CUNA Regulatory Comment Call

March 13, 2007

EXECUTIVE SUMMARY

• NACHA issued a Network Enforcement Proposal (Proposal) to address the highest-risk uses and users of the ACH Network.
• This proposal is part of NACHA’s entire comprehensive risk management strategy.
• The Proposal would expand the enforcement procedures within the NACHA Operating Rules and establish a process to monitor excessive unauthorized ACH payments.
• When NACHA believes an Originator’s or Third-Party Sender’s return rate for entries returned as unauthorized exceeds a defined threshold, an Originating Depository Financial Institution (ODFI) would be required to provide reporting information to NACHA.
• Specific fine levels in the National System of Fines would be increased to up to $500,000 per month for all violations.
• Origination privileges for Originators or Third-Party Senders may be suspended for worst cases.
• Please submit your comments to CUNA by April 13, 2007. Comments are due to the NACHA by April 23, 2007.

Please feel free to fax your responses to CUNA at 202-638-7052; Assistant General Counsel Lilly Thomas at lthomas@cuna.com; or mail them to Lilly c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. Click here for a copy of this Request for Comment.

BACKGROUND

NACHA is implementing a comprehensive risk management strategy to ensure high-quality ACH transactions and reduce risk for financial institutions, businesses and consumers. The Risk Management Strategy’s framework has the following categories:

1. Network Entry Requirements
2. Ongoing Requirements
3. Enforcement
4. ACH Operator Tools; and
5. Cross-Channel Risk Management

The Proposal is part of NACHA’s entire risk management strategy, under the “Enforcement” category, and is the first initiative under the strategy for which comments are requested.

DISCUSSION OF PROPOSAL

NACHA’s Network Enforcement Proposal (Proposal) would expand the rules enforcement procedures within the NACHA Operating Rules to establish stronger incentives for compliance with the rule provisions on the authorization of ACH entries.

The Proposal focuses on the highest risk uses and users of the ACH Network with the most disproportionate ratio of unauthorized entries. The return reason codes that are used for entries returned as unauthorized are:

• R05, Unauthorized Debit to Consumer Account using Corporate SEC Code;
• R07, Authorization Revoked by Customer;
• R10, Customer Advises Not Authorized, Notice Not Provided, Improper Source Document, or Amount of Entry Not Accurately Obtained from Source Document
;
• R29, Corporate Customer Advises Not Authorized; and
• R51, Item is Ineligible, Notice Not Provided, Signature Not Genuine, Item Altered, or Amount of Entry Not Accurately Obtained from Item.

When NACHA believes an Originator’s or Third-Party Sender’s return rate for entries returned as unauthorized exceeds a defined threshold, an Originating Depository Financial Institution (ODFI) would be required to provide reporting information to NACHA. The defined threshold would be set by the NACHA Board of Directors and would be reviewed annually and revised as appropriate.

If requested, an ODFI would be required to provide the following information for each Originator or Third-Party Sender that is specified:

• The complete legal name and any “doing-business-as” names; address; telephone number; contact person; owners and officers and the taxpayer identification number of the Originator/Third-Party Sender.
• A general description of the nature of the business and the methods used to obtain proper authorization for the ACH transaction.
• The length of the relationship between the ODFI and Originator/Third-Party Sender, the date of the last review of the exposure limit by the ODFI, and the exposure limit(s) for the Originator or Third/Party Sender.
• Proof of the ODFI’s completion of an ACH audit within the last twelve months; and a summary of the ODFI’s regulatory capital.
• A statement with respect to whether the Originator/Third-Party Sender acts as the ODFI’s Sending Point with direct access to the ACH Operator.
• The Originator/Third-Party Sender’s origination volume for the time-period specified.
• The actual return rate for unauthorized entries in total and by SEC code.
• An explanation of the Originator/Third-Party Sender’s reason for the return rate, or a statement refuting NACHA’s claim.

An ODFI receiving a request to report information to NACHA would be required to provide the information within ten banking days of receiving NACHA’s written notice. If the ODFI confirms that the Originator’s and/or Third-Party Sender’s return rates are in excess of the defined threshold, then the ODFI would be required to include a plan for reducing the return rate within thirty days of receiving NACHA’s written notice. If the ODFI substantiates that its return rate did not exceed the return threshold, then no additional action would be taken outside the risk monitoring process.

The ODFI would be considered to be in willful disregard of NACHA’s Rules, and NACHA would initiate a rules enforcement proceeding if:

• The ODFI does not respond to NACHA’s written request;
• The ODFI does not provide complete and accurate information in response to NACHA’s written request; or
• The ODFI were to confirm a return rate over the return threshold, but does not reduce the Originator’s or Third Party Sender’s return rate within 30 days.

The Proposal would also increase fines at all levels and for all violations. The fine amount would be determined at the discretion of the Rules Enforcement Panel up to the ceiling. The following chart compares the existing fines to the proposed fines:

This proposal would permit the ACH Rules Enforcement Panel to suspend an Originator or Third- Party Sender from the ACH Network when it is causing significant harm and other fines have been unable to resolve the problem.

When an Originator or Third-Party Sender is suspended, every other ODFI would be precluded from sending an entry on behalf of the suspended Originator or Third Party Sender. Any ODFI that sends an entry on behalf of a suspended Originator or Third-Party Sender would be in violation of the NACHA Rules. The ACH Rules Enforcement Panel would be responsible for establishing the criteria that the Originator or Third Party would need to meet before it would be permitted re-entry to the Network.

1. Do you support adding ODFI Reporting Requirements to the Rules as an enforcement tool?
   a. Yes _____
   b. No _____
   Please explain.
   
   

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2. Do you support assessing higher fines and possible suspension against alleged violators of the Rules?
   a. Yes _____
   b. No _____
   Please explain.
   
   

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3. Do you agree with NACHA’s Board of Directors establishing and revising from time to time the thresholds used for ODFI Reporting Requirements?
   a. Yes _____
   b. No _____
   Please explain.
   
   

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4. Do you agree that the information required by the ODFI is appropriate?
   a. Yes _____
   b. No _____
   Please explain.
   
   

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5. Do you agree that responding to NACHA’s request within ten days is reasonable?
   a. Yes _____
   b. No _____
   Please explain.
   
   

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6. Do you agree that the proposed time frame of thirty days to reduce an excessive return rate is reasonable?
   a. Yes _____
   b. No _____
   Please explain.
   
   

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7. Do you agree with the proposed increase in fine amounts for all rules violations?
   a. Yes _____
   b. No _____
   Please explain.
   
   

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8. Please provide any additional comments.
   
   

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