The Electronic Fund Transfer Act Explained: Safeguarding Consumer Rights in Cases Like Evolve Bank

Consumers involved in the Evolve Bank fiasco should understand that the Electronic Fund Transfer Act of 1978 (EFTA) marked a significant milestone in consumer protection for electronic banking transactions. Enacted as Title XX of the Financial Institutions Regulatory and Interest Rate Control Act, the EFTA was signed into law by President Jimmy Carter on November 10, 1978. Its primary purpose was "to provide a basic framework establishing the rights, liabilities, and responsibilities of participants in electronic fund transfer systems." 15 U.S.C. § 1693(b) (2023).

The EFTA was a response to the rapid growth of electronic banking services, particularly the increasing use of automated teller machines (ATMs). Congress recognized that while electronic fund transfers offered substantial benefits to consumers, "the unique characteristics of such systems . . . [left] the rights and liabilities of consumers, financial institutions, and intermediaries . . . undefined." 15 U.S.C. § 1693(a) (2023).

The law is implemented through Regulation E. Explaination on key points for the Evolve case follow.

Key Provisions of the EFTA

The EFTA includes several critical protections for consumers:

• Limiting liability for unauthorized electronic fund transfers. 15 U.S.C. § 1693g.

• Establishing error resolution procedures. 15 U.S.C. § 1693f.

• Requiring financial institutions to provide disclosures to consumers. 15 U.S.C. § 1693c.

• Setting rules for issuance of access devices like debit cards. 15 U.S.C. § 1693i.

These provisions have been instrumental in helping consumers recover funds from unauthorized transfers and ensuring transparency in electronic banking. They've been around since 1978 and have been regularly updated (the most recent update to Regulation E was in 2020). This law has teeth.

Seminal Cases Demonstrating EFTA Protections

EFTA has been applied in many different contexts by litigants in private litigation. Here are a few examples.

In Widjaja v. JPMorgan Chase Bank, N.A., the Ninth Circuit clarified consumer liability under the EFTA, holding that "under 15 U.S.C. § 1693g(a), a consumer may be held liable for unauthorized transfers occurring after the 60-day period only if the bank establishes that those transfers 'would not have occurred but for the failure of the consumer' to timely report the earlier unauthorized transfer reflected on her bank statement." 21 F.4th 579, 582 (9th Cir. 2021).

In Clemmer v. Key Bank Nat'l Ass'n, the Sixth Circuit emphasized banks' non-delegable duties under the EFTA, stating that "the EFTA imposes the risk of loss on banks rather than consumers" and that a bank "may not avoid liability under the EFTA by contracting with a third party." 539 F.3d 349, 353 (6th Cir. 2008). This is important because EFTA attaches to banks primarily, not to other providers like Yotta or Synapse. Evolve can’t rely on Synapse for this, the law requires that Evolve, as the bank, obtain the required consent.

The Cease & Desist Order against Evolve Bank & Trust, issued by the Federal Reserve and the Arkansas State Bank Department, highlights significant deficiencies in compliance with the EFTA. The order found "significant deficiencies in Evolve Bank & Trust's compliance with BSA/AML requirements and consumer protection laws, including the EFTA." Cease and Desist Order, at 2 (June 11, 2024). This case underscores the importance of regulatory oversight in ensuring financial institutions uphold EFTA protections and can be used to show ongoing violations of EFTA by Evolve.

Consent Under the EFTA

Did we, as consumers, ever "consent" to these transfers? No. The EFTA establishes strict requirements for obtaining consumer consent for preauthorized electronic fund transfers. Under 15 U.S.C. § 1693e(a), "A preauthorized electronic fund transfer from a consumer’s account may be authorized only by a writing signed or similarly authenticated by the consumer." This ensures that consumers actively agree to recurring transfers, protecting them from unauthorized or deceptive practices.

Regulation E, which implements the EFTA, provides additional clarity. According to 12 C.F.R. § 1005.10(b), "Preauthorized electronic fund transfers from a consumer’s account may be authorized only by a writing signed or similarly authenticated by the consumer. The person that obtains the authorization shall provide a copy to the consumer." This regulation highlights two key points:

1. Consent must be affirmative and specific. A general agreement to terms of service (TOS) does not meet the requirement for a "writing signed or similarly authenticated." 15 U.S.C. § 1693e(a); 12 C.F.R. § 1005.10(b).

2. Consumers must receive a copy of the authorization. This ensures transparency and provides documentation to challenge unauthorized transfers. 12 C.F.R. § 1005.10(b).

Why Terms of Service Do Not Constitute Consent

Financial institutions and their partners, such as fintech platforms (Yotta, Juno, Synapse, etc), often attempt to rely on broad TOS agreements to justify preauthorized transfers. However, such agreements fail to meet the EFTA’s and Regulation E’s requirements for several reasons:

• Lack of Specificity: TOS agreements typically cover a wide range of services and do not explicitly authorize specific preauthorized transfers. The EFTA requires a clear and specific authorization for each recurring transfer. 15 U.S.C. § 1693e(a); 12 C.F.R. § 1005.10(b).

• No Affirmative Action: Consent under the EFTA must be actively given, such as through a signed authorization or a similarly authenticated action (e.g., entering a PIN or providing a digital signature). Simply agreeing to a TOS does not constitute the affirmative action required by law. 15 U.S.C. § 1693e(a); 12 C.F.R. § 1005.10(b).

• Failure to Provide a Copy: Regulation E mandates that consumers receive a copy of the authorization. TOS agreements rarely fulfill this requirement, leaving consumers without the necessary documentation to verify or challenge the authorization. 12 C.F.R. § 1005.10(b).

How Consumers Can Counter Claims of TOS-Based Consent

If a financial institution or its partner claims that a TOS agreement constitutes consent for preauthorized transfers, consumers can take the following steps (there's draft text in the next section to guide you in drafting a demand letter for your transactions):

1. Demand Proof of Authorization: Under 12 C.F.R. § 1005.10(b), the institution must provide a copy of the signed or similarly authenticated authorization. If no such document exists, the transfer is unauthorized.

2. Highlight the Lack of Specificity: Point out that the TOS does not explicitly authorize the specific preauthorized transfer in question, as required by 15 U.S.C. § 1693e(a).

3. Emphasize the Absence of Affirmative Consent:Argue that agreeing to a TOS does not constitute the active, affirmative consent required by the EFTA and Regulation E.

4. Cite the Requirement to Provide a Copy: Note that the institution’s failure to provide a copy of the authorization violates 12 C.F.R. § 1005.10(b) and undermines any claim of valid consent.

The EFTA and Regulation E are designed to protect consumers from unauthorized transfers by placing the burden of proof on financial institutions. Under 15 U.S.C. § 1693g(b), "In any action which involves a consumer's liability for an unauthorized electronic fund transfer, the burden of proof is upon the financial institution to show that the electronic fund transfer was authorized."

Obtaining Complete Transaction Records

You may not have your transaction records. The EFTs in question were all recorded on a separate ledger maintained by Evolve but never shared with you. You'll need to get that information.

Federal law provides consumers specific rights to demand complete documentation of electronic fund transfers. Under the EFTA and Regulation E, consumers can request both documentation of specific transfers and an investigation of any transfers not properly disclosed on statements. This is a critical step for identifying unauthorized transfers and holding financial institutions accountable.

Here is sample language for such a demand:

"Pursuant to the Electronic Fund Transfer Act (15 U.S.C. § 1693d(c)) and Regulation E (12 C.F.R. § 1005.11), I am requesting:

• A complete transaction history for my account [ACCOUNT NUMBER] from [DATE] to present, including all electronic fund transfers of any kind;

• Copies of all documents related to any electronic fund transfers to or from my account, including but not limited to any authorizations for such transfers;

• Written explanation of any electronic fund transfers that appear in your internal records but were not disclosed on my regular periodic statements;

• Investigation under 12 C.F.R. § 1005.11(a)(1)(vi) of any electronic fund transfers omitted from my periodic statements; and

• Identification of any intermediary entities or platforms involved in such transfers.

You may provide these documents electronically to [email address] if you maintain electronic records. Please provide these documents within 10 business days as required by 12 C.F.R. § 1005.11(c)."

Banks must respond to such requests promptly (within 10 days), and any failure to provide complete documentation can itself be evidence of EFTA violations. Incomplete or inaccurate documentation of transfers may also support tolling the statute of limitations until the consumer discovers the unauthorized transfers.

Penalties and Attorney’s Fees Under the EFTA

There is a prize in EFTA: statutory damages ensure compliance and protect consumers from unauthorized electronic fund transfers. Under 15 U.S.C. § 1693m(a)(2)(A), consumers may recover statutory damages ranging from $100 to $1,000 per transaction for violations of the Act. The statute explicitly states: "In the case of an individual action, an amount not less than $100 nor greater than $1,000." 15 U.S.C. § 1693m(a)(2)(A).

This range is discretionary, meaning courts may consider factors such as the severity of the violation and the financial institution’s conduct. For example, evidence of bad faith or systemic noncompliance, such as the deficiencies highlighted in the Cease & Desist Order against Evolve Bank & Trust, could support a higher award within the statutory range. However, it is important to note that the law guarantees a minimum of $100 per unauthorized transfer, ensuring that consumers are compensated even for smaller violations. In other words, under the law, you are entitled to at least $100 per transaction and up to $1,000 per transaction.

This availability of damages should be very interesting for the thousands of customers that only have a few hundred dollars in the account---too small for regular litigation, but with statutory damages, it's a different story. In my daugher's case, her deposit of $2,411, when we add the unconsented EFTs, becomes $46,411 with the addition of 44 counts of penalty. I'm calculating at $1,000 apiece here but even at $100 it more than doubles her claim.

In addition to damages, the EFTA allows for the recovery of attorney’s fees and costs. This makes the cases suddenly very interesting for plaintiff attorneys who work on contingency. Specifically, 15 U.S.C. § 1693m(a)(3) states that a successful plaintiff is entitled to recover "the costs of the action, together with a reasonable attorney’s fee as determined by the court." 15 U.S.C. § 1693m(a)(3). This provision ensures that consumers can pursue their claims without being deterred by the financial burden of litigation.

These remedies make the EFTA a powerful tool for consumers seeking to hold financial institutions accountable for violations, particularly in cases involving recurring unauthorized transfers.

Conclusion

The EFTA continues to evolve (no pun intended), with amendments like the Dodd-Frank Act of 2010 transferring rulemaking authority to the Consumer Financial Protection Bureau. It's more than 40 years old and has been applied by consumers and regulators. It's worth it to take the time to understand its scope so you can assess your Evolve claim. Good luck.

Disclaimer: A mandatory common-sense disclaimer: the information provided in this article is based on my own research and understanding of the Electronic Fund Transfer Act (EFTA) and related issues. I am sharing this as a fellow traveler navigating similar challenges with Evolve, and not as a lawyer. This article is intended to describe background, not intended to provide you with any specific legal advice. For specific legal concerns or questions on your case, please consult an attorney licensed in your jurisdiction..