CUNA Comment Letter

Federal Government Participation in the Automated Clearing House

Via e-mail

July 31, 2001

Ms. Donna Kotelnicki,
Acting Director
Cash Management Policy and Planning Division
Financial Management Service
U.S. Department of the Treasury
401 14th Street, SW, Room 420
Washington, D.C. 20227

Dear Ms. Kotelnicki:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the Department of the Treasury's (Treasury) proposal to modify three automated clearing house (ACH) rules that govern payments to federal agencies. As a national trade association, CUNA represents more than 90 percent of the nation’s 10,600 state and federal credit unions. This letter 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.



The Department of Treasury (Treasury) proposes to revise the ACH rules that affect federal agencies that convert check payments into ACH debits. The proposal would govern point-of-purchase check conversion, lockbox check conversion, and Internet-initiated ACH debit entries, particularly with respect to the issues discussed below.


Corporate Checks

In general, CUNA supports Treasury's proposal to expand the scope of truncation by including corporate checks. The inclusion of these checks would eliminate the need for Treasury to separate consumer and corporate 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.

Treasury should use the same SEC code for both the consumer and corporate checks that are in the same ACH application to help consumers. In Treasury's proposal, corporate checks would have the same SEC code as their consumer counterparts for lockbox check truncation. In the point-of-purchase application, however, Treasury would use a different SEC code only for corporate checks. Treasury states that it will train its cashiers to apply this different type of SEC code. If the cashiers make a mistake and convert a consumer's check, the consumer will lose the consumer rights (i.e. longer return times) that (s)he would have received if the item had been correctly processed under the point-of-purchase SEC.

In addition, Treasury should use the same SEC code so that RDFIs can provide adequate customer service. According to NACHA rules, this SEC code, CCD, is supposed to be used for an ACH entry initiated by an organization to consolidate funds of that organization's branches or agents, or from other organizations, or to fund the accounts of its branches, or of another organization. Treasury should not use this SEC code for checks truncated at the point-of-purchase because no one will recognize that it is a point-of-purchase transaction. Mislabeling these transactions would make it hard for RDFIs to identify the transaction and help corporate customers that request information on the entry. Moreover, RDFIs personnel would have to be trained to expect Treasury's unique use of this code. Treasury should not force ACH participants to retrain their staffs to accommodate this unusual use of the SEC code. The better approach would be for Treasury to remain consistent among all three ACH applications and give corporate checks and consumer checks the same SEC code if they are used for same type of ACH transaction.

If consumer and corporate checks are used within the same SEC code, then the rules must allow RDFIs to provide these items equivalent treatment because RDFIs will be unable to distinguish between them. For example, credit unions should 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. If two sets of rules apply, then personnel may mistakenly apply one set of rules instead of another. Such a mistake could increase the potential liability of the RDFI. This hazard would be eliminated if there were just one set of rules. For that reason, CUNA supports using one set of rules for both corporate and consumer checks.

Treasury should exclude from eligibility those corporate checks that are disbursed by financial institutions using their own Federal Reserve Routing Transit Numbers (e.g., checks issued for share withdrawals). The reason for the exclusion of these checks is that most RDFIs’ ACH systems cannot yet communicate with their corporate check systems to verify the validity of a corporate account number. Without this capability, these ACH check items cannot post to their corporate accounts automatically. Consequently, RDFIs will return these corporate check ACH entries to the sender. As a result, federal agencies would likely receive ACH returns for these items. Treasury’s proposal does not exclude these types of checks and it should. NACHA rules have this exclusion.

Treasury requested comments on the operational impact and consequences of the conversion of corporate checks. Corporate accounts may have unique characteristics such as debit filtering or positive pay technology that will also increase the level of administrative returns and reduce the percentage of items that are successfully processed. NACHA’s pilot participants have experienced numerous returns due to RDFI’s positive pay and debit filtering programs for their corporate customers. The Treasury should be fully aware that, like these pilot participants, they also would experience administrative returns for these same reasons.

Some credit unions may experience difficulty with Treasury's decision to convert corporate checks. A few credit unions have reconciliation programs that are used to match checks and deposits. If a check has been converted to ACH, then these programs would not recognize the match and would list each conversion as an exception. This proposal would mean that the reconciliation system was no longer automated. As a result, many hours of manual effort would be required to reconcile the system. Furthermore, if a credit union's system recognizes checks and ACH items as separate types of items, then businesses may not be able to process stop payments. A business might place a stop payment on the ACH only to see it processed as an ACH item.

General Concerns

In addition, a few consumers may be disadvantaged by Treasury's proposal. The Treasury does not offer an alternative payment method to consumers who do not want their checks converted to automated clearing house (ACH) debits. For some consumers, this might be a problem and we recommend that Treasury provide an option to those consumers. In addition, Treasury’s proposal does not indicate whether a consumer’s check will be retained by the agency or returned to the consumer. If retained by the agency, the agency should maintain copies of the consumer’s check long enough to satisfy future requests for copies. As proposed, the federal agencies would only be required to maintain copies of checks (source documents) for two years. We believe this retention period is too short and may be inconsistent with some state laws. We recommend a retention period of seven years.

CUNA urges the Treasury to require that check copies be MICR-encoded.

The Treasury indicates that, for returned ACH checks, it would send a paper copy of the check to the RDFI. However, the Treasury does not clarify whether or not the check copy itself would be MICR-encoded. If it is not MICR-encoded, then the Treasury would have to key enter the MICR information and send the check in a MICR-encoded envelope. We believe key-entered MICR information may result in a higher incidence of errors. As a result, CUNA urges Treasury to use MICR-encoded checks.

We recommend that Treasury require in its rules that federal agencies respond to RDFI’s requests for check copies in a timely manner. Although consumers’ financial institutions will not have copies of their checks, consumers will most likely contact them for copies. If federal agencies do not respond quickly to requests for check copies, financial institutions could experience increased administrative burdens. We urge the Treasury to incorporate provisions that require federal agencies to respond promptly to requests for check copies within ten days. Such a time period is consistent with NACHA’s rules governing similar ACH applications.

Point-of-Purchase Entries

At the present time, CUNA supports requiring a consumer's signature to establish authorization for point-of-purchase 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. For those reasons, CUNA would not support letting notice serve as authorization for point-of-purchase entries.

CUNA also opposes using notice at the point-of-purchase as authorization because it would negatively impact financial institutions. While posted notices and paper disclosures might reduce consumers’ questions at federal agency locations, we do not believe consumers will fully read this information or understand how it impacts them until they receive their checking account statements. Consequently, financial institutions, not federal agencies, will receive inquiries from consumers about these transactions. Thus, mere notice would inadvertently shift the burden of educating federal agencies’ customers from federal agencies to financial institutions. We sympathize with Treasury's concern that agencies that piloted the point-of-purchase check conversion experienced longer, slower checkout lines because of the need to explain the program to customers and to obtain customers' signatures. However, these problems should diminish as the point-of-purchase program becomes more familiar.

Lockbox Check Truncation

In lockbox check truncation, CUNA supports the elimination of an authorization requirement that consumers either opt-in or opt-out for truncation. Instead, CUNA believes that notice of truncation should be considered sufficient to obtain consumer authorization for lockbox check truncation. Requiring an originator to obtain written authorization is time-consuming and impractical because there typically is no personal interaction between Treasury and the consumer at the lockbox. We do not believe that consumers would be disadvantaged under this proposal because there is greater consumer protection in the rules for ACH items than for checks. For instance, the consumer is entitled to a 15-day recredit if the ACH item is unauthorized and, there is no similar protection under check law. Therefore, consumers should not be disadvantaged.

As long as the notice provided to consumers is conspicuous and informative, CUNA supports the concept that notice may serve an authorization for lockbox entries. CUNA believes that such notice would best be provided within the forms that describe how to obtain the government product or service or the invoice for the product or service. Besides using inserts and/or reprinting these forms, Treasury should also post signs in customer service areas and lockbox locations. In those cases where consumers send checks to lockbox locations without an invoice, the consumers should receive notice of the possibility of check truncation when they learn of the bill -- to the extent that is possible. Finally, CUNA suggests providing notices to consumers on their invoices, and providing notices to the general public through public service announcements on the radio, in newspapers and magazines.

Internet ACH

With respect to the Treasury’s proposal related to Internet entries, we agree that federal agencies should be able to initiate such entries to both consumer and corporate accounts. We also agree that both consumer and corporate customers and their RDFIs should be given the same recredit and adjustment rights. Finally, we concur with the Treasury’s decision to forego exposure limits for federal agencies initiating Internet debit entries.


For the reasons stated above, CUNA does not oppose this proposal. CUNA does urge Treasury to adopt several key improvements to its check conversion program, such as excluding certain checks and keeping the SEC codes and rules consistent for consumer and corporate checks. In addition, CUNA is concerned about the elimination of the signature authorization under the point-of-purchase entries and asks Treasury to reconsider that decision. If you have any further questions, please contact me at (202) 682-4200.


Michelle Q. Profit
Assistant General Counsel