Are Banks Liable for Unauthorized Transactions?

An unauthorized transaction occurs when funds are moved from an account without the account holder’s permission or knowledge. This can happen due to a lost or stolen card, identity theft, or compromised account information. Understanding the protections afforded by federal laws and the procedures for reporting these incidents is important for consumers. This article outlines the legal framework, steps consumers should take, and the process banks follow to investigate and resolve these issues.

Understanding Unauthorized Transactions and Liability

Bank liability for unauthorized transactions is primarily governed by federal laws. These laws differentiate between types of accounts, particularly electronic fund transfers (EFTs), which include debit card and ACH transactions, and credit card transactions.

Electronic Fund Transfers, such as those made with a debit card, through an Automated Clearing House (ACH) system, or at an ATM, are covered by the Electronic Fund Transfer Act (EFTA) and its implementing regulation, Regulation E. Under Regulation E, consumer liability for unauthorized debit card transactions depends on how quickly the incident is reported. If an unauthorized transaction is reported within two business days of learning about the loss or theft of an access device, the consumer’s liability is limited to $50.

If the report is made after two business days but within 60 days of the statement showing the unauthorized transaction, consumer liability can increase to a maximum of $500. If the consumer fails to report within 60 days after the bank statement is sent, they could face unlimited liability for transactions that occurred after the 60-day period. Regularly monitoring account statements is important.

For credit card transactions, the Fair Credit Billing Act (FCBA) provides different protections. This limits a consumer’s liability for unauthorized credit card use to a maximum of $50, regardless of when the unauthorized charge occurred, once the card is reported lost or stolen. Many credit card issuers voluntarily offer “zero liability” policies, meaning consumers may not be held responsible for any unauthorized charges. The FCBA applies to open-end credit accounts, such as credit cards, and does not cover debit card transactions.

Transactions made by someone with permission, even if they exceed that permission, do not qualify as unauthorized. For example, if you allow a family member to use your card and they make purchases beyond what was agreed upon, those transactions may not be considered unauthorized. Disputes over the quality of goods or services purchased also fall outside the scope of an unauthorized transaction.

Steps for Reporting an Unauthorized Transaction

Prompt action is important when an unauthorized transaction is discovered on an account. The initial steps taken by a consumer can significantly impact the outcome of a dispute and the extent of their liability. Gathering specific information before contacting the bank can streamline the reporting process.

Before contacting the bank, consumers should collect relevant details about the unauthorized transaction. This includes the date and amount of the transaction, the merchant’s name if known, and any supporting documentation such as receipts or screenshots of online banking activity. Knowing the account number affected is also important. This preparation helps ensure that all necessary information is readily available for the bank’s records.

The recommended method for reporting an unauthorized transaction is to first contact the bank by phone. This allows for immediate notification, which is important for meeting strict reporting deadlines and limiting potential liability. Many banks have dedicated fraud departments for these reports.

Following the phone call, it is advisable to provide written confirmation of the unauthorized transaction to the bank. This written record serves as formal documentation and helps preserve consumer rights, especially for credit card disputes under the Fair Credit Billing Act. The written correspondence should include the account number, specific transaction details, and the date of the initial phone report. Sending this letter via certified mail with a return receipt provides proof of mailing and delivery.

The Bank’s Investigation and Resolution Process

Once an unauthorized transaction is reported, the bank initiates a formal investigation process. Banks have a legal obligation to investigate these claims to determine the legitimacy of the dispute. This process involves specific timelines and procedures that aim to resolve the issue for the consumer.

Upon receiving a report of an unauthorized transaction, banks are required to acknowledge receipt of the dispute, typically within 10 business days. The investigation involves reviewing transaction data, checking for unusual spending patterns, and utilizing security tools like IP tracking and geolocation data. Banks may also contact the merchant involved to gather more information.

For debit card transactions covered by Regulation E, if the bank cannot complete its investigation within 10 business days, it is generally required to issue a provisional credit to the consumer’s account. This temporary credit allows the consumer access to the disputed funds while the investigation continues. The provisional credit usually matches the disputed amount and becomes permanent if the investigation concludes in the consumer’s favor.

The timeline for the bank’s investigation varies depending on the type of transaction. For debit card disputes, banks typically have up to 45 days to complete their investigation, though in some complex cases, it can extend to 90 days. Credit card investigations, governed by the Fair Credit Billing Act, generally have a resolution timeframe of two billing cycles, which can range from 30 to 90 days.

Once the investigation is complete, the bank communicates its findings to the consumer in writing. If the bank determines the transaction was indeed unauthorized, the funds will be permanently credited or reversed to the account. If the bank concludes the transaction was authorized, any provisional credit issued will be reclaimed from the consumer’s account. Consumers have the right to request documentation used in the investigation if they disagree with the bank’s decision.