CUNA Regulatory Comment Call
July 7, 2000
NEW PILOT TO TRUNCATE CHECKS TO ACH AT POINT-OF-PURCHASE
(MAJOR RULE)
EXECUTIVE SUMMARY
NACHA-The Electronic Payments Association requests comments on a pilot to give merchants the ability to truncate checks into ACH items items at the point-of-purchase. In this pilot, the merchant collects a written authorization and a completed, signed check from the consumer. The merchant uses a MICR reader to obtain the consumer's routing and account numbers, the check is stamped void and an ACH item is created (POP check entries). Specific rules for this pilot are similar to other rules that allow for checks to be truncated into ACH items. This rule amendment would be effective from December 15, 2000 through December 13, 2001.
Comments are due by July 28, 2000. Please submit your comments to CUNA by July 21, 2000. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Regulatory Advocacy Attorney Catherine Orr at corr@cuna.com or mail them to Mary or Catherine in c/o CUNA's Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005.
NACHA has prepared its own survey that it would like financial institutions to complete on the proposed rule change. Click here or contact Catherine Orr for a copy of that survey. Please forward your responses to this survey to CUNA as well.
BRIEF BACKGROUND
This is a second Request for Comment regarding Point-of-Purchase Truncated Check Debit Entries. NACHA has slightly modified the pilot proposal based on responses to NACHA's initial Request for Comment distributed in January 2000.
RULE
All POP check entries are subject to the Uniform Commercial Code (UCC) the Federal Reserve's Regulation CC, Clearing House Rules, and the NACHA Rules. The Electronic Funds Transfer Act and Federal Reserve's Regulation E do not apply because POP check entries started as checks, and fund transfers originated by a check are excluded from coverage under the Electronic Funds Transfer Act (see 15 U.S.C. 1693(a)(6)) and the Federal Reserve's Regulation E (see 12 C.F.R 205.3(c)(1)).
The NACHA Rules place guidelines on what types of checks are eligible to become a POP check entry. Checks are eligible for this program if they meet the requirements listed below:
- They are items as defined in Revised Article 4 of the UCC (i.e., an instrument or a promise or order to pay money handled by a financial institution for collection or payment).
- They are negotiable demand drafts payable through or at a depository institution, other than a Federal Reserve Bank or Federal Home Loan Bank.
- They are in an amount less than $2,500.
- They are completed and signed by the consumer.
- They are dated less than 180 days from the date the entry is transmitted to the receiving depository financial institution (RDFI).
- They are drawn on a consumer account.
The following guidelines apply to the POP check entries:
- An item may only be presented for a total of three times in the ACH network. And the entry may not be transmitted through the ACH network if it has previously been presented in its physical form.
- The debit amount of the POP entry and the original paper check must be the same. No collection fee may be added to the dollar amount of the ACH entry.
Ineligible Items
Items that are ineligible to be sent as POP check entries include, but are not limited to:
- Noncash items;
- Drafts drawn on the Treasury of the United States, a Federal Reserve Bank or a Federal Home Loan Bank;
- Drafts drawn on a state or local government that are not payable through or at a Participating DFI;
- Credit card access checks;
- Money orders;
- Items payable in a currency other than United States currency;
- Third-party items; and
- Demand drafts that do not contain the signature of the Consumer.
Original Item/Copy of Item
The proposal includes an Originating Depository Financial Institution (ODFI) warranty that the ODFI has entered into an agreement with the merchant to provide for the secure retention of the items and copies of the items (if the ODFI is not going to retain them).
A Receiving Depository Financial Institution (RDFI) can send a written request to the ODFI to receive either the original item or a copy of the item to which the POP check entry relates:
- A request for the original item must be received by the ODFI within ninety (90) days of the Settlement Date of the POP check entry, and the ODFI must send to the RDFI the original item within ten (10) banking days of receipt of the written request.
- A request for a copy of the original item must be received by the ODFI within seven (7) years of the Settlement Date of the POP check entry, and the ODFI must send to the RDFI a copy of the item within ten (10) banking days of the receipt of the written request.
If the item has been finally paid, the original item or a copy of the item must indicated this on its face.
In addition, the merchants must be able to provide a copy of the written authorization to the ODFI for two years, in case the ODFI requests it.
Item Endorsed
The items to which the POP check entry relates are deemed to have been endorsed prior to the transmission of the entries.
Written Authorization Requirement
The consumer's written authorization is required before the merchant can originate a POP entry. The authorization must (1) be in writing, signed or similarly authenticated by the consumer, (2) be readily identifiable as an ACH debit authorization, and (3) clearly and conspicuously state its terms. The merchant must provide a copy of the authorization to the consumer. The written authorization and the receipt can be provided to the consumer on the same document or on separate documents, as the merchant prefers.
Receipt Requirement
The proposed rule requires the Merchant to provide the Consumer with a receipt, at the point-of-purchase, that contains the following minimum amount of information:
- Merchant's name (merchant)
- Company (merchant)/third-party service provider telephone number
- Date of transaction
- Transaction amount
- Check serial number, and
- Merchant number (or other unique number that identifies the location of the transaction)
The Rules Work Group has suggested that the NACHA Operating Rules recommend, but do not require, that the Merchant also provide the following information on the receipt provided to the Consumer:
- Merchant address
- Merchant identification number
- Consumer's financial institution routing number
- Consumer's truncated account number
- Consumer's truncated identification number; and
- Transaction reference number
- Note: The merchant cannot place the consumer's complete account number and complete identification number on the receipt.
Return of a PPD Point-of-Purchase Truncated Check Debit Entry
Unless the POP entry falls within a specific exception, the RDFI must transmit a return entry to the RDFI's ACH Operator by midnight of the second banking day following the banking day of receipt of the presentment notice (e.g., the PPD Point- of-Purchase Truncated Check Debit Entry). The presentment notice is deemed to be received when the ACH Operator makes the POP check entry available to the RDFI.
If a financial institution currently initiates all returns by midnight (RDFI's local time) of the banking day following the settlement date, then this difference in return time frames should not affect the institution's processing of return entries. If the RDFI initiates returns after midnight of the banking day following the settlement date, then the RDFI needs to initiate PPD Point-of-Purchase Truncated Check Debit Entry return entries by the midnight deadline.
The midnight deadline for transmitting return entries is also the applicable return time frame for RDFIs that are returning these entries because they: (1) are located in a state that has not adopted Revised Article 4 of the Uniform Commercial Code (1990 Official Text) and that have not revised their customer agreements to allow for electronic presentments, and 2) are located in a state that has a statute that requires the RDFI to return all cancelled checks to the Consumer in the periodic statement for a specific type of account.
For the following specific reasons, the RDFI will be able to transmit returns for POP check entries by transmitting them to its ACH Operator by its deposit deadline for the return entry to be made available to the ODFI no later than the opening of business on the banking day following the sixtieth calendar day following the settlement date of the entry. These reasons are:
(1) The consumer had placed a stop payment order on the check (item) to which the PPD Point-of-Purchase Truncated Check Debit Entry relates. The RDFI will be able to return the item if the Consumer notifies the RDFI that an item was not stopped as requested.
(2) The consumer claims that he did not authorize the Merchant to transmit the PPD Point-of-POP check entry or that the consumer revoked the authorization prior to the debit posting to the account.
(3) The consumer claims that the item to which the POP check entry relates was ineligible.
(4) The consumer claims that all signatures on the item to which the POP check entry relates are not authentic or authorized or the item has been altered.
In circumstances in which (1) the entry was not authorized or the authorization was revoked, (2) the item was ineligible, or (3) all signatures on the item are not authentic or authorized or the item has been altered, the consumer would be required to sign an affidavit in order for the RDFI to recredit the consumer's account and return the entry. Any subsequent dispute regarding an unpaid debt must be addressed directly between the merchant and the consumer. An affidavit is not required for the RDFI to return the ACH entry for a stop payment having been placed on the item (check).
Stop Payment of a PPD Point-of-Purchase Truncated Check Debit Entry
For stop payments on PPD Point-of-Purchase Truncated Check Debit Entries to consumer accounts, a minor variation from current NACHA Operating Rule provisions is included, stating that in order for a consumer to place a stop payment, the RDFI must have a reasonable opportunity to act upon the stop payment order prior to acting on the debit entry. This is in order to be consistent with the UCC and follows the requirements for POP check entries, point-of-purchase entries, and PPD Accounts Receivable Truncated Check Debit Entries.
IMPACT TO PARTICIPANTS
ODFIs
In addition to general warranties that cover ODFI transmission of all ACH entries, ODFIs assume the following warranties related to POP check entries:
- There is a contractual agreement with NACHA to provide statistical data.
- There is good title to the item.
- The signatures are genuine.
- The item is not altered.
- There are no defenses.
- There is no knowledge of insolvency of merchant.
- The POP entry accurately reflects check.
- The check will not be presented.
- The ODFI can fulfill a request for the original check or a copy of it.
ODFIs should take actions to avoid the liability ODFIs become responsible for under these additional warranties. Specifically, an ODFI should modify its agreements with its merchants to share liability, particularly as regards check retention. In addition, ODFIs should establish procedures with their merchants for providing the original checks and copies of them when they are requested by RDFIs. ODFIs must also remember that for these ACH transactions, they are required to have a contractual agreement with NACHA. This agreement is supposed to ensure that the ODFI gathers and provides statistical data on this short-term rule.
ODFIS are also responsible for formatting. This includes, among other formatting requirements, (1) the need to include the specific description "CHECKSAVED" within the Company Entry Description Field, (2) the requirement to place the name of the original payee on the face of the check (i.e., the merchant) within the Company Name Field, and (3) the obligation to provide the check serial number of the truncated check within the Individual Identification Number Field. It should be noted that, although the RDFI will not be required to include the check serial number on the consumer's monthly bank statement, the Merchant must provide this information for reference purposes.
RDFIs
RDFIs must be aware that the return time frames and return reason codes used for POP Truncated Check Debit Entries enable RDFIs to comply with the UCC and Regulation CC. For example, RDFIs that are located within a state that has not adopted Revised Article 4 of the UCC and has not revised its customer agreements to allow electronic presentment or that are located within a state that requires RDFIs to provide cancelled checks to consumers in their bank statements have ability to return these type of truncation entries. RDFIs must ensure that their return processing schedules are examined and, if necessary adjusted, to comply with the shorter return time frames governing these entries.
RDFIs should consider establishing a system link to check for potential stop payment orders in their DDA system when a POP Truncated Check Debit Entry is received. This link will help ensure that the ACH entry is returned "stop payment" even if the stop payment is incorrectly placed on the DDA system.
NACHA notes the following potential benefits derived from POP Truncated Debit Entries:
- Economies of scale can be realized from processing more ACH transactions rather than checks.
- A disputed ACH transaction results in less risk to the institution than a disputed check transaction. This is due to the ability of the financial institution to return a transaction for up to 60 days following the settlement date of entry if the consumer claims that the transaction was unauthorized after reviewing their bank statement. If a consumer alleges that a check has been forged, and the RDFI did not return the check before its midnight deadline, the paying bank would be potentially liable for the check. If the consumer then disputes the check and the financial institution decides to recredit the consumer's account, the financially institution would typically suffer a loss.
- The RDFI will also experience operating cost savings if the ACH debit is returned unpaid. If the ACH debit is returned unpaid, the RDFI will save between 25 cents and $1.00 per transaction compared to the costs of processing a returned check. Financial institutions that have automated the return process will save even more.
- ACH entries that are returned for insufficient funds are detected and returned more quickly.
- RDFIs need to consider the importance of linking their check and ACH stop payment systems.
- After the return time frames, RDFIs retain the right to enforce any breach of ODFI warranties if any entries have been sent that were not authorized or eligible, if both the check and ACH have been presented.
- RDFIs retain the right to return entries if they are located in a state that has not adopted Revised Article 4 of the Uniform Commercial Code and have not revised their customer agreements to allow for electronic presentments, and if they are located in a state that has a statute that requires the RDFI to return all cancelled checks to the customer in the periodic statement for a specific type of account.
Members
Members should be aware that they will not receive truncated checks back with their monthly periodic statement. However, their statement will include information relating to the check, including the payee's name, the description "CHECKSAVED," and the amount. Members will maintain their rights under the Uniform Commercial Code unless they have agreed otherwise with the RDFI. The Member can request the original or a copy of the original check item through his RDFI. Members can review their bank statement and sign an affidavit at their RDFI to be recredited for the entry if (1) the item was ineligible to be sent as an ACH debit entry, (2) the Member did not authorize truncation of his check or previously revoked his authorization for the check truncation, or (3) all signatures on the item are not authorized or authentic or the item has been altered. If the consumer placed a stop payment on the check item and requests that the ACH entry be returned, the RDFI may return the entry without receiving a signed affidavit from the consumer. Members should also be aware that they may place a stop payment order on the POP Truncated Check Debit Entry, just as for any other ACH entry.
QUESTIONS TO CONSIDER REGARDING THE NOTICE
- Should CUNA support the proposed rule change to create a new POP pilot? Please explain.
- Should CUNA support the stop payment proposal in this rule? The stop payment provision states that in order for a
consumer to place a stop payment, the RDFI must have a reasonable opportunity to act upon the stop payment order prior to
acting on the debit entry. If the stop payment cannot be placed, then the RDFI would probably have to adhere to the two-day
return rule and not the sixty day return rule. Is this provision fair to members and credit unions? Why or why not?
- The formatting for this rule does not require an individual's name to be placed on the ACH item. The check serial
number goes in the name field? Will this information be sufficient for you to post a member's items correctly?
- Other comments?
Leagues and credit unions should feel free to fax their responses to CUNA at 202-371-8240 or e-mail them to Michelle Profit at mprofit@cuna.com. Thank you!!
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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 |
