The New NACHA Rules & Regulatory Compliance. Marsha Jones, TPPPA Bonnie Finley, EFT Network Kirk Chewning, Strategic Link Consul@ng

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2 The New NACHA Rules & Regulatory Compliance Marsha Jones, TPPPA Bonnie Finley, EFT Network Kirk Chewning, Strategic Link

3 NACHA s Risk Management and Enforcement Rule was accepted by NACHA vo?ng members on August 22, The rule was designed to improve the overall quality of the ACH Network by reducing the incidence and associated costs of returns, (both financial and reputational,) to the Network and its participants. Two- Fold Approach to Reducing Risk Expand existing rules regarding ODFIs and Third-Party Senders requirements for risk management and origination practices. Expands NACHA s authority to initiate enforcement proceedings for unauthorized ACH entries.

4 Various components of the Risk Management and Enforcement Rule became effec?ve at different?mes over the past year. Varied Dates NACHA s Increased Enforcement Authority - (1/1/2015) Clarification of Third-Party Sender (TPS) Requirements- (1/1/2015) New Return Rate Levels (9/18/2015) Implementation of Inquiry and Review Process (9/18/2015) Clarification and Expansion of the Reinitiation Rule (9/18/2015)

5 The ACH Rules Enforcement Panel has an expanded role related to various aspects of the Risk Management and Enforcement Rule. The Panel falls under the Na?onal System of Fines and is the final authority regarding the imposi?on of fines when there is a viola?on of the rules. Panel members par?cipate in monthly conference calls. Makeup of NACHA s Rules Enforcement Panel The Federal Reserve Bank A private- sector ACH Operator A large asset size commercial bank (greater than $100 billion) A medium asset size commercial bank ($5 billion to $100 billion) A small asset size commercial bank (less than $5 billion) A credit union A Regional Payments Associa?on

6 NACHA s expanded enforcement authority related to unauthorized entries became effec?ve on January 1, Impact of Expanded Enforcement Authority Provides NACHA express authority to bring enforcement action based on the origination of Unauthorized Entries in an expedited manner. Requires the ACH Rules Enforcement Panel to validate materiality before NACHA can initiate enforcement proceeding. Encourages RDFIs to provide NACHA with information indicative of improper authorization, without requiring initiation of the traditional Rules Enforcement Proceeding.

7 Third- Party Payment Processors, know as Third- Party Senders under the NACHA Rules have been increasingly scru?nized by NACHA. NACHA clarifies the responsibili?es of Third- Party Senders in the Risk Management and Enforcement Rule. of Third- Party Senders Establish, implement, periodically review and enforce exposure limits for their originators. Monitor each originator s origination and return activity across multiple settlement dates. Enforce exposure limits. Conduct annual ACH Rules Compliance Audit

8 NACHA has been monitoring return rate levels for Unauthorized Returns for several years but has reduced the allowable rate by half and has added two new return rate levels, Administra:ve Returns and Overall Debit Returns. Return Rate Levels Unauthorized Returns -.05% Return Codes R05, R07, R10, R29 and R51 Administrative Returns 3% Return Codes R05, R07, R10, R29 and R51 Overall Debit Returns 15% All debit returns including Administrative and Unauthorized categories May exclude RCK entries

9 ODFI Return Rate Repor?ng to NACHA has been in effect for unauthorized returns for several years and is expanded to included administra?ve and total debit returns in certain circumstances. Components of Return Rate Procedure ODFI receives letter from NACHA (10 days to respond) ODFI must provide actual return rate data based upon two optional calculations Must reduce return rate below violated within 30 days of receipt of the letter Must maintain rate below required level for an additional 180 days

10 The new Inquiry and Review procedure provides an opportunity for an ODFI to justify the business reason for its originator exceeding either the Administrative or Overall Debit Return rate levels prior to executing the Return Rate Reporting procedure. Components of Inquiry & Review Procedure ODFI receives letter from NACHA (10 days to respond) ODFI must provide actual return rate data based upon two optional calculations AND additional information for consideration by NACHA NACHA may determine that no further action is required or recommend the Panel require the ODFI to reduce the return rate(s). Panel determines whether to close the case, or instruct NACHA to send a written directive requiring ODFI to reduce return rate(s). The Panel is the final authority.

11 NACHA and the Panel may consider the following information when determining the outcome of the Inquiry and Review procedure. Factors of Review Time in business,?me originated through the ODFI; Volume of forward and returned debit entries Amount by which return rate is exceeded; Unauthorized Entry Return Rate; Return rates for affiliates, or evidence returns allocated among affiliates; Evidence of compliance or non- compliance with Rules on Reini?a?on; Number of Rules viola?ons or RDFI complaints; Existence of inves?ga?ons or legal/regulatory ac?ons by any governmental agency involving the company, its principals, en??es with which its principals are or have previously been associated, or its current affiliates; Number and materiality of consumer complaints alleging fraud or decep?on related to the products/services offered by the company or its ACH origina?on prac?ces/ and Any other relevant informa?on submi^ed by the ODFI.

12 NACHA clarified the rules related to Reinitiation of Entries and added additional formatting requirements and consequences for violating the Reinitiation rules. Components of Rule Entries may be reinitiated two times for insufficient (R01) or Uncollected (R09) funds. Must submit Reinitiated Entries as a separate batch that contains the word RETRY PYMT in the Company Entry Description field. Must contain identical content as the initial entry in the following fields: Company Name, Company ID, and Amount Improper Reinitiations and can be returned as R10 (Unauthorized) for: Different amount than original entry Adding a fee to the original entry Reinitiating any entry returned Unauthorized Initiation of any entry believed by NACHA to be an attempt to evade the limits of Reinitiation.

13 Bonnie Finley EFT Network Payment A Processors Perspec@ve

14 While to date we know of no ac?ons taken by NACHA under the new rules. We believe NACHA inquiries are inevitable. The challenge will be accep?ng ACH payments while staying under the lowered return thresholds defined by NACHA. Use mixed payment types as a ve`ng tool, verifying rou?ng and account informa?on before running a NACHA regulated ACH payment. First Transac@ons In Loan Repayment is NOT an ACH - Use a check type transac?ons as first deposited item for your loans as a Ve`ng Tool. - This can clear your way back into ACH and allow you to stay within the new lower return limits - This does not require crea?ve volume modifica?on techniques

15 Lenders and other High Risk Organiza?ons can reduce the risk of receiving returns due to incorrect rou?ng or account numbers by processing your first debit transac?on as a check. Why It Works - If the check clears, you know the Rou?ng and Account Informa?on is good - Funds were available - There are no administra?ve return issues to worry about - You should be able to process following payments as ACH items - A cleared check can also aid in providing evidence of a valid authoriza?on

16 If The Check is Returned If return reason is NSF or UCF, then (with proper no?fica?on) you can RCK the item up to 2 more?mes [RCK is exempt from the 15% over all return rate] If the check is returned for other than NSF or UCF, you will need to contact the consumer, this informa?on was gained without increasing your ACH return rates. If you RCK the item for a second presentment, and it clears, your probably ok to ACH the next payment. If your second RCK is returned, for NSF or UCF, you can RCK for a final Third a^empt although you may want to remain in check processing for this consumer with an op?on to RCK eligible returns. In each of these RCK presentments, when ge`ng a return for other than NSF or UCF, you will need to contact the consumer for an alternate form of payment.

17 The best way to mix payment types is to leverage exis?ng technology, digital signature sokware can create a legal signature on a paper check, electronically. Example of Electronic Paper Checks TxtaCheck from EFT Network is a sokware that facilitates the crea?on of a check that can be digitally signed by a consumer with their finger or a mouse, smart phone or computer. Lender creates check drak via a web interface that is a legally nego?able instrument A text or is sent to the consumer with a link to the secure page that asks the consumer to confirm the banking informa?on and sign the check The Lender can then print and remote deposit the checks to their bank account Service providers can print and batch deposit checks on the Lenders behalf

18 Kirk Chewning Strategic Link ConsulAng Impacts and Conclusions

19 In order to remain compliant and be able to retain its payment processors many operators have or will have to alter their customer acquisi?on and recovery processes due to the new NACHA 15% max return rate rule. Many in the online lending industry have averaged 20% return rates or even higher in the past. The movement to sub 15% has been a year long process and one that some are s?ll trying to perfect. Customer Acquisi@on/ Underwri@ng New Porlolio limita?ons Growth limita?ons Lead Provider Considera?ons (price, acceptance, etc.) Bo^om?er lead impact Organic Marke?ng Development Limita?ons Credit Scorecard?ghtening (reducing credit available)

20 Due to the new rules it is clear that the biggest changes from operators will be made in the recovery area. Those with access to many payment strategies and willing to edit their strategies fairly dras?cally will be able to succeed. Recovery - Some may limit collec?on a^empts from 3 ACH total to 2 or poten?ally 1 a^empt - Analyze every type of payment a^empt automated or manual in nature (scoring and data analysis) - Innovate with other payment strategies including poten?ally customer push strategies - Work closer with collec?on agencies and debt buyers to make sure they are not exceeding the payment a^empts

21 In summary the rule changes will force the following things to occur: The lead marketplaces will change poten?ally in volume, price, etc. The rule created a barrier to entry to new lenders, new porlolios, new scorecards, etc. This barrier is not ideal and may stagnate growth of innova?on by new players in the market Some consumers will not get access to credit due to stricter underwri?ng that is required Opportunity for banks to pick up these customers They probably will not Opportunity for store front lenders to pick up customers that previously were on line Taking away convenience and an op?on for the consumer A small customer subsec?on may pay less return fees which is very favorable Less customer complaints Collec?on agencies may see less worked paper crea?ng an up?ck in their businesses if they can capitalize and harness addi?onal value Mixing of new payment types will be one of the keys to success. The card processing space is not currently taking advantage of the opportunity however should consider it Push payment strategies that are highly innova?ve and easy for the consumer to use will begin to be prevalent on a small scale

22 QUESTIONS?