Sole Proprietor Accounts and Reg. E Error Resolution Procedures

Issue/Inquiry

The Bank has a deposit account customer who is a sole proprietor. This customer claims that an unauthorized electronic funds transfer has been made from their account. Is the customer covered by Regulation E requirements and 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 Electronic Funds Transfer (“EFT”) disclosure 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 such.

Response Detail

Ordinarily, 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. The “account” of a consumer is a demand deposit (i.e., 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).

While a sole proprietor is a natural person, for Regulation E to apply, the account must have been set up primarily for personal, family, or household purposes. If the account was set up primarily for business purposes, it would not be covered by Regulation E, even if the sole proprietor occasionally ran personal transactions through it. For this reason, many banks require customers who are sole proprietors to have separate accounts for personal and business purposes.

If the account was set up by the sole proprietor for business purposes, liability for unauthorized transactions will be found in the provisions of the signature card or account agreement establishing the account as well as Article 4A of the Uniform Commercial Code. It would be beneficial to the Bank if the signature card or agreement indicated that the account has a business purpose, as such would demonstrate that Regulation E and its error resolution procedures do not apply.

The Bank, however, will also have to determine whether the error resolution disclosure required by Regulation E 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 may be subject to the provisions of the disclosure, not because Regulation E covers business accounts, but because the Bank incorporated the disclosure provisions of Regulation E into its agreement with the sole proprietor.

The language of the model form for the Regulation E error resolution disclosure does not use the term “consumer” or limit the transactions it covers to consumer transactions; rather, it 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 follows the model form, there will be no 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 may be required to follow the error resolution procedures prescribed by the disclosure. This includes making provisional credit of the amount in dispute if the investigation cannot be completed within 10 business days of the notice of error, assuming that the Bank requires a written notice and has received it.

 

This entry was posted on Monday, April 1st, 2019 at 6:00 am.