Articles


August 23, 2010

What Rules Apply When You Accept Credit Cards for Payment Over the Telephone?

By: William Raney

Summary

In a field of law with many regulators at multiple levels imposing sometimes restrictive and sometimes redundant rules, the restrictions applicable to telemarketers when accepting a credit card payment over the telephone are surprisingly few and easy to implement for legitimate companies.

Article

In a field of law with many regulators at multiple levels imposing sometimes restrictive and sometimes redundant rules, the restrictions applicable to telemarketers when accepting a credit card payment over the telephone are surprisingly few and easy to implement for legitimate companies.  This article will touch on those restrictions.  You should ensure compliance with a more thorough review.

The first baseline restriction applicable through multiple sources of law at federal and state levels including the Telephone Consumer Protection Act, the Telemarketing Sales Rules, and every state’s unfair trade practices laws are general prohibitions against fraud, deception, abuse or any practice which, in the opinion of the prosecutor usually based on the number of consumer complaints, rises to the level of an unfair trade practice.  Because of the general nature of this restriction, a company intending to implement compliance procedures sometimes must wonder what the rule actually is.  The best and easiest source for this information is the general standards and practices usually promulgated by trade groups or recognized as industry practice.

An example for telemarketers is the self-regulatory standards promulgated by the American Teleservices Association available at http://www.atasroconnect.org/sub_standards.asp.  The ATA rules state, for example, that no member should “complete a sale unless a consumer is made aware of and understands the nature of the goods or services purchased and complete information regarding the amount to be paid, the source of that payment, etc.

The second likely source for these general restrictions is the seller’s contract with the credit card company or merchant bank account which always contains behavioral standards required for valid sales. 

However, neither the Telephone Consumer Protection Act nor the Telemarketing Sales Rule provide any restrictions on the acceptance of credit cards by fundraisers, for the above purposes, other than general prevention of fraud, abuse, or deception.  The Telemarketing Sales Rule section prohibiting abusive practices specifically includes restrictions on the use of leads and offers to those persons, based on pre-acquired account information which would include credit cards but is not specifically applicable to the acceptance of credit cards for payments.  16 CFR § 310.4.

The Telemarketing Sales Rule, however, does apply restrictions to submitting items to a consumer account for payment without the customer or donor’s express verifiable authorization.  16 CFR § 310.3(a)(3).  That section specifically exempts payment by credit card (subject to the protections of the Truth in Lending Act and Regulation Z) or debit cards (subject to the protections of the Electronic Funds Transfer Act and Regulation E).  Id.

These rules treat payments via credit card and debit card differently, so your client should either ask the consumer if the card is a credit or debit card (and treat the sale accordingly under either regulation) or treat all card sales under the more restrictive debit card rules. Further, given that the Regulation E rules seem easy to implement, your clients may want to implement this more restrictive standard for all transactions as a precautionary measure.

Truth in Lending Act and Regulation Z

Regulation Z requires disclosures from lenders and provides protections to consumers in the event of billing errors or fraud. 12 CFR § 226.1 et seq.

Regulation Z does not impose any specific restrictions on merchants who accept credit cards for payment.  These merchants would be subject to general state and federal consumer protection laws and likely subject to contractual restrictions pursuant to their merchant bank account regarding acceptance standards for one or recurring payments.

Electronic Fund Transfer Act and Regulation E

Regulation E is administered by the FDIC, 12 CFR § 205.1 et seq.  Regulation E, promulgated based on the Truth in Lending Act, regulates debit card transactions and requires that recurrent preauthorized transfers from a consumer’s account be authorized “only by a writing signed or similarly authenticated by the consumer. The person that obtains the authorization shall provide a copy to the consumer.” 12 CFR § 205.10(b).

The Federal Reserve, however, has specifically authorized the use of “digital signatures and security codes” which evidences the consumer’s signature, identity, and intent to authorize transfer to meet this requirement. 12 CFR Part 205 Supplement I.

E-SIGN is therefore the second relevant law governing these transactions. E-SIGN requires that a signature may not be denied legal effect or validity solely because it is in electronic form. 15 U.S.C. § 7001(a)(1).

The term “electronic signature” is defined in E-SIGN as “an electronic sound, symbol or process attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” Id. at § 7006(5).

If a debit card is used to make a recurring payment, your client should obtain the consumer’s signature, electronic or otherwise, authorizing the transaction, as well as the above information.

Specific State Law

Some states prohibit announcing a preference or requirement for payment by credit card. I can provide this information if needed.  Federal law preempts state law which is inconsistent with the two above rules, however some state restrictions may still apply such as the above and you should research these rules in each state from which you receive payments.

 

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