Reg E does not give consumers the right to stop payment for a single debit.  However, Reg E, 205.10(c) “Consumer’s Right to Stop Payment” requires financial institutions to honor an oral stop-payment order made at least three business days before a scheduled recurring debit.  If the debit item is resubmitted, the financial institution must continue to honor the stop-payment order. 

 

Reg E gives the example of suspending all subsequent payments to the payee-originator until the consumer notifies the institution that payments should resume. In the case on online payday loans, this means that consumers have the right under Reg E to stop payment if the loan is structured with automatic renewals (preauthorized debits) but not if the loan must be repaid on the next payday.

On the other hand, NACHA rules give consumers a right to stop payment if they order the stop in time to give their bank a reasonable opportunity to act. Since payday loans are deposited into the borrower’s bank account by the next day, the window of opportunity to stop a deposit is very brief but the borrower has several days to stop the withdrawal to repay the loan.  Consumers do not have a private right of action directly to enforce NACHA rules, however. 

Withdrawing Authorization for Electronic Transactions

Reg E permits consumers to withdraw authorization for an electronic transaction by “notifying institution holding the account orally or in writing at least three business days before the transfer is scheduled.” The consumer’s bank can require that the consumer supplement the oral notification with a written confirmation of the stop payment order within fourteen days of the oral notification. 

Once a financial institution has been notified that the consumer’s authorization is no longer valid, it must block all future payments for the particular debit transmitted by the designated payee originator and may not wait for the payee-originator to terminate the automatic debits.  The consumer’s financial institution may confirm that the consumer has informed the payee-originator of the revocation, for example by requiring a copy of the consumer’s revocation as written confirmation to be provided within 14 days of an oral notification. If the bank doesn’t get this confirmation within the 14-day period, it may resume honoring subsequent debits to the account.

Under NACHA rules, a consumer can also withdraw authorization to access her bank account if recurring payments are involved. NACHA rules require that the merchant’s authorization form include the notice that consumers can revoke that authorization. A consumer has to contact the merchant directly and follow the instructions in the authorization agreement. The next step is to inform her bank that she has revoked authorization. The consumer will be asked to sign a form under pain of perjury that authorization has been revoked directly with the merchant in order for the consumer’s bank to return the merchant’s attempt to withdraw funds from the consumer’s bank account.

Presumably this right only applies to Internet payday loans where the contract authorizes interest only payments on the borrower’s next payday or installment payments. If the payday loan is a single WEB transaction, the authorization doesn’t have to include revocation language and the consumer has no right to revoke these one time payments despite the fact that the debit will not take place until the payday loan is due in a week or two.

Multiple Presentments to Collect Checks Electronically

When a paper check or electronic equivalent is returned for insufficient funds, NACHA rules impose limits on the number of times a lender can attempt to collect the check through electronic means.  The ACH entry can be reinitiated no more than two times after the first attempt is returned, for a total of three attempts. 

If a lender charges $25 per returned transaction, a consumer unable to repay the loan on its due date will owe an additional $75 in return fees in addition to the NSF fees charged by her bank. Since banks are currently charging $20 to $35 per returned check, a consumer can easily owe an additional $150 when unable to repay a payday loan collected through the ACH system.  When lenders fail to follow the NACHA three-presentment limit, fees escalate.

Some payday loan contracts in the study sample include agreements that the lender can send additional ACH entries if the first one is returned for insufficient funds or cannot be completed.  A typical agreement says that a consumer authorizes the lender to initiate debits to your account in amounts up to and less than the amount owed until the amount owed is paid in full.

Typically the lender adds a $25 insufficient funds fee for every payment request returned by the consumer’s bank.  As a result, Internet payday loan companies can use the ACH network to repeatedly ding the consumer’s bank account, triggering bounced check fees each time the debit is returned for insufficient funds. 

NACHA rules for handling returned checks (RCK) electronically also provide some consumer protections. RCK rules require that consumers give written authorization prior to the lender initiating a debit entry to the consumer’s account in order to use the ACH Network to collect a fee associated with a check or ACH entry returned for insufficient funds. This protection exceeds Reg E requirements for written authorization only for pre-authorized recurring payments.

Enforcing NACHA Rules

NACHA rules do not give consumers a right to enforce them. All commercial parties using the ACH Network have to agree to be contractually bound by the rules and the typical deposit agreement a consumer has with her bank provides that the consumer agrees to be bound by the NACHA rules. It is possible that consumers can file a lawsuit against any party that violates NACHA rules, but this is not certain. Consumers can also file complaints with their bank regulator, their state Attorney General or the Federal Trade Commission.

Consumers who believe NACHA rules have been violated to withdraw funds without their approval should file an “Affidavit of Unauthorized ACH Withdrawal” form at their bank.  If the withdrawal was unauthorized, the consumer’s bank must promptly recredit the disputed amount. Under NACHA rules, consumers must report the error within 15 days in writing and under penalty of perjury. 

For example, if the payday lender has attempted to collect payment more than three times, triggering more than three bank NSF fees, the victim should demand a refund of the excess penalty fees triggered by this violation of NACHA rules.  NACHA rules require the consumer’s bank to promptly re-credit the consumer’s account if the consumer claims the debit was unauthorized. This consumer right applies in situations where the merchant failed to comply with requirements for getting the consumer’s consent; and when the debit is greater than the amount agreed to.

Consumers must notify their bank of any unauthorized transactions within 60 days of receiving a bank statement. Under EFTA, consumers are not liable for unauthorized electronic withdrawals if they report it within 60 days to the bank. After that time limit, consumers can lose all funds in their bank accounts plus any overdraft lines. In addition, complaints should be filed with the consumer’s bank regulator and with the Federal Trade Commission.