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Letters to Regulators

Return Entry Monitoring

June 18, 2004

NACHA - The Electronic Payments Association
Attn: Maribel Bondoc, Network Services Associate
13665 Dulles Technology Drive
Suite 300
Herndon, Virginia 20171

RE: Rules Work Group #54- Return Entry Monitoring-Request for Comment

Dear Ms. Bondoc:

The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to comment on NACHA's proposed amendments to its ACH Operating Rules that bolsters the risk management provisions for ACH debits by further utilizing return entry monitoring.


Two challenges face NACHA and the ACH network: (1) improve network quality and decrease the volume of returns and notifications of change, and (2) develop methods to effectively manage risk in response to rapid network growth.

For over thirty years, the ACH network has proven a safe and reliable payment method that has enabled banks of all sizes to debit and credit customer accounts electronically. With the introduction of the Represented Check Entry (RCK) in 1998, the ACH network has released several innovative ACH debit applications that enabled banks and their merchants to use the ACH network as a method to convert paper checks into electronic transactions, or to replace check use all together.

The results of this shift have been dramatic. The Federal Reserve reported that commercial ACH volume increased by 12.1 percent in 2003. Correspondingly, paper check volume is on the decline. The Federal Reserve System reported a 5% decline in 2002 in its check processing volume and a 5.8% decrease in its first quarter 2004 volumes. Additionally, for the first time in the history of the ACH network, commercial debit volume has surpassed that of credits.

However, this growth has been accompanied by growing pains. NACHA estimates a 20% growth in unauthorized returns over last year. These returns present an operational burden for receiving banks (RDFI) and impair the integrity of the ACH network.

To address these needs, NACHA added an amendment to the NACHA Operating Rules in June 2003 that allowed NACHA the right to request an ODFI to provide specific information related to originators of telephone initiated transactions (TEL), when the return rate for unauthorized TEL transactions appears to exceed 2.5%. Since then, the return rate for TEL transactions has decreased from1.34% to 0.15%.


Rules Work Group #54 - Risk Management Issues has proposed a rule amendment that would improve ACH network quality by reducing the number of unauthorized transactions. The proposal would:

  1. Expand the current return entry monitoring requirements related to unauthorized Telephone-Initiated (TEL) Entries to include all unauthorized entries.

  2. Lower the rate for investigation of unauthorized return entries from the current level of 2.5% to 1 %.

  3. Add a procedure addressing ODFIs that exceed the monitoring limit. Once an ODFI acknowledges that its unauthorized rate is above 1 percent, the ODFI would be responsible for developing, within a thirty-day period, a written plan to reduce the return rate to less than 1 percent within sixty days of the submission of such a written plan. If the ODFI is not responsive or is not able to reduce its return rate for unauthorized entries within the required timeframe, the ODFI would be subject to a possible fine under the National System of Fines (up to $10,000 for willful disregard).

Specific information that the ODFI must provide to NACHA concerning any Originator that appears to have a return rate for unauthorized (R10, R29, R51) and authorization revoked (R07) entries that exceeds 1.0% will include a calculation of the Originator's actual return rate for those transactions. If the Originator's actual return rate for those entries exceeds 1.0%, the ODFI must also provide:

  1. The name, address, telephone number, contact person, principal owner(s), and taxpayer identification number for the Originator and, if applicable, any Third-Party Service Provider acting on behalf of the Originator with respect to the origination of ACH entries,

  2. A general description of the nature of the business of the Originator, and

  3. An explanation of the reason for the excessive return rate.

The provision of this information to NACHA is not in conflict with the privacy requirements contained within the Gramm-Leach-Bliley Act. This proposed amendment would affect only those ODFIs with an apparent problem with excessive return rates for unauthorized/authorization revoked entries. The proposed amendments would be effective September 10, 2004 upon approval by the NACHA Board of Directors.

ICBA Comments

The ICBA fully supports this proposed amendment as a starting point to control risk and improve network quality. Broadening return entry monitoring to include all unauthorized debits and lowering the return entry monitoring rate will bolster existing risk management provisions and help improve network quality. The expenses incurred to implement these provisions would be offset by improved network quality.

Additionally, the ICBA supports the proposed process for dealing with originators who exceed the monitoring percentage as a first step. The sixty-day time frame is ample enough for originators to make the necessary adjustments. However, the method of how and when NACHA would approach violators of the return entry monitoring rate needs to be codified. Additionally, no prescribed monetary penalties were suggested. We encourage NACHA to continue to define a fair and efficient manner of accessing fines to ensure network quality without requiring banks to pursue litigation.

The ICBA also encourages Rules Work Group #54 to remain active and consider implementing additional risk management measures and strengthen existing risk management provisions. The return entry rate and penalties for disregarding this should be annually revisited and strengthened as needed.

The issue of invalid account numbers concerns community banks, as these returns constitute a significant portion of all returns. Frequently these returns occur because banks are not vigilant in communicating to their customers the importance of using new routing and account numbers after a merger. NACHA should conduct a cost impact study to see whether the impact of monitoring of invalid account numbers would significantly increase ACH processing costs.

However, this proposal fails to address the burden on RDFIs to research and process unauthorized debit returns. For the RDFI, an unauthorized debit requires time and effort to capture and store the affidavit, research the customer's account, and return the transaction. The RDFI is penalized for the Originators failure to obtain an authorization from the customer. The ICBA supports the concept of a network return entry fee and awaits the recommendations of Rules Work Group #35, Enforcement Issues.

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 cary.whaley@icba.org.


Cary Whaley
Associate Director, Payments Policy

1 ICBA represents the largest constituency of community banks in the nation and is dedicated exclusively to protecting the interests of the community banking industry. We aggregate the power of our members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace.

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