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CUNA Regulatory Comment Call

March 28, 2002

EXECUTIVE SUMMARY

NACHA-The Electronic Payments Association has issued a request for comments to improve operational efficiencies within the ACH network. Comments on the proposal are due by May 15, 2002. The NACHA proposal would:

• Eliminate the requirement that the merchant include the consumer’s name in the Individual Name Field on account receivable entries (ARC). These ARC entries are created by merchants from checks mailed by consumers to lockboxes or placed by consumers in drop boxes to pay their bills. Inclusion of the name would become optional. This field is already optional for point-of-purchase (POP) entries. These ACH entries are created from checks made to purchase items in the store. RDFIs would not be able to return these transactions using Return Reason Code R02 (No Account/Unable to Locate Account) solely because the individual’s name was not provided. The change would become effective March 14, 2003.
• Limit the application of Return Reason Code R-08. Currently, this return reason code is used for two applications, which have two different deadlines. This code is used for a stop payment order placed on an ACH debit entry that must be returned within two days. It is also used for a stop payment order placed on a check related to an ARC entry that can be returned within 60 days. The change would only allow R08 to be used for returns based on stop payment orders for regular ACH entries. These returns must be sent within the standard two days. However, RDFIs will be able to use a new code for return entries for stop payment orders that are placed on ARC and POP entries. This rule change would be effective on March 14, 2003.
• Add language to require that an RCK entry must contain a pre-printed check serial number to be eligible for truncation. RCK entries are ACH items created from bounced checks. The proposed effective date would be September 13, 2002.
• Amend the NACHA Operating Rules (Rules) to clarify that an originating depository financial institution (ODFI) is liable for any breach of warranties that causes a receiving depository financial institution (RDFI) to violate Regulation E. This change would become effective on September 13, 2002.
• Add a section that will define the specific liabilities associated with a breach of warranty by an ODFI of an Internet-Initiated (WEB) entry. This section would become effective September 13, 2002, and it would correct an oversight in drafting the WEB rules.
• Eliminate the change codes C10-C12 for notice of change (NOC) transactions that are rarely used. These change codes are supposed to be used by the RDFI when the merchant’s name and ID number are incorrect and must be changed. This rule change would be effective on March 14, 2003.

Please send your comments to CUNA by May 6, 2001. Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Assistant General Counsel Michelle Profit at mprofit@cuna.com; or mail them to Michelle c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004.

NACHA asks that credit unions complete a survey to provide comments on this rule change. If you would like to respond directly to NACHA and copy CUNA you may do so by using their survey form at www.nacha.org. Comments sent directly to NACHA should be sent to William Colbert, Network Services Manager, NACHA, 13665 Dulles Technology Drive, Suite #300, Herndon, VA 20171, fax: (703) 787-0996 or email: wcolbert@nacha.org, no later than Wednesday, May 15, 2002. Please provide CUNA a copy by sending your comments to Michelle Profit at mprofit@cuna.co.

BACKGROUND

This proposal would make changes to the ARC application, which is used to create ACH items from checks mailed to lockboxes or placed in drop boxes to pay consumer bills. Currently, for ARC entries merchants are required to capture the consumer’s routing, account, and check serial numbers from the MICR line of the check or share draft. The merchants must manually enter the consumer’s name because it is required. Merchants have asked that the name placement be made optional, like it is in POP, so that they can decrease the manual processing that is required. As a result of this change, credit unions would be required to post ARC entries based on the account number, and they would not be able to use the return reason code that they could not find the account if they cannot find it because there is no name.

Currently, the Return Reason Code R08 has two time frames associated with its use: two days for a stop payment order placed on a regular ACH debit entry and sixty days for a stop payment order placed on a check for an ARC entry. NACHA believes that this inconsistency creates confusion. As a result, NACHA proposes that R08 only apply to returns for regular ACH entries with the applicable two-day deadline. A new return code would be established for stop payment orders placed on checks used to create ARC entries and POP entries.

This rule amendment would also require that the check used to create an RCK entry contain a preprinted check serial number. This requirement would make RCK consistent with the rules for ARC and POP entries.

The rule amendment would also restore the warranties that originating financial institutions have historically provided for ACH entries and that were excluded due to oversights. The ARC rule would explain that ODFIs are liable for breaches of warranty for ARC entries, including claims, demands, loss, liability, or expenses incurred by the receiving institution resulting from its inability to comply with Regulation E because of a violation of the Rules by the originating institution. As a result of an oversight during the development of the rules governing WEB entries, no specific provision currently exists to address an ODFI’s liability for breach of warranty associated with WEB Entries. The amendment would add language to address ODFI liabilities for breaches of warranty associated with WEB entries. The addition of such language would be consistent with the rules for other ACH entries.

The rule amendment would remove Change Codes C10, C11, and C12. These specific change codes are used when a merchant’s name and ID number are incorrect and must be changed. According to NACHA, it is unlikely that an RDFI will have knowledge as to the validity of this information or the need to change such data on the ACH record. According to NACHA, the volume of NOCs transmitted in 2001 using these codes was 349 or 0.00001% of the total NOCs transmitted. This low volume verifies that few RDFIs use these codes, according to NACHA.

1. Do you support eliminating the requirement that merchants place the name of the consumer on the ARC entry? Why or why not?
   
   

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2. Do you need the name in the ARC entry for item processing or exception handling? According to this amendment to the Rules, receiving institutions would not be able to return ARC transactions using Return Reason Code R03 No Account/Unable to Locate Account) on the basis that the individual’s name was not provided. Receiving institutions would be required to rely solely on the account number contained in the entry for posting purposes.
   
   

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3. do you support the change to return reason code r03? The consumer’s name is not required on pop entries. According to this amendment to the rules, receiving institutions would not be able to return arc transactions using return reason code r03 (no account/unable to locate account) on the basis that the individual’s name was not provided.
   
   

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4. Considering your experience processing POP entries, do you support the elimination of the name requirement for ARC entries? Please explain.
   
   

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5. Do you support the change to Return Reason Code R08? NACHA proposes that R08 only apply to returns for regular ACH entries with the applicable two-day deadline. A new return code would be established for stop payment orders place on checks used to create ARC entries and POP entries.
   
   

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6. Do you support the change to require that an RCK entry must contain a pre-printed check serial number to be eligible for truncation? Please explain.
   
   

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7. Do you support expanding the ODFI warranties for ARC and including the standard ODFI warranties for WEB entries? Please explain.
   
   

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8. Do you support the elimination of certain change codes for NOC transactions? These change codes were used to describe when the merchant’s name and ID number were not correct and needed to be changed. According to NACHA statistics, these change codes are used extremely rarely. Please explain your response.
   
   

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