On December 21 2012 the Consumer Financial Protection Bureau (CFPB) released a proposed rule and request for comments outlining a limited set of revisions to its previously published final rule on international money transfers, and an extension of the date on which the rule would become effective.(1)
The proposal would amend the final rule issued by the CFPB in early 2012 that implements Section 1073 of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding remittance transfers.(2) In particular, the proposal would:
- grant a remittance transfer provider additional flexibility to rely on a sender's representations regarding variables affecting the amount of foreign taxes or fees imposed by persons other than the provider and to make certain assumptions regarding the taxes and fees applicable to a transfer;
- limit a remittance transfer provider's obligation to disclose foreign taxes to those taxes imposed by a country's central government, thereby eliminating the obligation to disclose taxes imposed at the regional, provincial, state or local level; and
relieve a remittance transfer provider from liability for the principal transfer amount if the transferred funds are deposited into the account of an unintended recipient as a result of the sender providing the wrong account number, provided that the remittance transfer provider:
- informs the sender of the risk of loss;
- investigates the reported error; and
- attempts to recover the funds.
Comments on the proposal to extend the effective date of the remittance rule were requested by January 15 2013 and interested parties have until January 30 2013 to comment on all other aspects of the proposal.
Section 1073 of the Dodd-Frank Act added a new Section 919 of the Electronic Fund Transfer Act, establishing a disclosure and error resolution regime for consumers who use "remittance transfer providers" to send remittances from the United States to recipients located in foreign countries. Section 919 requires a remittance transfer provider to provide a written pre-payment disclosure to a sender that discloses specified information relating to the transfer, including the amount to be received by the designated recipient, and a written receipt that includes the information on the pre-payment disclosure together with additional specified information. Section 919 also specifies an error resolution scheme applicable to remittance transfers.
For these reasons, the proposal would utilise the exception authority granted by Section 904(c) of the Electronic Fund Transfer Act to eliminate the requirement that remittance transfer providers disclose subnational taxes. However, any required disclosures that omit subnational taxes would be required to be marked as "estimated". The proposal would also clarify that a discrepancy between the amount disclosed and the amount received by the designated recipient that results from the deduction of sub-national taxes would not constitute an error under the error resolution provisions.
In the supplementary information accompanying the proposal, the CFPB acknowledges the industry's concern that a remittance transfer provider is unlikely to have direct knowledge of certain variables affecting the imposition of fees by a recipient institution and the imposition of foreign taxes. For example, where fees may vary by type of account, the remittance transfer provider may be unable to ascertain the type of account held by the recipient. Similarly, the remittance transfer provider may not know whether the designated recipient is subject to various foreign taxes, such as those that may apply only to citizens of the destination country.
For these reasons, the proposal would expand the rules regarding the use of estimates to grant permanent exceptions permitting a remittance transfer provider to disclose the highest possible foreign taxes and recipient institution fees applicable to a transfer with respect to any unknown variable.(3) With respect to fees imposed by the recipient institution, a remittance transfer provider would be permitted to rely on published fee schedules or information ascertained from prior transfers to the same institution to determine the possible fees. If the provider cannot obtain the fee schedules and has no prior information on which to rely, it would be permitted to rely on "other reasonable sources of information", provided that the provider discloses the highest fees identified by the relied-on source. The permissible sources of information are defined as competitor fee schedules, surveys of financial institution fees and information provided by the recipient institution's regulator or central bank.
The commentary on the relevant disclosure rule would be revised by the proposal to clarify that where a remittance transfer provider lacks specific knowledge regarding any variable affecting the taxes imposed on a transfer or the fees imposed by a recipient institution, the provider may rely on the sender's representations regarding such variables, but is not required to ask the sender for any information. The provider may treat the sender's representations as resulting in exact disclosures and need not mark the disclosures as "estimated" unless the provider is otherwise providing estimated disclosures.
While the additional flexibility to disclose the highest possible taxes and fees and to rely on the sender's representations regarding variables beyond the provider's knowledge are superficially helpful, implementation of this aspect of the proposal would continue to pose significant challenges for industry participants. For example, the condition that a provider must lack "specific knowledge" regarding the variables before relying on the exceptions could prevent providers from implementing standard processes based on the maximum possible taxes and fees, instead requiring a case-by-case analysis of each transfer. In addition, the proposal provides no guidance as to how a provider's knowledge is established and whose knowledge is relevant. Is it the person who conducted the transaction with the sender? Every provider employee imputed to the transaction? Imputed knowledge based on information in the provider's system (eg, how many transfers that sender has made in a year to a particular destination)?
In addition, with respect to fees imposed by the recipient institution, the proposal would appear to require providers to collect and maintain information regarding fees at potentially thousands of other institutions. Beyond the simple burden of such a record-keeping obligation, the concerns previously raised by the industry regarding availability, translation and other practical limitations remain. Thus, despite a cryptic acknowledgement in the supplemental information that obtaining a fee schedule for every recipient may not be practical, the proposal is not sufficiently detailed or clear regarding when a provider could determine that such information is not available and instead rely on another source for the information. Moreover, while the CFPB is attempting to broaden the sources of information that can be relied on by a provider, the proposal's suggestion that sources such as competitor fee schedules will be indicative of the fees applicable to any particular transfer seem misplaced. In short, by failing to acknowledge that some information is most efficiently, effectively and accurately communicated between senders and recipients, rather than by remittance transfer providers which do not have ready access to that information, the CFPB perpetuates the fundamental flaw in requiring disclosure of recipient institution fees in open network transfers.
Lastly, the CFPB specifically requests comments on whether to allow grace periods for implementing changes in foreign taxes, and whether to require that fee schedules relied on by providers be dated or verified as accurate within a certain timeframe prior to the transfer. Those industry participants considering filing comments in response to the proposal should consider addressing these two points in particular.
Incorrect account number provided by sender
Possibly the most anticipated aspect of the proposal is the CFPB's attempt to address industry concerns regarding the remittance rule's characterisation as an "error" the misdirection of funds due to incorrect information provided by a sender. Under the remittance rule, the sender would be entitled to error resolution remedies, including resend or refund of the transfer amount, due to his or her own mistake, even if the provider is unable to recoup the misdirected funds from the account to which they are deposited. In the supplementary information to the proposal, the CFPB acknowledges that the allocation of risk in the remittance rule is inconsistent with state law Uniform Commercial Code provisions, which would require the sender, not the provider, to bear the risk of loss if certain conditions are met.
The proposal would exclude from the definition of an 'error' under the error resolution scheme a failure to make the funds available to the recipient by the disclosed date of availability where the funds were deposited into an account at the receiving institution other than the recipient's account because the sender gave the provider an incorrect account number, provided that certain conditions are met. The conditions would require a provider to be able to demonstrate that:
- the sender provided an incorrect account number;
- it notified the sender of the risk of loss of the transfer amount in such an event;
- the incorrect account number resulted in the funds being deposited to an incorrect account; and
- it "promptly" made "reasonable efforts" to attempt to recover the misdirected funds.(4)
While the requirements that a remittance transfer provider act "promptly" and use "reasonable efforts" to attempt to recover the misdirected funds appear to be reasonable on their face, the risk is that this requirement provides an avenue for potential litigation regarding whether a remittance transfer provider has done enough to justify holding the sender responsible for the risk of loss of the misdirected funds resulting from the sender's own error.
Notably, however, this exception from the definition of an error would not apply where the sender provides other incorrect or incomplete information, such as an incorrect routing number or recipient name. The CFPB asserts that such other mistakes do not pose the same risk as an incorrect account number and are unlikely to result in a deposit in the wrong account. Regardless of whether this assessment of the risk is correct, it begs the question of why providers should be asked to take any liability for sender error, and even whether the CFPB has the authority to impose such liability. To the extent that industry participants disagree with the CFPB's characterisation and believe that the sender should bear the risk of loss of the transfer amount for all sender-provided incorrect or incomplete information, comments on this point will be important.
Disclosure requirements on resend
The proposal would also outline a revised procedure for a remittance transfer provider to provide updated disclosures when resending funds where the funds were not received by the stated date of availability because the sender provided incorrect or insufficient information.(5) The process for the disclosure varies based on whether the provider makes direct contact with the sender in providing the report of its investigation into the error.
If the provider makes direct contact with the sender, the provider must provide (orally or in writing) the pre-payment disclosures, the date on which the funds will be available and the name and address of the recipient. If the provider does not make direct contact with the sender, the provider must provide the same disclosures, as well as the date on which the provider will complete the resend and, if the transfer is scheduled three or more business days before the date of transfer, a statement about the sender's cancellation rights. In determining the date of transfer for disclosures made when the provider has not been in direct contact with the sender, the accompanying comment notes that a provider may use the same date on which it would provide a default remedy (ie, one business day after 10 days after the provider sends the error investigation report).
Once the provider delivers these disclosures, the provider is not required to send a receipt or any additional disclosures to the sender. In addition, the sender's otherwise-existing right to cancel a transfer within 30 minutes would not apply to a resend. The accompanying comment clarifies that when providing disclosures where the provider is in contact with the sender, the provider need not allow the sender to cancel the resend.
The resend disclosure process outlined in the proposal is rather complicated and may be difficult for providers to implement in a standardised fashion. Accordingly, providers should review these provisions carefully when crafting their comment letters.
To account for the changes in the proposal and allow industry participants time to make any necessary operational adjustments, the proposal would delay the effective date of the remittance rule until 90 days after the CFPB issues a revised final rule implementing the proposal. The CFPB is separately soliciting comments on the extension of the effective date and the 90-day implementation period.
For further information on this topic please contact David Teitelbaum or Amber M Tofilon at Sidley Austin LLP by telephone (+1 202 736 8600), fax (+1 202 736 8711) or email (email@example.com or firstname.lastname@example.org).
(2) Electronic Fund Transfers (Regulation E), 77 Fed Reg 6194 (Feb 7 2012). The CFPB also published a technical correction on July 10 2012 (77 Fed Reg 40459), and on August 20 2012 further revised the remittance rule by adopting a safe harbour for determining when a provider does not offer remittance transfers "in the normal course of business" and by amending certain provisions of the remittance rule with respect to transfers scheduled in advance (77 Fed Reg 50244).
(3) According to the supplementary information, the exception regarding fees imposed by the recipient institution applies only to transfers received in an account based on an agreement between the recipient and the recipient institution. Transfers in a closed network, where the provider typically has some control over the paying agent or the transfer process, will not be entitled to use of this exception.
(4) The proposal is silent about the possibility that, as a result of the sender providing an incorrect account number, a transfer ends up in another account maintained by the recipient at the same institution, and whether that constitutes an error. This scenario could arise either where the sender inadvertently provides the account number of the alternative account, or the recipient institution attempts to correct the sender's error by depositing the funds into an account maintained by the designated recipient. As it is not uncommon for consumers to maintain multiple accounts at a single institution and the fees and terms of these accounts may vary, this is a possibility that might warrant addressing.
(5) The accompanying comment clarifies that the disclosures need not be provided if the sender has elected a refund remedy or if the provider's default remedy is to provide a refund and the sender has not elected a remedy before the provider sends the report of its investigation of error.
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