NACHA – The Electronic Payments Association by pengtt

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									                                         DRAFT DRAFT DRAFT

NACHA – The Electronic Payments Association
Rule Making Process
13665 Dulles Technology Drive, Suite 300 Herndon, VA 20171
Phone: 703/561-1100 Fax: 703/787-0996 www.nacha.org
Contacts: Deborah Shaw / Cari Conahan / Debbie Barr


                         DRAFT REQUEST FOR COMMENT
                RULES WORK GROUP #2/41, ELECTRONIC CHECK ISSUES

This Request For Comment (RFC) has been developed by Rules Work Group #2/41, Electronic
Check Issues, and the Electronic Check Council, under the solution creation step in the NACHA
Rule Making Process. Rules Work Group #2/41 is sponsored by the Electronic Check Council
and includes approximately tka volunteers. As part of the solution creation step, Rules Work
Group #2/41 is proposing a rule amendment that would require RDFIs to accept XCK entries.
This RFC is being sent to ACH participants in order to obtain their input on the recommended
solution and is composed of the following segments:


(1)     the recommendations of Rules Work Group #2/41,
(2)     draft modifications to the NACHA Operating Rules [not attached], and
(3)     Attachment A: an ACH Participant Survey [attached].


ACTION REQUESTED
ACH participants are encouraged to comment on this proposal by completing the attached ACH
Participants Survey. This RFC is being distributed for a comment period ending X, 2003.


BACKGROUND
In recent years, NACHA has developed a number of applications permitting the truncation /
conversion of checks and the subsequent origination of ACH debit entries for such payments.
One of these applications is the XCK (Destroyed Check Entry), which is a debit entry initiated in
the event an eligible item is contained within a cash letter that is lost, destroyed, or otherwise
unavailable to and cannot be obtained by an ODFI. Technically, the XCK application is neither a

  ____________________________________________________________________________________________________


This document was prepared for use by the Electronic Check Council Point of Deposit Work Group in March 2003 and is
not to be distributed outside the work group.
                                                              Rules Work Group #2/41, Electronic Check Issues
                                                    DRAFT Request For Comment – XCK Issues, xx/xx/03, Page 2


truncation or conversion application but XCK issues are often similar to those of the other
electronic check applications, and the application is therefore typically grouped with them. The
XCK application has been included in the NACHA Operating Rules since 1993.


Many ODFIs wish to require RDFIs to accept the XCK items because of the cost savings that
inure to both the ODFI and the RDFI when using an XCK entry instead of a paper draft. It is
typically less expensive to handle an electronic debit than a paper item. For the ODFI, significant
savings can be gained by not having to re-create a paper item. For the RDFI, it is typically less
expensive to handle the XCK entry than a paper draft. Currently, the NACHA Operating Rules
allow the RDFI to refuse XCK entries.


Legal Framework
An XCK entry is not deemed to be an “item” under Article 4 of the Uniform Commercial Code,
and neither transmittal to nor receipt by an RDFI of an XCK entry constitutes presentment of the
destroyed item. Further, an XCK item is not subject to Regulation E.


XCK Statistics
During 2001-2002, the ACH Network processed 248,215 interbank commercial (that is, non-
government) XCK transactions with a total dollar value of $58.6 million, or an average of $236
per transaction. The overall return rate was 17.79% overall, and the return rate for R33 (Return
of XCK Entry) was 5.78%. (For more detailed data on XCK transactions, see Appendix I at the
end of this RFC.)


NACHA Rule Initiatives
During the last year, the Electronic Check Council has conducted an in-depth study of the issues,
barriers, and risk related to several electronic check-related applications, including the XCK
entry. As a result of this analysis, this proposal recommends requiring RDFIs to accept XCK
entries.




  ____________________________________________________________________________________________________

This document was prepared for use by the Electronic Check Council Point of Deposit Work Group at the February 2003
Electronic Check Council meeting and is not to be distributed outside the meeting.
                                                              Rules Work Group #2/41, Electronic Check Issues
                                                    DRAFT Request For Comment – XCK Issues, xx/xx/03, Page 3


BARRIERS TO INCREASED USE OF THE ACH NETWORK TO TRANSMIT XCK
ENTRIES


Major barriers to the increased use of the ACH Network to originate and transmit XCK entries
are as follows:


     ODFIs are reluctant to originate XCK items because they anticipate that many XCK entries
      will be returned because they are XCK entries.1 For lost or destroyed checks that cannot be
      transmitted as XCK entries, the ODFI must re-create a paper item at a considerably higher
      cost than generating an ACH debit entry.
     The dollar limit of $2,500 on eligible items means that an ODFI has to sort eligible from
      ineligible items and process non-eligible items as paper items, thus eliminating some of the
      cost benefits of using XCK.
     Some RDFIs are reluctant to accept XCK items because they anticipate receiving enough
      customer calls concerning identification of the items such that the cost of handling those calls
      can exceed the cost savings from handling electronic items over paper drafts.
     Some ODFIs and RDFIs are uncomfortable with the legal status of XCK items, which are not
      covered by either the Uniform Commercial Code nor by Regulation E.


RULES WORK GROUP RECOMMENDED SOLUTIONS FOR REDUCING OR
ELIMINATING BARRIERS


To overcome the barriers that would allow the increased use of the ACH Network to collect XCK
entries, Rules Work Group #2/41 is recommending the following modifications to the NACHA
Operating Rules to require RDFIs to accept eligible XCK items. (Of course, an RDFI can return
any XCK item for the return reasons allowed by any ACH debit entry, such as insufficient funds,
account closed, and the like.)



1
 Recently, a major West Coast bank lost a cash letter and decided to use the XCK entry to replace the lost checks.
The RPA (Regional Payment Association) covering the geographic area of the FIs on which it was believed that
most checks were written sent a letter to its members requesting them to honor the XCK entries.
    ____________________________________________________________________________________________________

This document was prepared for use by the Electronic Check Council Point of Deposit Work Group at the February 2003
Electronic Check Council meeting and is not to be distributed outside the meeting.
                                                              Rules Work Group #2/41, Electronic Check Issues
                                                    DRAFT Request For Comment – XCK Issues, xx/xx/03, Page 4


     Require the ODFI to provide a copy of the underlying item, if one is available, within 10
      days of receipt of a request from the RDFI.
     Increase Receiver protection by allowing the RDFI to return an item if the Receiver disputes
      the item and ODFI cannot provide a copy within ten days of the date on which the ODFI
      received the request.
     Expand stop payment provisions so that stop payment orders must be provided to the RDFI
      at such time and in such manner as to allow the RDFI a reasonable opportunity to act upon
      the stop payment order prior to acting on the debit order.
     Establish usual rights of return within 2 days, and the usual ability to return unauthorized
      items within 60 days of the Settlement Date.
     Retain the current class of eligible items except to remove the $2,500 cap.
     Allow the ODFI to use the XCK entry for items lost in transit between an FI branch and its
      operation center.
     Clarify that the ODFI presentment warranty for endorsement is three years. Other ODFI
      warranties remain unchanged. (See Appendix I for more information on ODFI warranties.)


In addition, the group proposes that the Operating Guidelines encourage ODFIs to use databases
(or other data) to parse the MICR information before transmitting the XCK entries to help reduce
administrative returns.


CURRENT MARKETPLACE

Current NACHA Operating Rules


The current NACHA Operating Rules allow for the transmission of XCK entries.


PROPOSED NEW ENVIRONMENT


Legal Framework


The legal framework will remain the same.
    ____________________________________________________________________________________________________

This document was prepared for use by the Electronic Check Council Point of Deposit Work Group at the February 2003
Electronic Check Council meeting and is not to be distributed outside the meeting.
                                                              Rules Work Group #2/41, Electronic Check Issues
                                                    DRAFT Request For Comment – XCK Issues, xx/xx/03, Page 5




Authorization Requirement


XCK transaction will continue to be explicitly exempted from the authorization requirements of
NACHA Operating Rules. However, a Receiver can return an XCK entry as unauthorized.


Return Reasons


In addition to the usual reasons that an ACH debit entry can be returned, the Receiver can notify
the ODFI that the Originator has not been authorized to debit his account, and the request must
be made in writing within ten days after the RDFI sends or makes available to the Receiver
information pertaining to that debit entry. A Receiver may claim that an XCK transaction is
unauthorized if the ODFI was not able to provide a copy of the item within ten days of receipt of
the request from the RDFI.


An RDFI will no longer be able to return an XCK item only because it is an XCK item. Return
Reason code R33 will be no longer available for this purpose.


Formatting


This proposal recommends the continued use of the XCK Standard Entry Class Code for the
transmission of XCK items.


Dollar Limits


The Rules Work Group is proposing that there be no dollar limit established by the NACHA
Operating Rules on this application. Although most checks are written in an amount of under
$2,500, the cost effectiveness of the XCK application will decrease if an ODFI has to sort cash
letter content by amount and re-create paper items for any item of a value equal to or greater than
$2,500.

  ____________________________________________________________________________________________________

This document was prepared for use by the Electronic Check Council Point of Deposit Work Group at the February 2003
Electronic Check Council meeting and is not to be distributed outside the meeting.
                                                              Rules Work Group #2/41, Electronic Check Issues
                                                    DRAFT Request For Comment – XCK Issues, xx/xx/03, Page 6


BENEFITS


Benefits of Proposed Rule to Require RDFIs to Accept XCK Items


A number of general benefits to ACH participants will be derived from the proposed changes to
the NACHA Operating Rules governing the Destroyed Check Entry (XCK) application:


     Increases speed and cuts costs of collecting lost check items because ODFIs can send the
      item electronically rather than having to re-create a paper item that must be processed by the
      paper check clearing system.
     Typically decreases costs associated with collecting lost or destroyed paper checks.
     Increases ACH transaction volume.


Benefits to specific ACH participants include the following:


ODFI Benefits
     Enables ODFI to clear lost or destroyed checks more quickly and efficiently.
     Increases originated ACH volume.
     Speeds return of entries representing unpaid lost or destroyed checks, which helps to detect
      fraudulent transactions more quickly.


RDFI Benefits
     Provides enhanced customer protections. The Receiver will be able to obtain a copy of the
      underlying item within specified timeframes and will be able to return the item if the
      timeframe is not met.
     Enhances fraud protection for RDFI by being able to return an item as unauthorized. With a
      paper draft, the RDFI has only one day to return the item; with the ACH debit, the customer
      can return an unauthorized debit up to 60 days later.
     Gains efficiencies of electronic presentment of the underlying item; transactions can be
      returned more quickly and cost effectively than other forms of payment.
    ____________________________________________________________________________________________________

This document was prepared for use by the Electronic Check Council Point of Deposit Work Group at the February 2003
Electronic Check Council meeting and is not to be distributed outside the meeting.
                                                              Rules Work Group #2/41, Electronic Check Issues
                                                    DRAFT Request For Comment – XCK Issues, xx/xx/03, Page 7




Receiver Benefits


     Gains enhanced legal protections through the NACHA Operating Rules.
     Provides greater privacy of transactions because ACH payment information is handled
      electronically and cannot be read by people, unlike paper drafts.
     Provides customers with specific information about the transaction on the customer’s
      periodic statement (i.e., name of payee, date, and check serial number).




IMPACT TO PARTICIPANTS


ODFI


ODFIs will continue to have a choice as to whether to use XCK or to use traditional methods to
collect lost/destroyed items.


ODFIs must understand that this application is governed by NACHA Operating Rules but is not
governed by Regulation E. Further, these entries are not considered items under Article 4 of the
Uniform Commercial Code.


ODFIs need to ensure that they can respond to requests for copies of items within ten days of
receipt of the request from the RDFI.


ACH Operator


ACH Operators will need to disallow returns using the R33 Return Reason Code.


RDFI



    ____________________________________________________________________________________________________

This document was prepared for use by the Electronic Check Council Point of Deposit Work Group at the February 2003
Electronic Check Council meeting and is not to be distributed outside the meeting.
                                                              Rules Work Group #2/41, Electronic Check Issues
                                                    DRAFT Request For Comment – XCK Issues, xx/xx/03, Page 8


In general, these entries will follow the normal return time frames associated with consumer
debit entries.


RDFIs need to be able to process requests from Receivers for copies of the underlying item,
conveying requests to the ODFI in a timely manner and then sending the copy to the Receiver in
a timely manner.


Receiver


Receivers should be aware that if a check they have tendered is lost or destroyed, the payment
represented by that check may be debited from their account electronically.


The Receiver should also understand that they can request a copy of the item from the RDFI.


The Receiver should understand that the item can be returned as unauthorized in the manner of
other ACH debit entries.




Third-Party Service Providers


A third-party service provider acting on behalf of an ACH participant (i.e., Originator, ODFI or
RDFI) must establish procedures and processing requirements that ensure compliance with the
requirements of the NACHA Operating Rules.


TECHNICAL SUMMARY

The following changes to technical language within the NACHA Operating Rules are proposed
by this recommendation:

     Modifies Article Two, Subsection 2.7.1, Eligible Item
     Modifies Article Two, Subsection 2.7.3.1, Good Title to the Destroyed Check
     Modifies Article Two, Subsection 2.7.5, Copy of Item
     Eliminates Article Two, Subsection 2.7.6, Return of a Destroyed Check Entry
     Eliminates Appendix Five, Section 5.4, Table of Return Reason Codes, R 33
    ____________________________________________________________________________________________________

This document was prepared for use by the Electronic Check Council Point of Deposit Work Group at the February 2003
Electronic Check Council meeting and is not to be distributed outside the meeting.
                                                              Rules Work Group #2/41, Electronic Check Issues
                                                    DRAFT Request For Comment – XCK Issues, xx/xx/03, Page 9


     Modifies Article Two, Subsection 2.7.3, Warranties
     Modifies Appendix Five, Section 5.4, Table of Return Reason Codes, R52
     Modifies Operating Guidelines, Section IV, Chapter IV, Subsection C




PROPOSED IMPLEMENTATION DATE                                                            March 2004




    ____________________________________________________________________________________________________

This document was prepared for use by the Electronic Check Council Point of Deposit Work Group at the February 2003
Electronic Check Council meeting and is not to be distributed outside the meeting.
                                                             Rules Work Group #2/41, Electronic Check Issues
                                                  DRAFT Request For Comment – XCK Issues, xx/xx/03, Page 10




                                             XCK Return Rates
                                              1Q03 and 2Q03

                                                                   1Q03               2Q03
                Number of XCK transactions                        16,808              16,806
                Average transaction                                     $254                $195
                Overall % of items returned                       15.08%              23.74%
                  Average return item                                   $237                $240
                NSF/UCF return rate                               0.99%                0.96%
                  Average NSF/UCF return                                $139                $181
                Unauthorized return rate                          4.30%                3.85%
                  Average unauthorized return                           $316                $351
                Administrative return rate                        2.71%                3.03%
                  Average administrative return                         $246                $201
                R33 – Return of XCK Entry                         5.73%                7.31%
                  Average R33 return                                    $163                $218
                All other returns                                 1.34%                8.59%
                  Average other return                                  $351                $229
                                                      


                                                       ###




  ____________________________________________________________________________________________________

This document was prepared for use by the Electronic Check Council Point of Deposit Work Group at the February 2003
Electronic Check Council meeting and is not to be distributed outside the meeting.
                                                             Rules Work Group #2/41, Electronic Check Issues
                                                  DRAFT Request For Comment – XCK Issues, xx/xx/03, Page 11




                                                  Appendix II


Article Two, § 2.7.3, Warranties, lists and describes the following ODFI warranties for XCK
items (the descriptions are not included here):


2.7.3.1 Good Title to the Destroyed Check
2.7.3.2 Signatures are Genuine
2.7.3.3 Destroyed Check Entry Not Altered
2.7.3.4 No Defenses
2.7.3.5 No Knowledge of Insolvency
2.7.3.6 Destroyed Check Entry Accurately Reflects Item
2.7.3.7 Item Will Not Be Presented

                                                      ###




  ____________________________________________________________________________________________________

This document was prepared for use by the Electronic Check Council Point of Deposit Work Group at the February 2003
Electronic Check Council meeting and is not to be distributed outside the meeting.

								
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