CUNA Regulatory Comment Call
December 4, 2002
New Warranties on Return Rates for Telephone ACH Entries
(NOT A MAJOR RULE)
EXECUTIVE SUMMARY
NACHA-The Electronic Payments Association has issued a request for comments on a proposal that would require originating depository financial institutions to measure return rates for ACH entries conducted over the telephone (TEL entries) and take action for high rates of unauthorized TEL entries. Comments on the proposal are due by December 20, 2002. The NACHA proposal would:
- Require originating depository financial institution to measure the unauthorized return rate for TEL entries in one of two ways;
- Require ODFIs that have merchants with return rates higher than 2.5% to provide to NACHA, within ten business days, information that:
- Identifies the merchant,
- Identifies any third party involved in those transactions,
- Identifies the type of business to which the unauthorized TEL entries are related,
- Identifies contact people at the merchant and third parties, and
- Specifies the return rate.
- Require ODFIs that receives written requests from NACHA for TEL origination information from a merchant to provide that information to NACHA within ten business days after receipt of the written request.
- Punishes ODFIs that fail to provide such information on Tel merchants with willful disregard of the NACHA Operating Rules. The fines for willful disregard of the rules are $10,000 per month until the problem causing the fines is resolved.
Please send your comments to CUNA by December 17, 2002. The time to respond is so short because NACHA wants to act quickly on this problem. 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.
In addition, CUNA recommends that all credit unions respond directly to NACHA because NACHA tabulates results to its surveys. If you would like to respond directly to NACHA and copy CUNA you may do so by using the NACHA survey form at please click here. 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 Friday, December 20, 2002. Please provide CUNA a copy by sending your comments to Michelle Profit at mprofit@cuna.com.
BACKGROUND
A merchant that obtains the consumer’s authorization verbally using the telephone initiates a TEL entry. A TEL entry may be transmitted only in circumstances in which (2) there is an existing relationship between the merchant and the consumer, or (2) there is not a n existing relationship between the merchant and the consumer, but the consumer has initiated the telephone call to the merchant.
NACHA proposed this modification to that ACH application because of complaints regarding the disproportionately high TEL return rates. According to NACHA, complaints came from several sources including the Federal Trade Commission (FTC), the Federal Bureau of Investigation (FBI), and Postal Inspectors. According to NACHA, these high rates seem to be caused by a few merchants, with incredibly high rates of return.
NACHA proposes modifying the rules to address the problem. Under the new rule:
- ODFIs would provide a warranty related to the origination of TEL entries. This warranty states that ODFIS will immediately cease initiating TEL entries for any merchant whose return rate for unauthorized TEL entries has exceeded 2.5% until such time as the problem causing the unauthorized TEL entries is resolved.
- The ODFI would monitor the return rate in one of two ways.
- The number of TEL entries from any file that the merchant has transmitted to the ODFI that were returned as unauthorized within the 60 day period beginning on the Settlement Date of the entries, divided by the total number of TEL entries contained in the file in which the original entries were transmitted; or
- The number of TEL entries that the merchant has transmitted to the ODFI that were returned to the merchant as unauthorized in any month, divided by the total number of TEL entries transmitted to the ODFI by that merchant in that month.
- An ODFI that receives a written request from NACHA addressed to the ODFI’s Check Operating Officer for information related to the TEL origination for a particular merchant must provide that information to NACHA within ten business days after receipt of the written request.
- If the ODFI fails to provide this information on a TEL merchant with a return rate over 2.5%, then NACHA may charge the ODFI with a willful disregard of the rules. The fine for willful disregard of the rules is $10,000 per month.
- The 2.5 % rate would be regularly reviewed to determine if it should be adjusted.
- For all these changes, the proposed effective date is March 14, 2003.
4QUESTIONS REGARDING THE PROPOSAL
- Does your organization support this proposal? Why or why not?
- Does you organization agree with the proposal to add an ODFI warranty that the ODFI will
monitor the unauthorized return rates for TEL entries for their merchants?
- The proposal recommends 2.5 percent as the threshold for an ODFI to cease originating for any
merchant that has an unauthorized return rate higher than the threshold? Does your organization agree
with this threshold? If not, what other threshold would you agree with? The threshold is the same as a
similar threshold used by VISA and MasterCard and it is nearly double the average return rate of TEL,
which 1.34 percent.
- The proposal requires that an ODFI report any merchant exceeding the threshold to NACHA within
10 business days of determining that the unauthorized return rate has exceeded the threshold. Does
your organization agree with the reporting requirement?
Why or why not?
- The proposal requires the ODFI to identify the merchant, any third parties, the type of business
to which the TEL entries relate, contact information of the merchant and any third parties, and the
return rate. Does your organization agree that the ODFI should report that specific information?
Should the ODFI be required to report on more or fewer items?
- The proposal includes that non-reporting of the required information would be considered willful
disregard of the NACHA Operating rules and would be subject to the National System of Fines. Does your
organization agree with this proposal? If yes, why? If not, is the punishment too harsh? Should the
fine be for a 1st, 2d, or 3d offense? The fine for a first violation is $250; for a second recurring
violation $750; for a third recurrence of the violation $1,500; and for continuous, willful disregard
of the rules $10,000 per month until the problem is resolved.
- Would this proposal result in costs or benefits to your organization? Please explain.
Please submit your address and phone number.
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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 |
