Regulation Z, 12 CFR § 226.12

Payment Systems
The Credit Card System
Basic Concepts
Basic Concepts
Basic Concepts
• Credit Card a dual purpose mechanism
– Completing payments
– Accessing credit
Basic Concepts
• Governing Law
– Not the UCC (Article 4 excludes credit card
slip from definition of item § 4-104(a)(9) )
– Common law of contracts
– Truth in Lending Act
• Regulates the extension of credit by making
specified disclosures obligatory
• Extends some rights to cardholders
Basic Concepts
• Issuing Bank: Issues the card in its name;
extends credit up to the credit limit on the
card; commits to pay charges (subject to
certain rights of chargeback); bears risk of
non-payment by cardholder
Basic Concepts
• Issuing Bank: Issues the card in its name;
extends credit up to the credit limit on the
card; commits to pay charges (subject to
certain rights of chargeback); bears risk of
non-payment by cardholder
• Cardholder: Borrower from the Issuing
Bank; obligated to pay charges
Basic Concepts
• Card Network: Visa and MasterCard;
process payment slips and provide other
technology for payment system function;
association of banks and other participants
• Merchant Bank: Bank who accepts a
payment slip from a merchant, grants a
credit and forwards for collection through
card network
• Merchant: Member of Network who
accepts card as payment
Basic Concepts
Unauthorized Charges
• TILA caps liability at $50
• Protection afforded to business use as
• Can avoid $50 if you report loss before
unauthorized use
• Card Network rules forgive $50 if reported
within two business days
• Businesses that issue cards to 10 or more
employees can contract out (but can’t shift
loss to employees)
Problem 7-1
• Clark Consumer loaned his sister his bank
charge card. She promised to charge no
more than $200 worth of purchases. She
ran up $1,800 so far and counting the
charge slips mount each day. Issuer says
Clark is liable. Is he?
Basic Concepts
Customer is liable for all “authorized
charges.” TILA does not have any
provisions for converting authorized use to
unauthorized. Practical advice close down
the card.
• Note If the EFTA applied, §903(11)
converts card use to “unauthorized” once
the bank is notified. See EFTA§909(a)
and Reg. E §205.6.
Regulation E 12 CFR § 205.2(m).
• “unauthorized” transfers (protected
under Regulation E, 12 CFR § 205.6(a))
does not include any transfer initiated
“[b]y a person who was furnished the
access device * * * by the consumer.”
Basic Concepts
Who bears risk of loss for Unauthorized
• In face to face transactions the issuer if
the merchant used right procedures
• In remote (telephone, mail order, internet)
the merchant
Regulation Z, 12 CFR §
c) Right of cardholder to assert claims or defenses against card
1) General rule. When a person who honors a credit card fails
to resolve satisfactorily a dispute as to property or services
purchased with the credit card in a consumer credit transaction,
the cardholder may assert against the card issuer all claims
(other than tort claims) and defenses arising out of the
transaction and relating to the failure to resolve the dispute. The
cardholder may withhold payment up to the amount of credit
outstanding for the property or services that gave rise to the
dispute and any finance or other charges imposed on that
Regulation Z, 12 CFR §
(3) Limitations. The rights stated in paragraphs (c)(l) and (2) of
this section apply only if:
(i) The cardholder has made a good faith attempt to resolve the
dispute with the person honoring the credit card; and
(ii) The amount of credit extended to obtain the property or
services that result in the assertion of the claim or defense by
the cardholder exceeds $50, and the disputed transaction
occurred in the same state as the cardholder’s current
designated address or, if not within the same state, within 100
miles from that address.
Right to Withhold Payment
• Consumer transaction
• Dispute with the merchant unresolved after
good faith attempt
• Not yet paid credit card bill
• 100 mile radius or sames tate
Basic Concepts
Billing Errors
• TILA gives right to challenge billing errors
• Billing error
– Charge was not made or is for the wrong amount
– Cardholder requests additional documentary evidence
– Charge is for goods or services not accepted by or delivered
to cardholder in accordance with agreement with merchant
– Failure to credit a payment
– Computational or accounting error
– Failure to send a statement to the right address
Basic Concepts
Basic Concepts
Basic Concepts
Billing Errors Procedures
• Issuer must send statement to cardholder at
reported address
• Cardholder must send a notice of billing error
containing required information within 60 days of
date statement was sent
• Issuer must acknowledge within 30 days
• Issuer must resolve within two billing cycles
• To reject a claim as to goods or services issuer
must conduct reasonable investigation to reject