A New NACHA Rule Would Combat Returns on All ACH Debits

The national network for the automated clearing house system is sifting through comments on a new rule that would levy fines on banks that fail to reduce return rates to below 1% for all client originators and for all categories of ACH transactions. Within a week or so, says the National Automated Clearing House Association, it should have a sense of whether comments from banks on the new rule are running positive or negative. If they are largely supportive, NACHA hopes to have a ballot on the new rule out to voting members next month, with a Sept. 10 implementation date. The deadline for comments was June 18. NACHA introduced a rule a year ago limiting return rates on electronic checks initiated by consumers over the telephone?known by the ACH standard entry code TEL?to 2.5% for any single client originating such transactions. NACHA credits the rule for chopping the overall return rate for TEL from an alarming 1.34% of transactions in the third quarter of 2002 to 0.15% a year later. The return rate for all ACH debits at year end 2003 was 0.03%. Returns for TEL have historically been far higher than for any other type of ACH transaction. Now the Herndon, Va.-based trade group wants to lower the rate of acceptable returns for any single originator to 1% and extend the monitoring requirement beyond TEL to all standard entry codes, including transactions on the Web and electronic check conversions at the point of sale and in billers' lockboxes. Returned items for purposes of the proposed rule include transactions not authorized by the consumer and those for which the consumer revoked previously extended authorization. They do not include returns for non-sufficient funds. Some see the proposed rule as a response to the steady conversion of paper checks to electronic debits via the ACH, a process that brings with it the same check fraud besetting paper. “One thing we in the ACH industry have been struggling with is the potential for fraud and transactions that weren't authorized,” says Amy L. Smith, president and chief executive of The Payments Authority, a regional ACH association based in Troy, Mich. “We're sending a message that we're willing to put on limits and clean things up.” Under the new rule, NACHA would send a letter to an originating financial institution, or ODFI, to notify it of any client originators suspected of exceeding the 1% return threshold. Smith of The Payments Authority says the processors that handle ACH settlements?known as ACH operators?have collected historical data on return rates that show a 1% ceiling is reasonable for originating companies following ACH rules. The current ACH operators are the Federal Reserve and Electronic Payments Network LLC, based in New York. Once notified, the bank would have 10 days to respond to NACHA indicating whether the returns in question exceed the limit or not, and 30 days to draw up a written plan to reduce the rate. Once a bank submitted its plan, it would have 60 days to get the offending party under 1%. Any bank that fails to respond in a timely manner or that fails to reduce its client's return rate to under 1% would be subject to fines. Though NACHA says it's too early to gauge sentiment on the proposed rule, Smith says banks in her market, which includes all of Michigan except the Upper Peninsula, have largely bought in. “At first it was, 'One percent, isn't that kind of tight?' but when we shared the historical data from the operators they saw it was reasonable,” she says. She cautions, though, that the details of the rule could change, depending on how the comments turn out. And in any case, she's skeptical the rule will be implemented by the Sept. 10 target date. “Now [NACHA] has to digest comments and craft a ballot,” she says. “What is the likelihood they'll get this thing passed and in place by Sept. 10?”