CUNA Comment Letter

Proposal to Expand Checks Eligible for ACH Truncation and Liberalize Authorization Requirements

July 19, 2001

Mr. William Colbert
Network Services Associate
NACHA – The Electronic Payments Association
13665 Dulles Technology Drive
Suite 300
Herndon, Virginia 20171

Dear Mr. Colbert:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on NACHA’s proposed rules that alter three automated clearing house (ACH) applications. As a national trade association, CUNA represents more than 90 percent of the nation’s 10,600 state and federal credit unions. This letter reflects the opinions of those credit unions and was developed under the auspices of CUNA’s Payment Systems Subcommittee, chaired by Terry West, President and CEO of Jax Navy Federal Credit Union, Jacksonville, Florida. CUNA's position on this proposal is summarized below.

CUNA'S POSITION

BACKGROUND

NACHA requests comments on numerous changes to three automated clearing house (ACH) applications. The rule changes would affect checks truncated into RCK entries because they were returned for insufficient funds; checks truncated at the store counter into POP entries; and accounts receivable checks truncated to pay for goods and services. For all of these applications, the rules changes would increase usage of check truncation by permitting truncation of corporate checks and increasing the dollar limits for eligible checks from $2,500 to $50,000. In addition, for accounts receivable entries the proposal would relax consumer authorization requirements, so that notice would suffice. This letter will address the specific changes to each ACH application and address CUNA's responses to those proposals.

NACHA would create a new standard entry class code for accounts receivable entries (ARC) to convert checks received at lock boxes into ACH items. This final rule would become effective on March 15, 2002 and it would make corporate checks, checks delivered to a drop box, and checks up to $50,000 eligible for truncation. The proposal would make notice to a consumer a sufficient method of obtaining consumer authorization, and it would eliminate the current requirement that consumers have an opportunity to opt-in or opt-out of truncation. Finally, the proposal would require that the original checks be destroyed within 14 calendar days after the settlement of the ARC.

In addition, the proposed changes to the RCK and POP entries would both become effective on September 13, 2002. Similar to ARC, both RCK and POP eligibility would be expanded to cover corporate checks and checks up to $50,000. RCK would also eliminate the requirement that the original check be retained for a certain period of time. Retention of a copy of the check would be considered sufficient.

DISCUSSION

Corporate Checks

In general, CUNA supports NACHA's proposal to expand the scope of truncation by including corporate checks and checks up to $50,000. The inclusion of all checks would eliminate the need for originators and originating depository financial institutions (ODFIs) to separate these different checks for different processing. Requiring the separation of these items is difficult because corporate checks are often indistinguishable from consumer checks. For these handling and processing reasons it makes sense to include corporate checks as eligible items. Similarly, it makes sense to include checks that are above $2,500 and under $50,000. This increase allows NACHA to expand the list of eligible items without greatly increasing the risk from allowing extremely large payment transactions.

Despite these improvements, originators and ODFIs will still have to segregate ineligible items such as checks greater than $50,000, cashier's checks and Department of Treasury checks. If originators and ODFIs inadvertently include these items, then that will increase the level of administrative returns. In addition, corporate accounts may have unique characteristics such as controlled disbursements that will also increase the level of administrative returns.

Since corporate checks would become eligible items for POP, RCK and ARC applications, they should receive the same protections and rights accorded to consumer checks. Receiving depository financial institutions must be able to give these items equivalent treatment because consumer and corporate checks will be nearly impossible to differentiate. As a result, credit unions must know that the same return time frame applies to both consumer and corporate checks, since credit unions will not be able to distinguish between the two to apply different rules.

ARC Entries

CUNA supports adoption of a new SEC code, ARC, but at a later date. A new SEC code would help credit unions identify the type of ACH item received and determine the rules governing that item. NACHA proposes that ARC become effective on March 15, 2002. Under this time line, if the rule were approved in September 2001, financial institutions would have just six months to learn about and prepare for the new SEC. As you are aware, adoption of the ARC code would require software changes and personnel training. In order to give adequate time for financial institutions and their processors to reprogram, so that they can accept these ACH entries, CUNA asks NACHA to delay implementation until September 2002. This later date would provide adequate time for financial institutions to prepare for the new SEC code. CUNA believes that the pilot rules, due to expire in March 2002, should be extended until the later implementation date arrives.

CUNA supports the elimination of an ARC requirement that consumers opt-in or opt-out to provide their authorization for truncation. Instead, CUNA believes that notice of truncation should be considered sufficient to obtain consumer authorization in the ARC application. Requiring an originator to obtain written authorization is time-consuming and impractical because there is typically no personal interaction between the merchant and the consumer for accounts receivable entries. As long as the notice provided to consumers is conspicuous and informative, CUNA supports the concept that notice may serve as authorization for ARC entries.

CUNA supports the provision in the ARC proposal that would require the original check to be destroyed no later than 14 calendar days after the settlement date of the original if a copy is made. Quick destruction would eliminate the possibility that the original could be accidentally presented after the ARC has cleared. A copy of the check would have to be retained, however, so those participants have some evidence to resolve disputes. For example, consumers may need a copy to prove that they paid for an item. Therefore, the proposal should include a requirement for retention of the check.

CUNA also supports including checks received at a drop box as acceptable items for truncation in the ARC code. ACH rules should be consistent with those for checks delivered by mail and those physically deposited at a lock box. The type of delivery should not result in an inconsistent approach in terms of ACH Rules. CUNA supports expansion of the application to include checks from drop boxes.

Future Proposals

At the present time, CUNA would not support any future proposal to let notice serve as authorization for POP entries. During the introduction of this pilot to the public at large, a written signature is an effective and relatively efficient form of notifying and educating the consumer. The signature requirement educates consumers and focuses them on the transaction. Without a signature requirement, consumers may not pay attention to the check conversion process, and they may rely on the RDFI to answer questions that could have been answered at the point-of-sale. Since obtaining signatures for ACH is no more time consuming than it is for a credit card, it should be kept.

For similar reasons, CUNA opposes eliminating the requirement that consumers provide signatures for merchants to send collection fees on returned RCK entries via ACH. CUNA believes that such an effort would inundate credit unions with inquiries from members concerning returned check fees that are deducted from their accounts as ACH debits.

CUNA is also concerned about some potential changes regarding the XCK entries. The current rule for XCK allows financial institutions to create an ACH file to replace a cash letter, which is a grouping of checks, that has been lost or stolen. Currently, only financial institutions can originate this type of entry. CUNA believes that other organizations should not be permitted to originate this type of entry because that would increase the risk of fraud. In addition, CUNA supports limiting XCK entries to cash letters. Financial institutions should be allowed to recreate a cash letter through the ACH process because attempting to recreate one is very time consuming and cumbersome. Financial institutions should not be allowed, however, to use XCK entries to recreate a single lost check. If only a single check is loss, the credit union member would be better served by a "pay in lieu of" check. Extending the ability to recreate files to any single check would increase the risk for fraud.

CONCLUSION

For these reasons, CUNA supports aspects of the current proposal with several caveats. CUNA is concerned about future proposals and urges NACHA to take our concerns into full consideration as future proposals are developed.

If you have any further questions, please contact me at (202) 682-4200.

Sincerely,

Michelle Q. Profit
Assistant General Counsel