What a Seller May Not Make a Condition of Payment

Answer first: credit may not be conditioned on repayment by preauthorized debit

The statutory sentence is nine words long before the exceptions start. No person may condition the extension of credit to a consumer on such consumer's repayment by means of preauthorized electronic fund transfers.

The same statute's second clause bars requiring a consumer to establish an account for receipt of electronic fund transfers with a particular financial institution as a condition of employment or receipt of a government benefit.

Regulation E implements the first clause with named exceptions. No financial institution or other person may condition an extension of credit to a consumer on the consumer's repayment by preauthorized electronic fund transfers, except for credit extended under an overdraft credit plan or extended to maintain a specified minimum balance in the consumer's account. The regulation then removes that exception for a covered separate credit feature accessible by a hybrid prepaid-credit card, and for covered overdraft credit extended by very large financial institutions as those terms are defined in Regulation Z.

Two words carry the whole rule. Credit means the arrangement being conditioned has to be an extension of credit — the right to defer payment of debt or to incur debt and defer its payment. And preauthorized electronic fund transfer means the specific mechanism of a recurring transfer authorized in advance. A seller asking for a card on file for a purchase that is not an extension of credit is not what this provision addresses.

The distinction is worth holding onto because health purchases arrive in both shapes. A program billed month to month for services already delivered is not necessarily extending credit. A program that finances a course of care and collects it back in installments may be.

The definition of credit that decides whether the rule applies

Regulation E supplies its own definition. Credit means the right granted by a financial institution to a consumer to defer payment of debt, incur debt and defer its payment, or purchase property or services and defer payment therefor.

That third branch is the one most likely to describe a health purchase. Purchasing services and deferring payment for them is credit under this definition, whether or not anyone in the transaction uses the word.

The regulation's structure means the compulsory-use prohibition is not a general rule about how a seller may collect money. It is a rule about what may be attached as a condition to an extension of credit. Where nothing is being deferred, the provision has nothing to attach to.

The prohibition also runs against any person, not only a financial institution. The regulation's text is explicit on that point: no financial institution or other person may impose the condition.

A term in an agreement cannot take these rights away

The waiver provision is one sentence and it is unusually broad. No writing or other agreement between a consumer and any other person may contain any provision which constitutes a waiver of any right conferred or cause of action created by this subchapter.

The same section then names two things it does not prohibit. It does not prohibit a writing or agreement that grants the consumer a more extensive right, remedy or greater protection than the subchapter contains. And it does not prohibit a waiver given in settlement of a dispute or action.

The asymmetry is the point. Terms may move a consumer's position upward from the statutory floor and may be waived as part of settling an actual dispute. They may not move the position downward in advance.

This provision governs the electronic fund transfer subchapter — the error resolution procedures, the liability ceilings, the preauthorized transfer requirements and the compulsory use prohibition all sit inside it. A term in an enrollment agreement purporting to shorten one of those windows or raise one of those ceilings is what the sentence is written about.

What a card issuer may not require of a seller

Regulation Z carries a parallel set of prohibitions, but they run against the card issuer rather than against the seller, and they reach the consumer indirectly.

No card issuer may, by contract or otherwise, prohibit any person who honors a credit card from offering a discount to a consumer to induce the consumer to pay by cash, check or similar means rather than by use of a credit card or its underlying account for the purchase of property or services.

The second prohibition is about tie-ins. No card issuer may require any person who honors the issuer's credit card to open or maintain any account, or obtain any other service not essential to the operation of the credit card plan, from the issuer or any other person, as a condition of participation in a credit card plan. Where maintenance of an account for clearing purposes is determined to be essential to the plan's operation, it may be required only if no service charges or minimum balance requirements are imposed.

The same section carries a rule that decides what happens to refunds where a seller does give them. If a creditor other than a card issuer routinely gives cash refunds to consumers paying in cash, it shall also give credit or cash refunds to consumers using credit cards — unless it discloses at the time the transaction is consummated that credit or cash refunds for returns are not given. The regulation adds that it does not require refunds for returns and does not prohibit refunds in kind.

So the disclosure timing is the operative fact. A no-refund practice is something the regulation contemplates being disclosed when the transaction is consummated, not discovered afterwards.

How these three provisions read together on a checkout page

Each provision answers a different question, and confusing them produces wrong conclusions in both directions.

The compulsory use provision asks whether credit is being extended and whether repayment by preauthorized electronic fund transfer is being made a condition of it. If the answer to both is yes and no exception applies, the condition is prohibited. If no credit is being extended, the provision does not speak.

The waiver provision asks whether a term purports to give up a right conferred by the electronic fund transfer subchapter. If it does, the statute says a writing may not contain it, with the two named carve-outs for greater protection and for settlement of an actual dispute.

The card-issuer provisions ask what an issuer has required of the seller. They do not restrict what a seller chooses to do on its own, and they do not require any seller to offer a cash discount — they only bar an issuer from contractually preventing one.

None of the three requires a seller to accept any particular payment method, and none of them decides whether a price is fair. They are limits on what may be bolted onto the act of paying, which is a narrower question than it appears to be from a checkout screen.