CUNA Regulatory Comment Call
January 8, 2002
Electronic Conversion of Corporate Checks(A MAJOR RULE)
NACHA-The Electronic Payments Association has issued a request for comments on a proposal that would allow for the use of corporate checks with certain ACH applications that convert share drafts and checks into ACH items. Specifically, electronic conversion of checks used to pay bills (ARC entries) electronic conversion of checks used at the point of purchase (POP) and electronic conversion of checks returned for insufficient funds (RCK). Comments on the proposal are due by January 31, 2003. The request for comment proposes to modify the NACHA Operating Rules.
- The proposal would allow for the electronic conversion of corporate checks that do not contain an auxiliary on-us field in the MICR line for ARC, POP and RCK entries. As a result of the inclusion of corporate checks, corporate Receivers (those who receive ACH debits) will gain the ability to use the 60-day return time frame currently associated with improper or unauthorized consumer checks. Merchants will be able to convert corporate checks for ARC entries, POP entries and RCK entries.
- The proposal would establish a dollar limit of $25,000 on the origination of all ARC, POP and RCK entries in order to minimize the risk relating to the conversion of larger share drafts. This limit will be enforced by an ACH Operator edit that will automatically return any ARC, POP or RCK entry over $25,000.
- The proposal would increase the dollar limit on RCK entries from $2,500 to $25,000 resulting in three other modifications:
1) The return time frame for RCK entries would be changed to make the return time frame consistent with standard ACH return time frames. The return must be transmitted by the RDFI (a depository institution that receives ACH items for its members) so that it is made available to the ODFI no later than the opening of business on the second banking day following the settlement date of the original entry.
2) For RCK entries, an additional ODFI (financial institution that originates ACH items) warranty would require ODFIs to transmit such entries in a manner as to make those entries available to the RDFI before 2:00 p.m. (RDFIs local time) on the banking day prior to the Settlement Date, and
3) A cutoff hour would be established for RDFI receipt of these entries.
- The proposal would eliminate the requirement for ARC entries that the Originator (merchant or entity that creates the ACH item) maintain a copy of the back of the Receivers source document for two years. The Originator would still need to maintain a copy of the front of the Receivers source document.
- The proposal would establish a periodic statement requirement for non-consumer accounts that the RDFI send or make available to the Receivers the check serial number for each ARC, POP and RCK Entry.
The recommended implementation date is September 12, 2003 for this proposed rule amendment.
Please send your comments to CUNA by January 24, 2003. The time to respond is so short because NACHA wants to act quickly on this problem. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Assistant General Counsel Michelle Profit at firstname.lastname@example.org; or mail them to Michelle c/o CUNAs Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004.
In addition, CUNA recommends that all credit unions respond directly to NACHA because NACHA tabulates results to its surveys. If you would like to respond directly to NACHA and copy CUNA you may do so by using the NACHA survey form at http://www.nacha.org/ACH_Rules/ach_rules.htm. Comments sent directly to NACHA should be sent to William Colbert, Network Services Manager, NACHA, 13665 Dulles Technology Drive, Suite 300, Herndon, VA 20171, fax: (703) 787-0996 or email: email@example.com, no later than Friday, January 31, 2003. Please provide CUNA a copy by sending your comments to Michelle Profit at firstname.lastname@example.org.
In June 2001, NACHA distributed a request for comment on a similar proposal that would have allowed the acceptance of corporate checks for ARC, POP and RCK entries, and would have established a dollar limit of $50,000 for each of these types of entries. CUNA responded to this request with some concerns about the proposal.
According to NACHA, most commenters supported the conversion of corporate checks; however, some commenters, including CUNA had concerns about the ability of corporate Receivers to opt out of the proposal. Under this proposal, any business may choose to opt out of electronic conversion activity by printing an auxiliary on-us field in the MICR line of its checks. MICR readers will be able to edit for items that contain information in the auxiliary on-us field and reject these items from conversion/truncation. The size of the check stock can also be used by merchants to help identify ineligible items since checks bearing an auxiliary on-us field in the MICR line must be longer than six inches in length (the length of standard consumer checks).
The ARC, POP and RCK applications that are created from a corporate check will be indistinguishable from those created by a consumer check. As a result, the corporate checks will be granted the same extended return time frames for unauthorized items that consumer checks currently receive. Unauthorized corporate ARC entries will be subject to the same type of recredit for the consumer and 60-day return time frame currently associated with unauthorized consumer ARC, POP, and RCK entries. In these cases, the RDFI still will be required to obtain a written statement under penalty of perjury from the corporate Receiver prior to re-crediting the corporation or consumer returning the entry.
This proposal also would limit the dollar amount for checks that are converted into ACH transactions to $25,000. This limit would raise the current maximum for RCK entries from $2,5000 to $25,000. This increase triggers a special provision in Regulation CC regarding the return of checks larger than $2,500. It requires that a paying bank (the RDFI in the ACH debit environment) returning a check in the amount of $2,500 or more provide notice of non-payment to the depositary bank (ODFI of a debit in ACH terms) by 4:00 p.m. on the second banking day following the day the check was presented. It also has special requirements about what information must be continued in that notice.
In order to accommodate this change in return time frames and remain complaint with the Uniform Commercial Code and Regulation CC, an additional ODFI warranty would be added. This warranty would require ODFIs to transmit such entries in a manner so that those entries are not available to the RDFI before 2:00 p.m. at RDFI local time on the banking day prior to the Settlement Date. Also a cutoff hour would be established for RDFI receipt of these entries. This change would allow the presentment and settlement of the ACH debit to take place on the same day like checks do. As a result, the ACH return time frame and the check return time frame would match.
This request for comment includes the proposal that the requirement for a merchant to maintain a copy of the back of the check or share draft for two years for ARC entries be removed. The merchant would still need to retain a copy of the front of the share draft for two years from the Settlement Date of the ARC entry, and the merchant would still have to provide this copy to the RDFI on receipt of a written request.
According to NACHA, another concern found in the initial request for comment was that the truncation of corporate checks would require system links to be built between a financial institutions ACH and check processing systems in order to continue to support value added services. In particular, this link would be necessary to support the stop payment order, positive pay services, debit blocks, controlled disbursements, services that are currently offered to corporate account holders. If a financial institution chooses not to integrate its ACH and check systems and is unable to offer the value-added services noted above on a companys ACH activity, a company may choose to opt out of any truncation/conversion activity by printing an auxiliary on-us field in the MICR line of the check. This will cause the check stock to be longer than six inches in length and will help merchants to identify checks that are ineligible for conversion/truncation. The implementation date of September 12, 2003 provides time for companies to update or modify their check stock.
This proposal will impact ODFIs because it will require them to transmit ARC, POP, and RCK entries to both consumer and corporate accounts. This also means that corporate and consumer ARC, POP and RCK entries will be subject to the extended return time frames that are typically associated with consumer payments. This could increase the ODFI liability for such payments and ODFIs may want to reconsider their agreements with Originators in order to protect themselves.
This proposal also has implications for RDFIs. They should be aware that the limit on ARC, POP and RCK is $25,000 and that they should not receive such entries because the entries will be returned by the ACH Operator. RDFIs will need to obtain written statements under penalty of perjury from any corporate Receiver returning an unauthorized or improper ARC, POP, or RCK entry, with the exception of stop payment orders placed on items. RDFIs will also have to provide periodic statements with the check serial number to corporate Receivers.
The new rule would modify the return time frame for all other RCK entries to make it consistent with the 2-day return time frame for all other ACH applications. Specifically, the RDFI would be required to return the majority of RCK entries in such a time and manner that the return is made available to the RDFIs ACH Operator no later than the opening of business on the second banking day following the settlement date of the presentment notice. RDFIs should also note that they will no longer be required to transmit RCK returns by midnight (RDFIs local time) of the banking day following the Settlement Date, as previously required by the NACHA Operating Rules.
QUESTIONS REGARDING THE PROPOSAL
- Does your credit union believe that corporate checks should be eligible for conversion into the following ACH applications ARC, POP
and RCK applications as long as they do not contain an auxiliary on us field in the MICR line? Why or why not?
- Does your credit union believe that the amount of share drafts/checks eligible for conversion under ARC, POP and RCK applications
should be $25,000? This limit will be enforced by an ACH Operator edit which will automatically return any ARC, POP or RCK entry over
- To increase the limit on RCK entries from $2,500 to $25,000 and to make the return time frame under Regulation CC consistent with
ACH, modifications to the rules provisions for RCK entries are necessary. Regulation CC requires that a paying bank returning a check
over $2,500 or more provide notice of non-payment to the depositary bank by 4:00 PM. To accomplish this an additional ODFI warranty
would require ODFIs to transmit such entries in a manner as to make those entries available to the RDFI before 2:00 p.m. Does your
organization agree with such changes?
- In addition, this proposal would remove the requirement for ARC entries that the Originator maintain a copy of the back of the
Receivers source document for two years. The Originator would still need to maintain a copy of the front of the Receivers initial
share draft or check. Do you agree with the rule eliminating the requirement for merchants to retain the back of the share draft?
- This proposal would also establish a periodic statement requirement for non-consumer accounts that the RDFI send or make available
to the Receivers the Check Serial Number for each ARC, POP and RCK Entry? Does your organization agree with this requirement? Would it
place an additional burden on credit unions? Why or why not?
- Does your organization agree with the proposed implementation date of September 12, 2003? Would it provide enough time to convert
to on-us check stock for corporate Receivers that do not wish to participate? If you disagree, please specify which parts of the
proposal should have a different date and what you think that date should be.
- Would this proposal result in costs or benefits to your organization? Please explain.
Please submit your address and phone number.
Eric Richard General Counsel (202) 508-6742 email@example.com |
Mary Mitchell Dunn SVP & Associate General Counsel (202) 508-6736 firstname.lastname@example.org
Jeffrey Bloch Assistant General Counsel (202) 508-6732 email@example.com
Catherine Orr Senior Regulatory Counsel (202) 508-6743 firstname.lastname@example.org