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Resolving Customer/Merchant Disputes with Credit and Debit Cards

Credit and debit card use is mushrooming. Soon cash may almost become a thing of the past. Accordingly, disputes between customers and merchants about the merchandise purchased with a credit or debit card is increasing.  Bankers need to understand the institution’s liability when a customer complains about a transaction with a merchant when the customer used his or her card.

Credit card disputes are resolved under two separate provisions of Regulation Z. Under Section 1026.13, a card issuer is required to investigate and resolve billing errors, including transactions involving goods and services that the consumer did not accept or were not delivered as agreed. Billing errors include customers billed for the wrong amount, the delivery of goods or services different from what was agreed upon, delivery of the wrong quantity, late delivery and delivery to the wrong address. This provision is triggered by the customer sending a written notice to the card issuer within 60-days after the card issuer provides a periodic statement reflecting the transaction. Generally, the card issuer must acknowledge the billing error notice and resolve it within 30-days, unless the creditor has complied with the appropriate resolution procedures to take advantage of resolution within 2-billing cycles. Until the error is resolved, the cardholder may withhold payment to the card issuer of only the amount in question plus any finance charges attendant to it. (Payments are still due on any other undisputed amounts.)

The second consumer protection under Regulation Z is in Section 1026.12(c).  It permits the consumer to assert against the card issuer any defense or claims (except any tort claims) the consumer might have against the merchant in a transaction paid with a credit card if the merchant has been unwilling to resolve the dispute. The defenses or claims that the consumer might have are based on state law. For example, a consumer purchases something with his or her credit card; when it is delivered to the consumer or the consumer opens the packaging, the item is broken or damaged. State law would determine whether or not the item has indeed been “accepted.” Here, the consumer must first attempt, in good faith, to resolve the issue with the merchant; if that cannot be done, the consumer may then assert it in against the card issuer. Until resolution, the consumer may withhold only the payment of the amount in question.  Importantly, this consumer protection applies only if the transaction in question exceeds $50 and the transaction occurred in the same state as the cardholder’s designated address or within 100 miles of that address.

Under both provisions of Regulation Z, the creditor is prohibited from making an adverse credit report with respect to the disputed amounts, but the creditor may report that the amount or account is in dispute.

Debit card disputes are governed by Regulation E. Relative to the purchase of merchandise or services, it only protects a consumer from errors as that term is defined under Regulation E.  Errors include, for example, unauthorized transactions, an incorrect electronic fund transfer (EFT) to or from the consumer's account, the omission of an EFT from a periodic statement, computational or bookkeeping errors made by the financial institution regarding an EFT or incorrect receipt of money from an electronic terminal such as an ATM.

If the consumer authorized the merchant to debit his or her account and the merchant debited it in the amount authorized, the transaction is not an error under Regulation E. If a consumer authorized a merchant to debit his or her account for $95 and the merchant inadvertently debited the consumer’s account twice, that is an error. But, if the services or merchandise were not delivered or were not of the quality ordered or were damaged or broken, that is not a Regulation E error. The customer’s only recourse is against the merchant directly.

It is not surprising that the consumer protection under the two regulations is so different. When the credit card provisions were enacted by Congress in 1974, credit cards were used for point of sale transactions. When the debit card provisions were enacted by Congress in 1978, debit cards were not available for point of sale transactions. It is somewhat surprising that since then Congress has not taken any steps to equalize the consumer protections.

Also, it is my view that few consumers understand the error resolution differences between debit and credit cards, especially where debit cards are often issued by MasterCard or Visa, which are typically associated with credit cards. To most consumers, a card is a card. In light of this, I am surprised that the CFPB has not addressed this issue in one of its many consumer education efforts.

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