CUNA Comment Letter

CUNA Supports Proposal to Reduce Return Returns for Telephone ACH Entries

December 20, 2002

Mr. William Colbert
Network Services Manager
NACHA – The Electronic Payments Association
13665 Dulles Technology Drive
Suite 300
Herndon, Virginia 20171

RE: CUNA Supports Proposal to Reduce Return Returns for Telephone ACH Entries

Credit Union National Association (CUNA) appreciates the opportunity to comment on a proposal that would require originating depository financial institutions to measure merchant-return rates for Telephone-Initiated (TEL entries) and cease originating for merchants with high return rates. CUNA, a national trade association, represents more than 90 percent of the nation’s 10,000 state and federal credit unions.

Summary of CUNA's Views

CUNA has the following comments on the changes to the audit rules that would affect originating depository financial institutions (ODFIs) and receiving depository financial institutions (RDFIs):


According to the proposal, an ODFI would make a warranty that the ODFI will immediately cease initiating TEL entries for any merchant with a return rate for unauthorized TEL entries that has exceeded 2.5 percent until the problem causing the unauthorized TEL entries is resolved. The ODFI must monitor that rate in one of two ways. An ODFI that determines that it has an merchant with a return rate for TEL unauthorized transactions that has exceeded 2.5 percent, within ten business days, must provide NACHA with the merchant’s business information. Once the ODFI notifies NACHA that the problem causing the unauthorized TEL entries is resolved, the ODFI may resume transmitting TEL entries for that merchant, provided that the ODFI provides the information outlined above to NACHA for each of the three months following the resumption of origination activity. In addition, any ODFI that receives a written request from NACHA related to TEL origination for a particular merchant must provide that information to NACHA within ten business days. The failure of an ODFI to provide information on a TEL merchant exceeding an unauthorized return rate of 2.5 percent will be considered willful disregard of the NACHA Operating Rules and result in a fine of $10,000 per month until the problem causing the fine is resolved.

In general, CUNA supports a proposal that would include a new ODFI warranty related to the origination of TEL entries. This warranty states that the ODFIs immediately will cease initiating TEL entries for any merchant whose return rate for unauthorized TEL entries has exceeded 2.5 percent until such time as the problem causing the unauthorized TEL entries is resolved. CUNA supports this proposal because it stops merchants who do not conform to the NACHA rules or who participate in questionable business practices. It will require the ODFIs to know their customers, the merchants. As part of this warranty, CUNA supports the proposal that ODFIs monitor the unauthorized return rates for TEL entries for their merchants.

However, CUNA believes that the deadline for reporting and ceasing originations should be extended to a more reasonable timeframe. Currently, the rule requires that an ODFI report to NACHA a merchant that exceeds 2.5 percent within 10 business days and that the ODFI refrains immediately from originating until the problem is resolved. The ten business day reporting requirement does not permit merchants an opportunity to address their TEL entry problems before being reported, and it does not provide enough time for an ODFI to correct the problem before ceasing originations. ODFIs should be given 30 days, so that they have time to fix the problem before disrupting service for a merchant. It would be unfortunate to see the businesses of legitimate merchants interrupted for accidental error or for a minor correction that could be fixed with more time, instead of the shorter 10 business days. For example, merchants using ACH for the first time may only originate a few ACH items and then one or two returns would place them over the threshold. Thirty days would provide an ODFI with the opportunity to work with its merchant first to correct the problem and then to provide all required data, if necessary.

CUNA also supports the 2.5 percent threshold that establishes at what point the returns of a merchant become so high that an ODFI must cease operating for them. This threshold is the same as a similar threshold used by VISA and MasterCard and it is nearly double the average return rate of TEL, which is 1.34 percent. This threshold should be subject to periodic review, however, to see if it can be lowered. In particular, the threshold may be high for financial institutions that process a large number of transactions because they would have a higher number of returns.

CUNA supports the requirement that an ODFI provide detailed information on a noncompliant merchant including information that (1) identifies the merchant, (2) identifies any third parties involved in those transactions, (3) identifies the type of business to which the unauthorized entries relate, (4) identifies contact people at the merchant and any relevant third party, and specifies the return rate. However, CUNA believes that the information required in item two should be limited so that ODFIs are not required to include all consumers or receivers. Providing a list of receivers would be burdensome and may violate some of their privacy rights.

The proposal requires that non-reporting of the required information should be considered willful disregard of the NACHA Operating Rules and be subject to the applicable fine. CUNA supports this proposal as long as the ODFI is given 30 days to respond. If a 30-day reporting requirement is not adopted, then NACHA should first issue a warning to the ODFI before imposing such a harsh fine.

Overall, CUNA supports this proposal because it would benefit credit unions by reducing the number of bad merchants that use ACH. This approach helps on two fronts. First, there will be fewer costs to credit unions associated with the expense of returning these trasactions. Second, with the reduction in abusive merchants and their poor business practices, credit union members may feel ACH and electronic payments are safer.

Beyond this proposal, CUNA also has two additional recommendations to improve the automated clearing house system. First, credit unions believe that there should be a way for them to contact NACHA voluntarily about wayward merchants, when they see a large number of returns coming from a single source. Often RDFIs are the first to recognize problem merchants, and early notice of such merchant could assist NACHA in its efforts to curb TEL entry abuses. Second, some credit unions have seen merchants with high-unauthorized return rates, including telemarketers that do not use TEL entries. To resolve this problem, NACHA may consider monitoring some merchants across all ACH entries. This would prevent a merchant caught with a high return rate from eluding the system by using a different ACH entry.

CUNA commends NACHA for examining ways to reduce unusually high return rates for the TEL entries. As stated above, these return rates are particularly costly for RDFIs. 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.


Michelle Q. Profit
Assistant General Counsel