Consumer Compliance Outlook: First Issue 2016

Credit and Debit Card Issuers’ Obligations when Consumers Dispute Transactions with Merchants

By Kenneth Benton, Senior Consumer Regulations Specialist, Federal Reserve Bank of Philadelphia

Debit and credit card transactions increased significantly between 2000 and 2012, the most recent period evaluated in the Federal Reserve’s triennial payment card study. During this period, the number of credit card transactions increased from 15.6 billion to 26.2 billion, while the number of debit card transactions grew from 8.3 billion to 47 billion.1

Given the high volume of transactions, it is not surprising that disputes can occur when consumers use a credit or debit card to pay a merchant for a good or service. For example, if a card is used to purchase an item online that is delivered damaged and the merchant refuses to take it back, the consumer might contact the card issuer to dispute the transaction. The question then arises: What are the card issuer’s compliance obligations under federal law for merchant disputes?

The answer depends on whether the consumer paid the merchant with a debit or credit card because the consumer protections for these payment cards derive from different federal laws — the Truth in Lending Act (TILA) for credit cards and the Electronic Fund Transfer Act (EFTA) for debit cards. Under Regulation Z, TILA’s implementing regulation, credit card issuers have two separate legal obligations that could apply to merchant disputes. By contrast, under Regulation E, EFTA’s implementing regulation, debit card issuers only have obligations if a consumer alleges an error with the fund transfer underlying the purchase.

To facilitate compliance, this article reviews a card issuer’s obligations under Regulations Z and E when a cardholder disputes a transaction with a merchant for goods or services purchased with a credit or debit card. This discussion is based solely on federal consumer protection laws. The card issuer may have other obligations under state law or under the rules of the payment processing network through which the card was issued, such as Visa or MasterCard.


Congress passed TILA in 1968 “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him [and] to avoid the uninformed use of credit.”2 In 1974, Congress amended TILA through the passage of the Fair Credit Billing Act (FCBA) “to protect the consumer against inaccurate and unfair credit billing and credit card practices.”3

Under the FCBA, as implemented in Regulation Z, credit card issuers have two separate obligations that may apply to merchant disputes. First, under 12 C.F.R. §1026.13(a), issuers must investigate and resolve certain billing errors, including a transaction reflected on a periodic statement involving goods or services that the consumer (or representative) did not accept or was not delivered or was not delivered as agreed. Comment 13(a)(3)-1 of the official staff commentary (commentary) for Regulation Z provides these examples for this type of billing error:

The commentary further clarifies that the error does not apply to a dispute relating to the quality of goods or services that the consumer accepts (whether acceptance occurred is determined by state or other applicable law).

A credit card issuer’s compliance obligation under §1026.13(a) is triggered when the consumer sends a written notice to the issuer within 60 days after the issuer provides the periodic statement that reflects the alleged billing error.4 The consumer is not required to notify the merchant and attempt to resolve the dispute, assuming the consumer did not accept the goods.5 The card issuer must provide a written acknowledgment to the consumer within 30 days of receiving the billing error notice and investigate and resolve the alleged error within two complete billing cycles (but in no event later than 90 days) of receiving the billing error notice. Until a billing error is resolved, the consumer is entitled to withhold payment to the card issuer for the amount owed the merchant and any associated finance charges, and the issuer is prohibited from reporting negative information about the consumer’s credit standing (for example, to a consumer reporting agency) because the consumer failed to pay this amount. If the creditor determines that a billing error has occurred as asserted, it must credit the consumer’s account with the full disputed amount, including any associated finance charges.6

The second consumer protection in a merchant dispute is found under §1026.12(c), which permits a consumer to assert against the card issuer any defenses and claims (except tort claims) arising out of a transaction paid with a credit card.7 This right applies only if the cardholder attempted in good faith to resolve the dispute with the merchant and the transaction exceeds $50 and occurred in the same state as the cardholder’s designated address or within 100 miles of that address.8 The amount of the claim is limited by the amount of credit outstanding for the disputed transaction at the time the cardholder first notifies the card issuer of the claim or defense.

For example, a consumer uses a credit card to purchase a product for $200 from a merchant in the same state as the consumer (based on the cardholder’s address), and the product is delivered damaged to the consumer. If the merchant refuses to take it back, the cardholder could dispute the transaction with the card issuer based on the defense that the merchant sent a damaged item. The cardholder could also withhold payment on the amount of the transaction and associated finance charges until the matter is resolved. The commentary clarifies that §1026.12(c) “merely preserves the consumer’s right to assert against the card issuer any claims or defenses that can be asserted against the merchant. It does not determine what claims or defenses are valid as to the merchant; this determination must be made under state or other applicable law”(emphasis added).9

One potentially confusing issue is the interplay between the protections of §1026.12(c) and §1026.13(a). For example, if both sections apply to a particular dispute, can the consumer invoke them both? The commentary discusses the overlap and differences between these sections and clarifies that each section operates independently of the other:

The §1026.12(c) credit card “holder in due course” provision deals with the consumer’s right to assert against the card issuer a claim or defense concerning property or services purchased with a credit card, if the merchant has been unwilling to resolve the dispute. Even though certain merchandise disputes, such as non-delivery of goods, may also constitute “billing errors” under §1026.13, that section operates independently of §1026.12(c). The cardholder whose asserted billing error involves undelivered goods may institute the error resolution procedures of §1026.13; but whether or not the cardholder has done so, the cardholder may assert claims or defenses under §1026.12(c). Conversely, the consumer may pay a disputed balance and thus have no further right to assert claims and defenses, but still may assert a billing error if notice of that billing error is given in the proper time and manner. An assertion that a particular transaction resulted from unauthorized use of the card could also be both a “defense” and a billing error.10

In summary, credit card issuers have certain obligations when a cardholder disputes a transaction with a merchant and contacts the issuer. Whether §§1026.12, 1026.13, or both apply depends on where the product was purchased, the type of merchant dispute, whether there is an outstanding balance on the transaction, whether the good or service was accepted, whether the consumer has attempted to resolve the dispute with the merchant, and how and when the consumer contacts the card issuer. Each section is independent of the other, so even though one section may apply to a dispute, it would not preclude the consumer from obtaining protection under the other section if applicable.


The EFTA was enacted in 1978 to provide consumer protections for electronic fund transfers (EFTs), including debit card transactions, and is implemented through Regulation E.11 Among other provisions, the EFTA provides consumers with the right to dispute “errors” related to their debit cards. The regulation defines an error as:

Unlike Regulation Z, Regulation E does not define an error to include the right to dispute a transaction with a merchant because of a problem with goods or services. While a consumer may assert an error with respect to the EFT underlying the purchase of goods or services, a merchant dispute about an issue with the goods or services would generally not qualify. For example, an unauthorized EFT is narrowly defined as “an electronic fund transfer from a consumer’s account initiated by a person other than the consumer without actual authority to initiate the transfer and from which the consumer receives no benefit.”13

However, Regulation E does apply to an error in the amount a merchant charged the consumer’s card. For example, if a consumer disputed a transaction because the merchant inadvertently charged the consumer’s card twice, the card issuer would have to investigate the alleged additional charge because the regulation protects against “an incorrect electronic fund transfer to or from the consumer’s account.”14

Thus, in contrast to Regulation Z’s protections for credit cards, Regulation E provides more limited protection for disputes with a merchant arising from a debit card transaction. When the EFTA was enacted in 1978, debit cards were not available for point-of-sale transactions,15 so it is not surprising that the EFTA does not cover certain merchant disputes. By contrast, when the FCBA was enacted in 1974, credit cards were used for point-of-sale transactions, and Congress specifically provided protections for certain merchant disputes.16


Card issuers will likely see an increase in the number of cardholder disputes as the percentage of consumer transactions paid with debit and credit cards continues to increase. A card issuer’s obligations for merchant disputes depend on whether a credit or debit card was used and certain other factors. Thus, it is important for debit and credit card issuers and their staffs to understand their obligations under Regulations Z and E when a consumer files a dispute. Specific issues and questions should be raised with your primary regulator.