Jennifer J. Johnson
Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Ave., NW
Washington, DC 20551

Re: Proposed Amendments to Official Staff Interpretation of Electronic Fund Transfers (Regulation E); Docket No. R-1074

Dear Ms. Johnson,

The Food Marketing Institute (FMI) is pleased to respond to the Federal Reserve Board’s (FRB’s) request for comments on proposed amendments to the Official Staff Interpretation that accompanies Regulation E (12 CFR, Part 205, Supp. I, hereinafter “Commentary”). 65 Fed. Reg. 40061 (June 29, 2000). FMI is a member of NACHA and generally agrees with the comments filed by the association. (Issues of particular importance to FMI are highlighted below.) However, in contrast to NACHA, we urge the FRB to clarify the proposed Commentary amendments with respect to service fees re-couped electronically in conjunction with a re-presented check. Specifically, as discussed more fully below, service fee debits should not be covered by Regulation E and no separate authorization should be required to retrieve these fees electronically.

FMI is a non-profit association that conducts programs in research, education, industry relations and public affairs on behalf of its 1,500 members and their subsidiaries. Our membership includes food retailers and wholesalers, as well as their customers, in the United States and around the world. FMI’s domestic member companies operate approximately 21,000 retail food stores with a combined annual sales volume of $300 billion, which accounts for more than half of all grocery sales in the United States. FMI’s retail membership is composed of large multi-store chains, small regional firms, and independent supermarkets. Our international membership includes 200 members from 60 countries.

1. Section 205.2-2(a): Access Device

Section 205.2-2(a) of the Commentary clarifies the “access device” definition in Regulation E by setting forth examples of items that are or are not considered access devices by the FRB. The proposed amendment to the Commentary provision would clarify that the term “access device” does not include a check or draft used as a source document to initiate an EFT. Proposed Commentary Section 205.2-2(a)(2). FMI agrees that source documents should not be considered access devices and appreciates the FRB’s proposed clarification of the issue.

2. Section 205.2-2(h): Electronic Terminal

Section 205.2-2(h) of the Commentary describes the circumstances under which a point-of-sale (POS) terminal will be considered an “electronic terminal,” to which the receipt requirements of Section 205.9 would attach. The proposed change to the Commentary provision would clarify that the use of a source document to initiate an electronic fund transfer would render the POS terminal an “electronic terminal” within the meaning of Regulation E. FMI supports the proposed amendment.

3. Section 205.3(c)(1): Exclusions from Coverage – Checks

Regulation E states that the term “electronic fund transfer” does not include any transfer of funds originated by check, draft, or similar paper instrument. 12 C.F.R. § 205.3(c)(1). The proposed amendments to the Commentary would add a new paragraph 3(c)(1) regarding re-presented checks and checks used as source documents. As explained in the proposed Commentary provision, the FRB does not intend Regulation E to apply to the electronic re-presentment of a returned check. Proposed Commentary Section 205.3(c)(1)1. The agency justifies the exclusion of re-presented checks from Regulation E by stating that the transfer is “originated by check.” 65 Fed. Reg. at 40062. In contrast, the proposed amendments to the Commentary would apply Regulation E to electronically debited service fees that are accrued as a result of a dishonored check. The FRB’s rationale is that “the debited fee would not be part of the RCK debit, and appears to meet the definition of an EFT.” 65 Fed. Reg. at 40062. As a result, the FRB continues, the transaction “must be authorized by the consumer.” Id. We respectfully disagree with the FRB’s analysis.

Regulation E defines an EFT as “any transfer of funds that is initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit an account.” 12 C.F.R. § 205.3(b). The regulation continues by specifically excluding certain transactions from the scope of the EFT definition, including “any transfer of funds originated by check, draft, or similar paper instrument; or any payment made by check, draft, or similar paper instrument at an electronic terminal.” 12 C.F.R. § 205.3(c)(1). We submit that a service fee that is accrued as a result of a dishonored check is “originated by” the initial check just as surely as the electronic re-presentment of the check. That is, the service fee at issue is only charged if a check is tendered that is not honored by the appropriate financial institution. Consequently, the origin of the service fee also resides in the initial check. Therefore, the service fee debit should fall within the “originated by” check exclusion of the EFT definition, and, thus, Regulation E should not apply and the proposed Commentary should be amended accordingly.

However, if we assume arguendo that a fee re-couped electronically for a re-presented check should be considered an electronic fund transfer and, thus, covered by Regulation E, no separate authorization should be required for the service fee debit. Specifically, customers are routinely provided with notice that tendering a check that cannot be honored to a merchant will result in the imposition of a service fee since most retailers specifically post such notices1 and service fees are set by law in thirty-nine states.2 Thus, when a customer tenders a check to a merchant in exchange for goods received or services rendered, the customer is implicitly agreeing to pay the service fee if the check is not honored by the financial institution. The customer’s promise to pay the face value of the check and also to pay any service fees associated with the check should be sufficient authorization to allow merchants to retrieve service fees electronically.

Accordingly, if the FRB concludes that the service fee debit is, in fact, covered by Regulation E, we respectfully request that the FRB amend the proposed Commentary language on exclusions from coverage as indicated in italic type below:

Regulation E does apply, however, to any fee debited electronically from the consumer’s account for representing the check electronically, except that no separate authorization is required.

Proposed Section 205.3(c)(1).1 (with proposed amendments). For the reasons stated above, the FRB should also consider modifying the Commentary that accompanies the regulatory definition of “unauthorized electronic fund transfer” in Section 205.2(m) to clarify that an electronic service fee re-coupment associated with re-presentation of a check is not an unauthorized transaction, even if no separate authorization is obtained.3

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Overall, we commend the FRB for proposing generally reasonable and balanced amendments to the Commentary that accompanies Regulation E, and hope that you will consider the foregoing recommendations favorably. If we may provide further explanation or assistance, please do not hesitate to call on us.

Sincerely,


Tim Hammonds   
President and CEO


1 Indeed, the FRB notes in the preamble that “the merchant payee usually has provided notice to the consumer that any returned item may be collected electronically if returned for insufficient or uncollected funds.” 65 Fed. Reg. at 40062. These notices are usually accompanied by a statement regarding the service fee that will be charged for dishonored checks.

2 The eleven states in which merchant fees are not established by law are Delaware, Kentucky, Maine, Massachusetts, Nebraska, New Jersey, New Mexico, Oklahoma, Pennsylvania, Rhode Island, and Vermont.

3 Regulation E defines an unauthorized electronic fund transfer as an EFT from a consumer’s account that is initiated by a person other than the consumer without actual authority to initiate the transfer and from which the consumer receives no benefit. 12 C.F.R. § 205.2(m). As discussed above, tendering a check should provide a merchant with sufficient authority to initiate the transfer; moreover, the consumer has received the benefit of the goods and services provided by the merchant in exchange for accepting the consumer’s check. Therefore, an electronic service fee re-coupment does not fall within the regulatory definition and the Commentary should be amended accordingly.