NACHA: Proposed Changes on ACH Network Risk and Enforcement, and Improving ACH Network Quality by Reducing Exceptions

Executive Summary

 

NACHA - The Electronic Payments Association has issued two proposals intended to reduce risk and reduce exceptions that would improve the safety, security, and integrity of Automated Clearing House (ACH) Network.

Specifically, these proposals would amend the NACHA Operating Rules (NACHA Rules) regarding several areas:

1. Proposed Changes on ACH Network Risk and Enforcement – The first proposal aims to improve NACHA’s ability to identify and enforce rules against “outlier” Originators responsible for the highest levels of exceptions. This proposal would:

        • Reduce the existing return rate threshold for unauthorized debits from 1.0 percent to 0.5 percent;

        • Establish a return rate threshold for account data quality returns (i.e., administrative returns with return reason codes R03, R04, or R20) at 3.0 percent, and an overall debit return rate threshold (for all return reason codes) at 15.0 percent;

        • Clarify the definition of a reinitiated entry (i.e., resubmission of a returned entry) by incorporating NACHA Operations Bulletin #3-2013, by specifically prohibiting against reinitiating a transaction that was returned as unauthorized, and by specifying entries that are not considered reinitiations;

        • Explicitly apply certain risk management rules to third-party senders; and

        • In addition, expand NACHA’s authority to initiate enforcement proceedings for a potential violation of the NACHA Rules based on the origination of unauthorized transactions. Currently, NACHA has more limited authority to initiate enforcement proceedings.

2. Proposed Changes to Improve Network Quality by Reducing Exceptions – The second proposal aims to reduce exceptions by establishing a system of economic incentives for Originating Depository Financial Institutions (ODFIs) to improve the quality of the ACH transactions they originate. An ODFI would pay fees based on exceptions to partially offset the Receiving Depository Financial Institution's (RDFI’s) costs for exception processing and customer service, under these circumstances:

        • A return due to erroneous data - An RDFI returns an ACH transaction to an ODFI due to incorrect account data within the transaction (proposed flat fee range of $.10 to $.40 paid by the ODFI per return);

        • An NOC - An RDFI corrects information within an ACH transaction and sends the correction back to the ODFI (proposed flat fee range of $.25 to $.75 paid by the ODFI per Notification of Change (NOC)); or

        • A return due to an unauthorized entry - An RDFI returns an ACH transaction to an ODFI due to a problem with the Receiver’s authorization (proposed flat fee range of $1.50 to $2.50 paid by the ODFI per authorization-related return).

• Regarding effective dates, the first proposal’s proposed effective date for the return rate and reinitiation changes would be March 20, 2015, while the proposed effective date for the changes related to third-party senders and NACHA’s enforcement authority would be September 19, 2014. For the second proposal on network quality, the proposed effective date is March 20, 2015.

• CUNA is interested in how these proposals would affect credit union operations and compliance on the ACH network. According to NACHA, ODFIs would incur additional costs if they are associated with higher-risk Originators and Third-Party Senders, from enforcement and information requests from NACHA, from additional policies and procedures, and ODFIs would also have to pay quality fees to RDFIs based on the number of exceptions, as well as incur likely costs associated with risk management. (ODFIs that are also RDFIs would also receive fees for exceptions they process as RDFIs).

• Also, RDFIs generally would benefit from these proposed rules to lower returns and exceptions, receive fees for exceptions, and may also incur costs to implement systems to account for receipt of quality fees, according to NACHA. Smaller RDFIs generally incur higher costs associated with each exception.

•Comments for the proposed rules are due to NACHA by January 13, 2014; please submit your comments to CUNA by January 7, 2014.

• Please e-mail any questions to CUNA Assistant General Counsel for Regulatory Research Dennis Tsang at dtsang@cuna.com.

•For further details, please visit the NACHA requests for comment on network quality and risk and enforcement, which will include executive summaries, proposed modifications to the NACHA Rules, and participant surveys.


Questions to Consider Regarding the Proposals
*
1. Is your credit union an ODFI or RDFI on the ACH Network?
2. First Proposal – Does your credit union support these proposed changes that would
YesNeutralNo
Reduce the existing return rate threshold for unauthorized debits from the current threshold of 1.0 percent to 0.5 percent
Establish a return rate threshold for account data quality returns (i.e., administrative returns with return reason codes R03 and R04) at 3.0 percent, and an overall debit return rate threshold for all return reason codes at 15.0 percent
Clarify the definition of a reinitiation (i.e., resubmission of a returned entry) by incorporating Operations Bulletin #3-2013, by specifically prohibiting against reinitiating a transaction that was returned as unauthorized, and by specifying entries that are not considered reinitiations
Explicitly apply certain risk management rules to third-party senders
Expand NACHA’s authority to initiate enforcement proceedings for a potential violation of the NACHA Rules based on the origination of unauthorized transactions.
3. Second Proposal - Does your credit union support the concept that an ODFI would pay fees based on exceptions to partially offset the RDFI’s costs for exception processing and customer service for certain exceptions related to erroneous data, NOCs, and unauthorized entries?
4. Second Proposal – Also, do you support the proposed fees paid by ODFIs for exceptions (based on your credit union’s operational costs) under these three circumstances?
YesNeutralNo
A return due to erroneous data - An RDFI returns an ACH transaction to an ODFI due to incorrect account data within the transaction (proposed flat fee range of $.10 to $.40 paid by the ODFI per return)
An NOC - An RDFI corrects information within an ACH transaction and sends correction back to ODFI (proposed flat fee range of $.25 to $.75 paid by the ODFI per NOC)
A return due to an unauthorized entry - An RDFI returns an ACH transaction to an ODFI due to a problem with the Receiver’s authorization (proposed flat fee range of $1.50 to $2.50 paid by the ODFI per authorization-related return)
5. Effective Dates – Do you have any comments on the proposed effective dates?
6. Other Comments or Concerns
7. (Optional) What is your credit union's asset size?
8. (Optional) Please provide information about yourself and your credit union.
Thank you for your input and time - CUNA Regulatory Advocacy Team