Regulation E: Stop Payment versus Revocation of Authority
by Blair Rugh
Stop payment and revocation of authority requests are still a challenge for many. This may, in part, be due to the increased scrutiny on whether or not your system does what you say it will do when it comes to servicing your customers. So, let’s revisit the stop payment vs. revocation of authority dilemma.
Once during my annual physical, my doctor told me I was overweight and that my muscle tone was poor. I asked him if I could cure the problem with beer; he said, “No,” I needed exercise. So, I went to a local health club and asked about joining. A very attractive, curvaceous young lady in a very tight leotard took me through all of the machines and devices and said that she wanted to be personally involved in my exercise regimen. She also said that if I would sign up that day, I could get a 20% discount off of a two-year membership. What a deal. I would have signed up for 20 years if she had asked. The next day I went back to the club. Every muscle in my body hurt, and the young lady was not nearly as interested in me as I thought she should be. In any event, I knew I had made a huge mistake. I had given the club my bank account information, and it was going to charge my account $50 the first day of each month. I went into my bank and filled out the paperwork to stop payment on a $50 charge from the club. Shazam! On the first of the next month there was no charge from the club to my account; but on the first day of the following month, there was a charge for $100. I called my bank to complain, and it explained that I had stopped payment on a $50 charge, and it had stopped payment on that charge. I had not requested a stop payment on a $100 charge. Then it explained to me the difference between a stop payment of a charge and the revocation of authority for a group of continuing charges.
Many of us grew up in a check-based culture. You wrote one check at a time and a stop payment could solve a problem. In an electronic culture, where a continuing authorization is given frequently for a string of periodic debits, the rules change. Regulation E provides a solution when a consumer wants to stop payment on a single electronic debit that the consumer has authorized. The consumer may stop payment of an electronic debit if he or she notifies the financial institution three or more days before the effective date of the transaction and provides sufficient information about the item for the financial institution to identify it. This is seldom of much help to the consumer because most single electronic debits are effective the date that they are authorized, so the consumer seldom has the three days in advance to react. More often when a consumer thinks that he or she wants to stop an electronic debit, what the consumer really wants to do is cancel a continuing stream of electronic debits that he or she has authorized, such as with my authority to the health club.
When that is the case, the NACHA rules, not Regulation E, provide the solution. The NACHA rules require that first the consumer provides the person who was authorized to initiate the debits a written revocation of authority to do so. Having done that, the consumer must then provide his or her financial institution an affidavit that the revocation of authority was provided to the originator. Once that is accomplished, then the financial institution must refuse to pay any of the items that were previously authorized. In its return of the item, rather than using a reason code of payment stopped, it will use the reason code of authorization revoked so that the originating bank will also know that the authorization has been revoked and will know not to originate additional items under the now revoked authorization.
It is critical that a financial institution’s customer service representatives understand the distinction between a stop payment of an electronic item and a revocation of authorization. When a customer says that he or she wants to stop payment of an electronic debit to his or her account, the customer service representative should always ask the customer what he or she is trying to accomplish. If it is really the revocation of a continuing authorization, they should be able to explain what the customer must do to authenticate the revocation. This can save the financial institution from a very disgruntled customer and maybe a complaint to the Consumer Financial Protection Bureau.