BY EVAN D'ABROSCA
as seen in Issue 1-33 of a360inc's Compliance Newsletter
Foreclosure, bankruptcy, and debt collection law firms may often see requirements related to compliance with the Electronic Fund Transfer Act (EFTA) in their client retention agreements. In this article, we will clarify whether the EFTA requirements apply to default legal services law firms and what internal procedures firms should be implemented to ensure compliance with this federal and client-mandated requirement.
The EFTA, 15 U.S.C. § 1693 et seq, was enacted in 1978 to protect consumers engaged in the transfer of funds through electronic methods.
Under the EFTA, an electronic fund transfer means any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, that is initiated through an electronic terminal, telephone, computer, or magnetic tape that instructs a financial institution to debit or credit an account.
The EFTA applies to entities that hold a consumer’s account within the CFPB’s supervisory authority, as well as their third parties that provide electronic fund transfer services. This means that default legal services law firms that collect debts and use preauthorized electronic fund transfers to facilitate this collection, must comply with the EFTA.
There are some instances where the EFTA will not apply to debt collections. In Puglisi v. Debt Recovery Solutions, LLC, a debt collector’s withdrawal of funds from a debtor’s checking account was not a “preauthorized electronic fund transfer” because there were no reoccurring payments or withdrawals at regular intervals. The debtor agreed to make two payments to settle the debt and the debtor only authorized two withdrawals. The lack of frequency and the limited amount of transfers did not meet the EFTA’s standards before being considered a “preauthorized electronic fund transfer.” Additionally, in Okocha v. HSBC Bank USA, N.A.,the court dismissed the EFTA § 1693e claim because the preauthorized transfer was not set to occur at recurring intervals and the transfer between the account holder’s bank account was not an electronic transfer covered by the EFTA.
It is also important to note that EFTA violations do not apply where the transaction was originated by a paper instrument. In Vigneri v. U.S. Bank National Association, the Plaintiffs brought an action against their bank for a violation of the EFTA, stating that the exemption within EFTA section 1693(a)(6) of “checks, drafts, or similar paper instruments” does not apply because the transactions occurred electronically. The Court held that the Defendant did not violate the EFTA because the original transaction from the Plaintiffs to the third-party debt collector was initiated via the paper draft. Even though the money would be taken from the Plaintiffs’ account and transferred electronically to the debt collector, the EFTA does not apply. 1693(a)(6) states, “the term “electronic fund transfer” means any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal…” Under this definition, the transaction is not considered an electronic fund transfer.
Law firms that are engaged in preauthorized electronic fund transfers should:
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