UCC 4A and the ACH Network. Presented by Wanda Downs, AAP Director of Payments Education

Transcription

1 UCC 4A and the ACH Network Presented by Wanda Downs, AAP Director of Payments Education 2018

2 Audio Handouts Questions

3 UCC 4A AND THE ACH NETWORK Wanda Downs, AAP Director of Payments Education

4 Disclaimer This presentation and applicable materials are intended for general education purposes and nothing in this presentation should be considered to be legal, accounting or tax advice You should contact your own attorney, accountant or tax professional with any specific questions you might have related to this presentation that are of a legal, accounting or tax nature Image source: Thinkstock 2

5 What is UCC Article 4A? Article 4A is state law first promulgated in 1989 by National Conference of Commissioners on Uniform State Law and American Law Institute A uniform or model law must be adopted by state legislatures to be effective By 1996, all 50 states and the District of Columbia have adopted Article 4A 3

6 When Does UCC 4A Apply? UCC 4A applies to funds transfers that credit the receiving account Wholesale wire transfers ACH credit entries Including Same Day ACH credits On-us transfers Remittance transfers UCC 4A does not apply to Regulation E transactions Debit transactions 4

7 How is a Payment Order Issued? Orally In person By phone Electronically On line File transmission Storage media Fax Writing Letter Signed funds transfer document 5

8 UCC 4A Relationship to Other Law and Rules NACHA Rules Govern all funds transfers made over the ACH network, including those to which Article 4A does and does not apply Federal Reserve Operating Circulars 4 & 6 Drafted to be consistent with Article 4A; circulars control in event of conflict Apply only when the Federal Reserve Bank participates in the credit transfer Electronic Fund Transfer Act (Regulation E) Apply generally to consumer electronic fund transfers, which are not governed by Article 4A 6

9 UCC 4A Provision Alterations Allowed alterations Rejection time limits for on-us Entries and interest liability Right of RDFI to make credit provisional until final settlement Prior notice to Originator and Receiver required ODFI, RDFI, and Receiver must be bound to NACHA Operating Rules Notice of Receipt to Receiver Choice of Law 7

10 UCC 4A Choice of Law Between ODFI & Originator governed by state law where ODFI is located ODFI & RDFI governed by state law where RDFI is located RDFI & Receiver governed by state law where RDFI is located ODFI & Receiver (on-us Entry) governed by state law where ODFI is located Originator & Receiver regarding the issue of when the payment is made governed by state law where RDFI is located except in on-us Entries 8

11 UCC 4A Provision Alterations Prohibited alterations Originator s duty to pay ODFI if funds transfer is completed and not to pay if not completed Right of Originator for refund in event of ODFI error Liability of ODFI for late or improper transmittal Requirement to pay Receiver upon acceptance Receiver s right to receive payment and damages if RDFI refuses to make payment Allocation of liability for unauthorized Entries Obligation of ODFI to refund unauthorized Entry with interest 9

12 UCC Article 4A Terminology Article 4A Acceptance (Section 4A-209) Beneficiary (Section 4A-103(s)(2)) Beneficiary s Bank (Section 4A-103(a)(3)) Execute (Section 4A-301) Originator s Bank (Section 4A-104(d)) Payment Date (Section 4A-401) Payment Order / Funds Transfer (Sections 4A-103(a)(1), 4A- 104(a)) Receiving Bank (Section 4A-103(a)(4)) Rejection (Section 4A-210) Sender (Customer) (Sections 4A-103(a)(5), 4A-105(a)(3)) Payment date (Section 4A-401) NACHA Operating Rules No counterpart Receiver RDFI (which is the same as the ODFI in an on-us entry) Transmit to an ACH Operator or sending point Originator Settlement Date (or, in the se of an on-us entry, the date on which payment to the Receiver is to be made) Credit Entry ODFI, ACH Operator, or RDFI, as applicable Return of Entry by RDFI Originator, ODFI, or ACH Operator, as applicable Settlement Date 10

13 Article 4A Credit Transfer in NACHA Rules Terminology Originator s Bank = ODFI Beneficiary s Bank = RDFI Beneficiary = Receiver Originator = Originator 11

14 UCC Article 4A Definitions 4A-103 "Funds transfer" means the series of transactions, beginning with the originator's payment order, made for the purpose of making payment to the beneficiary of the order 12

15 Funds Transfer: A Series of Payment Orders Funds Transfer Originator Issues Payment Order Receiving Bank Intermediary Bank Beneficiary s Bank Beneficiary Each of the payment orders in a funds transfer must be either Accepted or Rejected. The moment of acceptance is when liability for the funds transfer occurs. 13

16 UCC Article 4A Definitions 4A-103 "Payment order" means an instruction of a sender to a receiving bank, transmitted orally, electronically, or in writing, to pay, or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary if: i. the instruction does not state a condition to payment to the beneficiary other than time of payment, ii. the receiving bank is to be reimbursed by debiting an account of, or otherwise receiving payment from, the sender, and iii. the instruction is transmitted by the sender directly to the receiving bank or to an agent, funds-transfer system, or communication system for transmittal to the receiving bank. 14

17 UCC Article 4A Definitions 4A-104 "Sender" means the person giving the instruction to the receiving bank "Receiving bank" means the bank to which the sender's instruction is addressed Intermediary bank means a receiving bank other than the originator's bank or the beneficiary's bank 15

18 UCC Article 4A Definitions 4A-103 "Beneficiary" means the person to be paid by the beneficiary's bank "Beneficiary's bank" means the bank identified in a payment order in which an account of the beneficiary is to be credited pursuant to the order or in which otherwise is to make payment to the beneficiary if the order does not provide for payment to an account Originator means the sender of the first payment order in a funds transfer Originator s bank means (i) the receiving bank to which the payment order of the originator is issued if the originator is not a bank, or (ii) the originator if the originator is a bank 16

19 UCC Article 4A Definitions 4A-401 Payment date means the day on which the amount of the order is payable to the beneficiary by the beneficiary s bank. The payment date may be determined by the instruction of the sender but cannot be earlier than the day the order is received by the beneficiary s bank and, unless otherwise determined, is the day the order is received by the beneficiary s bank 17

20 Acceptance of Payment Order 4A-209 Receiving Bank (ODFI), other than a Beneficiary Bank (RDFI), accepts a Payment Order when it executes it (i.e., issues a new Payment Order to carry out the received order) Beneficiary s Bank accepts at the earliest of: When Beneficiary s Bank pays the Beneficiary or notifies it of receipt of the Payment Order When Beneficiary s Bank receives payment at final settlement (wire settlement time, or ACH: 8:30 a.m. 1:00 p.m. or 5:00 p.m. ET) 18

21 When Acceptance Cannot Occur 4A-209 Beneficiary does not have account with Receiving Bank, Account has been closed, or Receiving Bank is not permitted to receive credits for Beneficiary s account 19

22 Rejection of Payment Order 4A-210 Bank is not required to accept a payment order How can a bank reject a payment order? By sending rejection Bank does not execute (i.e., send the payment order to the next Receiving Bank) Bank fails Acceptance precludes rejection 20

23 Rejection Fine Print 4A-210 Rejection of Payment Order a) A payment order is rejected by the receiving bank by a notice of rejection transmitted to the sender orally, electronically, or in writing. A notice of rejection need not use any particular words and is sufficient if it indicates that the receiving bank is rejecting the order or will not execute or pay the order. Rejection is effective when the notice is given if transmission is by a means that is reasonable in the circumstances. If notice of rejection is given by a means that is not reasonable, rejection is effective when the notice is received. If an agreement of the sender and receiving bank establishes the means to be used to reject a payment order, (i) any means complying with the agreement is reasonable and (ii) any means not complying is not reasonable unless no significant delay in receipt of the notice resulted from the use of the noncomplying means. 21

24 When Must Bank Refund Payment 4A-204, 4A-304, 4A-505 Bank (ODFI) must refund if: Transfer not authorized Not enforceable Erroneously executed Customer must notify bank within a reasonable time (not exceeding 90 days) in order to be entitled to interest on refund (at Federal Funds Rate) A reasonable time may be fixed by agreement but must truly be reasonable Customer must make claim within one year of notification 22

25 Mis-Description of Beneficiary 4A-207 Acceptance cannot occur if: Name, Account, or other Number refers to nonexistent or unidentifiable person If Payment Order identifies Beneficiary by both name and account number and name and number identify different person: If Bank does not know, Bank may rely on number If Bank does know, Bank may pay person named or account number if person is entitled Bank (RDFI) liable if wrong person is paid 23

26 Cancellation and Amendment 4A-211 Made orally, electronically, or in writing Received before acceptance occurs Not effective after acceptance Unaccepted payment order is cancelled after five business days Cancelled payment order cannot be accepted Agreement or Funds-transfer System Rule can affect rights of cancellation and amendment 24

27 From Issuance to Payment Sender issues a Payment Order Receiving Bank is not Beneficiary's Bank Receiving Bank issues Payment Order to carry out order of Sender (Execution 4A-301) (Acceptance 4A- 209) Receiving Bank is obligated to execute the Payment Order in accordance with instructions of the Sender (4A- 302) Sender becomes obligated to pay Receiving Bank for the Payment Order (4A-402(c)) Upon acceptance by Intermediary or Beneficiary s Bank, Receiving Bank is obligated to pay for Payment Order (4A-402(c)) Receiving Bank is Beneficiary s Bank Acceptance occurs when bank pays or notifies Beneficiary (4A-209(b)(1) When Beneficiary's Bank receives payment (4A- 209(b)(2)) Opening of next funds transfer business day if Sender has withdrawable balance and order has not been rejected (4A-209(b)(3)) Payment Order cannot be rejected, amended, or cancelled after acceptance occurs and creditor process and setoff come too late (4A-502) Upon acceptance, Beneficiary s Bank becomes obligated to pay the Beneficiary (4A-404(a)) 25

28 Security 26

29 Security Procedures 4A-201, 4A-202 Procedures established by agreement that accomplishes Verification of authenticity of order or cancellation Error detection Commercially reasonable security procedure Question of law Circumstances known to bank Security procedures in general use Alternative security procedures offered 27

30 Enforceability of Funds Transfer 4A-203 Authorized transfers enforceable Unauthorized transfers enforceable if: Verified pursuant to security procedure Security procedure is commercially reasonable Bank accepted it in good faith and in compliance with security procedure 28

31 Unenforceability Funds Transfer 4A-203 Unauthorized transfers not enforceable if: Bank agrees not to enforce No security procedure Security procedure is not commercially reasonable Not made by authorized person or person entrusted with security procedure Not made by person who obtained access to transmitting facility Made by person that obtained security procedure from a source not controlled by customer 29

32 Factors to Consider Customer Agreements List of authorized agents Security procedures generally in use Transaction monitoring Case law 30

33 FFIEC Expectations in a Changing Environment The supplement guidance restates the need to continually adapt as technology and risks change Standing still is not acceptable More is better, layered is better The guidance provides an updated expectation in a hostile environment in the form of Risk Customer authentication Layered security (defense in depth) and other controls 31

34 Commercially Reasonable Security Procedure Checklist Document current security procedures Online access Wire transfer & ACH Origination Customer selected security procedure Document transaction monitoring Compare bank security procedures to FFIEC guidance Compare bank security procedures to other bank s Review customer agreements 32

35 Agreements Online / Internet Banking Agreements Wire transfer agreements ACH Origination Agreements Security procedure Customer agrees is commercially reasonable Customer will scan personal computer(s) Customer will give notification of unauthorized transfer 33

36 ODFI Disclosures Required by Rules a) The Entry may be Transmitted through the ACH Network b) Choice of law state Default is state of New York c) Credit given to Receiver by RDFI is provisional until the RDFI has received final settlement d) RDFI is entitled to a refund from Receiver in event final settlement does not occur May be provided within Origination Agreement or otherwise 34

37 RDFI Entitled to Refund Credit Entries governed by UCC-4A are provisional until final settlement If settlement does not occur, RDFI is entitled to a refund from the Receiver of the amount credited Originator is considered not to have paid the Receiver in these cases Not applicable if Receiver has not agreed to be bound by the Rules 35

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39 Continuing Education Credits AAP Continuing Education Credits Session title: UCC 4A & the ACH Network Session is worth: 1.2 AAP CE (continuing education) credits Topic area: Rules & Regulations Date conducted: 2/14/18 Conducted by: epayresources Some of our sessions may also be eligible for other industry certification renewal credits Check with your certifying organization for eligibility requirements 37

40 Resources From epayresources AgreementsNow! ProceduresNow! Originator Handbook series Seven handbooks written with the corporate Originator in mind: easy-toread language, just what a non-banker needs to know, helpful examples CCD & CTX Edition speaks to wholesale commercial credit transactions Revised Uniform Commercial Code Article 4A and the ACH Network (publisher NACHA) 38

41 Wanda Downs Director of Payments Education (800) Upcoming epayresources events with CBANC Education: Reg CC Updates Fri 2/23 at 11am CT/12pm ET