CUNA Regulatory Comment Call


September 17, 2003

Automated Clearing House (ACH) Use by Federal Agencies

EXECUTIVE SUMMARY

DESCRIPTION OF THE PROPOSAL

I. CONVERSIONS

Definition of "Business Check"
The proposal would add a new definition of "business check" to include not only any check drawn on a corporate or business account (including third party checks), but also credit card checks, negotiable instruments issued by a financial institution (that is, traveler's checks, cashier's checks, official checks, money orders, etc.), and checks drawn on a state or local government).

Revised Accounts Receivable Disclosure
Currently, agencies that receive checks via the mail or at a dropbox may covert those checks to debit entries if the notice set forth at Appendix C of 31 C.F.R. part 210 has been provided to the check writer. The disclosure below must be provided to the Receiver (member/customer) before the check is delivered. In the cases discussed in the section below (Expanded Accounts Receivable Check Conversion Applications), the disclosure must be provided to the Receiver (member/customer) before the check is delivered). In situations in which the check is being delivered in person, the disclosures must be posted or handed to the Receiver (member/customer). A number of agencies have indicated that the standard disclosure set forth in Appendix C is too lengthy to be included on many invoices and remittance documents. Therefore, the rule would shorten the disclosure as follows:

If you send us a check, it will be converted into an electronic fund transfer (EFT). This means we will copy your check and use the account information on it to electronically debit your account for the amount of the check. The debit from your account will usually occur within 24 hours, and will be shown on your regular account statement. You will not receive your original check back. We will destroy your original check, but we will keep the copy of it. If the EFT cannot be processed for technical reasons, you authorize us to process the copy in place of your original check. If the EFT cannot be completed because of insufficient funds, we may try to make the transfer up to 2 times [and we will charge you a one-time fee of $--------, which we will also collect by EFT].

Note: This disclosure must be conspicuous. This means that it should be printed in reasonably large typeface. If this disclosure is combined with other information, it should be set off by contrasting color, by surrounding it with a box, or by using other means to ensure that it is prominently featured.

Expanded Accounts Receivable Check Conversion Applications
The rule would be revised to allow agencies to originate ACH debit entries using checks that are (1) received via the mail; (2) received at a dropbox; and (3) delivered in person in circumstances in which it is impossible or impractical for the agency to image and return the check at the time the check is delivered. Under this approach where those situations are treated as accountable receivable check conversions, these checks would be converted using an Accounts Receivable Check (ARC) code (for consumer checks) or a Cash Concentration or Disbursement (CCD) code (for business checks); and the checks would be destroyed, rather than returned to the check writer.

Conversion of Additional Instruments
At present, agencies are permitted to convert business checks received at point-of-purchase, dropboxes, and via the mail. However, they are not permitted to originate ACH debit entries using as a source document various other kinds of payment instruments such as money orders, traveler's checks, certified bank checks, and credit card checks. The proposed rule would permit the origination of ACH debit entries at agency points-of-purchase using as source documents instruments included under the new definition of "business check." (FMS is not proposing to include Treasury checks among the items eligible for conversion.) Until conversion of these instruments is possible, the agencies may used stored item images to create paper drafts of any items returned due to debit blocks or similar mechanisms and process these drafts through the check processing system.

FMS recognizes that there are authorization issues that may arise in connection with conversion of these instruments because an individual presenting such an item to an agency does not have authority to act with respect to the account on which the check is drawn and, therefore, cannot authorize conversion of the item. However, FMS believes that the ACH rules incorporated into the rules governing agency use of the ACH System provide an adequate framework to enable a Receiver (member/customer) to pursue recovery of an unauthorized debit to the Receiver's (member's/customer's) account.

Re-Presented Check Entry Service Fee
Agencies right now may use a RCK entry to electronically re-present, via the ACH Network, a consumer check that has been returned unpaid due to insufficient funds. Some of the agencies that originate RCK entries also wish to use the ACH Network to collect a service fee from the issuer of the returned item. However, they often do not find it cost effective or customer friendly to obtain a written authorization from every check writer to collect a service fee electronically because only a small percentage of checks are returned unpaid. The proposal would permit agencies to originate ACH debit entries to collect one-time service fees in connection with RCK entries if prior notice of the fee is given. It would require that, prior to accepting the Receiver's (member's/customer's) check or source document, the agency disclose to the Receiver (member/customer) that a service fee may be collected. It permits an agency that has the authority to impose such a fee to collect the fee by ACH debit without a written authorization.

II. RECLAMATIONS; MISDIRECTED PAYMENTS

Mandatory Use of R15 or R14 Return Reason Code
A financial institution is required to return any federal benefit payment received after the institution learns of the death of the recipient. The rules, however, do not specify what ACH return reason code should be used to make these returns. Under the proposal, financial institutions that learn that an account holder has died would be required to return any subsequent federal benefit payments using return reason code R15 (Beneficiary or Account Holder Deceased) or R14 (Representative Payee Deceased), as appropriate. The use of an R15 or R14 code would satisfy the receiving depository financial institution's (RDFI's) obligation to notify the agency after learning of the death of a recipient or beneficiary from a source other than notice from the agency. FMS believes that the use of the R15 and R14 codes is an efficient means of notifying agencies that the recipient is deceased because of the stop on subsequent payments and investigation that is automatically triggered when an agency receives an R15 returned payment.

Post-Death Payments to Which Recipient is Entitled
Currently, the rules impose partial or full liability on RDFIs for benefit payments received after the death or legal incapacity of a recipient. This proposal provides that financial institutions would not be held liable for post-death benefit payments to which the recipient was entitled if the agency that certified the disbursement of the payment determines that the recipient or beneficiary is entitled to the post-death payment. FMS believes the practical effect of this amendment would be that financial institutions may expect a small number of post-death payments will not be the subject of a notice of reclamation.

Misdirected Federal Payments
The proposal would require a financial institution that becomes aware that a federal benefit payment was misdirected to promptly notify the agency that sent the payment of the error. "Promptly" will normally mean no later than two business days after the error has come to the RDFI's attention. An RDFI that fails to provide the notice may be liable to the federal government for loss resulting from its failure to notify the paying agency. RDFIs may rely on the account number alone in posting payment. RDFIs have no obligation to verify that the payee name matches the name of the account holder on the RDFI's records.

Seven Year Limit on Reclamations
Currently, the rules prohibit, subject to one exception, an agency from reclaiming any post-death or post-incapacity payment made more than six years prior to the most recent payment made by the agency to the recipient's account. The proposal would prohibit agencies from reclaiming payments that were made more than seven years prior to the date of the notice of reclamation. The only exception to this limitation would be in a situation in which the account balance exceeds the total amount of the payments that the agency would otherwise be permitted to reclaim after applying the seven year limitation.

Right to Financial Privacy Act
The rules as they stand right now provide that in order to limit its liability in a reclamation, a financial institution must respond to a notice of reclamation by providing the names, addresses, and "other relevant information" regarding account co-owners and other persons who withdrew, or were authorized to withdraw, funds from the recipient's account after the death or legal incapacity of the recipient. The information is used by paying agencies to pursue the recovery of payments from persons who have made use of the funds but who were not entitled to them. The information that an agency may obtain from a financial institution in connection with a reclamation is limited by the Right to Financial Privacy Act (Act). The proposal would limit the information that agencies may request from financial institutions in accordance with the Act. Under the Act, (except in cases involving an administrative or judicial subpoena or a search warrant) the information regarding withdrawers and co-owners is limited to the name and address of those individuals. The information is to be provided only in cases involving the reclamation of Social Security Federal Old-Age, Survivors, and Disability Insurance benefit payments, or benefit payments certified by the Railroad Retirement Board or Department of Veterans' Affairs.

Notification to Account Owners
The proposal would allow financial institutions to notify an account owner of the receipt of a notice of reclamation "promptly" rather than "immediately," as is currently required. This change is intended to reduce an unnecessary burden on financial institutions.

QUESTIONS REGARDING THE PROPOSAL

  1. Do you agree with the addition of the new definition of "business check?"
    Yes ______ No ______

    Please explain why or why not.
















  2. Does the proposed revised Accounts Receivable Disclosure strike the appropriate balance between the need for a shorter notice and the need to insure that members/consumers understand what is happening to their share drafts/checks?
    Yes ______ No ______

    Please explain why or why not.
















  3. Do you agree with the expanded accounts receivable check conversion applications provision?
    Yes ______ No ______

    Please explain.
















  4. Do you agree with the elimination of the regulatory prohibition against agencies converting to ACH debit entries certain types of payment instruments (such as money orders, traveler's checks, certified bank checks, and credit card checks) that are commonly received at lockboxes and points-of-purchase?
    Yes ______ No ______

    If not, why not?
















  5. Do you feel it is appropriate to allow agencies to originate an ACH debit entry in order to collect a service fee related to an RCK entry if notice of the fee is given to the Receiver (member/customer) before the agency accepts the Receiver's check?
    Yes ______ No ______

    If not, why not?
















  6. Is the use of the R15 and R14 codes an efficient means of notifying agencies that the recipient of a federal benefit payment is deceased?
    Yes ______ No ______

    If not, what other means would you suggest?
















  7. Do you agree with the proposed liability provisions regarding post-death payments to which recipient is entitled?
    Yes ______ No ______

    Please explain.
















  8. With regard to misdirected federal benefit payments, what is the most convenient and effective means by which this notice to agencies could be provided?
    Yes ______ No ______

    Please explain.
















  9. Do you believe that the limit on reclamations of seven years is appropriate?
    Yes ______ No ______

    If not, should the timeframe be longer or shorter?
















  10. Should the information that financial institutions are required to provide in connection with a reclamation be limited to the information specified in the Financial Privacy Act, as set forth in the proposal?
    Yes ______ No ______

    Please explain.
















  11. Does the provision requiring financial institutions to notify an account owner of the receipt of a notice of reclamation "promptly" rather than "immediately" significantly reduce the burden on financial institutions?
    Yes ______ No ______

    Please quantify the reduction in burden, if any.
















  12. 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