CUNA Comment Letter
Proposed Revision to NACHA's PPD Accounts Receivable Truncated Check Debit Entries Pilot
August 28, 2000
Ms. Debbie Barr
Assistant Director of Network Services
13665 Dulles Technology Drive
Herndon, Virginia 20171
Dear Ms. Barr:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on NACHAs proposed revision to the PPD Accounts Receivable Truncated Check Debit Entries pilot (lockbox pilot). As a national trade association, CUNA represents more than 90 percent of the nations more than 10,500 state and federal credit unions. This letter reflects the opinions of those credit unions and CUNAs Payments System Subcommittee, directed by Stan Hollen, President and CEO of The Golden 1 Credit Union in Sacramento, California.
In the lockbox pilot, the consumer sends a check payment by U.S. mail to the remittance address as directed by the merchant. Upon receipt of the check, the merchant captures payment information from the Magnetic Ink Character Recognition (MICR) line, including the routing number, account number, and serial number. The merchant also enters the amount of the check and the name of the payee as indicated on the check. The proposed revisions would extend the current pilot, eliminate the $2,500 limit on the value of eligible items, amend the return timeframe for these truncated items, require ODFIs to monitor when they are transmitting these entries to their ACH operators, and establish a cutoff for RDFI receipt of these entries. CUNA recognizes NACHAs hard work in sponsoring and administering automated clearing house (ACH) pilots. These ACH pilots will ultimately reduce check use and create a faster, more efficient payment system. CUNA commends NACHA for its concerted efforts to improve existing ACH pilots by revising them based on the results and participant feedback from current pilots.
In general, CUNA supports the proposed revisions to the lockbox pilot. CUNA believes that the PPD Accounts Receivable Truncated Check Debit Entry application is an appropriate application for the ACH network. Allowing Originators and ODFIs to truncate accounts receivable checks at the time they are received benefits all ACH participants. The pilot provides merchants, Originating Depository Financial Institutions (ODFIs), and Receiving Depository Financial Institutions (RDFIs) with an alternative to paper check processing that is more efficient, less costly, and more secure. Consumers benefit from additional consumer protections provided by the ACH network processing system.
CUNA agrees with the recommendation to extend the lockbox pilot for an additional 15 months through March 14, 2002 to allow more merchants and institutions to participate in the pilot. This extension and increased participation would allow enhanced opportunity for evaluation of consumer reaction and institution impact before possible implementation of a final rule. The statistical data that NACHA proposes to gather from pilot participants is adequate for such a thorough analysis. The information requested seems to provide a good overview of the volumes processed, returned, re-presented and finally paid. In particular, figures as to how many consumers opt-in and how many opt-out is important for gauging consumer acceptance. CUNA believes that if the pilot is successful, the collected information can be used to encourage other merchants and ODFIs to participate in the lockbox program.
CUNA also agrees with the recommendation to remove the restriction limiting these truncated check debit entries to amounts under $2,500. Removing the restriction would enable Originators and ODFIs to apply this application to consumer checks of all amounts, not just those under $2,500. This would eliminate the need for merchants and ODFIs to separate checks based on dollar amounts for processing purposes. Removal of this limit would make the lockbox application more attractive to credit unions. In addition, elimination of limit would make it more practicable for ODFIs to offer lockbox services. However, ODFIs would still have to sort through incoming checks to make sure that only consumer checks are processed as ACH transactions. It would be most practicable to offer this option when the ACH network rules allow both consumer checks and corporate checks received through U.S. mail to be processed as ACH transactions. The larger volume would allow for real cost efficiencies.
Although CUNA concurs with the recommendation to remove the $2,500 restriction, CUNA is concerned about the increased risk of fraud accompanying these electronic entries. CUNA is concerned that the elimination of the limit would move large dollar notification to the ACH side, shifting the risk from the check payment system to the ACH network. The larger the value of the checks converted to ACH transactions, the greater the risk to the RDFIs of improper payment of an item. NACHAs Operating Rules alleviate this concern to some extent by providing additional protections in this area by permitting RDFIs to return PPD Accounts Receivable Truncated Check Debit Entries for up to 60 days following the settlement date of the entry for certain specified reasons, including situations in which the signatures on the item are not authentic or authorized, the item was altered, or under the option where the consumer authorizes the check truncation, the proper authorization was not obtained. In order to fully and accurately assess whether elimination of the limit would result in a significant large dollar fraud problem for lockbox services, CUNA urges NACHA to carefully track instances of large dollar fraud in the pilot before issuing a final rule with removal of the limit. In addition, CUNA encourages NACHA to investigate further ways to prevent fraud from occurring.
CUNA feels it is reasonable to amend the return time frame provisions so that the return entry is received by the RDFIs ACH operator for the return entry to be made no later than the opening of business on the second banking day following the receipt of the presentment notice. Currently, the pilot allows RDFIs to transmit such returns to their ACH Operator by midnight of the banking day following the Settlement Date. Given the fact that the revised rule mandates that receipt of the presentment notice and the Settlement Date occur on the same day, it makes sense to change the return time frame for PPD Accounts Receivable Truncated Check Debit Entries so that it is equivalent to the typical return time frame for ACH transactions.
CUNA agrees that ODFIs should warrant that the ODFI will transmit PPD Account Receivable Truncated Check Debit Entry transactions to its ACH operator so that such entries are not made available to an RDFI by its ACH operator before 2:00 p.m. on the banking day prior to the Settlement Date. According to Regulation CC and the Uniform Commercial Code (UCC), the timing requirements for returns begins at the time of presentment of the check. Under Regulation CC and the UCC, presentment and settlement happen on the same day. In contrast, in the ACH system, truncated check entry presentment occurs when the entry is made available to the RDFI, not when the entry is actually settled. Therefore, under the current pilot the clock for returns starts ticking the day before the Settlement Date, which disadvantages RDFIs. Under the revised pilot proposal, because the PPD Accounts Receivable Truncated Check Debit Entry would not be made available until after 2:00 p.m. RDFI local time, the presentment notice would not be considered to have been made until the following banking day. This proposed provision ensures that presentment and settlement occur on the same banking day and allows ACH participants to remain in compliance with the large dollar return time frames in both Regulation CC and in the UCC. Synchronization of the timing requirements for returns in the check and ACH systems does away with the disadvantage for RDFIs.
CUNA recognizes the benefits of processing checks as ACH transactions and supports efforts to encourage such practices. However, the benefits of this pilot to RDFIs are not likely to be realized until a substantial portion of their members/customers checks are processed by merchants and ODFIs through the ACH network. In particular, overhead expenses, such as staff and check processing machinery, cannot be trimmed until the number of checks processed by traditional means is substantially reduce. Moreover, while RDFIs are not charged fees to process checks through the check processing system, they are charged fees by the Federal Reserve and ACH network to receive a check processed as an ACH transaction.
CUNA is concerned that several serious issues still remain unaddressed in this revised pilot. Under the proposed revised lockbox pilot, the merchant would retain the check. That leaves open the possibility that the merchant or ODFI could process the check and the ACH item.
CUNA also has concerns related to the merchants retention of the original check. Merchants and their agents may not adequately safeguard checks, which contain private financial information. CUNA believes that the merchants ODFI would provide better storage of the check. In addition, CUNA is concerned that if the RDFI requests an original item the merchant may not provide it promptly. Credit unions have truncated checks for years, and are used to member requests for copies of these checks for numerous reasons (e.g., taxes, fraud investigations and payment disputes). Credit unions are currently able to fulfill these requests quickly. In this pilot, however, credit unions will have to request a share draft from another source, which may delay or eliminate their ability to retrieve a share draft for a member. Merchants may not comply with the seven-year storage requirements, which could make it difficult for RDFIs to retrieve checks for customers. If the check is truncated and the merchant is no longer in business (ie. the merchant fails, closes, becomes insolvent or the owner is deceased), the ODFI may be unable to locate the records. Therefore, CUNA requests that a time limit be placed on the ODFIs retrieval of the check. This deadline should be no more than 10 days, which is the time allowed under NACHA rules for ODFIs to respond to similar requests.
CUNA requests that there be specific penalties for noncompliance in order to encourage all institutions to comply with the revised pilot rules. A merchant or ODFI that does not comply should be subject to the penalties and enforcement procedures in the NACHA rules. In addition, NACHA should reserve the right to end the participation of a merchant or ODFI in the pilot if they do not comply with the pilot rules.
CUNA supports measures aimed at more efficient processing of ACH items, however we have remaining concerns regarding PPD Accounts Receivable Truncated Check Debit Entry stop payments that should be addressed. CUNA believes that consumers should be informed as to how such transactions work. Otherwise, consumers may be confused and treat a PPD Accounts Receivable Truncated Check Debit Entry as a normal share draft or check transaction when, in reality, it will go through as a PPD Accounts Receivable Truncated Check Debit transaction. In addition, these lockbox transactions are handled quickly, and consumers may often be too late to place stop payment orders on them in time for an RDFI to react. Consumers may have trouble understanding why their credit union cannot place a stop payment order for them. Furthermore, credit unions have reported instances where a stop payment was placed on a share draft, but the share draft was presented in paper format and not accepted. The merchant, in turn, then truncated the draft into an ACH item and represented it. The draft went through as an ACH item and was paid. If there are problems with stop payment orders, check retrieval or duplicate presentment caused by the operation of this pilot, consumers will confront their RDFI.
Credit unions have incurred additional costs as a result of member confusion over check transactions that have been converted to ACH transactions. In many cases, a member forgets that his or her check was converted and cannot identify the item by description on their statements. Member inquiries and administrative returns resulting from confusion over these types of transactions increases member servicing costs. These problems may negatively impact the relationship between an RDFI and its customer or member. Consequently, CUNA firmly believes a strong consumer education and awareness program, including authorization and merchant disclosure, is key to the success of this pilot. It would be helpful from an education/awareness perspective if NACHA would draft a pamphlet for merchants that details the lockbox truncation process as well as the authorization/notification requirements with associated model forms. It would further consumer understanding and acceptance of this lockbox program if NACHA would also create an informational pamphlet explaining the rights and obligations of consumers under the program, in particular the opt-in/opt-out provision, that merchants could provide to their customers.
CUNA urges NACHA to address the critical concerns mentioned above before extending the lockbox pilot. 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