Posts tagged ‘NACHA’

Why This Week is an Important One For Your Credit Union

This is not your average July week, especially for those credit unions located in the great state of New York.

July 15th is the target date for eligible members to start receiving child tax credits under the American Rescue Plan (ARP). That means that your credit union may already see federal government ACH payments being sent to your member’s accounts. This also means that your credit union has to decide both operationally and on a policy level how it is going to handle these payments.

In March, President Biden signed the American Rescue Plan. The Act increased the child tax credit from $2,000 to 3,000 and raised the age limit from 16 to 17. This year the tax credits will come in the form of advance monthly payments. Unlike the previous round of stimulus funding, Congress passed this measure using budget reconciliation and could not exempt these funds from Levy and restraint as a matter of federal law.

In March, New York State passed a law (S5923-A) that exempted federal stimulus check payments as well as tax refunds, recovery rebates, refundable tax credits, and any advances of tax credits for under the ARP from Levy and restraint under NYS law. The law does not protect child support payments. The language is intentionally written broad enough to include the tax credits that some of your members are going to begin to receive this week. In addition, the law prohibits state chartered financial institutions from the right of set off against these funds.

Against this backdrop, neither federal nor state credit unions have the legal authority to Levi or restrain these funds on behalf of third parties. In addition, state chartered credit unions don’t have the authority to set off these funds to satisfy delinquencies. Since federal credit unions have explicit authority under federal law to exercise a right of set off then they can set off these funds. Whether it’s smart to do so is an entirely different question.

The anticipated payments also underscore NACHA’s concern with the availability of payments under its existing rules. As I explained in this recent blog, financial institutions frequently receive ACH credits days before the sending entity wants the credits posted for payments. Right now, however, there are no penalties imposed against receiving institutions which make money immediately available to account holders. Later this week comments are due to NACHA about whether or not the existing regulations should be changed. The association would love to get your feedback on this issue.  

July 12, 2021 at 9:56 am Leave a comment

When Does Your Credit Union Make ACH Credits Available?

The repeated rounds of stimulus checks and the practices of many FinTechs have underscored the fact (subscription required) that there is often a time lapse between the time a credit union receives ACH credits and the settlement date that the originator (ODFI) stipulates those funds be made available.  Does your credit union make these funds available immediately?  If so, is it increasing its own risk?

These are the questions NACHA is asking financial institutions to consider as it analyzes the existing payment framework and considers placing more responsibility on financial institutions that choose to credit accounts prior to the specified settlement date. 

Here is a very basic example of what I am talking about.  The federal government sends out a high volume of ACH credits reflecting payments on tax refunds, social security payments and those stimulus checks.  According to NATCHA, the settlement date can often be three or four business days after these funds are received by your credit union.  My sense is that many credit unions make these funds immediately available.  Technically, however, the credit union is actually advancing its own money assuming that it can simply reclaim its advances when the credits actually become effective.  Legally, this assumption is a safe one to make.  While there are exceptions to every rule, a bedrock principle of the NATCHA system is that the originator of an ACH is warranting that the money will be available on the settlement date.  (See NATCHA rules Subsection 2.4.1) 

Crucially, these warrantees are made at the time that a file is transmitted, not at the specified settlement date.  This means that if a receiving depository financial institution advances its own funds to make funds such as directly deposited paychecks available sooner than the settlement date, it has recourse against the originating institution in the event there are insufficient funds at settlement. 

In its request for comment, NATCHA is asking if the existing rules do not adequately allocate the risk of loss.  It points out, for example, that files are occasionally sent in error and creating lag time between when a file is transmitted and when it becomes available for use gives the originating institution time to request that its payment be reversed.  But this is a classic example of a seemingly arcane compliance debate that has big implications for consumers and customer service.  It seems to me that there are now millions of consumers out there who expect payments to be made available to them immediately.  The existing framework creates a black and white rule putting the originating financial institution on notice of its responsibilities the second it hits the send button. 

But this is just the opinion of one middle aged attorney who is distracted by dreams of watching his Islanders beat the Boston Bruins tonight.  The Association will be sending out a request for comments on this proposal to gauge credit union sentiment.  We’re curious to learn your thoughts.

June 9, 2021 at 9:50 am 1 comment

Governor Extends Vaccine Eligibility as CDC Extends Eviction Moratorium

In case you haven’t already heard, Governor Cuomo announced yesterday that starting today individuals 30 years and older can schedule vaccinations and individuals 16 years and older can start scheduling appointments on April 6th.

Is the CDC Guilty of Regulatory Overreach?

The Governor’s announcement came the same day that the Center for Disease Control announced that it would be extending a moratorium on evictions.  Aside from its practical significance, the CDC’s aggressive use of its regulatory authority may provide a vehicle for federal courts to further chip away at the judicial deference that has been afforded to agency determinations over the last 30 years.  As readers of this blog know, as the most heavily regulated financial institutions in the country, credit unions have a keen interest in any litigation dealing with the extent to which agencies can regulate in the absence of explicit congressional authority.

If you’re wondering why the CDC has the authority to block evictions in the first place, you are not alone.  Yesterday the United States Court of Appeals for the Sixth Circuit refused to issue a stay of a lower court ruling that ruled the CDC had exceeded its authority when it extended the eviction moratorium without Congressional authorization (Tiger Lily, LLC v United States Dept. of Hous. and Urban Dev., 21-5256, 2021 WL 1165170, at *3 [6th Cir Mar. 29, 2021]).  The ruling sets the stage for further litigation which may impact the status of evictions nationwide and could produce important rulings on how much authority agencies have to interpret federal laws.  Remember, that no matter what the court decides, states such as New York have the authority to issue eviction and foreclosure moratoriums and have done so.   

For those of you scoring at home (that’s a baseball reference since opening day is just two days away), in March of 2020 the CARES Act imposed an eviction moratorium that expired on July 25, 2020.  The CDC director extended this moratorium through December of last year.  Congress extended the moratorium until January 31st and when this authority expired, the CDC director extended the moratorium until March 31st and further extended it yesterday.  In exercising this authority, in the absence of congressional authorization, the director is relying on 42 USC § 264 which authorizes the CDC, acting through the Surgeon General to make and enforce regulations that “in his judgement are necessary to prevent the introduction, transmission or spread of communicable diseases.”  The logic of the CDC is that, in the absence of a nationwide eviction moratorium an increase in homelessness and crowded living arrangements will contribute to the spread of the disease. 

In refusing to uphold the CDC’s previous order, the Sixth Circuit explained that “…we cannot read the Public Health Service Act to grant the CDC the power to insert itself into the landlord-tenant relationship without some clear, unequivocal textual evidence of Congress’s intent to do so. Regulation of the landlord-tenant relationship is historically the province of the states.”

NACHA Releases List of Top ODFIs

Just in time for this morning’s blog, Nacha has issued this press release detailing the most active financial institutions when it comes to ACH transactions over the past year.  This year’s statistics are more intriguing than usual because they provide a snapshot of how the pandemic has accelerated the trend towards electronic payment options.  According to Nacha the top 50 originating financial institutions processed more than $23B in payments last year, an 8.4% increase and the top 50 receiving institutions witnessed an 11% increase.  What I find intriguing about these numbers is how the ACH network continues to be dominated by a relative handful of financial institutions even as the Nacha network becomes more ubiquitous. 

March 30, 2021 at 9:55 am 1 comment

What Not to Do With Those $600 Relief Checks

The IRS has already started sending out the $600 checks authorized as part of the long-awaited COVID relief stimulus (SEC. 6428A). With these payments has come an unprecedented level of scrutiny to deposit procedures and garnishments. Here are some of the key provisions to keep in mind.

Many of you have already begun to receive checks deposited via ACH. As Nacha explained, these payments “will be identified with a Company Name of ‘IRS TREAS 310’ and a Company Entry Description of ‘XXTAXEIP2’.” The real tricky part begins when this money actually hits your accounts. If you remember, certain financial institutions were criticized for setting off the first round of payments, and the new legislation is accompanied with prohibitions making it clear that this money is not to be garnished or set off. For instance, page 63 of the Administrative Provisions stipulates that these funds are not to be used to facilitate a levy or offset as a matter of federal or state law. 

I know for many of you that some of this is easier said than done. For instance, how are you going to handle the automatic actions taken by your systems on accounts that are already overdrawn? Last week, the New York Times highlighted the commitment of larger institutions to solve this problem by bringing their consumer accounts even for a limited period. For those of you who either do not want to or cannot take this step, I would consider putting a notice on your website explaining how members can obtain their stimulus payment.

January 5, 2021 at 11:03 am Leave a comment

Important ACH Changes Right Around the Corner

In 1974, when a bunch of major banks got together in California and created a network to facilitate the electronic payment of paper checks, the internet wasn’t even called the internet. It was used by only a handful of universities to facilitate research, much of which was funded by the Department of Defense. Fast forward to today. What we now call the world wide web was used to expedite an estimated 24.7 billion transactions in 2019. That’s before we knew what COVID-19 was. 

Why am I presenting you with this interesting factoid? Because in March 2021, the NACHA Operating Rules are changing in a way that will place more legal responsibility on financial institutions that originate Web Based Debits. A web transaction is generally a debit of a consumer account using the internet or a mobile device to verify the consumer’s account. Specifically, the new rule reads as follows:

(a) Fraud Detection Systems. The Originator has established and implemented a commercially reasonable fraudulent transaction detection system to screen the debit WEB Entry.

(a) Fraud Detection Systems. The Originator has established and implemented a commercially reasonable fraudulent transaction detection system to screen the debit WEB Entry. Such a fraudulent transaction detection system must, at a minimum, validate the account to be debited for the first use of such account number, and for any subsequent change(s) to the account number.

(b) Verification of Receiver’s Identity. The Originator has established and implemented commercially reasonable methods of authentication to verify the identity of the Receiver of the debit WEB Entry.

(c) Verification of Routing Numbers. The Originator has established and implemented commercially reasonable procedures to verify that the routing number used in the debit WEB Entry is valid.

Remember, the NACHA system consists of originators, which are businesses that enter into contracts with banks and credit unions to participate in the ACH network. This network electronically sends payment information to receiving depository financial institutions. By making this change, originating depository financial institutions will be warranting the legitimacy of the account number. This has always been a best practice, but by making it a warranty, originators are now on the hook for a greater number of fraudulent transactions. The change is being made because under the ACH system, the institution initiating a payment transaction is typically in the best position to detect the fraud. 

If you aren’t aware of this change and your credit union is an originator of ACH transactions, the good news is you still have time. The network is giving participants an additional year to incorporate these updates to their transactions, provided they take steps to comply with the changes. For those of you who act as receivers of ACH transactions, you should anticipate seeing more micro debits as originators verify the validity of account numbers. 

December 2, 2020 at 9:32 am Leave a comment

The Complexity of the ACH Network and Why it Matters to You

Good morning, folks. I’ve always prided myself on keeping the bank bashing on this blog to a minimum. It’s one of the things that I like about the credit union industry in general: it is not anti-bank as much as it is pro-credit union. Besides, so much of the back and forth between the two industries ends up being a counterproductive waste of time, which does little to advance the interests of your average credit union or community bank.

Today, I’m making an exception because the situation I’m going to discuss involves the complexities of the ACH system while underscoring how foolish it is for community banks and their associations to continue to waste so much of their lobbying fire power on credit unions. The real culprit is a federal political system that has made it increasingly difficult for community banks and credit unions to survive. Today’s blog examines the ACH legalities, and tomorrow’s blog will get into how this case demonstrates why so much of the credit union bashing is misdirected. As you read about the facts, think about the implications for your third-party vender management, as well as your oversight of your vender’s vender.

The sorted tale starts in early August. According to an FBI complaint and a civil complaint filed in one of the first lawsuits, Michael Mann, founder of MyPayrollHR and several other companies, had been kiting millions of dollars in checks between his accounts at Bank of America and Pioneer from August 1st through August 30th of 2019.

MyPayrollHR had a longstanding contract as a client of Pasadena-based Cachet Financial Services. This contract allowed MyPayrollHR to use Cachet’s ACH services to move funds electronically from the bank accounts of MyPayrollHR’s employer-clients to Cachet’s settlement account, where money was then transferred to the bank accounts of employees. Cachet acted as the originator of MyPayroll’s transactions. According to a civil complaint, in early September, Mann manipulated Cachet’s ACH batch file instructions to cause over $26 million to be transferred to numerous bank accounts of companies controlled by Mann.

Before Cachet could find the fraud, it made ACH payments from the master account to employees around the country. Cachet made news when it reversed these credits in an attempt to claw some of them back when it discovered that the money had never actually been deposited, and that Mann did not have money in his bank accounts to cover the shortfall. The result was that the money that had been properly credited to accounts under ACH rules suddenly disappeared. In the meantime, Pioneer, a local savings bank headquartered in the Albany area, which has taken aggressive steps to grow over the past year, moved quickly to freeze Mann’s accounts, as did local branches of Bank of America, but the damage had already been done.

All this compelled Nacha to come out with a rare public statement on September 13th. Why was Nacha so upset by Cachet’s attempted claw back? First, payroll processing is a core ACH activity, but even more importantly than that, receiving depository financial institutions have to be able to rely on the validity of ACH transfers, or the system falls apart. Specifically, take a look at Chapter 12 of the Nacha Operating Guidelines (subscription required). They explain that reversals are allowed in instances in which erroneous or duplicate files have been sent. In this case, there is nothing erroneous about the files. Cachet mistakenly relied on Mann’s honesty, which is why they are suing him.

In the meantime, Pioneer has had to postpone required filings it is responsible for now that it is a mutual holding company traded on NASDAQ. Tuesday, it came out with this press release explaining that it could be delisted. Pioneer’s role in this story says a lot about the true causes of community bank consolidation, and that’s what I will talk about tomorrow.

 

October 24, 2019 at 10:41 am 1 comment

Add Same-Day Processing To Your Compliance To-Do List

The Federal Reserve yesterday decided to go along with NACHA and mandate that all financial institutions be able to provide same-day payment of ACH transactions. Currently, a credit union receiving an ACH has until the next business day to complete the transaction. This mandate will be phased in starting September 23rd 2015 and is slated to be fully operational by March 16, 2018.

The shift to mandatory same day processing capability seems like a really big deal to me but has so far not generated all that much excitement in CU Land. . Under the new framework NACHA envisions two “submission and settlement windows” of 10:30 a.m. ET with settlement occurring at 1:00 p.m. and an estimated afternoon submission deadline at 3:00 p.m. ET with settlement occurring at 5:00 p.m. The Receiving Depository Financial Institution will receive a Same Day Entry fee of 5.2 cents for each same-day transaction (That’s right, we are seeing the birth of a new fee for merchants and financial institutions to squabble over for years, nay decades, to come).

If you’re a small credit union concerned about the costs of implementing same day processing the Fed feels your pain…to a point. In approving these changes it noted that upgrading to accommodate same day processing may impose new costs on smaller institutions but  it concluded “that exempting small institutions would undermine the ubiquity—and therefore the utility—of the service.” It also rejected the use of a tiered fee system with smaller institutions getting more than 5.2 cents. Remember not all parties will request same day processing. The Fed expects that any additional expenses will ultimately borne by the customer requesting expedited settlement.

I know a few of my more astute readers are asking isn’t this old news? Yes and No. NACHA already approved changes to its operating rules in May 2015. The Fed, along with the Electronic Payments Network operates the ACH system and it requested feedback on whether or not it should go along with the plan. In addition, the fed has offered financial institutions the option of voluntarily providing same day settlement since 2010 but less than 1 percent of FedACH customers are using the service.

This moves the payment system one step closer to where it ultimately has to be: real-time clearance. As your average consumer gets used to paying at the checkout line with a wave of her IPhone and settling a bar tab by simply transferring money into her friend’s account the idea of a gap between payment and settlement won’t be acceptable. Here is a link to the Fed’s announcement and a link to a previous blog I did on the subject,

http://www.federalreserve.gov/newsevents/press/other/20150923a.htm

https://newyorksstateofmind.wordpress.com/2015/07/07/what-is-the-future-of-same-day-processing/

 

 

September 24, 2015 at 9:23 am Leave a comment

ACH System Scores Crucial Victory

Financial institutions and advocates of a vibrant electronic payment system won a crucial early victory in a federal courthouse in New York last week. Specifically, a federal judge dismissed a lawsuit seeking to sue Bank of America for honoring ACH debit transactions to pay for payday loans. The court ruled that the bank did not violate its account agreement or engage in unfair or deceptive practices when it followed electronic clearinghouse rules.

Why is this ruling so important? Because the lawsuit is an outgrowth of an attempt by New York’s Department of Financial Services to brow-beat banks and credit unions into refusing to process payday loans. To understand the importance of this case, look at the number of ACH debit transactions your credit union will process today. Imagine if you could not rely on the representations made by the bank originating the transaction that the debits are legally authorized. Conversely, imagine if your member could hold you responsible for every ACH transaction, even if they have contractually agreed to let a merchant pull money from their account. My guess is that the ACH system would grind to a halt, and quickly.

In Costoso v. Bank of America (14-CV-4100), a plaintiff took six payday loans with out-of-state lenders. As is common with almost all payday loans, when she entered into these agreements, she agreed to authorize the payday lenders to request that payments be electronically debited from her account over the ACH network. The plaintiff argued that the bank violated its own account agreement and various New York laws by processing payments for loans that violated New York’s interest-rate cap on non-bank lenders of 16%. She pointed to language in the account agreement stipulating that the bank would strictly adhere to NACHA operating rules, which governs ACH transactions. These rules require financial institutions to block ACH transactions that it knows to be unlawful or unauthorized.

The court rejected this argument. In a crucial passage that all NACHA members should memorize, the court held that even if the defendants were obligated to comply with NACHA rules with respect to debits on consumer accounts, “defendants may rely on the representations of the original depository financial institutions, the bank that processes the ACH debit for the payday lender.” This sentence reaffirms one of the most important lynchpins of the ACH network.

I can already hear consumer groups bemoaning this decision. So, let’s be clear on what it does not do. It does not legalize payday loans in New York. Perhaps future plaintiffs should sue banks that knowingly hold accounts for out-of-state payday lenders who offer such loans in New York. In addition, the ruling means that credit unions and banks don’t have to hesitate before honoring a member’s request that payments to their health club, for example, be automatically debited from their account. This is good for consumers.

March 2, 2015 at 8:36 am Leave a comment

Clamping Down On Payday Loans, Cont’d. . .

The extent to which states can block payday lending activities and the role financial institutions, including credit unions, should play in this effort continues to be an issue that is vexing regulators, law enforcement and the judiciary.

An article in this morning’s New York Times demonstrates why the issue is so confusing. On the one hand, it highlights how the Justice Department is targeting financial institutions as the choke point of payday lending activities. However, the same article shows that legislators, such as Darrell Issa of California, are critical of such efforts complaining that the Justice Department is trying to deter perfectly lawful lending activities. Who’s right and who’s wrong? The truth is that there is no definitive answer to either one of these questions and that how you answer it depends on where you live.

First, some basics. The Internet has made it incredibly easy to export financial products across state lines. New York, with its usury limits, has always effectively banned payday loans. However, federal law contains no such prohibitions as applied to banks. It has always been possible for a federal bank located in a state with no usury limit to offer payday lending options to New York State residents. However, the growth of the Internet has greatly expanded the marketplace for such offers.

There are two separate paths that have been taken to deter payday lending. One approach is to make financial institutions utilizing the ACH system more closely scrutinize payment requests coming from payday lenders. The other is to have the Court issue injunctions against payday lending activity.

Under the first approach, when a member enters into a payday lending agreement, these agreements typically include authorization for the lender to electronically pull money from the borrower’s account. Generally speaking, when an originator such as a payday lender originates such a payment request, the primary obligation to assess whether the payment is in fact authorized is on the institution with which the business has a banking relationship (the Originating Depository Financial Institution). Rules being proposed by NACHA would generally lower the threshold after which originators are obligated to further scrutinize such payment requests. On Friday, the FTC weighed in favoring NACHA’s approach.

But according to New York State’s Department of Financial Services, which has also commented on the proposal, NACHA’s proposal is a step in the right direction but does not go far enough. According to the Department evidence “that illegal payday lenders continue to use the ACH system to effectuate illegal transactions demonstrates that there are insufficient consequences for exceeding the return rate threshold. More effective enforcement of NACHA rules is necessary to prevent originators from engaging in illegal conduct through the ACH network.”

The problem is that what might be illegal to New York State’s Department of Financial Services is a perfectly legitimate business activity when viewed from the perspective of a Californian congressman. A federal district court judge in New York has ruled that the state has the authority to regulate payday lending activity when conducted over the Internet even when such activity is originated by a financial institution on an Indian Reservation. In contrast, California state courts have reached the exact opposite conclusion. A recent decision ruled that California’s financial regulator did not have the authority to impose fines on payday lenders controlled by Indian tribes. See People v. Miami Station Enterprises, 2d District, CA Court of Appeals (January 24, 2014).

If all this sounds confusing, it’s because it is. Ultimately, Congress or the Supreme Court, will have to decide if states have the ability to regulate payday lending and if so, under what conditions. The use of NACHA rules to regulate unseemly but arguably legal activity is destined to be an ineffective way of dealing with payday lending.

January 27, 2014 at 9:12 am 4 comments

Who’s Pay Day Loan Is It Anyway?

As readers of this blog and those credit unions unfortunate enough to get caught in the cross fire know, the state has taken aim against pay day lenders who provide loans to New Yorkers.  Specifically, in early August it sent out cease and desist letters to 32 Internet pay day lenders; criticized NACHA rules for not enabling institutions to do more to block the processing of pay day loans; and sent a letter to 117 institutions, including credit unions, strongly urging them to assist the state’s efforts in curtailing pay day lending activity.

Among the pay day lenders subject to the state’s wrath were Indian Tribes based in Michigan and Oklahoma.  These tribes have sued the state claiming that its activities interfere with their sovereignty.

Round One of what may end up being a very protracted legal dispute went to the state.  For those of you who like boxing, the fight is not over yet, but let’s say the Indian Tribes certainly received a standing eight count.  In The Otoe-Missouria Tribe of Indians, et al v. NYS Department of Financial Services, et al, the Tribes sought to get a preliminary injunction blocking the state from further interference with its payday lending activity.  As a general rule, preliminary injunctions are granted to parties who can show that they are likely to win in a lawsuit and are being harmed by the ongoing activity over which they are suing.  The issue comes down to whether or not Internet activity takes place on Indian land.  It is pretty well settled that activities taking place wholly on Indian reservations are exempt from state law unless Congress says otherwise.  The Indian tribes argued that they own and control the websites through which the payday loans are offered and that consumers are clearly informed that payday loans are subject to tribal law.

In its ruling, the Court said that none of this mattered since “consumers are not on a reservation when they apply for a loan, agree to the loan, spend loan proceeds, or repay those proceeds with interest.”  The Court concluded that consumers “have not in any legally meaningful sense travelled to tribal land.”  New York State can regulate this off-reservation activity.

The decision still leaves credit unions and other financial institutions whose members receive pay day loan proceeds via ACH transactions (so called “receiving depository financial institutions”) in a legal grey area.  Simply put, it is still not realistic to expect RDFIs to monitor where a specific electronic transaction originated and if it is legal in that given jurisdiction.  If any changes are to be made, the onus has to be placed on the institution originating the requested money transfer since that institution is in the best position to know if the activity being triggered is lawful.  However, the decision does strengthen the state’s hand as it seeks to clamp down on Internet payday lenders.

Perhaps the best thing about this weekend for Giants fans is that we aren’t obligated to sit through three hours of losing football on Sunday.  We already got that out of our system last night.  There’s always hockey season and basketball is right around the corner.  Your faithful blogger is taking some time off next week, but I should be back before week’s end.  In the meantime, let’s hope common sense prevails and that most politicians realize, like my four year old already does, that defaulting on debt payments is a BAD thing to do.

October 11, 2013 at 8:09 am Leave a comment


Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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