payment. The rule also does not cover expense reimbursement if the card were solely used for that purpose since expense reimbursement does not constitute "wages or other compensation." However, the rule does cover seasonal employees since they are paid on a recurring basis.
The amendment adds a new section to the regulation specific to payroll cards: Section 205.18, Requirements for Financial Institutions Offering Payroll Card Accounts. This section provides that financial institutions offering payroll cards must comply with all other applicable requirements of Regulation E and includes modifications of those requirements, which are discussed below.
Alternative to periodic statements. This section allows financial institutions some flexibility in complying with the section 205.9 requirement to provide periodic statements regularly. As an alternative to providing paper periodic statements, financial institutions can instead elect to offer payroll card customers any of the following options to access their account transaction information:
The history of account transactions provided electronically, or upon request, must include the same type of information required to be provided on paper periodic statements under section 205.9. This includes information about any EFT fees in connection with the payroll card account imposed during the period for which the information was requested.
In addition, a financial institution electing to use one of the alternatives to periodic statements must modify its account opening disclosures. The initial account disclosure must provide a number a customer can call to obtain his account balance and history of transaction information, and it must also disclose the customer's error resolution rights for payroll cards.
The 60-day period for reporting errors. Section 205.11 requires customers to notify financial institutions about errors with electronic funds transfers within 60 days after the institution sends a periodic statement in which the alleged error is first reported. This is done for purposes of determining the extent of the customer's liability for unauthorized transactions. If an institution elects an alternative to periodic statements, section 205.18(c) addresses the critical issue of when the 60-day period begins. If customers choose to access the account statement electronically, the 60-day period begins the date the customer accesses the electronic statement. If customers request a copy of the written statement, the 60-day period begins the date the institution mails the statement. If customers request both a written statement and electronic statement, the 60-day period begins on the earlier of the two dates.
Annual error resolution notice. Financial institutions must provide payroll card customers an annual error resolution notice substantially similar to the Board's model form notice. In lieu of the annual notice, institutions that elect one of the alternative methods to periodic statements can include an abbreviated error resolution notice, substantially similar to the model form abbreviated notice, each time the institution responds to a consumer request for transaction history, either electronically (e.g., through the Internet) or in writing. The Board specifically declined to allow financial institutions the option of providing the abbreviated notice exclusively through a telephone line because consumers would not be able to retain a copy of the notice.
Model Disclosure Clauses and Forms
The final rule includes model disclosure forms and clauses for account opening disclosures and error resolution notices, including those used by government agencies. Financial institutions are provided with a safe harbor if they use the model clauses and forms.
Financial institutions that currently offer payroll cards should review their compliance programs to ensure that their policies and procedures incorporate the new rules. Additionally, institutions that choose to provide alternatives to periodic statements should revise their initial disclosure and error resolution procedures to comply with the requirements of the final rule.
Financial institutions that are considering developing a payroll card program should review the new rules carefully with their compliance officer to ensure compliance. The complexity of the payroll card will determine the associated compliance obligations. For example, check writing, fund transfers, or bill pay features will be subject to additional regulatory requirements.
If you have any questions about Regulation E and the recent amendments, please contact either Supervising Examiner Eddie L. Valentine or Supervising Examiner John D. Fields through the Regulations Assistance Line at (215) 574-6568.
The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.