Hot Takes: CFPB Backs NY AG’s Position That EFTA Applies to Consumer Wires

We have been closely tracking the recent action by the New York Attorney General (“NY AG”) against Citibank regarding the bank’s treatment of consumer wire transfers. By way of background, the NY AG sued Citi in January 2024 alleging the bank violated the Electronic Funds Transfer Act (“EFTA”) because it lacked sufficient online security measures to protect against scammers and unlawfully refused to reimburse them for fraud losses from wire transfers.

In its complaint, the NY AG takes the position that the EFTA and Regulation E apply to all parts of the wire transaction except for the bank-to-bank wire transfer through Fedwire. It construes consumer wire transfers as consisting of three independent transfers of funds: a transfer from the consumer originator’s account to the payor bank’s wire funding account; a transfer between the payor’s bank and the payee’s bank conducted over Fedwire or similar wire rails; and a transfer by the payee’s bank into the payee’s account. The NY AG asserts that Article 4A only covers wire transfers between the payor’s bank and the payee’s bank, while the other transfers (i.e. the initial and final funding transfers from and to consumer accounts) are non-wire EFTs covered by Regulation E.

In a surprise move, on May 28th the CFPB filed an amicus brief in support of the NY AG’s position. The CFPB contends that the NY AG’s position that the EFTA applies to all parts of the consumer wire transaction except for the bank-to-bank wire transfer is supported by nearly 30 years of regulatory history. Since the CFPB is the agency primarily responsible for interpreting the EFTA, its brief is generating serious concern across the industry.

Industry insiders have been overwhelmingly aligned in their opposition to the NY AG and CFPB’s position that consumer wire transfers are not wholly exempt from the EFTA and Regulation E. The American Bankers Association, Bank Policy Institute, NY Bankers Association, and The Clearing House Association filed an amicus brief in the case supporting Citi’s position and legal interpretation, as well as a statement in opposition to the CFPB’s recent amicus brief.

In support of Citibank, trade groups have generally made three arguments. First, the groups argued that the NY AG’s position sidesteps UCC Article 4A and the universally accepted understanding and handling of consumer wire transfers as a united whole, and not three separate transactions. Second, the trade groups argued that both courts and regulators have confirmed Article 4A, not Regulation E, governs consumer wire transfers, citing myriad federal and state court decisions that examined the EFTA’s coverage exemptions and ruled that Article 4A governs wire transfers, as well as pronouncements from the CFPB, FDIC, OCC, and FinCEN establishing the EFTA does not apply to wire transfers other than remittance transfers. Third, the trade groups argued that adopting the NY AG’s position would upend settled industry practices at significant cost to consumers. Consumer wire transfer services are structured to align with Article 4A’s framework, and if portions of the transaction are made subject to the EFTA and Regulation E consumer protections, financial institutions will need to make significant changes to their agreements, procedures, and pricing, or reevaluate whether to offer online or mobile consumer wire transfers at all.

The arguments raised by the trade groups are compelling, and we are not persuaded by the CFPB’s claim that federal banking regulators have interpreted the EFTA as applying to consumer wire transfers (or at least the intra-bank book transfer from the consumer’s account to the bank’s omnibus account) for nearly 30 years. We question whether the CFPB is trying to make an end-run around rulemaking to remove the wire transfer exemption from Regulation E by publicly supporting the NY AG’s position, given the CFPB’s role as the agency primarily responsible for interpreting the EFTA. Undoubtedly the CFPB wants to see a reduction in the amount of consumer wire fraud losses, which have increased significantly in recent years. Applying the error resolution requirements and liability limits of Regulation E to consumer wires is one way to achieve that goal, by forcing banks to bear a larger share of those losses. But in our view, this will require rulemaking by the CFPB to remove the wire transfer exemption from Regulation E.

Accepting the CFPB’s claim that its interpretation of the EFTA is aligned with how federal banking regulators have interpreted it for nearly three decades would undermine the existence of the Regulation E exemption for wire transfers, rendering it meaningless. If the funding transfer from the consumer’s account to the bank’s omnibus account for consumer wires is an EFT subject to Regulation E, the full transaction is functionally subject to Regulation E. Consumer wires always include an initial intra-bank transfer from the consumer’s account to the bank’s omnibus account; the wire transfer cannot go directly from the consumer’s account to the recipient. So when would the Regulation E wire transfer exemption apply?

We are not aware of any banks that treat consumer wires (other than remittance transfers) as being subject to Regulation E. We are also not aware of the CFPB or any other federal banking regulators taking the position that consumer wires are subject to Regulation E in an examination or other supervisory context. If, as the CFPB asserts in its amicus brief, this has been the longstanding position of regulators, it stands to reason that we would have seen banks being cited for violations and subjected to enforcement actions to target the widespread non-compliance in the industry. But this hasn’t happened.

Consumer advocates are also seemingly unaware of banking regulators’ longstanding interpretation that the EFTA applies to consumer wires. In February, shortly after the NY AG filed its complaint against Citi, a representative for the National Consumer Law Center testified before a Senate Committee about fraud in the banking system, arguing in favor of legislative efforts to amend the EFTA to eliminate the exemption for bank wire transfers given the massive uptick in consumer wire fraud in recent years. The NCLC noted this issue could also be addressed with rulemaking from the CFPB, but expressed a preference for Congressional action for the sake of expediency and avoiding challenges. This testimony confirms our observation that banks are not providing Regulation E protections for consumer wires based on the understanding that the wire transfer exemption applies, and reflects the widely held belief that legislative action or rulemaking will be required to change the status quo.

We will continue to monitor the Citibank case as it makes its way through the court. While we are confident that the NY AG and CFPB’s position is unsupported by statutory and regulatory language and case law, it is concerning that the federal regulator primarily responsible for interpreting the EFTA has chosen to publicly support this position. Given the uncertainty, we recommend that banks conduct a preliminary evaluation of what changes would be necessary to their consumer wire services if the court ultimately adopts the NY AG’s position. If Regulation E liability and error resolution requirements apply to consumer wire transfers, banks will need to decide whether it is economically feasible to continue offering such transfers and whether additional guardrails or changes to fees is required to balance the increased risk and liability. Please reach out if you’d like to share your opinion.