CUNA Comment Letter
ACH Preliminary Recommendations
November 30, 2001
Mr. William Colbert
Network Services Associate
NACHA The Electronic Payments Association
13665 Dulles Technology Drive
Herndon, Virginia 20171
Dear Mr. Colbert:
The Credit Union National Association (CUNA) appreciates the opportunity to comment on the ten preliminary recommendations from The NACHA Board of Directors Next Generation ACH Task Force. This letter was developed under the auspices of CUNAs Payment Systems Subcommittee, chaired by Terry West, President and CEO of Jax Navy Federal Credit Union, Jacksonville, Florida.
Summary of CUNA's Views
CUNA has the following comments regarding the preliminary recommendations:
- NACHA should not create an operational requirement that receiving depository financial institutions (RDFIs) accept MICR information from the bottom of a check for posting automated clearing house (ACH) items. A rules work group should be created to explore alternative ways to ensure more accurate posting from MICR lines.
- A rules work group should be created to explore integration of check and ACH processing and to develop a plan for sharing the cost of financial institutions integrating their check and ACH systems.
- Retrieval of ACH files by a financial institution is an operational issue that each financial institution should decide for itself.
- NACHA should examine possible ways to increase the financial benefit to all parties and to address fraud risk. In particular, NACHA should change its Operating Rules to allow financial institution correspondents and ACH operators to return fraudulent items for clients that they process or settle for.
- NACHA should examine numerous ways to enhance compliance and not focus solely on enforcement.
- The usage of a universal format and XML may enhance the ACH network.
CUNA shares NACHAs concern regarding accurate ACH posting and agrees that a rules work group should examine this issue, but we are concerned by a proposed new requirement. NACHA recommends enhancements to obtain accurate ACH posting information from the MICR line. As a tentative solution, NACHA proposes formation of a rules work group to investigate a rule that would require RDFIs to accept accurately obtained MICR information. CUNA does not support a requirement for RDFIs to accept MICR information from the bottom of a check for posting ACH items. The purpose of the MICR information on the bottom of a check is to ensure the item is received by the financial institution that is responsible for paying the item or is responsible for delivering the item to the ultimate payor. The MICR information was never intended to be used as the basis for originating an ACH debit, particularly when a payable through bank is an intermediary in the payment process. This proposal would present numerous issues for financial institutions that have more than one routing number and use different routing numbers for ACH processing and check processing. In addition, the rule would harm financial institutions that have logarithms for posting to their accounts. CUNA shares NACHAs concern about reducing administrative returns and supports the creation of a rules work group to address this issue. Such a rules work group should also be amenable to implementing alternative solutions. If originators are having difficulty with obtaining accurate routing and account numbers because of transcription errors, then that can be resolved by introducing procedures that are more reliable. In addition, originators can resort to prenotifications.
CUNA agrees that integration of financial institutions systems would make the ACH system function better. However, financial institutions should not be expected to bear the entire expense for the integration effort. This effort benefits all ACH participants not just financial institutions. A rules work group should be created to explore this issue and to develop a plan for sharing the cost of financial institutions integrating their check and ACH systems.
NACHA also recommends that originating depository financial institutions (ODFIs) and RDFIs makes changes to increase processing capacity, and NACHA recommends possible formation of a rules work group that would require more frequent retrieval of files by RDFIs. This appears to be an operational issue that RDFIs should make based on what practice would best serve their institution. The number of times that it is practical for a financial institution to retrieve its files depends on the size of the financial institution and the volume of its files. Some credit unions may not have the system capability to retrieve and process more than one file per day unless modifications are made to their systems. The cost of these modifications may exceed the benefits realized by the credit union. In addition, a blanket requirement for more frequent retrieval may also pose a problem for financial institutions that are not online. NACHAs Operating Rules currently require that ACH credits be available no later than 9:00 AM. Credit unions and other financial institutions that are off-line make these funds available by sending a positive balance file to their ATM processors by 9:00 AM each day. To update the balance file more frequently would burden financial institutions and their ATM system providers. The ATM system could charge the credit unions more for each balance file received, thereby increasing costs.
CUNA supports NACHAs examination of ways to increase financial benefit to all parties and to address the risk of fraud. CUNA believes that it would be helpful to have a rules work group to consider requiring ACH operators to report ODFI and merchant return rates to NACHA. Such a provision may provide a good front line defense against fraud. CUNA asks that this rules work group consider other proposals to reduce the risk of fraud. In particular, CUNA requests a rule change that would allow ACH operators and correspondent institutions to take action for the immediate return of large dollar ACH items drawn on their client institutions that are known to be erroneous or fraudulent. Making this change would provide additional protection against fraud. Current ACH system procedures do not allow for operators or correspondents to return specific ACH items for institutions that they process or settle for.
CUNA is aware of several situations where ACH correspondents (corporate credit unions) were aware of erroneous large dollar ACH entries (in the tens of million of dollars) and could have returned these items on a same day basis. Current procedures prohibit this action. As a result, these erroneous entries caused overdrafts in the payments system. The inability for operators and correspondents to take corrective action on behalf of the institutions that they represent poses a threat to the stability of the ACH system and it makes the ACH system particularly vulnerable to fraud. Other payments systems such as check, automated teller machine settlement, and credit/debit card settlement systems allow for correspondents to return payment items on behalf of their institutions. CUNA asks that NACHA adopt this proposed rule change as an implementation step within the report of its task force.
NACHA recommends improving rules compliance to enhance the quality of the ACH network, but focuses its suggestions on rules enforcement only; the focus should be broadened. In order to improve rules compliance, NACHA needs to proactively make the rules more accessible. NACHA should set up a task force with the regional associations or others to consider how to provide information about the network more effectively to ACH participants who request it. Possible solutions include setting up hotlines for those with pressing questions and placing more educational materials on its website.
CUNA and many credit unions believe that use of a universal format and XML would greatly enhance the ACH network. Currently, there are too many formats that have separate rules. This lack of consistency makes the ACH system confusing and inefficient.
CUNA also recommends that NACHA review the amount of information it requires RDFIs to place in the ACH format. Too much information is forced into too little space. As a result, sometimes, inappropriate information is placed in the wrong field. For example, merchants have placed the social security number (as the ID number) in the Entry Detail Record, which is also used for the check serial number. Credit unions are required to print the check serial number and have unintentionally printed the social security number of their members on statements. This format mishap generates irate consumer inquiries and raises privacy issues. We urge NACHA to examine their requirements for information and use of formats. However, NACHA should proceed with caution, format changes require financial institutions to recreate entirely new ACH processing systems. As a result, any format changes are extremely expensive to all financial institutions participating in the ACH network.
Overall, NACHA needs to be aware that many of these issues have a cost that must be borne by the organization that is required to modify its systems to remain in compliance. Sharing these costs between all participants in the process needs to be considered, particularly when all participants do not benefit from the changes or when there is not an equal distribution of the benefits among all ACH participants.
CUNA commends NACHA for examining ways to improve the ACH. CUNA asks that NACHA bring the current fraud risk (prohibiting correspondents from returning fraudulent or erroneous items for their clients) to the attention of the NACHA Board of Directors and include it as a change in your draft report under the fifth recommendation. If you have any further questions, please contact CUNA's Senior Vice President and Associate General Counsel Mary Dunn or me at (202) 638-5777, for more specifics on this risk.
Michelle Q. Profit
Assistant General Counsel