The Consumer Financial Protection Bureau (CFPB) recently issued a Bulletin (Bulletin 2015-06) on November 23 which it says is "intended to remind entities of their obligations under the Electronic Funds Transfer Act and Regulation E" when engaging in preauthorized transfers (PATs) from consumer accounts. The Bulletin falls short on clarity and may provide more confusion than guidance.

A copy of the CFPB Bulletin is available at:  Link to Bulletin 2015-06

E-Sign and the EFTA Guidance

As you may recall, preauthorized EFTs (PATs) refer to an "electronic fund transfer authorized in advance to recur at substantially regular intervals."  See 12 CFR § 1005.2(k).  More specifically, a PAT "is one authorized by the consumer in advance of a transfer that will take place on a recurring basis, at substantially regular intervals, and will require no further action by the consumer to initiate the transfer."  See Off. CFPB Comment to 12 CFR § 1005.2(k).

Regulation E requires that PATs must be authorized "only by a writing signed or similarly authenticated by the consumer."  See 12 CFR § 1005.10(b).  "The person that obtains the authorization shall provide a copy to the consumer."  Id.

The CFPB's Bulletin 2015-06 provides favorable guidance on the interplay between the EFTA and The Electronic Signatures in Global and National Commerce Act ("E-Sign").

EFTA and Regulation E require PATs to be in writing and "signed or similarly authenticated" by the consumer. The Bulletin confirms that if an entity uses E-Sign, it can obtain a consumer's signature by use of an oral recording of a consumer's agreement to a PAT.

Under E-Sign, provided all E-Sign disclosures and other requirements are satisfied, recording a consumer's statement of, for example, "I have read and agree to the agreement allowing you to debit my bank account $100 on the 5th day of each month for 20 months" would qualify as an electronic signature. The Bulletin provides other examples of electronic signatures.

The problem for many is that EFTA and Regulation E require the PAT agreement to be "in writing." As the Bulletin itself notes, E-Sign draws a distinction between an "electronic record" and an "electronic signature."

In the above example, we have only obtained an "electronic signature" under E-Sign. While the oral recording of the consumer's voice in the example contains the terms of the agreement, E-Sign expressly prohibits creating an "electronic record" solely by ". . . a recording of an oral communication . . . except as otherwise provided under applicable law."

Written PATs May Not Be Oral Recordings

Because E-Sign does not allow an oral recording of the terms of an agreement to be an "electronic record," the above example would not likely provide for an "electronic record" of a PAT agreement. We would only have an E-Sign "electronic signature."  If the EFTA and Regulation E required the consumer to be provided with a copy of the written PAT agreement, that creates a problem.

As noted by the Bulletin, E-Sign would prohibit an oral recording of an agreement as an "electronic record" where a statute or regulation (such as the EFTA and Regulation E) requires that the agreement "be provided or made available to a consumer in writing."  But that prohibition does not extend to a PAT "authorization" according to the Bureau, because "Regulation E does not specify that entities must provide a writing to consumers when obtaining the authorization."

Unfortunately, the wording used here by the CFPB may be misconstrued to mean that the EFTA's "written agreement" requirement may be satisfied by an oral recording of the agreement. That construction appears to be incorrect.

What the CFPB  does not clearly say is that the prohibition against the creation of "electronic records" by an oral recording of an agreement does not prohibit you from obtaining an "electronic signature" by use of an oral recording.  Stated differently, the CFPB is addressing, in unfortunately contorted fashion, the distinction between electronic signatures and electronic records.

Delivery of Written Agreement

What has plagued many under the EFTA is the timing of the delivery of the "written agreement" authorizing the PAT. Must it be provided before the PAT begins and at the time of the "authorization" be it written or E-Sign electronic signature?

The Bulletin answers the question by saying that you can obtain an E-Sign Signature and then provide the writing separately, either in paper or as an E-Sign electronic record.

But what the Bureau is focusing on is that there must be clear assent to the agreement – "authorization must be readily identifiable as such to the consumer and the terms of the preauthorized EFTs must be clear and readily understandable to the consumer. The authorization process should evidence the consumer's identity and assent to the authorization."

In this regard, the above example might provide assent as to amount and timing of the payments.

Now, as far as the written agreement is concerned, it may be either in paper or E-Sign compliant electronic record form. 

The Bulletin's statement "Regulation E requires persons that obtain authorizations for preauthorized EFTs to provide a copy of the terms of the authorization to the consumer," demonstrates that the "written agreement" requirement does not authorize the use of oral recordings to satisfy the writing requirement.  But is does solve the problem of the assent (signature) occurring before delivery of the writing and not simultaneously with or following the writing.