CUNA Regulatory Comment Call


June 11, 2001

ACH Rules Changes on Check Truncation Limits & Usage
(A MAJOR PROPOSAL)

EXECUTIVE SUMMARY

NACHA - The Electronic Payments Association requests comments on numerous changes to three automated clearing house (ACH) pilots. The rule changes would affect the RCK items truncated because they were returned for insufficient funds; the POP items truncated at the counter; and the accounts receivable checks truncated in the pilot for checks received through the mail to pay for goods and services. The rules changes would increase usage of check truncation by permitting truncation of corporate checks, increasing dollar limits of share drafts to $50,000; and relaxing consumer authorization requirements, so that notice would suffice.

The specific rules changes for each pilot are listed below:

Accounts Receivable Transaction

Re-presented Check (RCK)M

Point-of-Purchase (POP)

Credit unions may help CUNA prepare comments, which are due by July 18, 2001. Please submit your comments to CUNA by July 9. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Michelle Profit at mprofit@cuna.com or mail them to Mary Dunn or Michelle Profit in c/o CUNA’s Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005.

Credit unions may also respond directly to NACHA by completing NACHA's comment form on the proposed rule as well. Click for a copy of that request for comment. This information may also be used by NACHA to draft its response to Treasury regarding a similar proposal, which is due on July 31. This survey and other credit union comments can be submitted directly to NACHA c/o William Colbert, Network Services Associate, NACHA, 13665 Dulles Technology Drive, Suite 300, Herndon, VA 20171, faxed to (703) 787-0996, or sent via e-mail to wcolbert@nacha.org. Please submit a copy to CUNA, so we can incorporate your views into our letter

RULE

The outline of the rule and how it changes each particular program is mentioned above. Concerns have been identified, however, with respect to transmitting RCK, ARC and POP entries. These concerns that apply to all the transactions are described below.

Return Reasons

Most RCK, POP, and ARC entries will need to be returned by the RDFI by the opening of business on the second banking day after the settlement date. This includes those entries returned by the RDFI because they offer positive pay services and the ACH entry does not correspond to their positive pay file.

ARC, POP, and RCK can be returned for 60 days after settlement under some circumstances.

RCK, ARC and POP can also be returned by the RDFI for 60 days from the settlement date if the consumer or corporation places a stop payment on the source document (i.e., in the check stop payment system) instead of the ACH stop payment system. The RDFI has 60 days from the settlement date to return the entry for this reason; the sixty day timeframe will allow a safety net for RDFIs that have opted not to build a bridge between their check and ACH systems to check for stop payment orders for this application. An affidavit is not required for this return reason.

Returns for Invalid Account Number or Unable to Locate Account are considered administrative returns because they cause the entry to be returned because the routing number or account number on the entry is incorrect for ACH posting. There is some concern that returns for administrative reasons will be higher for single-entry ACH debit transactions and when the ACH routing information is obtained by scanning the MICR line of a check. In the current pilot for the accounts receivable transaction, the reported return rate for these reasons is 0.37%. NACHA and the Electronic Check Council is working with other trade associations and organizations to encourage the development of more databases to help determine the accuracy of the MICR data and to encourage more financial institutions participation in commercially available databases, in addition to exploring other means of eliminating returns for these reasons.

The RCK changes have unique considerations described below
There are certain unique concerns for RCK transactions, however, because RCK transactions fall under check law, including the Uniform Commercial Code (UCC). The $2,500 limit on the value of the items (checks) that are eligible for truncation as an RCK entry would be removed under this proposal. In addition, the return time frame for RCK entries would be adjusted to mirror the typical return time frame for ACH transactions, an additional ODFI warranty would require ODFIs to transmit such entries in a manner as to not make those entries available to the RDFI before 2:00 p.m. (RDFI’s local time) on the banking day prior to the Settlement Date, and a cutoff hour would be established for RDFI receipt of these entries.

The legal and regulatory reasons why the $2,500 dollar limit can be removed at this time is explained below, as are the additional changes that are required. In order to determine how raising the threshold would impact participants in the ACH Network, it was necessary to look at the requirements of both the UCC and Regulation CC because they govern truncated check entries. Regulation CC contains special provisions dealing with the return of checks of $2,500 or more. 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 contained in that notice. Therefore, under the proposed pilot, truncated check entries must comply with the UCC requirements for those returns that are larger than $2,500.

With checks, presentment and settlement generally take place on the same day. In contrast, the delivery of ACH debits often takes place the day before settlement. Because these ACH transactions represent truncated checks, the clock for returning truncated check entries starts ticking on the presentment date (i.e., the day before the Settlement Date), resulting in a disadvantage for RDFIs. An amendment to the NACHA Operating Rules is necessary to ensure that presentment and settlement occur on the same banking day and synchronize the timing requirements for check and ACH returns. This is accomplished by an additional ODFI warranty requiring the ODFI to use a processing cycle that ensures that a RCK Entry is not made available to the RDFI before 2:00 p.m. (RDFI’s local time) on the banking day prior to the Settlement Date. Because the RCK Entry is not being made available before 2:00 p.m., the presentment notice will be deemed to be received on the following banking day (i.e., Settlement Date). For example, a RCK Entry made available to the RDFI at 3:15 p.m. on Wednesday will be after Wednesday’s cut-off time for receipt of these entries and will be considered to have been presented on Thursday, which is the Settlement Date for the entry.

Because the receipt of the presentment notice and the Settlement Date are the same day, the return time frame for RCK Entries (under check law) consequently becomes the same as the typical return time frame for ACH transactions (which requires that the return entry be received by the RDFI’s ACH Operator by its deposit deadline for the return entry to be made available to the ODFI no later than the opening of business on the second banking day following the Settlement Date). The return of the ACH entry serves as sufficient notice of non- payment under Regulation CC.

Lastly, a provision has been added to the proposed rules that states the RDFI has agreed to establish a cutoff hour of 2:00 p.m. (RDFI’s local time) for the receipt of RCK Entries. This guarantees that any RCK Entry received after 2:00 p.m. will be considered received the next day, ensuring that the requirements for large-dollar returns under Regulation CC and the return time frames under the Uniform Commercial Code have been met.

FUTURE ISSUES

There may be future amendments that address the following three issues: 1) potentially changing the authorization requirement for POP entries to only require notice, 2) potentially changing the authorization requirement to collect a fee if an RCK Entry is returned for insufficient or uncollected funds to only require notice, and 3) potentially making changes to the Destroyed Check Entry (XCK) format to make it more consistent with the RCK transaction and to consider expansion of the scope of this application. NACHA requests comments to gage interest in these potential changes.

The current NACHA Operating Rules require that the Originator obtain the consumer’s written authorization that is signed or similarly authenticated for POP entries.

Should NACHA maintain its current written authorization requirement for POP Entries or consider amending the NACHA Operating Rules to only require that notice be provided to the consumer?

The current NACHA Operating Rules require that the Originator obtain the consumer’s written authorization that is signed or similarly authenticated to the Originator for a PPD entry to be transmitted to collect a fee if an RCK Entry is returned for insufficient or uncollected funds.

The revised Official Staff Commentary to Regulation E and the FMS Notice of Proposed Rule Making on ACH check conversion regarding potential changes to 31 C.F.R. Part 210 both state that for the purposes of Regulation E and 31 C.F.R. Part 210 providing notice to the consumer equals authorization. Should NACHUA maintain its current written authorization requirement for collection fees related to RCK entries returned for insufficient funds or consider amending the NACHA Operating Rules to only require notice be provided to the consumer?

The Destroyed Check Entry (XCK) application is currently defined in the NACHA Operating Rules to allow a financial institution to electronically collect checks which have been irretrievably lost or destroyed in the collection process. Currently XCK entries can be returned by the RDFI for any reason for 60 days from the settlement date. We are seeking comment via this ACH Participant Survey from ACH participants on whether: 1) XCK entries should be defined to have rules more consistent with RCK entries, 2) XCK entries should be more broadly accepted by RDFIs and only returned for processing issues, 3) the XCK application should be expanded to allow for the transmission of an XCK entry for one lost check (as opposed to a cash letter) or so the Originator could initiate an XCK entry if the Originator loses a check or cash letter before transmitting it to the ODFI.

QUESTIONS REGARDING THE NOTICE

  1. Do you support the implementation date for the adoption of a new standard entry class code, which is March 14, 2002? If not, what should be the implementation date (September 2002 or March or September 2003 or something else)? Do you support the effective dates for the RCK and POP rule changes, which is in September 13, 2002, or do you recommend a later one? If so what date is appropriate?









  2. Would it impact the operations of your credit union if the check serial number field in the ARC, POP, and RCK formats were changed from alphanumeric to numeric? Please explain.









  3. Does your organization agree with raising the limit to $50,000 for all three pilots? Do you agree with raising the limit for some, but not all pilots? For which pilots should the limit be raised? Why?









  4. Does your organization agree with extending eligibility to corporate checks for all of the pilots or only certain ones? Which pilots should permit truncation of corporate checks? Why?









  5. Does your organization agree with the recommendation to create a new Standard Entry Class Code, ARC? How much time do you need to become ready for a new standard entry class code? What should the effective date for the new code be? Is March 2003 fine or should it be later?









    6) Does your organization agree with the recommendation to include checks received at a dropbox as eligible items acceptable for truncation in the accounts receivable pilot?









  6. Does your organization agree with the recommendation in the ARC proposal to require the source document (share draft to be destroyed no later than 14 calendar days after the settlement date of the accounts receivable entry)? Is there any reason that the credit union would need the original?









  7. Is your credit union supportive of allowing notice to serve as authorization for accounts receivable entries? Why or why not?









  8. Are your credit union's DDA and ACH systems currently integrated for stop payments, and other purposes?









  9. Does your organization do positive pay, electronic debits block/filters or controlled disbursement accounts? Please describe. Does the current proposal for two day return of positive pay items allow your institution sufficient time to process return positive pay ACH items under these three models.









  10. NACHA asks for comments on potential changes not yet proposed. Would your credit union be supportive of eliminating the requirement for a written authorization and allowing notice to serve as authorization for POP entries in the future?









  11. What are the risks or concerns for your credit union if notice is allowed, in the future, instead of a written authorization for POP entries?









  12. NACHA may recommend in the future that the requirement for a written authorization be eliminated to allow notice to serve as authorization for ACH debits to collect fees related to RCK entries that have been returned for insufficient funds? Would your credit union support this? What risks/concern for your organization develop if notice is allowed instead of a written authorization for the collection of fees related to RCK entries returned for insufficient funds?









  13. The current rule for XCK applies only to lost/stolen cash letters and allows financial institutions to create an ACH file to replace a cash letter. However, an RDFI may return any XCK because it is an XCK entry. Should the NACHA Operating Rules be revised to make the acceptance of XCK entries mandatory? Thus, RDFI would have to accept them unless they had a valid reason for returning them based on the NACHA Operating Rules.









  14. Should the NACHA Operating Rules be revised to allow Originators, merchants to originate XCK if they have a lost check prior to submission? Currently, only institutions can originate this type of entry. Would this increase the risk of fraud?









  15. Should the NACHA Operating Rules be revised to allow XCK entries to be sent by a financial institution for a single lost check instead of just for a cash letter?









  16. What has been the experience of your credit union with XCK entries?









  17. Do you have any other comments?









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