CUNA Regulatory Comment Call


March 13, 2007

NACHA’s NETWORK ENFORCEMENT PROPOSAL

EXECUTIVE SUMMARY

Please feel free to fax your responses to CUNA at 202-638-7052; Assistant General Counsel Lilly Thomas at lthomas@cuna.com; or mail them to Lilly c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. Click here for a copy of this Request for Comment.

BACKGROUND

NACHA is implementing a comprehensive risk management strategy to ensure high-quality ACH transactions and reduce risk for financial institutions, businesses and consumers. The Risk Management Strategy’s framework has the following categories:

  1. Network Entry Requirements
  2. Ongoing Requirements
  3. Enforcement
  4. ACH Operator Tools; and
  5. Cross-Channel Risk Management

The Proposal is part of NACHA’s entire risk management strategy, under the “Enforcement” category, and is the first initiative under the strategy for which comments are requested.

DISCUSSION OF PROPOSAL

NACHA’s Network Enforcement Proposal (Proposal) would expand the rules enforcement procedures within the NACHA Operating Rules to establish stronger incentives for compliance with the rule provisions on the authorization of ACH entries.

The Proposal focuses on the highest risk uses and users of the ACH Network with the most disproportionate ratio of unauthorized entries. The return reason codes that are used for entries returned as unauthorized are:

When NACHA believes an Originator’s or Third-Party Sender’s return rate for entries returned as unauthorized exceeds a defined threshold, an Originating Depository Financial Institution (ODFI) would be required to provide reporting information to NACHA. The defined threshold would be set by the NACHA Board of Directors and would be reviewed annually and revised as appropriate.

If requested, an ODFI would be required to provide the following information for each Originator or Third-Party Sender that is specified:

An ODFI receiving a request to report information to NACHA would be required to provide the information within ten banking days of receiving NACHA’s written notice. If the ODFI confirms that the Originator’s and/or Third-Party Sender’s return rates are in excess of the defined threshold, then the ODFI would be required to include a plan for reducing the return rate within thirty days of receiving NACHA’s written notice. If the ODFI substantiates that its return rate did not exceed the return threshold, then no additional action would be taken outside the risk monitoring process.

The ODFI would be considered to be in willful disregard of NACHA’s Rules, and NACHA would initiate a rules enforcement proceeding if:

The Proposal would also increase fines at all levels and for all violations. The fine amount would be determined at the discretion of the Rules Enforcement Panel up to the ceiling. The following chart compares the existing fines to the proposed fines:

Violation Current Fine Proposed Fine/Penalty
First recurrence $250 $1,000
Second recurrence $750 $2,500
Third recurrence $1,500 $5,000
DFI - willful disregard $10,000 per month $100,000 per month maximum
DFI - significant harm None $500,000 per month maximum
ODFI non-compliance with reporting requirements: significant harm None $500,000 per month maximum plus $25 per return
Originator/Third-Party Sender - significant harm None Suspension

This proposal would permit the ACH Rules Enforcement Panel to suspend an Originator or Third- Party Sender from the ACH Network when it is causing significant harm and other fines have been unable to resolve the problem.

When an Originator or Third-Party Sender is suspended, every other ODFI would be precluded from sending an entry on behalf of the suspended Originator or Third Party Sender. Any ODFI that sends an entry on behalf of a suspended Originator or Third-Party Sender would be in violation of the NACHA Rules. The ACH Rules Enforcement Panel would be responsible for establishing the criteria that the Originator or Third Party would need to meet before it would be permitted re-entry to the Network.

QUESTIONS REGARDING THE PROPOSAL

  1. Do you support adding ODFI Reporting Requirements to the Rules as an enforcement tool?
    a. Yes _____
    b. No _____
    Please explain.
















  2. Do you support assessing higher fines and possible suspension against alleged violators of the Rules?
    a. Yes _____
    b. No _____
    Please explain.
















  3. Do you agree with NACHA’s Board of Directors establishing and revising from time to time the thresholds used for ODFI Reporting Requirements?
    a. Yes _____
    b. No _____
    Please explain.
















  4. Do you agree that the information required by the ODFI is appropriate?
    a. Yes _____
    b. No _____
    Please explain.
















  5. Do you agree that responding to NACHA’s request within ten days is reasonable?
    a. Yes _____
    b. No _____
    Please explain.
















  6. Do you agree that the proposed time frame of thirty days to reduce an excessive return rate is reasonable?
    a. Yes _____
    b. No _____
    Please explain.
















  7. Do you agree with the proposed increase in fine amounts for all rules violations?
    a. Yes _____
    b. No _____
    Please explain.
















  8. Please provide any additional comments.
















Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Deputy General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Lilly Thomas • Assistant General Counsel • (202) 508-6733 • lthomas@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com