CUNA Regulatory Comment Call

September 3, 2010

NACHA: Addressing Problem Areas in its Rules

EXECUTIVE SUMMARY

BACKGROUND

NACHA’s proposed rules attempt to address issues that were raised and identified as “pain points” during the detailed review of the Rules during the Rules Simplification process conducted earlier this year. The Rules Simplification process was intended to provide ACH Network participants with a set of Rules that is more user-friendly, consistent, and clear, and corresponds to established industry practices.

NACHA anticipates that the proposed rules will affect these areas:

BRIEF DESCRIPTION OF THE PROPOSED RULES – REQUEST FOR COMMENT

NACHA requests comment on the following proposed rule changes:

1. Requirement for Third-Party Senders to conduct annual Rules compliance audits

The proposal would require Third-Party Senders to conduct annual audits of their compliance with the Rules. Currently, while a Third-Party Sender that performs any of the ODFI’s functions must also meet the requirements that are applicable to the ODFI, the Third-Party Sender is exempt from an annual audit of their compliance with the Rules.

Each ODFI that enters into an agreement with a Third-Party Sender for the transmission of entries will continue to remain liable for the Third-Party Sender’s performance of various obligations under the Rules, but the ODFI will not be responsible to verify that the Third Party Sender has completed the audit. NACHA expects that an annual audit for a Third-Party Sender would reduce the risk to the ACH Network.

Proposed effective date of January 1, 2011.

2. Removal of language regarding days on which a financial institution or facility is closed

The proposal would remove current language concerning the transmission and availability of entries on days that are not banking days for both the transmitting and receiving ACH Operator or financial institution. This current language appears to be obsolete and based on an early definition of a “banking day.”

NACHA expects that this removal of language would have no effect in light of current processing requirements and settlement deadlines.

Proposed effective date of January 1, 2011.

3. Clarification of rule requiring an RDFI to return a credit entry returned to it by its consumer customer

The proposal would clarify that an RDFI must return to the ODFI any credit entry returned to the RDFI by its (consumer or non-consumer) customer within two banking days of receipt of the entry from the Receiver, regardless of the SEC Code or type of entry. The proposal would close an existing technical gap in the Rules that references only non-consumer customers in regard to credit entry returns.

Proposed effective date of January 1, 2011.

4. Clarification of reasons for the dishonor of a return by an ODFI and the contesting/ correcting of that dishonor by an RDFI

The proposal would clarify the specific reasons under which an ODFI may dishonor a return entry, and the specific reasons under which an RDFI may contest and/or correct such a dishonor. Currently, some reasons are explicitly listed while others are described in a generic way.

NACHA believes that explicitly listing each reason would improve user understanding of and compliance with the Rules.

Proposed effective date of January 1, 2011.

5. Removal of language regarding warranties and liabilities of associations

The proposal would remove current language regarding warranties and liabilities of associations, and similar language for the warranties and liabilities of ODFIs and RDFIs to Regional Payments Associations.

NACHA believes that the current language, which has been included in the Rules since 1977, may have been relevant at a previous time. However, such language has not been updated to reflect changes to ACH processing.

Under the proposed rule, if any association chooses to enter into transaction processing arrangements in the future as either an ACH Operator or a third party, such activity would be covered in the Rules as they apply to ACH Operators and Third-Party Service Providers.

Proposed effective date of January 1, 2011.

6. Clarification of requirements regarding revocation of authorization for single entries

The proposal would provide that the revocation language requirement would also apply to single-entry transactions for WEB and TEL entries to provide the Receiver a reasonable opportunity to revoke authorization and the Originator to act on this revocation. Currently, there is no such language for WEB and TEL single-entry transactions.

However, the revocation language would not apply to check conversion entries for ARC, BOC, and POP because authorization is provided at the time payment is made and there is not sufficient time for the Receiver to be able to revoke authorization.

Proposed effective date of June 17, 2011.

7. Require ODFIs to provide information regarding return entries to Originators

The proposal would explicitly require that an ODFI provide its Originator with information related to return entries either within two banking days of receipt of the return or as determined by agreement. Currently, there is no requirement for ODFIs to provide this information about returned transactions.

NACHA believes that an Originator’s ability to receive timely information on returned entries is important for risk management.

Proposed effective date of June 17, 2011.

REQUEST FOR INFORMATION

NACHA requests information and additional perspectives on the issues listed below.

1. Authorization requirements for corporate entries; proof of authorization for corporate entries

NACHA is seeking information about whether the Rules should have some specific manner of authorization or agreement (i.e., written v. oral), the minimum criteria for defining a valid authorization from a business Receiver, and the proof of authorization for business transactions.

A business/non-consumer Receiver has to explicitly authorize an ACH transaction to its account. Currently, the Rules specify that the Receiver must enter into an agreement with the Originator under which the Receiver has agreed to be bound to the NACHA Operating Rules. However, the Rules do not specify the details about the terms for the authorization of ACH transactions in the agreement between the Originator and Receiver. Currently, an RDFI may not request the ODFI to provide it with a copy of the business Receiver’s authorization.

NACHA believes that business Receiver can be harmed if the return period for the unauthorized debit has lapsed and the ODFI neither authorizes the transmission of a late return nor provides proof of authorization.

Options to address this issue include:

  1. requiring an ODFI to provide proof of authorization for disputed business transactions within ten banking days, which would be consistent with the rules on proof of authorization for consumer entries
  2. exempting the ODFI from a requirement to provide proof of authorization if it permitted the return of the entry, and/or
  3. requiring the ODFI to provide the Originator’s contact information to the RDFI for resolution outside the Network.
2. Notifications of Change for Single-Entries

NACHA is seeking information about whether Notification of Change Entries (NOCs) should apply to single-entries. Currently, the Rules do not have a distinction between transactions specifically defined as single-entry one-time payments and other ACH transactions.

There is an argument that NOC rules should not apply to single entries because the payment cycle has been completed with each one-time transaction. However, many single-entry transactions are made on a regular basis to the same payee, so another argument that there should be a means to correct recurrent problems to ensure efficient processing and posting.

RDFIs may transmit NOCs for any transaction, and ODFIs/Originators must make the changes within six banking days or prior to the initiation of the next entry, whichever is later. There is an apparent disconnect between: (1) the rule that requires an RDFI to accept an Entry that is based exclusively on data accurately obtained from the on-us MICR line of a Check unless the RDFI had previously initiated an NOC that was not properly acted upon, and (2) the Originator’s obligation to use information captured from the MICR line of each individual source document for purpose of creating a check conversion entry (ARC, BOC, POP).

3. Stop Payment Return Reason Codes

NACHA is seeking information about whether to include a method to determine the Receiver’s intent to stop one, some, or all future transactions with the Return Reason Code R08. Currently, an Originator does not receive information within the return entry itself as to the Receiver’s intent.

Options to address this issue include:

  1. establishing a new return reason code for “stop all payments”;
  2. converting the return reason code R07 from “authorization revoked” for an unauthorized debit to “stop all payments”; or
  3. including information within the addenda record of the R08 return that communicates the Receiver’s intent to stop one, some or all future transactions.

Questions to Consider Regarding the Proposed Rules

  1. Does your credit union support the proposal to require Third-Party Senders to conduct annual audits of their compliance with the NACHA Operating Rules?
  2. Does your credit union agree that the language regarding days on which an institution or facility is closed is obsolete in today’s processing environment?
  3. If you are an RDFI, does your credit union currently handle credit entries returned by consumers and credit entries returned by business customers in the same manner?
  4. Does your credit union support the clarification of the rules governing dishonored returns, contested dishonored returns, and corrected returns by explicitly stating each reason for which an entry may be dishonored, contested, or corrected?
  5. Does your credit union agree that the warranties and liabilities of associations (which relate to an association’s processing of ACH transactions) are obsolete?
  6. Does your credit union agree that authorization language for single-entry WEB and TEL entries should be required to include language instructing the Receiver how to revoke authorization with the Originator?
  7. Should ODFIs have agreements with their Originators that define a specific time frame or manner in which you must provide them with notice concerning any returned transactions?
  8. Does the lack of definition with respect to authorization requirements for non-consumer transactions cause problems or concerns for your credit union?
  9. If you are an RDFI, does your credit union currently initiate NOCs for single-entry transactions?
  10. If you are an Originator, has your credit union experienced any problems in determining how to respond to receipt of an entry returned as payment stopped and remain in compliance with both the Rules and Regulation E?


  11. 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
    Luke Martone • Senior Regulatory Counsel • (202) 508-6743 • lmartone@cuna.com