In May, we highlighted the FTC’s notice of proposed rulemaking that proposed changes to the Telemarketing Sales Rule (TSR) (16 CFR 310). The NPRM included a proposed ban on the use of certain “novel” payment methods in all telemarketing transactions (i.e., both inbound and outbound). The proposed banned payment methods include remotely created checks (RCCs) and remotely created payment orders (RCPOs), as well as cash-to-cash money transfers and cash reload mechanisms (collectively, the “banned payment methods”). Comments were originally due July 29, 2013, but that deadline has now been moved to August 8, 2013.
Historically, the FTC permitted use of these banned payments methods because consumers without access to a credit card had few, if any, convenient alternatives. RCCs and RCPOs provided an efficient way for consumers to pay direct from their bank account. However, the FTC recognized that there has been a “dramatic proliferation of noncash payment alternatives for consumers” in the last decade, such that the risks from using the banned payment methods now appear to exceed their previously perceived benefits to both consumers and telemarketers that use such payment methods. The FTC therefore proposes to exercise its authority under the TSR to prohibit the use of these payment methods as abusive and unfair to consumers.
The primary concern for the FTC appears to be that the banned payment methods, in particular RCCs and RCPOs, provide little consumer protection mechanisms. For example, prepaid cards generally run over card networks, which are self-governed by network operating rules and are generally subject to the consumer protections in the Electronic Fund Transfer Act’s Regulation E.¹ Bank transfers submitted through the ACH network are further governed by the NACHA operating rules. Both types of transactions are subject to a comprehensive scheme to monitor for fraud, including authentication and authorization requirements, representations and warranties, chargeback procedures, and other fraud controls imposed on various network participants.
RCCs and RCPOs, in contrast, are submitted through the check clearing system. These payments are thus governed by the UCC, which does not contain provisions for dispute resolution, chargeback rights, provisional crediting, and other consumer protections, unlike what is found in the credit card network, Regulation E or ACH rules. The UCC also does not impose the same standards of service (like chargeback thresholds) that are imposed on card and ACH network participants. (Moreover, unlike RCCs that are subject to some protections under Regulation CC (albeit these are between the banks), RCPOs are not paper-based and thus not even covered by Regulation CC.)² Telemarketers are thus highly motivated to use the check clearing system to avoid the added administrative, legal and economic costs associated with ACH networks—at the expense of the consumer’s ability to protect against fraud. It is particularly difficult because consumers essentially have no control over how a telemarketer may use their bank account information—with the bank account and routing numbers, the telemarketer can choose to utilize RCCs, RCPOs or the ACH network without the consumer ever really knowing which was used.
The FTC’s proposed ban will likely have a significant impact on telemarketers, who will find it necessary to restructure their payment processes to run through the ACH network or accept other types of payments. At a minimum, using the ACH will involve executing agreements with originating depository financial institutions (OFDIs), who are responsible for submitting ACH entries into the ACH network. Telemarketers, like many merchants today, may also coordinate with a Third Party Sender that has an existing relationship with an ODFI. These changes will, in turn, result in increased costs to the telemarketer and delays in receiving funds from consumers’ banks (ACH entries can take several days to process). For outbound telemarketing calls, the ACH rules prohibit the use of a TEL entry unless there is an existing relationship with the customer.³ As a practical matter, telemarketers may therefore find it difficult to use the ACH system for many transactions.
1 The position of general purpose reloadable prepaid cards under Regulation E continues to be complex. Most issuers offer Regulation E-type protections in their terms and conditions, and prepaid cards must have such protections in order to be eligible to receive government benefits. See Financial Management Service, Fiscal Service, Treasury, Interim Final Rule (Dec. 2010). Payroll cards are subject to special Regulation E provisions. See 12 CFR 1005.18. The treatment of general purpose reloadable cards is expected to be clarified by the CFPB in a future rulemaking
2 The FTC rulemaking notes that the Federal Reserve Board left open the possibility that RCPOs should be governed by Regulation E. See NPRM note 61.
3 See NACHA Operating Rules & Guidelines (2013) at OR 19.