wespay aap exam preparation series session 6: ach ... aap exam preparation series session 6: ach...

Western Payments Alliance 1

WesPay AAP Exam Preparation SeriesSession 6: ACH Regulations &

Government PaymentsJohn Curtis, AAP NCP, SVP Education

Connie LaChance, AAP, AVP of EducationJim Petkovits, AAP, NCP, VP of Education

Patty Presta, AAP, VP, Professional Development Events

© 2016 Western Payments Alliance. All rights reserved. No reproduction/distribution without prior written consent.

WesPay, as a Direct Member of NACHA, is a specially recognized and licensed provider of ACH education, publications and support. Regional Payments Associations are directly engaged in the NACHA rulemaking process and the Accredited ACH Professional (AAP) program.This material is derived from collaborative work product developed by NACHA ─ The Electronic Payments Association and its member Regional Payments Associations. This material is not intended to provide any warranties or legal advice, and is intended for educational purposes only. © 2016 Western Payments Alliance (WesPay). All rights reserved.

NACHA owns the copyright for the NACHA Operating Rules & Guidelines.

The Accredited ACH Professional (AAP) is a registered service mark of NACHA.

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Agenda

» Regulation E (12 CFR 1005)» Uniform Commercial Code Article 4A (UCC 4A)» Regulation D (12 CFR 204)» Regulation CC (12 CFR 229)» Federal Reserve Operating Circular 4» Office of the Comptroller of the Currency Banking

Circular 235 (OCC 235)» OFAC, FinCEN, USA PATRIOT Act, BSA» Green Book (31 CFR 210)» Garnishments (31 CFR 212)

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Objectives

» To become familiar with fine points of related industry standards and regulations associated with ACH network

» To become familiar with Federal Government’s role and use of ACH Network

» To understand provisions and guidelines initiated by Federal Government

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Regulation E

» Implements Electronic Fund Transfer Act (EFTA) of 1978• Establishes basic rights, liabilities and responsibilities of

consumers who use electronic fund transfer serviceso ATM, debit card and ACH transactions

» Found in Title 12, Code of Federal Regulations, Part 1005 (12CFR1005)

» Administered by Consumer Financial Protection Bureau (CFPB)

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Regulation E Defines “Electronic Fund Transfer”» “Any transfer of funds that is initiated through an

electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit an account.”

» Regulation does not use words “credit” or “debit” but instead says “electronic funds transfer to an account” or “electronic funds transfer from an account””

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Regulation E

Initial Disclosure

» Written or electronic» Disclosure of business

days» Permissible transactions» Fees/charges» Rights regarding receipts,

statements, notices» Liability for unauthorized

transactions» Stop payments» Error resolution

Periodic Disclosure» Monthly when EFT activity» Amount of transfer» Date of debit/credit» Type of account and

account number» Party debiting/crediting

account» Terminal ID» Fees» Balances in account» Address/phone to report

errors

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Regulation E-Electronic Terminal Receipt Requirements» Electronic Terminal is:

• “An electronic device, other than a telephone operated by a consumer, through which a consumer may initiate an electronic fund transfer.”

» Includes, but not limited to:• POS Terminals• Automated Teller Machines• Cash Dispensing Machines• MICR Reader at checkout for POP

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Regulation E

» Disclosure requirements for ACH POS transactions• Card issued by a third-party other than the account

holding financial institution

» Error resolution handled by card issuer and consumer

» No periodic statement from card issuer if certain requirements met

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Regulation E Error Resolution

» Error defined as:• Unauthorized or incorrect transfer• Missing entry from periodic statement• Bookkeeping error• Incorrect amount on ATM receipt• Incorrectly identified entry• Consumers request for more information regarding

electronic funds transfer when they assert there may be error

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Regulation E – Error Resolution

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Action ACH Debit Card ExceptionConsumer notifies DFI of error

Within 60 days of statement date

Within 60 days of statement date

Within 90 days of statement if debit card issued by third party

DFI investigation 10 business days 10 business days 20 business days if error occurred in new account

DFI investigation completed

Advise consumer within three business days; if error confirmed, correct within one business day

Advise consumer within three business days; if error confirmed, correct within one business day

DFI investigation incomplete

Provide provisional credit; must complete within 45 days of consumer notification

Provide provisional credit; must complete within 45 days of consumer notification

Provide provisional credit; must complete within 90 days of consumer notification for new account debit


Uniform Commercial Code(UCC) Article 4A and ACH» Governs “wholesale credit entries”, including wire

transfers and non-consumer ACH credits• ACH credits not subject to EFTA-primarily CCD/CTX

» Comprehensive body of state law/Choice of law» Some provisions may be altered through agreements

while others cannot• ODFI/Originator, ODFI/TPS and deposit agreements

» Determines liability of parties» KEY CONCEPT – Acceptance of payment order

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Notice by ODFI

» Following must be included in notice – notice may be part of agreement with Originator or provided separately• Entry may be transmitted through ACH• Rights and obligations concerning entry governed by and

construed in accordance with laws of New York, unless Originator and ODFI have agreed that laws of another jurisdiction shall govern their rights and obligations

• Credit given by RDFI to Receiver is provisional until RDFI has received final settlement from Federal Reserve Bank

• If RDFI does not receive such payment for entry, RDFI is entitled to refund from Receiver in amount of credit

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UCC 4A and the ODFI

Disclosures need to contain following:» Responsibility based on: ACCEPTANCE » Execution date can be varied by Funds Transfer Rule» Liability cannot be varied if instruction is improper or

delayed» Originating company MUST pay Originating Financial

Institution on execution date» Non-acceptance by notice ONLY

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UCC 4A - Commercially Reasonable Security» To determine commercially reasonable, you should

consider:• Size of financial institution• Size of Originator• Type of origination activity

o SEC codeo Frequency of transactionso Nature of business

• Similarly situated Originators doing similarly related business

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UCC 4A - Commercially Reasonable Security» Originator and ODFI must agree to security procedures

» When offered by ODFI, if refused by Originator, alternate procedures by Originator must be agreed upon• Originator accepts liability

» Signature comparison alone is not considered to be commercially reasonable

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UCC 4A and the RDFI

» Disclosures need to contain following:• All same as for ODFI—PLUS:• Notice need not be provided by RDFI to Receiver unless

RDFI has agreed

» NO return after acceptance

» Obligation based on acceptance

» If RDFI fails to make funds available they are liable for consequential damages

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Regulation D

» Establishes level of reserves financial institutions must hold at Federal Reserve Banks• Reserves are based on deposits in transaction accounts

» Defines transaction account• Any deposit account, even if technically savings account,

that allows six or more electronic transfers or withdrawals per month


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Regulation CC

» Implements Expedited Funds Availability Act of 1988• Speeds up availability of deposited funds

» NACHA Operating Rules provide for better funds availability than Regulation CC


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FRB Operating Circular 4

» Federal Reserve Bank’s terms and conditions of its functions as ACH Operator

» Governs clearing and settlement of ACH credit and debit entries

» Governs debit and credit processing windows

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OCC 235

» Office of the Comptroller of the Currency (OCC)

» Applies to national banks

» Relates to DFI’s responsibilities for Network risk identification• Includes ACH Network

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OFAC

» Office of Foreign Assets Control

» Administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals

» Not bank regulator

» OFAC requirements are separate and distinct from BSA, FinCEN and USA PATRIOT Act

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OFAC and ACH

» NACHA Operating Rules reflect “Know Your Customer” (KYC) principle

» Domestic ACH• ODFI – Know your Originator• RDFI – Know your Receiver

» International ACH• ODFI and RDFI must screen all information in IAT

transaction (e.g., all participants to transaction and remittance information)

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FinCEN

» Financial Crimes Enforcement Network

» Oversee and implement policies to prevent and detect money laundering• Administer Bank Secrecy Act

» Provide intelligence and analytical support to law enforcement

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USA PATRIOT Act

» Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001

» Combats international terrorism and money laundering

» Requires financial institutions to have Customer Identification Program (CIP)

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Customer Identification Program

» Financial institutions must complete following prior to opening new account:• Verify identity of any person seeking to open account• Maintain records of information used to verify identity• Consult government known suspected terrorist lists to

determine whether person appears on list

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BSA

» Bank Secrecy Act of 1970• Requires U.S. financial institutions to assist U.S.

government agencies to detect and prevent money laundering

• Financial institutions must: o Keep records of cash purchases of negotiable

instrumentso File reports of cash transactions exceeding $10,000

(daily aggregate)o Report suspicious activity

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BSA “Travel Rule”

» Incorporated into IAT Entries• Requires following information to “travel” with payment

throughout processo Name and address of Originatoro RTN/Account Number of Originatoro Name and address of Receivero RTN/Account Number of Receivero Amount and transaction dateo Reason for payment

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EFT Mandate

» Provided for within Debt Collection Improvement Act of 1996

» All payments made by Federal government to individuals and companies must be via electronic funds transfer• Vendor Express• Direct Deposit• Direct Express® Debit MasterCard®

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EFTPS

» Electronic Federal Tax Payment System• Directed by IRS and FMS

» Methods of payment• EFTPS Direct (ACH debit)• EFTPS through financial institution (ACH credit)• Same-day payment through Fedwire®

» Businesses with $2,500 or less in quarterly tax liabilities are exempt

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Electronic Signatures in Global & National Commerce Act» E-sign Act

• Gives electronic signatures and documents the same force in law as those done with ink

• Allows the electronic collection and storage of documents • Allows disclosures requirements to be provide

electronically

» An Originator that is in compliance the E-Sign Act is considered to be in compliance with the NACHA Operating Rules and Regulation E

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Federal Government ACH

» Title 31, Code of Federal Regulations, Part 210 (31CFR210)• Federal regulation for “Federal Government Participation

in the ACH”• In 1999 adopted NACHA Operating Rules

o Exempts certain rules

» Green Book• Procedure manual for financial institutions• https://www.fiscal.treasury.gov/fsreports/ref/greenBook/do

wnloads.htm

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FOMF

» Financial Organization Master File

» Department of Treasury’s master list of financial institutions receiving Federal Government ACH payments

» Used to transmit payments, reclamation notices and trace inquiries

» Maintained by Federal Reserve Banks

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Federal Government ACH

» Collecting and disbursing agents for agencies of the Federal Government • Financial Management Service (FMS)

o Social Security Administration, Railroad Retirement Board, Office of Personnel Management, Department of Veterans Affairs, Health Care Financing Administration, etc.

• Department of Defense (DoD)» Payments include

• Federal salary and travel reimbursement, benefit, and vendor payments, including service providers and grant or program recipients

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Consumer Enrollment

» Direct Deposit of government payments (e.g., Social Security benefits and tax refunds)

» Enrollment methods• GoDirect.org• Automated Enrollment Entry (ENR)• Paper (SF 1199A or 1200)• Telephone

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Consumer Enrollment

» Account requirements• Federal government benefit payment enrollments MUST

be established for account that is in name of recipient with following exceptions:o Representative payee selectedo Investment accounto Waiver granted by Treasury

• RDFI could be held liable for noncompliance if they are involved in enrollment processo Paper o ENRo GoDirect.org

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Corporate Enrollment

» Direct Deposit of vendor payments• Vendor Express

» Can use paper enrollment (SF 3881)• RDFI must validate corporate account holder and financial

institution information• RDFI must have authorized official sign form

» ACH formats used: CCD or CTX

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Prenotifications

» Optional use by government agencies• Social Security originates prenotifications for all new

Direct Deposit enrollments

» RDFI must, at minimum, verify account number

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Misdirected Payments

» Federal payment directed to account number other than that owned by entitled payee

» Payment may be• Unpostable• Directed to valid account owned by someone other than

entitled payee

» RDFI to promptly notify agency when it becomes aware of this situation

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Posting and Availability

» Payment posting• May rely solely on account number• Must inform agency if RDFI learns that name and account

number do not match• Must return entry that cannot be properly posted

o May not hold payment in suspense account or open new account

» Availability of funds• PPD credits must be available for withdrawal by opening

of business on Settlement Date• CCD and CTX credits must be available for withdrawal on

Settlement Date

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Consumer Claims Nonreceipt

» Recipient notifies RDFI» RDFI verifies receipt/return of entry or notifies recipient

to contact government agency» Agency notifies FMS» FMS investigates

• Manual non-receipt process• Telephone non-receipt process (vendor and salary

payments)• Tele-TRACE (SSA, SSI, and VA payments)

» RDFI must respond to trace request

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Return of Government Payments

» Entry must be returned if:• Enrollment is terminated• Beneficiary/representative payee has passed away or

become legally incapacitated• Death Notification Entry (DNE) or other death notification

received from federal agency• Account is closed• Payment cannot be posted

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Effect of Returning a Payment

» Automatically suspends Direct Deposit • May stop further payments from federal agency

» Entries returned in error may require new enrollment form from recipient

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Government NOCs

» May only be used to correct banking information contained in recurring benefit payment

» May not be used to change financial institutions or for name changes

» Six NOC codes authorized

» Refused NOCs• Only Social Security Administration, Office of Personnel

Management, and Railroad Retirement Board have capability to send

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Death Notification Entry (DNE)

» DNE is non-monetary ACH entry with addenda record• Addenda contains date of death, deceased payee’s Social

Security Number and amount of next scheduled benefit payment

» DNE received from one federal agency constitutes notification by all federal agencies sending recurring benefit payments

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Government Reclamations

» Procedure used to recover benefit payments made through ACH to account of recipient or beneficiary who died or became legally incapacitated

» Applies to recurring benefit payments only• Social Security, Supplemental Security Income and

retirement income

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Federal Government Reclamations Time Frames» 120 day rule

• Reclamations should be sent within 120 days of agency discovering death of beneficiary

» 60 day rule• Financial Institutions must respond to all reclamations

within 60 days to limit their liability to 45 day amount» 45 Day Amount

• Amount of money that posted into account from date of death until 45 calendar days later

» 1 Day Rule• Financial institution must verify account balance within 24

hours of receipt of reclamation

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Reclamation Regulation

» Notice of Reclamation (FMS-133)• Federal agencies must initiate within 120 calendar days

after having “actual or constructive knowledge” of death of recipient

• Request could include benefit payments up to six years from date of reclamationo Exception: Account balance in excess of six-year

amount

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RDFI’s Liability

» Full liability• RDFI did not respond accurately and timely to Notice of

Reclamation

» Limited liability (45-day amount)• RDFI had no knowledge of death at time of payment• RDFI returned all payments received after learning of

death• RDFI responded accurately and timely to Notice of

Reclamation

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Erroneous Reclamations

» Recipient is alive• Terminate reclamation process by returning Notice of

Reclamation within 60 days

» Date of death is incorrect• Notify federal agency via Notice of Reclamation (copy of

death certificate required)

» Federal government may issue subsequent Notices of Reclamation

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Treasury Direct

» Method by which Treasury marketable securities, bills, notes and bonds are maintained in book-entry form

» Payments to investors by direct deposit• Principal, interest and original issue refunds

» Enrollment in Direct Deposit is automatic• Establish new Treasury Direct account• Purchase security

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Government ACH Collections

» Preauthorized debits• Payments such as licensing fees, grant repayments and

loan payments• Recurring or single entry

» Remitter required to complete Authorization Agreement for Preauthorized Payments form (SF 5510)

» Remitter’s account is debited and federal agency’s account is credited

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Government Check Conversion

» ARC, BOC and POP• Available to any federal agency• All checks eligible for conversion

o Business checks with Auxiliary On-Us field are converted to image

• Notice equals authorizationo Unlike NACHA Operating Rules, POP entries do not

require written authorization• Collection of service fee for entries returned as insufficient

and uncollected fundso Notice equals authorization

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Authority for Garnishment Rule

» Title 31, Code of Federal Regulation, Part 212

» Guidelines for Garnishment of Accounts Containing Federal Benefit Payments• Issued by U. S. Department of Treasury’s Financial

Management Service* (FMS) March 2011• Is included at end of Chapter Two in Treasury’s Green

Book, A Guide to Federal Government ACH Payments and Collections

*Now called “Bureau of the Fiscal Service” (BFS)

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Garnishment Rules Pertaining to Federal Government Payments» Upon receipt of garnishment order:

• Determine if United States is plaintiff• If not, review account history to determine if account

received any exempt benefit payments• If so, determine lesser amount of protected received

benefit payments or amount in account• If there is protected amount, notify account holder• Ensure hold is not placed on protected amount

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References & Recommended Reading

» 2016 NACHA Operating Rules & Guidelines: A Complete Guide to the Rules Governing the ACH Network

» ACH Compliance Manual: How to Comply with ACH-Related Rules & Regulations

» Title 12, CFR, Part 1005 (Regulation E), http://www.consumerfinance.gov/eregulations/1005

» Revised Uniform Commercial Code Article 4A and The Automated Clearing House Network

» Green Book: A Guide to Federal ACH Payments, Bureau of the Fiscal Service, U.S. Department of Treasury, https://www.fiscal.treasury.gov/fsreports/ref/greenBook/greenbook_home.htm

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Questions???

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Next Session

» ACH Technical Specifications and Rules Enforcement» Homework

• Technical Standards & formats: Rules Compliance and Rules Enforcement (Pages 66-73) of the 2016 Accredited ACH Professional Handbook

• Appendixes 1 through 11 of the 2016 ACH Operating Rules

• Take practice exams in “AAP quiz part 7”

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Questions? Please contact us at:

300 Montgomery St, Suite 400San Francisco, CA 94104

Phone: 415-433-1230Fax: 415-433-1370www.wespay.org

[email protected]

Payments Hotline - 415-373-1200 or [email protected]

Participants from other Regional Payments Associations are encouraged to contact your Regional Payments Association directly. You can find them here: www.nacha.org/regpayassoc

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