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How to Beat the NACHA Rule Now

NACHA1 is still in the process of adopting its final rule revising the Official Staff Commentary to Regulation E, which implements the Electronic Fund Transfer Act to permit the collection of check service fees without a written authorization from the consumer. The service fee ruling has been assigned to a rules workgroup for the next step in the approval process. In all probability, the pilot program for electronic service transactions will not conclude until sometime in 2002.

The only legal obstruction to the automatic collection of service fees is the NACHA rule2 requiring a separate transaction and separate signature for the collection of service fees. The dilemma can be succinctly summed up in one question, according to Peter Hoyt, president of National Payment Services, which processes electronic payments: "How does one obtain significant benefits of automatic service fee collection without violating the NACHA rule requiring a signature?"

The answer lies in the automatic collection of re-presentment service fees using Pre-Authorized Paper Drafts - a regular practice of Hoyt's company.

Pre-Authorized Paper Drafts are not electronic and therefore are not subject to the NACHA rulings. Paper drafts have been a legal form of payment for more than eight years and are explicitly established as a legal method for payment, as provided in the Uniform Commercial Code.3

Checks created by anyone other than the original checking account holder are called "paper drafts." The primary requirement for paper draft usage is that the checking account holder (customer) must give you oral or written pre-authorization to complete that transaction. Telephone checks (pre- authorized paper bank drafts) are also completely legal.

The Federal Trade Commission established rules on the telephone authorization of paper drafts, which are exactly what NACHA utilized when it established telephone authorization of electronic payments. Basically, the rules are that you must have an agreement from the customer authorizing you to create the paper draft.

Unfortunately, the NACHA rule sometimes is broken. Even though NACHA's enforcement of that ruling is lax at best, this is very important issue, and most merchants are not even aware of the peril involved when they break the rule.

When you break the NACHA rule, you are guilty of committing an unfair collection-practices action. That action comes under the Fair Debt Collections Practice Act,4 which states that major fines apply to any unfair collection. Therefore, any merchant who collects the service fee electronically based on a notice at the point of sale is liable to an FDCPA suit.

Processing Pre-Authorized Paper Drafts is much faster and less expensive than going through the efforts to contact a bad check writer and then still having to manually process another check. Once you have received pre- authorization, you really don't even need a signature on the paper draft, just as you don't need a signature on a phoned-in credit card order. Customer confidentiality is maintained, because the customer is providing no more information than what is required on the face of a standard check.

The information required to generate a paper draft is exactly the same information required to create an ACH payment. Additionally, there is plenty of space on a paper draft to put contact phone numbers and information for the collection agencies, etc., but with an ACH payment only a limited amount of information can be included.

"If we look at the legal agreement at the point of sale, and we have legal precedence to say that that transaction is indeed a legal agreement, then we should be able to authorize a paper draft," Hoyt said. "And, in fact, if it is not sufficient to authorize a paper draft, if it is not a legally binding agreement, then it wouldn't be sufficient to authorize an electronic payment, either.

"What we are looking at - and it is crazy for us because we are an electronic payments company - but we are saying that we are going back to paper drafts to capture these service fees, which is the only legal way that we can do it at the moment. This is all based upon the fact that the notice at the point of sale actually creates an implied contact. For some individuals that concept is a sticky issue.

"Nevertheless, if you don't believe that to be the case, then when NACHA finally changes the rule you still will not be able to follow the new NACHA rule because the premise is that the notice at the point of sale does not create an implied contract. However, you have to ask that if it doesn't create an implied contract, how come the Federal Reserve says that it's OK with them? How come NACHA attorneys say that it's OK with them? How come everybody says that it's OK with him or her?"

We know that if NACHA approves that rule, we will go electronic, and that will cut the costs in half as well as the time frame because it is faster to process transactions electronically. But, in the meantime, if you could collect a $25 service fee for way under $2, that's exceptional.

Not only does it allow you to collect the service fee, it allows you to totally change the way in which collections are accomplished - because if you couldn't get the service fee automatically, everybody would do electronic collection at the back end. Businesses report that if you can get the service fee automatically, which typically will clear 80 percent of the time, and collect the check, even old checks, the service fee will collect 80 percent of the time while completely eliminating the exorbitant NSF fees banks charge.

This will work well for both merchants and their collection agencies. It will drastically change the economics of how collections are done in the future. This is why we've tried to obtain the service fee electronically, because we knew that it would transform the way that collections are completed.

If NACHA approves the rule, and it is widely believed that this will occur in the next year or so, then it not only will save a small amount of money. This also presents the opportunity to change collection strategy now, because we have an enabling technology.

The advantages of using Pre-Authorized Paper Drafts in the interim are that customers do not have to:

Bring you a money order or cashier's check. Worry about postage, writing checks, timely mailings, late fees or the interruption of service. Receive a threatening collection letter. Answer an uncomfortable phone call. Go through the embarrassment!

And the merchant will:

Receive the scheduled payment on time.

Eliminate time spent invoicing and billing.

Eliminate collection calls to customers.

Have no software or hardware costs.

Invest no time in the process.

Reduce expenses associated with generating and mailing invoices/statements, receiving and depositing payments, and collecting on delinquent accounts.

In addition, the greatest advantage is that this action will legally "beat" the NACHA rule until the rule revising the Official Staff Commentary to Regulation E is finalized. When NACHA changes the service fees authorization rule, we can easily switch from using Pre-Authorized Paper Drafts to using electronic payments for the collection of service fees.

Footnotes:

1 National Automated Clearing House Association is the trade association that develops operating rules and business practices for the ACH network.

2 NACHA has not changed its authorization requirements for one-time ACH transactions, although the recent Reg. E interpretation permits (but does not require) NACHA to change such rules. Presently, the NACHA requirement for a signature for one-time ACH transactions, including collecting an RCK service fee through the ACH network, remains in force.

3 Uniform Commercial Code: Title 1, Section 1-201 [39] and Title 3, Sections 3-104, 3-403, 2-403 Code of Federal Regulations, Title 12 Chapter II, Part 210 Regulation J, Federal Reserve Bank, Part 2, Sections 4a-201 to 4a-212.

4 Fair Debt Collections Practice Act 15 USC 1692f, section 808


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