CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2002 No. 3, January 30, 2002

Vol 2002 No. 3, January 30, 2002

Attorney General Opinion on Debit Cards

The Attorney General of the State of California issued a legal opinion disapproving the practice of gasoline station owners who place a hold on a customer's bank account in an amount in excess of the purchase price, where the hold extends beyond the transaction, and the customer is given no notification of the extended hold.

The situation arises where the customer, prior to fueling, swipes a debit card for preauthorization. Because the actual purchase price is unknown until the fueling is completed, some station owners arrange to hold, as a matter of course, an amount equal to the highest purchase price that could be charged. The hold is typically effective until the merchant's bank processes the actual receipts.

In response to an inquiry from Senator Wesley Chesbro, the Attorney General's office issued a letter stating that it would be a violation of California's Unfair Competition Act (Business & Professions Code, §§ 17200-17208, hereafter "Section 17200") unless the station owner, in such situations, provides prior notice to the customer of the extended hold.

If the amount of the hold does not exceed the purchase price or if the hold is immediately reduced to the amount of the purchase upon completion of fueling, the customer would have no need to know ofthe hold. The letter also notes that no federal law expressly requires the disclosure of the existence of a hold placed on a debit cardholder's account.

Section 17200 does not directly address this issue. But the Attorney General notes that the law's purpose is to deter any unlawful, unfair, or fraudulent business practice. A practice can be deemed to violate Section 17200 even if it is not illegal. The practice of placing extended holds without notification, the letter states, potentially subjects the gasoline purchaser who uses a debit card to substantial injury in the form of dishonored checks and overdraft fees. Moreover, there is no rationale for not disclosing the hold.

The letter does not suggest that banks may be liable or have obligations to disclose. However, it may be prudent for banks to consider and review their practices in connection with other similar transactions, especially if the bank has control over placing the hold. Also, Ted Kitada, an attorney with Wells Fargo, adds that it may be prudent for banks to consider including in their account disclosures a notice that third parties, including hotels, restaurants, and car rental businesses, may place such holds.