Relates to the federal electronic fund transfer act

Summary of provisions

The bill would amend section 4-A-108 from the state Uniform Commercial Code effective upon enactment.

Subdivision (1) keeps the current section 4-A-108 but makes the application of the general rule subject to an exception as set out in subdivision (2). Subdivision (2) provide that Article 4A applies to a "remittance transfer" as defined in the EFT Act unless that remittance transfer is also an "electronic fund transfer" as defined in the EFT Act. Subdivision (3) makes it clear that that the protections afforded consumers who send "remittance transfers" are preserved by stating that if there is an inconsistency between an applicable provision of Article 4A and an applicable provision of the EFT Act, the EFT Act will govern.

Justification

Article 4A was designed to provide a set of rules to govern wholesale wire transfers-high-value commercial payments normally made exclusively by businesses firms.(1) Article 4A was not intended to be a consumer-protection statue; consumers were already protected by the federal EFT Act, which covers a wide variety of electronic payments used by consumers.(2) In order to ensure that there could be no confusion, section 4-A-108 excluded from Article 4A's coverage any funds transfer governed by the EFT Act.

The EFT Act, in turn, excluded from its definition of "electronic fund transfer" any transfer of funds, other than those processed by automated clearinghouse, made by a financial institution on behalf of a consumer by means of a service that transfers funds held at either Federal Reserve banks or other depository institutions and which is not designed primarily to transfer funds on behalf of a consumer.(3)

The effect of section 4-A-108 was to make Article 4A and the EFT Act "mutually exclusive,"(4) and it meant that funds transfers sent through wholesale funds-transfer networks, such as the Federal Reserve Banks' Fedwire funds-transfer service and the Clearing House Interbank Payments System ("CHIPS")(5) would be governed by Article 4A even if they involved consumers.

This balance was changed when Congress enacted the Dodd-Frank Wall Street Refonn and Consumer Protection Act ("Dodd-Frank Act").(6) Section 1073 of the Dodd-Frank Act amended the EFT Act to provide protections for senders of "remittance transfers," which are defined to include any electronic transfer of funds from a consumer in the U.S. to a recipient located in a foreign county regardless of whether the transfer is technically an "electronic fund transfer" under the EFT Act.(7) These consumer protections include disclosure requirements regarding the amount that the recipient will receive, the fees charged for the remittance transfer, the exchange rate (if the recipient is to receive funds in a different currency), and the promised delivery date;(8) section 1073 also provides procedures for the resolution of disputes.(9) Rules implementing section 1073 have been adopted by the Consumer Financial Protection Bureau ("CFPB") and take effect in February 2013.(10) The effect of section 1073 was to include in the EFT Act a certain class of funds transfers, even if such transfers are sent through a wholesale funds-transfer network like CHIPS or Fedwire, and thus by operation of U.C.C. § 4-A-108 to exclude those funds transfers from Article 4A.

This creates a problem for operators and users of wholesale funds-transfer networks. While the originator of a remittance transfer is given certain protections under section 1073, there is no longer any law to govern the relations between the banks that will necessarily be part of the payments chain-no law to govern the relationship of the originator's bank and an intermediary bank or the beneficiary's bank. While a court might in the case of a dispute "apply appropriate principles from Article 4A by analogy,"(11) it is not clear that this will always be the case.

Faced with this legal uncertainty, the Board of Governors of the Federal Reserve System has adopted an amendment to its Regulation J, which governs funds transfers by the Federal Reserve Banks to clarify that "Regulation J continues to apply to a Fedwire funds transfer even if the funds transfer also meets the definition of 'remittance transfer under the Electronic Fund Transfer Act..."(12) While this works for Fedwire, private-sector systems do not have the ability to issue federal regulations that have the effect of overriding conflicting provisions of state law. Thus, private-sector systems are left in the position of having to process some payments for which it is not clear which legal principles apply.(13).

The CFPB is very aware of this problem and understands that there is no conflict between the consumer-protection provisions of section 1073 and the interbank-liability rules of Article 4A. Nevertheless, it declined to issue a rule that would have adopted Article 4A to govern the aspects of remittance transfers that do not affect consumers while incorporating the consumer-protection provision of section 1073; the CFPB stated its belief that "the best mechanisms for resolving this uncertainty rests with the states, which can amend their respective versions of UCC Article 4A,..."(14)

The bill would amend New York's Article 4A to (i) continue the traditional exemption from Article 4A electronic funds transfers as defined in the federal EFT Act, but (ii) provide that remittance transfers under section 1073 would not be excluded from Article 4A unless they are also electronic fund transfers under the EFT Act.

Importantly, the consumer protections afforded under section 1073 of the Dodd-Frank Act would not be impaired by this bill. The consumer who sends a remittance transfer would still have the full set of protections with respect to the institution directly providing the remittance-transfer service. This bill would simply be analogous to the recently amended Federal Reserve Regulation J providing the same legal protections to users and operators of private-sector funds-transfer systems.

Subdivision (3) of the bill explicitly recognizes the operation of the Supremacy Clause of the U.S. Constitution would ensure that the protections that Congress has accorded to U.S. consumers who initiate remittance transfers will be unaffected by New York's change to Article 4A.

This amendment has been drafted in coordination and support from the National Conference of Commissioners on Uniform State Laws ("ULC") and the American Law Institute ("ALI"), the sponsors of the Uniform Commercial Code, and with the Federal Reserve Bank of New York. The staff of the Board of Governors of the Federal Reserve System has also been consulted in the drafting process.

Official comments

The ULC and ALI supply each section of the UCC with an Official Comment to explain the provision and give examples of how it would operate. Although the New York legislature does not adopt these comments as part of the New York UCC, members of the Senate and Assembly may find the new Official Comment for 4-A-108 useful in understanding the revision to this section. The Official Comment is attached as Annex A.

Legislative history

New.

Fiscal implications

None.

Effective date

Immediate.

Footnotes

(1) See U.C.C. § 4A-102, cmt.

(2) See U.C.C. § 4A-108, cmt

(3) 15 U.S.C. § 1693a(6)(b). The automated clearinghouse ("ACH") is a funds-transfer system that is often used to make consumer credit and debit payments, such as direct deposit of payroll or direct debits for mortgage or insurance payments.

(4) U.C.C. § 4A-108, cmt.

(5) CHIPS is owned and operated by The Clearing House Payments Company L.L.C., which is headquartered and has its primary operations center

in New York.

(6) Pub. L. No. 111-203, 124 Stat. 1376 (Jul. 21, 2010).

(7) 15 U.S.C. § 16930-1(g).

(8) Id. § 16930-1(a).

(9) Id. § 16930-1(d).

(10) 77 Fed Reg. 6194 (Feb. 7, 2012).

(11) U.C.C. § 4A-108, cmt

(12) 77 Fed. Reg. 21,845 (Apr. 12, 2012). Regulation J adopts Article 4A as the law governing Fedwire funds transfers. 12 C.F.R. § 210.25(b)(1).

(13) While private-sector systems may amend their rules to provide that Article 4A's principles will continue to govern all of their transactions, it is not clear how effective such rules would be. CHIPS has amended its rules to provide that as between the banks that send and receive CHIPS payment messages, the Article 4A rules continue to apply.

(14) 77 Fed Reg. at 6212.

ANNEX A

OFFICIAL COMMENT

1. The Electronic Fund Transfer Act (EFTA), implemented by Regulation E, 12 C.F.R. Part 1005, is a federal statute that covers aspects of electronic fund transfers involving consumers. EFTA also governs remittance transfers, defined in 15 D.S.C. Sec. 16930-1, which involve transfers of funds through electronic means by consumers to recipients in another country through persons or financial institutions that provide such transfers in the normal course of their business. Not all "remittance transfers" as defined in EFTA, however, qualify as "electronic fund transfers" as defined under the EFTA, 15 D.S.C. Sec. 1693a(7). While Section 4A-108(a) broadly states that Article 4A does not apply to any funds transfer that is governed in any part by EFTA, subsection (b) provides an exception. The purpose of Section 4A-I08(b) is to allow this Article to apply to a funds transfer as defined in Section 4A-104(a) that also is a remittance transfer as defined in EFTA, so long as that remittance transfer is not an electronic fund transfer as defined in EFTA. If the resulting application of this Article to an EFTA-defined "remittance transfer" that is not an EFTA-defined "electronic fund transfer" creates an inconsistency between an applicable provision of this Article and an applicable provision of EFTA, the provision of EFTA governs to the extent of the inconsistency. Section 4A-108(c).

2. The following examples are not exhaustive, but illustrate the relationship between EFTA and this Article pursuant to Section 4A-108.

Example 1. A commercial customer of Bank A sends a payment order to Bank A, instructing Bank A to transfer funds from its account at Bank A to the account of a consumer at Bank B. The funds transfer is executed by a payment order from Bank A to an intermediary bank and is executed by the intermediary bank by means of a clearinghouse credit entry to the consumer's account at Bank B (the beneficiary's bank). The transfer into the consumer's account is an electronic fund transfer as defined in 15 U.S.C. Sec. 1693a(7). Pursuant to Section 4A-108(a), Article 4A does not apply to any part of the funds transfer because EFTA governs part of the funds transfer. The funds transfer is not a remittance transfer as defined in 15 D.S.C. Sec. 16930-1 because the Originator is a not a consumer customer. Thus Section 4A-108(b) does not apply.

A court might, however, apply appropriate principles from Article 4A by analogy in analyzing any part of the funds transfer that is not subject to the provisions of EFTA or other law, such as the obligation of the intermediary bank to execute the payment order of the originator's bank.

Example 2. A consumer originates a payment order that is a remittance transfer as defined in 15 D.S.C. Sec. 16930-1 by providing the remittance transfer provider (Bank A) with cash in the amount of the transfer plus any relevant fees. The fund transfer is routed through an intermediary bank for final credit to the designated recipient's account at Bank B. Bank A's payment order identifies the designated recipient by both name and account number in Bank B, but the name and number provided identify different persons. This funds transfer is

not an electronic fund transfer as defined in 15 U.S.C. Sec. 1693a(7) because it is not initiated by electronic means and is not from a consumer's account. Both Article 4A and EFTA apply to the funds transfer. Section 4A-108(a), (b). Article 4A's provision on mistakes in identifying the designated beneficiary, Section 4A207, would apply as long as not inconsistent with the governing EFTA provisions. Section 4A-108(c).

Example 3. A consumer originates a payment order from the consumer's account at Bank A to the designated recipient's account at Bank B located outside the United States. Bank A uses the CHIPS system to execute that payment order. The funds transfer is a remittance transfer as defined in 15 U.S.C. Sec. 16930-1. This transfer is not an electronic fund transfer as defined in 15 U.S.C. Sec. 1693a(7) because of the exclusion for such types of transfers in 15 U.S.C. Sec. 1693a(7)(B). Under Section 4A-108(b), both Article 4A and EFTA apply to the funds transfer and EFTA, as federal law, will prevail to the extent of any inconsistency between EFTA and Article 4A. Section 4A-108(c). For example, Suppose the consumer subsequently exercised the right to cancel the remittance transfer under the light given under EFTA and obtain a refund. Bank A would be required to comply with the EFTA rule concerning cancellation even if Article 4A prevents Bank A from cancelling or reversing its payment order it sent to its receiving bank. Section 4A-211.

Example 4. A person fraudulently originates an unauthorized payment order from a consumer's account through use of an online banking interface. This transaction is an electronic fund transfer as defined in 15 U.S.C. Sec. 1693a(7) and would be governed by EFTA and not Article 4A. Section 4A-108(a). Whether the funds transfer also qualifies as a remittance transfer under 15 U.S.C. Sec. 169.30-1 does not matter to the application of Article 4A.

Example 5. A person fraudulently originates an unauthorized payment order from a consumer's account at Bank A through forging written documents that are provided in person to an employee of Bank A. This funds transfer is not an electronic fund transfer as defined in 15 U.S.C. Sec. 1693a(7) because the fund transfer is not initiated by electronic means. Article 4A will apply to this funds transfer regardless of whether the funds transfer also qualifies as a remittance transfer under 15 U.S.C. Sec. 169.30-1. If the funds transfer is not a remittance transfer, the provisions of Section 4A108 are not implicated because the funds transfer does not fall under EFTA, and the general scope provision of Article 4A governs. Section 4A-102. If the funds transfer is a remittance transfer, and thus governed by EFTA, Section 4A-108(b) provides that Article 4A also applies.

3. Regulation J, 12 C.F.R. Part 210, of the Federal Reserve Board addresses the application of that regulation and EFTA to fund transfers made through Fedwire. Fedwire transfers are further described in Official Comments 1 and 2 to Section 4A-107. In addition, funds transfer system rules may be applicable pursuant to Section 4A-501.