VIDEO: Reg E Dispute Involving a Previous Merchant
In this Compliance Clip (video), Adam responds to a question about how to handle disputes involving a merchant that a consumer has previously used. He explains whether financial institutions can deny a dispute solely based on a customer's history with that merchant, highlighting the requirements set forth by Regulation E.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about a Reg E dispute that involves a previous merchant.
Here's the question I recently received. The question said this: if a customer comes in and files a dispute just because they have dealt with the merchant before is not a good enough reason to deny the claim, correct? We must do our investigation and prove they did or didn't do it, right?
So, what they're saying is that they've got a customer coming in who is claiming to dispute a transaction with a vendor that the financial institution can see from transaction history has previously done business with the consumer. So, the consumer has done business with this merchant before and they've not disputed it previously. But now, there's a transaction coming through and the consumer is disputing it. So, the bank wants to know, can they just deny it because they've known that they've done business with this merchant before? It seems legitimate and I have seen financial institutions use that denial reason. Now, is that correct? That's the real question.
Let's take a look at our answer and the answer comes from Regulation E, which is 1005.11(c)(1) and our answer is also going to come from an enforcement action that was issued by the CFPB several years ago.
First of all, let's look at Regulation E section 1005.11(c)(1). What this section requires is financial institutions have a certain time limit and extent of investigation. So, what the rules say is a financial institution shall investigate promptly and accept as otherwise provided in paragraph (c) of Regulation E, this section of Regulation E, shall determine whether an error occurred within 10 business days of receiving a notice of error. The institution shall report the results to the consumer within three business days after completing its investigation, and the institution shall correct the error within one business day after determining that an error occurred.
So, these are the requirements for conducting an investigation on a dispute. A dispute for example, an unauthorized EFT. So, the key here is the financial institution shall investigate promptly and determine whether an error occurred within 10 business days. So, this really doesn't answer our question, does it? So, let's take a look and find more guidance. Well, it's not really guidance, but we can see what the regulators have said in a formal enforcement action. This was a consent order that the CFPB issued against USAA Bank back in 2019. USAA was doing the exact practice allegedly. According to the CFPB, they were doing the exact practice of denying transactions where the customer had prior history of doing transactions with the same merchant.
And so, let's take a look and see what the CFPB said in their consent order. They said, USAA routinely failed to conduct a reasonable review of all relevant information within its own records prior to making a determination about whether the consumer had asserted a valid error. They go on to say that when consumers had transactions with the merchant at issue that predated the disputed transaction, the bank made the summary determination that no error had occurred, and this is key, without reasonably considering other evidence in its own records, including the consumer's assertation that the EFT was unauthorized or an incorrect amount, or the basis for the consumer's assertion. So, the consumer is saying, “hey, there was fraud,” and they're saying, “well, you've done business with them before.” “No, I'm telling you, there's fraud.” “Well, too bad we're gonna deny it because you've done business before.” So, what the CFPB is saying is that because the consumer was asserting that this was an error, the bank was not taking that into consideration. And so, they were not doing a proper investigation. That's the concern.
Now, this is confusing and so, the CFPB does give us an explanation in their words. What they said, was this, when conducting an error resolution investigation, a financial institution must determine whether an error has occurred, and in doing so, must conduct, at a minimum, a review of its own records regarding the alleged error. This review must include any relevant information within the institution's own records, and the investigation must be reasonable. So, what they're saying is, when you are just relying on the fact that a customer has had a prior purchase history with a merchant they are not disputing, that is not any relevant information, and it's not reasonable, and therefore you cannot deny it for that sole purpose.
Now, can that be a contributing factor to your denial? Probably. But it cannot be the sole reason you deny it. So, if you're a financial institution that is denying disputes under Regulation E just because a customer has a prior purchase history with a merchant they are not disputing a transaction, I would take another look at this. This is not an appropriate investigation, you should be looking at more things, taking a deeper dive into this, and not just doing a blanket deny-all because a customer had a prior history of purchases with a merchant that they are not disputing a transaction with. So that is our answer.
That’s it for this Compliance Clip.