A recent court order issued in New York should concern any financial institutions that allow consumers to initiate wire transfers online. Financial institutions that allow consumers to execute wire transfers online should consider whether additional measures are necessary to avoid unknown risks and exposure.
The main question that is causing a stir in the financial services industry is: “Are consumer wire transfers excepted from the Electronic Fund Transfer Act (EFTA) and Regulation E?”
In 1978, the EFTA was enacted to provide certain protections for consumers in making electronic funds transfers. The EFTA contained an exception for wire transfers that has been recognized and applied within the industry for 45 years. Specifically, financial institutions have operated under the premise that a wire transfer, whether issued by a consumer or a business customer, was controlled by Article 4A of the Uniform Commercial Code. This provided certainty for financial institutions to know when and how a wire transfer could be enforced against a customer: (1) when authorized by the customer or (2) verified pursuant to a commercially reasonable security procedure.
In January 2024, the New York Attorney General filed a lawsuit against a national bank defendant that alleged that a consumer wire transfer involves at least three distinct transactions: (1) a transfer from the consumer’s account to a general ledger or wire funding account at the consumer’s bank; (2) a transfer between the consumer’s bank and the beneficiary’s bank conducted; and (3) a transfer by the beneficiary’s bank into the beneficiary’s account.
According to the New York AG, Article 4A only applies to bank-to-bank wire transfers and not to other portions of the transaction when a consumer is involved. Here is a visual depiction of a fraudulent consumer wire transfer according to the New York AG:
If true, the burden effectively shifts from the consumer to the consumer’s financial institution to prove whether a wire transfer was authorized in situations where a consumer claims the wire transfer was unauthorized.
The bank defendant in the New York case filed a motion to dismiss, which was fully briefed last summer. The American Bankers Association, the New York Bankers Association, The Clearing House, and the Bank Policy Institute intervened to support the defendant. The Consumer Financial Protection Bureau intervened and agreed with the New York Attorney General.
On Jan. 21, the U.S. District Court for the Southern District of Mississippi entered a 62-page order on a motion made by the bank defendant. Although the order dismissed some of the claims, it denied a request for dismissal on the most important issue and the question raised above: “Are consumer wire transfers excepted from the EFTA and Regulation E?” The court ruled that the consumer portion of the wire transfer was subject to the EFTA and Regulation E. This decision is sure to cause concerns in the financial services industry. It is almost certainly a decision that will be appealed.
Conclusion
The recent court order in New York has cast significant doubt on the long-standing assumption that consumer wire transfers fall outside the scope of the EFTA. This uncertainty presents a critical challenge for financial institutions, potentially shifting the burden of proof for unauthorized transactions onto them. This order also increases the legal and financial risks for financial institutions. It will likely also increase the legal claims based on prior fraud investigations that were denied on the basis that the EFTA and Regulation E did not apply.
To mitigate these risks and safeguard their customers, financial institutions must consider whether limitations should be placed on consumer wire transfer services. If offered, financial institutions should reconsider their fraud prevention measures, such as enhanced authentication, robust monitoring, customer education, and technological advancements. Financial institutions should also consider whether changes to the process for fraud investigations should be amended for online wire transfers by consumers.
We will continue to monitor future court orders and decisions around this situation and any future news evolving from these decisions within the financial services industry.
