CUNA Regulatory Comment Call


August 23, 1999

Accounts Receivable Truncated Check Debit Entries

As of August 20, 1999, the National Automated Clearing House Association (NACHA) requests comments on a short-term NACHA operating rule regarding Accounts Receivable Truncated Check Debit Entries (the "Rule"), which would be valid for one year. The Rule would allow the originator (Originator) to transmit an ACH debit in lieu of presenting a physical check after the check is received by the Originator as payment. Comments are due to NACHA by September 1, 1999. Please submit your comments to CUNA by August 30, 1999, by fax to CUNA at 202/371-8240 or e-mail to CUNA's Assistant General Counsel Michelle Profit.

BRIEF BACKGROUIND

The Rule would allow Originators to use the Prearranged Payment and Deposit (PPD) format to truncate checks, received through the U.S. mail, as payment for goods or services and convert them to ACH debit entries. The Rule will not require receiving depository financial institutions (RDFIs) or ACH operators to make software changes, but it will provide them with the necessary reason codes and rules language to enable RDFIs to remain in compliance with Uniform Commercial Code (UCC) and Regulation CC.

DISCUSSION OF RULE

The Originator is required to provide the consumer with notice of the check truncation policy prior to receiving the first check payment. The Consumer will deliver his check payment by U.S. mail to the remittance address as directed by the Originator. Based on the truncated check policy notice that is provided, one of the following will occur:

When the Originator receives the check, the Originator will capture electronically or key enter the payment information from the check, including the routing number, account number, and check serial number. The Originator will also enter the name of the payee as indicated on the check. This information will be used to create an ACH debit to the Consumer's account for the face value of the check.

In order for an Originator to offer this service, its originating depository financial institution (ODFI) must have signed an agreement with NACHA. In the agreement, the ODFI agrees to abide by NACHA's reporting requirements. The Originator must retain the original item to which the debit entry relates for 90 days from the settlement date of the PPD accounts receivable truncated check entry (PPD entry) and retain a copy of this item for a period of seven years. At the request of the ODFI, the Originator will be required to provide the original item or a copy of the front and back of the item for its use or for the use of an RDFI requesting the information. An item that has been paid must indicate that on its face. In addition, in order to be eligible for this pilot, a check must be less than $2,500, less than 180 days old, drawn on a consumer account, and not been previously presented.

The PPD entries are subject to the same time frames and return reason codes that are used for re-presented check entries. If the entry is to be returned, the RDFIs will need to transmit a return entry to the RDFI's ACH Operator by midnight of the second banking day following the banking day of receipt of the PPD entry. An RDFI has sixty days, following the settlement date of the PPD entry, to return entries when (1) a stop payment order was placed on the item to which the PPD entry relates, (2) the check to which the PPD entry relates was ineligible, (3) signatures on the item are not authentic or authorized, (4) the item was altered, (5) the required notice was not provided, or (6) under the option where the consumer authorizes the check truncation, the proper authorization was not obtained. In order for a consumer to place a stop payment, the RDFI must have a reasonable opportunity to act upon the stop payment order prior to acting on the debit entry. For every 60-day-return circumstance listed above, except a stop payment, the consumer will be required to sign an affidavit in order for the RDFI to recredit the consumer's account and return the entry. After that, any subsequent dispute regarding an unpaid debt must be addressed directly between the Originator and the consumer.

Under this proposal, a PPD entry may be transmitted a maximum of three times via the ACH Network. A PPD entry may not be transmitted through the ACH network if it has previously been presented as a check.

The ODFIs assume the following specific warranties in addition to the standard ones:

ODFIs must ensure that they are aware of such warranties and resultant liabilities, and they should be sure such issues are addressed within their ODFI/Originator agreements. The NACHA agreement ODFIs must enter is intended to ensure ODFI compliance with the requirement to gather and provide statistical data regarding the application of this short-term rule. ODFIs must ensure that PPD Accounts Receivable Truncated Check Debit Entries are formatted in accordance with the requirements of Appendix Two of the NACHA Operating Rules. This includes, among other formatting requirements, (1) the need to include the specific description "CHECKPAYMT" within the Company Entry Description Field, (2) the requirement to place the name of the original payee on the face of the check (i.e., the Originator) within the Company Name Field, and (3) the obligation to provide the check serial number of the truncated check within the Individual Identification Number Field. It should be noted that, although the RDFI will not be required to include the check serial number on the consumer's monthly bank statement, the Originator must provide this information for reference purposes.

Check law governs these transactions because the initial payment was a paper check written for goods and services. Therefore, the PPD entries will be subject to the applicable NACHA Operating Rules, UCC, and Regulation CC, but not the Electronic Funds Transfer Act or Regulation E.

QUESTIONS REGARDING THE CURRENT SYSTEM

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