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Rising Interest Rates and Regulation E

6/13/2018

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By: Brian Taylor

As interest rates slowly climb back to pre-2008 levels, financial institutions are encouraged to evaluate the effects of a rising rate environment on deposit compliance. Specifically, banks should assess how rising interest rates impact their Regulation E error resolution procedures.

When a customer disputes a fraudulent transaction, the bank provisionally credits the customer’s account for the amount the customer claims is fraudulent. Following regulatory guidelines, the bank has 10 business days from the date the customer notifies the bank of the allegedly fraudulent transaction to either provisionally credit the customer’s account or issue final credit. Now, let’s suppose the account in question is an interest-bearing account. According to Section 1005.11(c)(2)(i), the provisional or final credit amount should include interest that would have been accrued. In recent years, the low rate environment has rendered any interest earned too small to calculate, even for institutions that wait the full 10 business days to provide credit.
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However, as interest rates trend upward, institutions need to pay attention to interest calculations for error disputes, especially for large dollar disputes. The intent of the regulation is to make the customer whole after the fraudulent activity has occurred. For customers with interest-bearing accounts, banks must return not only the amount disputed but interest that would have been earned as well.
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