Regulation E and Account of Sole Proprietor

Issue/Inquiry

The Bank has a sole proprietor as a deposit account customer who may have suffered a fraudulent Electronic Funds Transfer (“EFT”) on the account. Is a sole proprietor covered under Regulation E? Does the Bank have to provide provisional credit?

Response Summary

Ordinarily, the account of a sole proprietor would not be subject to the requirements of Regulation E because it was not established primarily for personal, family, or household purposes. However, if the Bank provided an EFT disclosure to the customer when the account was set up, the provisions of that disclosure will be part of the contract between the Bank and the customer, and the Bank will be required to follow them.

Response Detail

Generally, the account of a sole proprietor would not be covered by Regulation E. Regulation E applies to any EFT that authorizes a financial institution to debit a consumer’s account. A “consumer” is a natural person. An “account” is a demand deposit (checking), savings, or other customer asset account that has been established primarily for personal, family, or household purposes.  12 CFR §§1005.2(b)(1), (e); 5.3(a).

A sole proprietor is a natural person, but in order for Regulation E to cover the account, it must have been set up primarily for personal, family, or household purposes. Therefore, if the account was set up by the sole proprietor primarily for business purposes, it would not be covered by Regulation E, even if the proprietor occasionally runs personal transactions through it.

Liability for unauthorized transactions would be covered by the requirements of the Uniform Commercial Code and the provisions of the signature card or agreement establishing the account. The signature card or agreement should state that the account has a business purpose.

The Bank, however, will also have to determine whether or not an EFT disclosure was provided to the customer when the account was set up. If it was, the account would arguably be subject to the provisions of that disclosure, not because Regulation E covers the account, but because the Bank incorporated the disclosure provisions contractually.

If that is true, the Bank would have to follow the error resolution procedures prescribed by the EFT disclosure, including the making of provisional credit if the matter cannot be resolved within 10 business days, assuming that the Bank has received a written notice of error. The language of the Model Form provided by Regulation E does not use the term “consumer” or limit the transactions it covers to consumer transactions, but simply refers to the accountholder as “you” and to EFTs as “transfers.” Appendix A to Part 1005, A-3(a).

This entry was posted on Monday, May 30th, 2016 at 3:00 pm.