CUNA Comment Letter
Proposal to Allow ACH Debits to Purchase Securities
March 15, 2001
Mr. William Colbert
Network Services Associate
NACHA The Electronic Payments Association
13665 Dulles Technology Drive
Herndon, Virginia 20171
Dear Mr. Colbert:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on NACHAs proposed rule to allow purchase of securities and commodities with an ACH debit. These types of purchases would be designated by a newly credited standard entry class code (SCT). As a national trade association, CUNA represents more than 90 percent of the nations 10,600 state and federal credit unions. This letter reflects the opinions of those credit unions and was developed under the auspices of CUNAs Payment Systems Subcommittee, Chaired by Terry West, President and CEO of JAX Navy Federal Credit Union, Jacksonville, Florida.
Under this rule the following provisions would apply:
- A receiving credit union would not be able to automatically recredit a credit union member's account, when the member alleges a debit to pay for securities was unauthorized, as is the case with other ACH transactions.
- If there was a dispute about an unauthorized transaction, then the receiving credit union would have to request from the originating financial institution the consumer's authorization. If the authorization was provided within four days, then the credit union would not be able to recredit the member's account. The member would have to be referred to the securities broker for resolution of the dispute. If the authorization was not provided within this time frame, then the receiving credit union would be required to recredit the account.
- Originating credit unions would be required to establish a procedure with brokers that would allow them to respond to receiving depository financial institution (RDFI) requests within four days, and they would be required to respond within four days to requests for authorization confirmations. In addition, the originating depository financial institution (ODFI) would be required to warrant that the underlying transactions were these securities transaction that are not subject to Regulation E.
CUNA strongly opposes the proposed SCT rule for the following reasons:
- SCT places additional administrative and operational burdens on RDFIs;
- SCT imposes additional liability on RDFIs;
- SCT places RDFIs in the middle of disputes between securities and commodities brokers and consumers;
- SCT inhibits the ability of RDFIs to resolve consumer service issues;
- SCT substantially decreases the consumer protections afforded in the ACH system; and
- SCT shifts the risks for securities trades from securities firms, which are best able to prevent fraud, to RDFIs that have no control over these transactions.
The SCT proposal raises additional administrative burdens on all RDFIs, including credit unions. Under the proposal, a unique subset of ACH transactions, SCTs, would be subject to a prequalification procedure for returns. Before a credit union could return a debit and credit a member's account, it would have to contact an ODFI and obtain verification from the ODFI. Following this prequalification procedure places an administrative burden on RDFIs, because it is difficult and time consuming to communicate with the ODFI and find a knowledgeable, responsive contact. The prequalification procedure would require extensive personnel training in new return procedures and new return deadlines. Moreover, employees would have to keep track of new SCT transactions and remember that the return and deadline rules that apply for those ACH transactions are different from those for other ACH transactions. These administrative and operational burdens for one particular ACH rule are unwieldy, unnecessary and enough to justify defeat of this proposal alone.
This rule also increases the liability risks to RDFIs under too many circumstances. For instance, even if an RDFI follows the rule, it may not have enough time to return an unauthorized SCT. If a consumer's affidavit is given to the RDFI at or near the end of the 60 day return deadline, the ODFI may respond after the RDFI return deadline has passed. As a result, the RDFI would be unable to return the debit and would be liable for the loss. Moreover, an RDFI may be held liable for a recredit mistake or premature debit return, caused by staff confusion about the two sets of ACH rules. For instance, if an SCT is mistaken for another ACH item and returned before a prequalification procedure, the RDFI would be liable. The four day waiting period during the prequalification procedure may also subject RDFIs to liability for wrongful dishonor if the SCT transaction is unauthorized and checks drawn on that account, do not clear during the waiting period.
This proposal places the RDFIs in the middle of disputes between consumers and brokers, which RDFIs are unable to resolve. Financial institutions are not equipped to provide their members or customers with guidance regarding these transactions, which are exempt from the requirements of the Federal Reserve Board's Regulation E. These transactions are regulated by the requirements of the Securities Exchange Commission (SEC) or the Commodities Futures Trading Commission. Financial institutions should not be placed in the middle of disputes governed by unfamiliar laws and regulators.
Moreover, the rule restricts a RDFI's ability to resolve customer service issues. The RDFI must deny requests for an automatic recredit and force all consumers to wait for recredits, during the prequalification procedure. The RDFI would no longer be able to recredit consumers without the permission of a third party. In addition, RDFIs may be forced to reduce consumer service because of the threat of extra liability. For example, RDFIs may refuse to initiate a prequalification procedure for consumers who claim that their transaction was unauthorized because the rule does not provide RDFIs with enough time to process the request and return items within the return deadline.
In addition, this proposed rule reduces the level of protection that consumers receive and may subject these consumers to new types of fraud. For example, for the first time, this rule would eliminate the automatic recredit right for consumers who claim that they had received an unauthorized debit. In addition, this rule may also expose consumers to fraud. For instance, use of the ACH debit may make it easier for disreputable stockbrokers to churn accounts. Even though this rule requires an ODFI to verify the authorization, the confirmation process an ODFI chooses may be so passive that it does not prevent this type of abuse. There is no incentive for an ODFI to conduct a thorough confirmation because the RDFI assumes all the risks.
This rule shifts the risks for securities trading from the securities industry to depository institutions, and by doing so disproportionately disadvantages too many participants in the ACH network. Consumers loose their right to automatic recredit; financial institutions are not given enough time to return bad debits; and both ODFIs and RDFIs are subjected to onerous procedural and operational burdens. Although protecting securities firms from dishonest consumers is a worthy goal, the burden for doing so should fall on securities firms. After all, these firms are in the best position to prevent fraudulent abuse by properly training brokers and screening clients. Financial institutions, as a passive third party, do not have the information or client relationship to prevent consumer abuses in securities trading.
We are aware that securities transactions are unique and may impose unique burdens on the securities industry. However, solutions to this problem should be pursued that would fairly distribute this burden. One possible solution would be greater use of the CIE credit entry, which allows a consumer to use a bill payment service provider to transmit a credit entry to the securities broker instead of the broker debiting the consumer. In the absence of a better solution that will not concentrate the harm on specific types of ACH participants, NACHA should keep the current system.
If NACHA seeks to propose another rule to address this problem, then that rule should have the following attributes: a longer comment period; an ODFI requirement to include a telephone number in the Batch Header Record for inquiries about transactions; appropriate lead time for proper training and system changes; and requirements that the consumer and broker use SEC arbitration procedures when recredits are denied.
For all the reasons stated above, CUNA opposes the SCT proposal in its current form. CUNA urges NACHA not to proceed before addressing these concerns that would disproportionally disadvantage RDFIs and consumers. If you have any further questions, please contact Michelle Profit at (202) 682-4200.
Michelle Q. Profit
Assistant General Counsel