Regulation E and the Sole Proprietor

Issue/Inquiry

The Bank has a sole proprietor as a deposit account customer who may have suffered a fraudulent EFT on the account.  Is a sole proprietor covered under Regulation E? Does the Bank have to give provisional credit, as required by the regulation?

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 may be part of the contract between the Bank and the customer, and the Bank will be required to follow them.

Response Detail

The account of a sole proprietor would generally not be covered by Regulation E. Regulation E applies to any electronic funds transfer (“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 for Regulation E to cover the account, the account must have been set up primarily for personal, family, or household purposes. If the account was set up by the sole proprietor primarily for business purposes, it would not be covered by Regulation E, even if he or she occasionally ran personal transactions through it.

If the account was set up by the sole proprietor for business purposes, liability for unauthorized transactions will be based on the provisions of the signature card or agreement establishing the account and the requirements of the Uniform Commercial Code. It would be helpful in this regard if the signature card or agreement indicated that the account has a business purpose.

However, the Bank will also have to determine whether an EFT disclosure was provided to the customer when the account was set up. If such a disclosure was provided to the customer as part of the account opening documentation, the account would be subject to the provisions of such disclosure, not because Regulation E covers business accounts, but because the Bank incorporated the provisions of Regulation E contractually through the disclosure.

The language of the model disclosure 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). Therefore, if the Bank’s EFT disclosure followed the model form, there would not be a conflict between its language and the business account it was provided for.

If the Bank made the EFT disclosure part of the account opening documentation, it will have to follow the error resolution procedures prescribed by the disclosure, including the making of provisional credit if the matter cannot be resolved within 10 business days, assuming that the Bank has received written notice of error.

This entry was posted on Monday, August 7th, 2017 at 1:34 pm.