CUNA Comment Letter
CUNA's Letter to NACHA Regarding Payment for Goods and Services Via Telephone-Initiated Debit Entries
Via e-mail dbarr@NACHA.org
July 31, 2000
Ms. Debbie Barr
Assistant Director of Network Services
National Automated Clearing House Association
13665 Dulles Technology Drive
Herndon, Virginia 20171
Dear Ms. Barr:
The Credit Union National Association (CUNA) appreciates the opportunity to comment NACHA's proposed rule to allow consumers to pay for goods and services authorized/initiated over the telephone. Under the proposed rule, the consumer would provide oral authorization and appropriate financial institution routing number and account number to the Originator over the telephone. The Originator would then initiate a single-entry ACH debit to the consumer's account in order to collect payment. As a national trade association, CUNA represents more than 90 percent of the nation's more than 10,500 state and federal credit unions and solicits the opinions of these credit unions on relevant matters. The following comments were developed by CUNA with input from the Payments System Subcommittee, directed by Stan Hollen, President and CEO of The Golden 1 Credit Union in Sacramento, California.
In principal, CUNA supports the proposed rule because telephone-initiated ACH payments would enable Originators to provide credit union members an alternative method of payment as convenient as credit card and debit purchases. Specifically, credit unions that are ODFIs could offer members the option of telephone-initiated ACH payments for transactions such as paying loans, purchasing certificates, and placing mail orders. Telephone-initiated debits could prove valuable as a way to help the underserved population make such payment transactions. For those credit unions with a sufficient volume of customer demand to warrant this service, telephone payments would be a more efficient process than check collection and would reduce overall processing costs. The resulting cost savings could be passed along to credit union members.
From CUNA's viewpoint, the major additional risk that ACH payments authorized solely over the telephone would pose to credit unions is fraud. For example, telephone scam artists may attempt to compromise this payment vehicle. This would result in an increase in the volume of unauthorized transactions. It is vital that information related to such telephone-initiated transactions be made available to depositors on their monthly account statements so they can assist in fraud detection.
CUNA agrees that a new Standard Entry Class Code is the most appropriate method to identify ACH payments that have been authorized over the telephone. A new SEC Code would facilitate the identification and processing of these telephone transactions. In addition, a new SEC Code that is easily identifiable would help credit unions address customer service issues.
CUNA supports the concept of ODFIs warranting that Originators of telephone-initiated transactions have used commercially reasonable procedures to verify the identity of the consumer. This risk mitigation practice would help protect credit union members from fraudulent or abusive merchant practices including identity theft and thereby help protect the RDFIs who unknowingly pay these unauthorized transactions. ODFIs should ensure that they are dealing with reputable merchants. Furthermore, ODFIs should have specific language in their contracts with merchants as to the procedures that merchants are to follow. In addition, ODFIs could require the merchant obtaining the authorization to ask for personal information such as the maiden name of the consumer's mother, the city and state where the consumer was born, or the last 4 digits of the consumer's social security number and then check that information against ODFI records. In the case where the consumer and the merchant have an existing relationship, another tool available to ODFIs is to check past transaction history and/or purchase history with merchant for any unusual/suspicious activity. Such practices would likely reduce the number of exception items and administrative returns.
CUNA also supports the concept of ODFIs warranting that Originators of telephone-initiated transactions have used commercially reasonable procedures to verify that account number structures and routing numbers are valid for ACH transactions to avoid delay in processing as well as to reduce the number of exception items and administrative returns. It is more difficult to verify account number structure because it varies throughout the industry. In terms of tools available to Originators to verify account and routing numbers, Originators could use Thompson Financial Publishing's ABA Routing and Transit Number Files or a commercial service provider which has a national routing number and account number database, such as Thompson's Epicware.
While CUNA believes it is important for merchants to have these reasonable procedures in place to maintain the continued security of transactions through the ACH system, in practice CUNA has concerns about the additional ongoing liabilities that such warranties regarding third parties would impose on ODFIs.
CUNA agrees with the recommendation that telephone-initiated transactions could not be returned for Return Reason Code R07 (Authorization Revoked by Consumer). A single-entry telephone-initiated payment is the result of a one-time payment authorized by a consumer at the time the consumer purchases a product or service. ACH Rules indicate that R07 may not be used for PPD debit entries initiated at the point-of-purchase. The Return Reason Code R07 should only be used to revoke authorization previously granted or to revoke authorization for an unauthorized debit. If dissatisfied with a transaction, a consumer may call the payee directly for a refund, or return the item using R10 (Unauthorized transaction) or R08 (Stop Payment). Consumers still have the opportunity to place stop payment immediately or return unauthorized transactions within 60 days of settlement. If Originators disclose properly to consumers, then Return Reason Code R07 is unnecessary.
CUNA agrees that there should be a modification regarding stop payment orders for telephone transactions. CUNA has some concerns in this regard because credit unions participating in the Telephone Pilot have found stop payments to be problematic. The computer systems use the group number for stops; since the credit unions do not know the group number for telephone entries, accounts with stop payments have had to be manually processed. Therefore, we support a modification that would allow a stop payment orders for telephone-initiated transactions placed with the institution when the institution has been given a reasonable time to act on the order instead of three days notice.
CUNA believes that the oral customer authorization is a critical part of the telephone-initiated debit process. It is important that Originators adhere to the information requirements that must be included in the oral customer authorization. Merchants should have clear guidelines on disclosures that need to be made to consumers so that all consumers, including ones with special needs who may be confused and the elderly and those who are unsophisticated regarding electronic transfers, fully understand that their account will be debited. According to the experience of credit union participants in the Telephone Pilot, members have been confused as to how the item will clear because they have not been adequately informed by the Originators. Further, members have been confused about how to stop these type of payments. Originators should disclose that consumers may not revoke authorization but could return the transaction if it is unauthorized (Return Reason Code R10), place a stop payment on the ACH debit, or call the company directly for a refund.
Based on the experience of credit unions participating in the Telephone Pilot, CUNA anticipates that required software changes associated with the new SEC Code will be very extensive and moderately costly. CUNA strongly recommends an implementation date for the Rule of September 2001 in order to provide credit unions adequate time to make necessary adjustments to their systems and procedures. Some credit unions are in the process of implementing new systems that were put on hold in 1999 due to Y2K.
CUNA appreciates the opportunity to comment on NACHA's proposals. CUNA makes every effort to give each request for comment a careful review but would like to offer one comment on the comment process. In general, CUNA believes that NACHA should avoid setting the comment deadline for multiple proposals on the same date. For instance, in this case comments on the New Pilot to Truncate Checks to ACH at Point-of-Purchase are due at the same time as this letter. We believe it would be beneficial to all interested parties if NACHA would stagger comment letter deadlines to allow for more time for a thorough review of each proposal. Following this procedure will avoid overtaxing the resources of any interested party and facilitate the filing of thoughtful and informative comments.
CUNA supports the implement of this rule with the recommendations stated above. If you have any further questions, please contact Mary Dunn or Catherine Orr at (202) 682-4200.
Mary Mitchell Dunn
Associate General Counsel
Catherine A. Orr
Regulatory Advocacy Attorney