NACHA proposes ACH rule changes

NACHA − The Electronic Payments Association seeks input from the payments industry about how to improve the automated clearing house (ACH) network. NACHA, which oversees the ACH, issued two complementary proposals designed to collectively enhance the network by reducing the number of unauthorized ACH transactions and allowing the association to better police ACH rule violators.

The first proposal, titled "ACH Network Risk and Enforcement," addresses the problem of "outlier" organizations that originate money transfers for consumers that disproportionately result in insufficient funds notices, called "exceptions." Such aborted money transfers clog the ACH network and are an expense largely shouldered by the financial institutions (FIs) that receive bad money transfer requests and must return them. By amending the ACH rules, NACHA seeks the authority to bring enforcement actions against those violators.

The second proposal, "Improving ACH Network Quality," would establish economic incentives, or disincentives as the case may be, for FIs to tighten up the policies of money transfer originators, such as check cashing stores that utilize those FIs to offer money transfer services to consumers.

NACHA's argument: if an FI that facilitates a money transfer, called an Originating Depository Financial Institution (ODFI), had to pay a fee when an exception occurs, it would have a financial incentive to reduce exceptions by providing more oversight over third-party money transfer providers.

"Taken together, these proposed rules will contribute to a holistic, interconnected approach to strengthening ACH network payments," NACHA said. "Both approaches are intended to protect the safety, security and integrity of ACH network payments and the consumers, governments, businesses and financial institutions who move their money via ACH."

Risk and enforcement

NACHA said the first proposed rule would reduce exceptions by strengthening risk controls. For example, implementing thresholds on the return rate of exceptions would "cause ODFIs to focus on reducing the number of returns and thereby reducing the number of risky transactions entering the ACH network," NACHA stated. The specific changes sought by NACHA include:

• Reducing the existing return rate threshold for unauthorized debits from 1 percent to 0.5 percent
• Establishing a return rate threshold for account data quality returns (that is, administrative returns) at 3 percent, and an overall debit return rate threshold of 15 percent
• Clarifying permissible and impermissible practices for the collection of ACH debits returned for insufficient funds and other reasons
• Explicitly applying certain risk management rules to third-party money transfer senders

Additionally, NACHA wants the authority to initiate enforcement proceedings for potential violations of the rules. "Unauthorized transactions within the ACH network have a particularly pernicious effect on ACH network integrity, creating significant reputational issues for RDFIs [Receiving Depository Financial Institutions] and the ACH network as a whole," NACHA said.

Network quality

NACHA noted that the second proposed rule would institute fees under the following conditions:

• When an RDFI returns an ACH transaction to an ODFI due to incorrect account data within the transaction
• When an RDFI corrects information within an ACH transaction and sends the correction back to the ODFI
• When an RDFI returns an ACH transaction to an ODFI due to a problem with the money transfer receiver's authorization

"For each of these incentives, the fee would be paid by the ODFI and passed through to the RDFI to partially offset the RDFI's cost for exception processing and customer service," NACHA said.

Issues with outliers

NACHA said that even among third-party money transfer providers that are deemed high risk because they deal with low income consumers, outliers exist that have confusing money transfer policies, and those policies result in high levels of exceptions due to insufficient funds. NACHA added that, at those outliers, consumers may not even "understand that s/he was authorizing an ACH transaction."

Of additional concern to NACHA are high-risk providers that deliberately circumvent ACH rules to submit, as if for the first time, returned money transfer requests. A rule called Reinitiation allows exceptions to be resubmitted under certain limited circumstances.

NACHA said it has "reason to believe that some high-risk originators may ignore or attempt to evade the requirements of the Reinitiation Rule, including by changing content in various fields to make an entry appear to be a new entry, rather than a reinitiation."

NACHA's executive summary of its proposed rule changes can be accessed at www.nacha.org/sites/default/files/files/ACH_Rules/2013%20RFC/ACH%20Network%20Risk%20and%20Enforcement%20Topics%20-%20Rule%20Proposal%20Description%20-%20November%2011%202013.pdf . Industry stakeholders have until Jan. 13, 2014, to comment on the proposals.

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