Unauthorized Return Rate Threshold Q1: What is the new Unauthorized Return Rate Threshold? This rule reduces the return rate threshold for unauthorized debit entries from 1.0 percent to 0.5 percent. All other aspects of the Rules regarding the Unauthorized Return Rate Threshold remain the same. Q2: What return codes are included in the Unauthorized Return Rate Threshold? The Unauthorized Return Rate Threshold covers Return Reason Codes R05, R07, R10, R29, and R51. Q3: What SEC Codes are included? Unauthorized Return Rate Threshold covers debits using any SEC Code. It does not apply to credits returned as unauthorized. Q4: Does this rule change NACHA s current risk investigation and enforcement processes? No, the rule does not change any of NACHAs existing risk investigation or enforcement processes related to the Unauthorized Return Rate Threshold. Q5: How is an unauthorized return rate calculated? The Rules allow two methods to calculate an unauthorized return rate: 1. Dividing the number of debit Entries returned as unauthorized for the preceding sixty days or two calendar months by the total number of debit Entries contained within the ACH File(s) in which the original Entries were transmitted; or 2. Dividing the number of debit Entries returned as unauthorized for the preceding sixty days or two calendar months by the total number of debit Entries originated for the preceding sixty days or two calendar months, respectively. New Preliminary Inquiry Process for Administrative and Overall Return Rate Levels Q6: What is the new preliminary inquiry process? When an Originator or Third-Party Sender is identified as being above one of the new Return Rate Levels, NACHA would utilize this new preliminary inquiry process to review the facts and circumstances of that organization s ACH origination activity, rather than going directly into enforcement. Q7: Why is it called preliminary?
It is called preliminary because it is a new step taken prior to the beginning of an enforcement action, if one is started at all. The outcome of a preliminary inquiry could be that a review is closed with no enforcement action. Q8: What are the new Return Rate Levels? The rule establishes two new Return Rate Levels, which allow for the preliminary inquiry process: 1. A Return Rate Level of 3.0 percent will apply to debit entries returned due to administrative or account data errors (Return Reason Codes R02, R03 and R04). 2. A Return Rate Level of 15.0 percent will apply to all debit entries (excluding RCK entries) that are returned for any reason. Q9: How is a Return Rate Level different than the Return Rate Threshold for unauthorized debits? The most significant difference is that a return rate above a Return Rate Level will not be considered automatically as a violation of the Rules. Instead, a return rate above a Return Rate Level allows for a preliminary inquiry into an Originator s or Third-Party Sender s ACH origination practices and activity. The inquiry process may ultimately lead to a directive from an industry review panel to reduce a return rate, but only after dialogue and exploration of facts. Q10: What return codes are included in the Return Rate Levels? The Administrative Return Rate Level applies to Return Reason Codes R02, R03 and R04. This return rate level does not apply to returned credit entries. The Overall Return Rate Level applies to all Return Reason Codes for all debit entries (excluding RCK entries). This return rate level does not apply to returned credit entries. Q11: Why are RCK entries excluded? RCK Entries are excluded because, by definition, an RCK is a representment of a check payment that has already been returned for insufficient funds. This makes establishing a valid return rate level impractical. Q12: How is an administrative return rate or an overall return rate calculated? The Rule provides two methods to calculate an administrative return rate or an overall return rate. 1. Dividing the number of debit Entries returned either for administrative reasons (Return Reason Codes R02, R03 and R04 when calculating the Administrative Return Rate) or for any reason (when calculating the Overall Return Rate) for the preceding sixty days or two calendar months, by the total number of debit Entries contained within the ACH File(s) in which the original Entries were Transmitted (when
calculating the Overall Return Rate, RCK Entries and Returns may be excluded from both the numerator and denominator); or 2. Dividing the number of debit Entries returned either for administrative reasons (Return Reason Codes R02, R03 and R04 when calculating the Administrative Return Rate) or for any reason (when calculating the Overall Return Rate) for the preceding sixty days or two calendar months, by the total number of debit Entries originated for the preceding sixty days or two calendar months, respectively (when calculating the Overall Return Rate, RCK Entries and RCK Returns may be excluded from both the numerator and denominator). Q13: Does exceeding a Return Rate Level constitute a Rules violation? No, the identification of an Originator or Third-Party Sender with a return rate that is higher than the respective return rate level would not be automatically considered as a violation of the Rules. Instead, a return rate above a Return Rate Level allows for a preliminary inquiry into an Originator s business or ACH practices. Q14: Does this rule change NACHA s current risk investigation and enforcement processes? Yes, specifically for the Return Rate Levels, there would be a preliminary inquiry process used rather than automatically beginning a Rules enforcement proceeding. The identification of an Originator or Third-Party Sender may lead to a review of its business or ACH origination practices and activity. The inquiry process is an opportunity for the ODFI to present, and for NACHA to consider, specific facts related to the Originator s or Third-Party Sender s ACH origination practices and activity. At the conclusion of the preliminary inquiry, NACHA may determine that no further action is required, or may recommend to an industry review panel that the ODFI be required to reduce the Originator s or Third- Party Sender s overall or administrative return rate below the Return Rate Level Q15: What is the industry review panel? The industry review panel is composed of ACH experts from large and small financial institutions, Regional Payments Associations, and the ACH Operators. The panel meets regularly to review specific risk or enforcement cases. Q16: As an ODFI, do I need to reduce an Originator s return rate below 15 percent? The rule does not automatically require an ODFI to reduce an Originator s return rate below 15 percent; as such, it is meant to be flexible in accounting for differing needs of a variety of businesses. The rule would require an ODFI to reduce an Originator s return rate below 15 percent if directed to do so by the industry review panel. As an ODFI, you should determine how you monitor an Originator s return rates, and the return rates or changes in return rates that constitute red flags. As an ODFI, you should recognize that for specific
Originators or Third-Party Senders with return rates above the Return Rate Levels, you might be subject to the preliminary inquiry process. You should consider what you would present as facts and documentation related to the review criteria defined in the rule, should you ever be asked to do so by the industry review panel. Q17: Does exceeding a Return Rate Level cause an immediate fine? No. The identification of an Originator or Third-Party Sender with a return rate that is higher than the respective Return Rate Level would not automatically cause the assessment of a fine. Fines are a possible outcome only at the conclusion of an enforcement proceeding. Q18: Who decides fines? In all cases, the industry review panel is the final authority in deciding and assessing fines for violations of the NACHA Rules. Q19: What factors will the industry review panel consider in determining whether to direct an ODFI to reduce an Originator s return rate? In reviewing the results of a preliminary inquiry, the industry review panel can consider a number of factors, such as: 1. The total volume of forward and returned debit Entries; 2. The return rate for unauthorized debit Entries; 3. Any evidence of Rules violations, including the rules on reinitiation; 4. Any legal investigations or regulatory actions; 5. The number and materiality of consumer complaints; 6. Any other relevant information submitted by the ODFI. Q20: Will the Rule impact low-volume Originators? The Return Rate Levels are intended not to disproportionately impact very low-volume Originators. Low volume is a defined circumstance in the existing process that the industry review panel can take into consideration when determining whether to assess a fine for a Rules violation. In addition, an Originator s total volume would be a defined factor in the new inquiry process that can be considered prior to determining whether to require an ODFI to reduce the Originator s return rate. Through these mechanisms, NACHA thinks that low-volume Originators currently are, and would continue to be, largely excluded from being encompassed within these processes except for the most egregious cases. Q21: Does this Rule ban any industries from using the ACH Network?
No. The Rule does not ban the use of the ACH Network by any industry or any specific businesses. The Rule provides tools for identifying outlier Originators that cause a disproportionate levels and exceptions, and also provides for an inquiry into their ACH origination practices rather than an automatic rules enforcement sanction. Q22: Does the Rule identify high-risk industries? No. The return rate levels are not industry-based. They are designed to be tools in identifying outlier Originators regardless of the industry. Reinitiation of Entries Q23: What fields in the reinitiated entry should not change from the original entry? Consistent with ACH Operations Bulletin #3-2013 Reinitiation of Returned Debit Entries, the Rule requires a reinitiated Entry to contain identical content in the following fields: Company Name, Company ID, and Amount. Further, the Rule permits modification to other fields only to the extent necessary to correct an error or facilitate processing of an Entry. This allows reinitiations to correct administrative errors, but prohibits reinitiation of Entries that may be attempts to evade the limitation on the reinitiation of returned Entries by varying the content of the Entry. Q24: Are there other formatting requirements for a reinitiated entry? The ODFI is required to include the description RETRY PYMT in the Company Entry Description field to identify Entries that are permissible resubmissions of Returned Entries under the Reinitiation Rule. Use of this description in the field notifies the Receiver that the Entry relates to a previously Returned Entry, and will facilitate research and dispute resolution for RDFIs. Q25: What if I need to re-initiate an entry that already has content in the Company Entry Description? Do I still need to include RETRY PYMT? Yes, the RETRY PYMT descriptor must be included in the reinitiated entry even if that means replacing content from the original entry. Q26: Does a reinitiated entry have to be the same amount as the original entry? Yes, reinitiating any entry in an amount greater or less than the original entry would be considered an improper reinitiation practice. Q27: If a returned debit is one in a series of recurring debits, would initiating the following debit(s) be considered reinitiation?
No, the Rule allows that a debit Entry in a series of preauthorized recurring debit Entries will not be treated as a reinitiated Entry, even if the subsequent debit Entry follows a returned debit Entry, as long as the subsequent Entry is not contingent upon whether an earlier debit Entry in the series has been returned. Q28: If an entry is returned as unauthorized, can it be re-initiated? No, an unauthorized debit cannot be remedied. Reinitiating any entry that was returned as unauthorized would be considered an improper reinitiation practice. The Rule allows that a debit Entry will not be considered a reinitiation if the Originator obtains a new authorization for the debit Entry after the receipt of the return. The timing requirement is important, however, since Originators will not be permitted to obtain advance approval to debit an account in a manner that would otherwise violate this Reinitiation Rule. Q29: Who decides if there has been an attempted evasion of the limitations on reinitiation? The industry review panel has the final authority in deciding whether a specific case involves attempted evasion of the limitations on reinitiation. Q30: What return reason code should be used to return improperly re-initiated entries? The Rule allows these returns to use Return Code R10 (currently used for Extended Returns) to include a Return for an improperly reinitiated debit, because these debits are likely to be identified via a customer complaint after the expiration of the normal two-day return timeframe (i.e., an extended return timeframe would be necessary). In order to use R10 and the extended return timeframe, the RDFI needs to obtain a Written Statement of Unauthorized Debit. The Rule does not create any new risk management obligations for Third-Party Senders. The Rule clarifies and makes explicit existing risk management obligations. The Rule does obligate a Third-Party Sender to cooperate with its ODFI for the purpose of providing a valid proof of completion of a Rules compliance audit, when requested.