CUNA Comment Letter

Proposed Interim Rule for Accounts Receivable Truncated Check Debit Entries

September 1, 1999

Debbie Barr, AAP
Assistant Director of Network Services
National Automated Clearing House Association
13665 Dulles Technology Drive
Suite 300
Herndon, Virginia 20171

Dear Ms. Barr:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on a proposed interim rule for Accounts Receivable Truncated Check Debit Entries (the "Rule") sponsored by the National Automated Clearing House Association (NACHA). As a national trade association, CUNA represents more than 90 percent of the nation's 11,000 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 general, CUNA supports adoption of the Rule that would allow a merchant to convert a check that the merchant received as payment through the mail into an Automated Clearing House (ACH) debit entry. If a merchant is to offer this service, its ODFI must have signed an agreement with NACHA. The merchant also must retain the original item for 90 days and a copy of the item for seven years. These ACH entries are subject to the same time frames and return reason codes that are used for re-presented check entries (returned checks that are converted into ACH items). CUNA commends NACHA for setting aside a clear ACH format, the Prearranged Payment and Deposit format, and clear reason codes that will not require receiving depository financial institutions (RDFIs) to make software changes.

CUNA also commends the Rule for including additional originating depository financial institution (ODFI) warranties that help protect RDFIs and consumers against fraudulent or abusive merchant practices. Specifically, the Rule requires that ODFIs make the following warranties: that the check item will not be presented, that if a check item is requested from the merchant it will be provided, and that the ODFI has no knowledge of merchant insolvency. In effect, the ODFI warrants that the merchant will not attempt to collect on the ACH item and the check; that the merchant, who is supposed to store the original item, will be able to produce it; and that the ODFI is not aware that the merchant will terminate its business. The ODFI assumes the liability, if these warranties are breached. Although these warranties may seem onerous, it is appropriate that the ODFI make them because the ODFI is the only party with an opportunity to determine a merchant's fitness and include or exclude a merchant from the pilot based on that determination. The ODFI has the opportunity to assess a merchant because a merchant is required to sign an agreement with the ODFI, before the merchant originates ACH transactions. This agreement binds the merchant to all of NACHA's rules, and the ODFI should use it to bind the merchant to this new rule and to transfer liability back to the merchant. Liability for a breach of these warranties should be consistent with the liability for breaches of other ODFI warranties; specifically, a breach should mean that the ODFI indemnifies the RDFI and other parties to the transaction.

CUNA also believes that various aspects of the Rule protect consumers and RDFIs. First, consumers are protected by limiting the number of times that an item may be presented to a maximum of three. Without this protection, a merchant could repeatedly present an unpaid ACH item against a consumer's account, each time creating an additional charge against that consumer. Second, consumers and thus RDFIs are protected against unscrupulous merchants by the return rules. An RDFI has sixty days to return an ACH entry after the settlement date of the ACH entry when: (1) a stop payment order was placed on the item, (2) signatures on the item are not authentic (3) the item was altered, (4) the required notice was not provided, or (5) when the consumer did not provide a required authorization for check truncation. These time frames give a consumer time to realize a mistake has been made and provide the RDFI with time to act.

CUNA does have some concerns related to the merchant's retention of the original check. CUNA believes that a merchant may not keep the original checks safe and believes that the ODFI would provide better storage of the check. Moreover, CUNA is concerned that if the RDFI requests an original item, the merchant may not provide it promptly. Therefore, CUNA requests that a time limit be placed on 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.

In addition, CUNA requests that there be specific penalties for noncompliance to encourage all institutions to comply with the Rule. A merchant or ODFI that does not comply with the Rule should be subject to the new 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 Rule.

In conclusion, CUNA would support this proposed Rule if NACHA includes the features that CUNA recommends. CUNA also asks that, in the future, NACHA provide participants with more time to comment on proposals of this nature.

Michelle Q. Profit
Assistant General Counsel