CUNA Comment Letter

ACH Returns Issues: Invalid SEC Codes and Fraudulent Entries

August 18, 2003

Ms. Maribel Bondoc
Network Services Assistant
13665 Dulles Technology Drive
Suite 300
Herndon, Virginia 20171

Dear Ms. Bondoc:

The Credit Union National Association appreciates this opportunity to comment on NACHA’s request for information regarding the current provisions of the NACHA Operating Rules (Rules) concerning the ability to return certain types of automated clearing house (ACH) entries -- those ACH returns that the Receiving Depository Financial Institution (RDFI) believes contain a Standard Entry Class (SEC) Code that is not valid for that account type or that the RDFI believes may be fraudulent. Specifically, NACHA is seeking input regarding: (1) whether a return reason code should be created to allow an entry that contains an SEC Code that is not valid for that type of account to be returned solely for that reason (NACHA believes that this would only be used to return debit entries, as the majority of RDFIs would allow credit entries to post to accounts even if the SEC Code were invalid) and (2) whether a return reason code should be created that an RDFI could use to return entries it believes are fraudulent. We understand that NACHA is seeking information that may be used to formulate a proposal on this issue. CUNA, a national trade association, represents more than 90 percent of the nation’s 10,000 state and federal credit unions. This letter reflects the views of CUNA’s Payment Systems Subcommittee, whose chair is Terry West of VyStar Credit Union, Jacksonville, Florida.

Summary of CUNA’s Position

General Comments

In the request for information, NACHA asks for input on what the potential impact on payments that the Receiver (member/consumer) desires to be made but are incorrectly coded would be if the Rules were amended to create a return reason code for an SEC Code that is not valid for that type of account and allow the RDFI to return the entry through the ACH Network. If a credit union automatically returned a debit solely because the SEC Code was wrong and a member wanted the debit paid, that return could negatively impact the member who had intended a debt to be paid in a variety of ways, depending on what the debit was for. For example, the member could be negatively affected by an assessment of late fees/fines, terminated insurance policies, or even delinquency of home mortgage payments leading to foreclosure proceedings. The member is the innocent party in that they have no control over what SEC Code is used by the Originator. The member would be very upset about a legitimate entry/debit being returned and would not understand the significance of the SEC Code; they would certainly complain to the credit union. This, in turn, would harm the credit union from a member relations standpoint.

A return for an SEC Code that is not valid for that type of account would require an extended return time period and the written statement under penalty of perjury that is usually associated with the extended return time frame. First, CUNA believes an affidavit should be required if the new return reason code were adopted; it would not be reasonable to permit members/consumers to repudiate a legitimate entry simply because they just no longer feel like paying for their purchase. Second, it is important that the Rules allow for the extended time so that the member/consumer can review their statement and file an affidavit. RDFIs are normally alerted to an unauthorized entry when they are notified by a member/consumer who has reviewed their statement and identified the unauthorized entry. If a corporate entry is initiated to a consumer account, RDFIs should be permitted to return the item within the same time frame allowed for consumer entries.

Under the current Rules, when an RDFI receives entries that it believes may be fraudulent, the RDFI either contacts its account-holder to determine if an entry is authorized or allows the entry to post and waits for the account-holder to review his statement. If the member/consumer indicates to the RDFI that an entry was not authorized, and the RDFI is still within the appropriate time frame, the RDFI will obtain a written statement under penalty of perjury from the member/consumer and return the entry in question as unauthorized. CUNA does not support the establishment of a return reason code to allow an RDFI to return an entry it believes is fraudulent. CUNA believes it is appropriate to continue to send back such entries as unauthorized without defining the reason why the entry was unauthorized. If a credit union or other financial institution were to return an unauthorized entry as fraudulent, the institution would be opening itself up to potential legal liability if it were, in fact, not fraudulent.

It would be very difficult for RDFIs to determine that transactions are fraudulent or unauthorized without consulting the member/consumer. Given that it would place a burden on the RDFI to make an assessment, it would seem more appropriate for the RDFI to contact the ODFI and have the ODFI investigate the Originator.

If a credit union or other financial institution makes a judgment call on the legitimacy of an ACH entry and erroneously returns an entry, the institution would open itself up to potential legal liability for damages suffered by the member/consumer as a result of the payment being returned. Consumers today are quite litigious; and there is a very real possibility that a member/consumer may sue the institution for a wrong judgment call.

CUNA recommends that NACHA create two new return reason codes: one code for returning a corporate entry that was initiated to a member/consumer account and subsequently reported as unauthorized and another code for returning an entry with an SEC Code that is inappropriate for the type of account that is being debited or credited. The first new return reason code would be helpful in providing an extended (60-day) right of return after settlement for unauthorized corporate transactions posted to a member’s/consumer’s account. The second new return reason code would be helpful as RDFIs may have to return corporate entries initiated to a consumer’s account or return consumer entries initiated to a corporate account because the entry may not contain all the information necessary to process the transaction correctly. For example, a member/consumer may try to use an ACH entry instead of a wire transfer; the ACH entry can get batched into a corporate account without adequate instructions and may take a long time to return. This approach would provide RDFIs flexibility in deciding whether to accept authorized corporate entries to member/consumer accounts or return all (authorized or unauthorized) corporate entries to member/consumer accounts.

Thank you for the opportunity to share our comments. If you have any further questions, please contact Mary Dunn ( or Catherine Orr ( at our e-mail addresses or at (202) 638-5777.


Mary Mitchell Dunn
Associate General Counsel and Senior Vice President

Catherine Orr
Senior Regulatory Counsel