Bank error in ITS favor ... Hmmm

I have no idea how often this happens, but any case is disturbing.  It turns out that a couple I wrote about last week were repeatedly given misinformation about their liability for a debit-card fraud that looted $5,200 from their checking account in December. You can read my column about the case here.

The Quakertown couple, Bill Manning and Joan Dashiell Manning, discovered the fraud belatedly, after letting a couple of bank statements sit in a pile of mail.  They don't live paycheck-to-paycheck, so the missing funds didn't trigger any overdrafts or bounced checks – events that would have alerted some people.

But here's the crux of the matter: The fact that they reported the fraud 63 days after evidence first appeared on a bank statement does not carry the onerous penalty they were repeatedly told it did. They were told they were responsible for the entire fraud, but federal rules limit their liability to $500.

“They just keep on falling back on, 'You didn’t report it in 60 days. You’re out of luck,'” Bill Manning told me last week. Manning says the bank – Harleysville National, which became First Niagara Bank a week ago today – said that because the Mannings failed to report the fraud within 60 days, the standard $500 fraud liability didn't apply. Instead, bank personnel said they faced unlimited liability for the loss. A lawyer they contacted was no help, either.

It took me several days to sort through the misinformation – partly, I have to suspect, because of the lack of a strong, focused consumer-protection agency for financial services. The Federal Reserve's Washington press office did not return at least two phone messages requesting help – not a good sign for an agency that seems to want to preserve its role in consumer protection and has resisted proposals for an independent Consumer Financial Protection Agency.

A spokesman for the Office of the Comptroller of the Currency, which oversees the bank in question, wasn't familiar enough with the rules to comment initially, and tried to refer questions back to the Fed, anyway. "They write the rules. It's their job to interpret them."  It's a common response from the OCC, and one that reflects our fractured system of bank oversight.

This time, the spokesman was helpful after I reminded him that it's the OCC's job to enforce the rules when it comes to national banks. Enforcing them requires understanding them, doesn't it?

Late Friday, I finally got a response from the OCC – not about the Mannings' case specifically, but at least about the pattern of facts.

Here's how the Electronic Funds Transfer Act, as interpreted by the Federal Reserve, works when it comes to debit-card fraud – or unathorized withdrawals made with an "access device," in Fed-speak:  Because of the fraud's timing, the law and rules limit liability for a couple such as the Mannings to $500.

The fraud on the Mannings, apparently with a cloned card, occurred in early December. They could have noticed it on their December statement, which is why Harleysville said they were more than 60 days late when Bill Manning reported the fraud on March 8.  But the law's basic protections apply to fraudulent transactions that occur within a period that ends 60 days after the transmittal of a bank statement showing evidence of the fraud.

They did face a risk of potentially unlimited liability for failing to report the fraud within 60 days. But that limitless liability would have applied only for fraudulent withdrawals that occurred after the 60-day window – in their case, on Days 61, 62 and 63. Before that, the limit was essentially capped at $500. (There's actually a slightly more complicated formula because of special limits that govern fraud occurring in the first two days.)

It's worth noting that the lawyer the Mannings contacted confused matters further by telling them it would cost more to fight the bank than the case was worth. It turns out that was also misinformation, because the EFTA provides for attorney's fees, plus additional, statutory damages of $100 to $1,000, at a judge's discretion. Many lawyers would accept a case where fees are provided and the result, as one source told me, "is a slam-dunk."

For more about the EFTA, go to this Cornell University site. To find Federal Reserve staff commentaries on EFTA liability limits, click here.

The Mannings' case raises other issues, especially about Visa's and the finance industry's roles in pushing the use of inherently risky signature-based debit cards. Like most people who pay off their credit card bills each month, the Mannings have no real need for a signature-based debit card instead of a PIN-only bank card. But the banks and Visa make more money on the Visa-branded debit cards, so they push them onto all but the most insistent account-holders, even though federal law limits credit-card users' liability for fraud to $50.

Sure, a $500 loss beats a $5,200 loss. But why were they needlessly exposed in the first place?