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Letters to Regulators
Network Return Entry Fee
December 15, 2004
NACHA - The Electronic Payments Association
RE: Rules Work Group #35-Network Return Entry Fee
Dear Ms. Bondoc:
The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to comment on NACHA's proposed amendments to its NACHA Operating Rules designed to improve ACH Network quality and redirect the financial responsibility for costs associated with processing unauthorized Automated Clearinghouse (ACH) debit transactions by assessing a Network Return Entry Fee (NREF).
Overall, ICBA enthusiastically supports NACHA's proposal to revise NACHA Operating Rules to address the current economic inequities associated with unauthorized ACH debit transactions and to bolster ACH Network quality and integrity by assessing a NREF. Our comments are summarized below.
The ACH is in a dynamic growth environment, a direct result of the recent introduction of five ACH applications to facilitate transactions online, by phone, and by converting paper checks to electronic entries. This increase in volume has resulted in an increase in unauthorized transactions. In 2003, there were 2.79 million unauthorized transactions. These transactions are expected to increase to 3.27 million in 2004. Improving overall quality and integrity is essential for the ACH Network to remain viable in a digital marketplace.
Currently, the RDFI bears the burden associated with processing unauthorized transactions that they cannot police. The RDFI must accept the warranties provided by the ODFI, including a warranty that the transaction is authorized. Therefore, in today's environment, the party that is bearing the cost cannot mitigate the risk of the transaction.
This proposal recommends that a NREF ranging from $13-$18 be assessed on banks that originate unauthorized ACH debits.2 The NREF would compensate the RDFI for costs associated with the transaction and would compensate NACHA for its risk management program. Additionally, the NREF is designed to remedy the economic imbalance in processing unauthorized transactions and the overall quality of the ACH Network.
The NREF would be established and reviewed by the Return Entry Fee Panel, a seven-member panel representing financial institutions and ACH operators under oversight by the NACHA Board of Directors. A Return Entry Fee Panel would be established to determine and review the NREF. This panel would be composed of two large asset size (greater than or equal to $10 billion) financial institutions, two small asset size (less than $10 billion) financial institutions, two ACH operators and a regional payments association.
The Return Entry Fee Panel would determine the NREF based on a series of RDFI quantifiable cost components. The NREF would consist of 100% of the costs that WILL occur with each unauthorized transaction and 40% of the costs that MAY occur. Additionally, the panel will determine the cost components that NACHA incurs in managing payment system risk, including the National System of Fines, the Surveillance and Risk Alert System, ACH Network Rules, legal, staff and overhead support. The NACHA Board of Directors has the right to veto the proposed fee within 15 days by a two-thirds vote.
Each ACH Operator would provide NACHA a monthly report with the total number of entries returned as unauthorized by the RDFI and received by the ODFI. NACHA (or a designated agent) would then net-settle NREFs received with NREFs incurred into either an ACH credit or an ACH debit, depending on the net total. The aggregate NREF would be assessed monthly by NACHA (or a designated agent) based on the institution's net position as both an ODFI and RDFI. A bank would have five days to challenge if it believes that the calculation of the NREF was erroneous.
The proposed implementation date is June 17, 2005.
While not a part of the proposal, NACHA also requested comment on the inclusion of a compliance procedure that an ODFI could use if the RDFI fails to provide a WSSUP. The ODFI would initiate compliance action at the cost of $100 and if the RDFI were found in breach of warranty, it would be fined $200. If the RDFI failed to provide such a copy to NACHA, the NREF would subsequently be deducted from the RDFI and refunded to the ODFI. In addition, the RDFI would be charged a $200 fee and the ODFI would be refunded their $100 administrative fee. While not specified in the proposal, it is assumed that NACHA would use the remaining $100 as compensation for managing the compliance process. This would hold the RDFI accountable for its warranty and prevent frivolous returns.
The ICBA strongly supports assessing the NREF for unauthorized debits as a means to compensate banks for costs incurred in processing returns. The concept of automatically assessing a NREF to compensate the RDFI for costs associated with processing unauthorized transactions is a sound concept, which is currently employed in many card-based payment systems. The NREF remedies the existing economic imbalance while giving originators extra incentives to obtain proper authorization prior to originating the transaction, thus improving the overall quality of the ACH. Additionally, the ICBA urges NACHA to consider using the NREF for any return reason that has resulted from the lack of due diligence on the part of the ODFI and their customer, the originator.
NREF Determination/ Calculation
According to the proposal, a Return Entry Fee Panel would be established to determine and review the NREF. This panel would be composed of two large asset financial institutions, two small asset sized financial institutions, two ACH operators and a regional payments association. The ICBA applauds NACHA for including financial institutions of all sizes and urges NACHA to include the perspective of at least one community bank with assets less than $1 billion on the panel.
The proposal states that the NREF would be based on quantifiable costs that occur in each incidence of an unauthorized debit return and a percentage (40%) of quantifiable cost that occur in some, but not all, cases. Non-quantifiable costs (such as reputation risk) are not included in the calculations. The ICBA is particularly concerned with the wide variation of cost estimates in the proposal. The reasons for such disparity should be considered in order to establish and maintain a NREF that assures sufficient compensation for all parties. ICBA recommends that NACHA conduct a structured annual survey that measures the costs of financial institutions of all sizes should be established to serve as a primary tool in setting and reviewing the NREF.
Additionally, the ICBA urges NACHA to provide additional clarity on which cost components will be used to calculate NACHA's risk management assessment. Possible cost components include: related costs pertaining to the maintenance and billing of the NREF, the Surveillance and Risk Alert System, and the research and development of new risk management tools (such as a fraud database). Additional costs should be identified and quantified. Costs that are recoverable from other sources of revenue, such as the National System of Fines, or those currently covered by NACHA membership dues, such as ACH Network Rules development, should not be included as a cost component. The amount should be determined in the same manner as RDFI costs; non-quantifiable costs should not be used in determining the NREF.
The ICBA recommends that the NREF be reviewed annually to ensure that the fee structure is fair and balanced. We also recommend that fee changes be implemented no more than once per year to reduce market confusion.
Under the proposal, each ACH Operator would provide NACHA a monthly report with the total number of entries returned as unauthorized by the RDFI and received by the ODFI. The total amount of NREFs incurred would be subtracted from the total NREFs received and an ACH credit or an ACH debit, depending on the net total, would be sent by NACHA (or its designated agent). Banks that serve only as a RDFI will receive a credit for the fees received.
ICBA strongly opposes net settlement for NREF assessment. Keeping the debit and credit entries separate allows financial institutions to easily record and track the amount of expense (or income) and affords ODFIs the ability to easily pass NREFs to originators. ICBA strongly believes that debit and credit entries should be kept separate to facilitate prompt and accurate processing and reconcilement.
The ICBA strongly urges NACHA to develop strategies and metrics to effectively measure and monitor the success of the NREF. Reasonable timeframes and expectations should be established before the NREF is implemented. At a minimum, regular reporting should include: the number of unauthorized debits, the total of NREFs assessed, and the number of complaints received by NACHA with respect to the process.
For the current growth of the ACH Network to continue, an originator and its ODFI need protection within the NACHA Operating Rules to defend against instances of buyer's remorse. Currently, an ODFI that can produce a properly obtained authorization from that customer has to pursue costly and cumbersome legal action against its customer to recover its financial outlay. ICBA urges NACHA to explore ways of protecting the ODFI in instances where the ODFI has a valid customer authorization.
Written Statement Under Penalty of Perjury (WSUPP)
This proposal introduces much-needed accountability into the ACH Network. Originators are accountable for their warranties. Such accountability should flow both ways. When a RDFI returns an ACH debit as unauthorized, it warrants that it has obtained a Written Statement Under Penalty of Perjury (WSUPP) from the consumer. In an NREF environment, obtaining the WSUPP from the consumer becomes essential as it safeguards the ODFI from an inappropriate return. There are several issues pertaining to obtaining WSUPP from the RDFI that should be addressed in a NREF environment.
Currently, the RDFI has 60 days after the ODFI's request to provide a copy of the WSUPP. This is excessive since the RDFI has warranted that it has obtained a WSUPP. A timeframe of 15 days should be sufficient.
NACHA has proposed a compliance procedure where the ODFI can initiate compliance action for $100. If the RDFI failed to provide such a copy to NACHA, the NREF would subsequently be deducted from the RDFI and refunded to the ODFI. In addition, the RDFI would be charged a $200 fee and the ODFI would be refunded their $100 administrative fee. The ICBA agrees that RDFIs should be accountable within the rules to ensure they have obtained a WSUPP from the receiver, but feels that this proposal creates a painful bureaucracy for ACH participants. The ICBA urges NACHA to consider utilizing the system of fines to ensure that the RDFI has obtained a WSUPP from the consumer.
Currently, WSUPP requests and submissions occur via telephone and/or fax transmission. This could be done in a more efficient manner. The ICBA urges NACHA to consider employing electronic alternatives for the request and retrieval of WSUPPs.
While ICBA strongly believes that the NREF will improve ACH Network quality and economic balance among ACH participants, there remains the potential for abuse of the proposed NREF system. NACHA, in concert with regional payment associations and banking industry groups (such as the ICBA) should establish an educational program to instruct all stakeholders on how to identify and process unauthorized debits. This should assist all stakeholders in adapting to a NREF-based environment.
Initially, the NREF could affect all ACH participants negatively if implemented quickly. Sufficient time should be given for originators and ODFIs to put new procedures in place to prepare for the NREF environment. Each ODFI should carefully assess the impact of the NREF and alter its procedures accordingly. Additionally, RDFIs will need time to implement tracking systems to assist in accounting for the NREF. To provide stakeholders time to address these issues, ICBA recommends a one-year implementation timeframe.
Thank you for the opportunity to comment. For questions regarding our position on this issue, please contact me at (202) 659-8111 or by email at email@example.com.
Cary Whaley, AAP
1 The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the nation, and is dedicated exclusively to promoting the interests of the community banking industry. With nearly 5,000 members, ICBA members employ more than 225,000 Americans and hold more than $778 billion in total assets. For more information, visit ICBA's website at www.icba.org.
2 The following Return Reason Codes would be subject to the NREF: R05- Unauthorized Debit to a Consumer Account Using a Corporate SEC (Standard Entry Class) Code; R07- Authorization Revoked by Customer; R10- Customer Advises Not Authorized, Notice Not Provided, Improper Source Document, or Amount of Entry Not Accurately Obtained from Source Document; R29 - Corporate Customer Advises Not Authorized.