Your bank’s compliance department is correct that Regulation E prohibits banks from requiring borrowers to repay consumer loans by preauthorized electronic fund transfers. This rule applies to preauthorized electronic fund transfers from “consumers’ available funds at the same institution via direct transfers, or at other institutions via recurring ACH transfers.”

While your bank is prohibited from requiring preauthorized electronic fund transfers as a condition of a consumer loan, you may offer incentives to a borrower to agree to an automatic repayment feature ­­­— such as a reduced annual percentage rate (APR). However, in such case, you would be required to offer an alternative loan program without preauthorized electronic fund transfers in addition to the reduced APR option.

Additionally, while Regulation E exempts automatic bank account transfers from the definition of “electronic fund transfer,” it expressly provides that such bank account transfers remain subject to the prohibition on requiring preauthorized loan repayments.

For resources related to our guidance, please see:

• Regulation E, 12 CFR 1005.10(e)(1) (“No financial institution or other person may condition an extension of credit to a consumer on the consumer’s repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer's account. This exception does not apply to a covered separate credit feature accessible by a hybrid prepaid-credit card as defined in Regulation Z, 12 CFR 1026.61.”)

• Regulation E, Official Interpretations, Paragraph 10(e)(1), Comment 1 (“Creditors may not require repayment of loans by electronic means on a preauthorized, recurring basis.”)

• Regulation E, 12 CFR 1005.2(k) (“‘Preauthorized electronic fund transfer’ means an electronic fund transfer authorized in advance to recur at substantially regular intervals.”)

• Proposed Rule, Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z), 79 Fed. Reg. 77101, 77133 (December 23, 2014) (“Congress enacted the compulsory use provision to prevent financial institutions that are creditors from mandating repayment of credit by future preauthorized electronic fund transfers. Were the compulsory use provision not to exist, creditors could access consumers’ available funds at the same institution via direct transfers, or at other institutions via recurring ACH transfers, to repay the debt. By doing so, consumers could lose access to these funds and lose the ability to prioritize repayment of debits, as a creditor could compel the consumer to grant the creditor preauthorized transfer access to a consumer’s asset account as a condition for agreeing to provide credit to that consumer.”)

• Regulation E, Official Interpretations, Paragraph 10(e)(1), Comment 4 (“A creditor may offer a program with a reduced annual percentage rate or other cost-related incentive for an automatic repayment feature, provided the program with the automatic payment feature is not the only loan program offered by the creditor for the type of credit involved. . . .”)

• Regulation E, 12 CFR 1005.3(c)(5) (“The term ‘electronic fund transfer’ does not include: . . . Any transfer of funds under an agreement between a consumer and a financial institution which provides that the institution will initiate individual transfers without a specific request from the consumer:

(i) Between a consumer’s accounts within the financial institution

(ii) From a consumer's account to an account of a member of the consumer's family held in the same financial institution; or

(iii) Between a consumer’s account and an account of the financial institution, except that these transfers remain subject to § 1005.10(e) regarding compulsory use and sections 916 and 917 of the Act regarding civil and criminal liability.”)