NACHA Rulemaking Process Update

NACHA Rulemaking Process Update NAFCU Webcast February 2, 2016 Amy Morris Senior Director, ACH Network Rules - NACHA

2 Agenda Standing Rules Work Group Activities Compliance and Operations Minor Rules Topics Risk and Quality Third Party Sender Registration Rules Implementing in 2016 January 1 Rules POS Disclosure Requirements Same Day ACH Unauthorized Entry Fee

Standing Rules Work Group Activities

4 Compliance and Operations Minor Rules Topics Same Day ACH ENRs RCK Return Time Frame Settlement of TRC/TRX Entries RDFI local time for Atlantic and Chamorro time zones Reinitiated Entry Rule Entry description clarification Corrected Entries Enforcement Clarifications Recurrence of infractions Protection from liability IAT formatting for Originating DFI Identification

5 Same Day ENR Eligibility Issue - Same Day rule does not provide for Same Day ENRs ENRs do not use Effective Entry Dates, making it impossible to uniquely identify Same Day ENRs ENRs are only received by Federal government agencies, who would have to agree to receive Same Day ENRs In Rules language, Effective Entry Date shows that ENRs cannot be same-day, but definition of Same Day Entry does not Proposed Solution Expressly identify ENRs as not eligible for sameday processing No change to original intent Rules sections affected Appendix Three, Part 3.2 (Glossary of ACH Record Format Data Elements) Effective Entry Date

6 RCK Return Timing with Same Day Processing Issue RCK Entries processed and settled same day could have a longer-than-normal return time period RCK entries have a unique return deadline to correspond with check law on returned items an RDFI must transmit an RCK return to its ACH Operator by midnight of the RDFI s second banking day following the receipt of the RCK entry. With Same Day debits, some RCK entries may be both received by the RDFI and settled on the same day (Banking Day #0). In these cases, the RDFI will now have a LONGER return window than all other return entries (it would be a late return by normal standards). Proposed Solution Modify the NACHA Operating Rules to align RCK return time frame with normal return time period i.e., made available to ODFI no later than opening of business on 2 nd banking day following settlement date Rules sections affected Article Three, subsection 3.8.3.3 (Timing Requirements for Return of RCK Entries)

Settlement of TRC & TRX Entries in Same Day Environment 7 Issue ACH Operators currently settle TRC and TRX entries at the earliest opportunity This could lead to inconsistent treatment of TRC and TRX entries from Same Day Entries, such as fee applicability There is currently no volume of TRC and TRX entries flowing over the ACH Network New users for new check truncation programs would be aware of these rules for sameday processing Proposed Solution Modify the technical language to fully align TRC and TRX with other SEC Codes for forward entries This would result in the operators handling TRC and TRX entries like any other SEC Code: settlement date would be based on the effective date, subject to the exceptions noted in the rules. TRC/TRX could not be same day until debits go in, but could at Phase 2, provided they re $25,000 or under. Rules sections affected Appendix Three, Part 3.2 (Glossary of ACH Record Format Data Elements) Effective Entry Date Settlement Date

8 Same Day Credit Funds Availability As of Phase 3, RDFIs will be required to make funds available for same-day credits by 5:00 p.m. local time Atlantic Time Zone (Puerto Rico, USVI) ACH file received from Operator at 3:45 pm Eastern standard time equates to 4:45 p.m. Atlantic standard time Not reasonable to expect funds availability by 5:00 p.m. Propose to allow RDFIs in Atlantic time zone to make funds available by 5:00 p.m. Eastern time Guam, Northern Marianas Islands are on the other side of the International Date Line ACH file received from Operator at 3:45 p.m. Eastern time (on Day 0) equates to 6:45 a.m. Chamorro standard time tomorrow (on Day 1) Staff is seeking assistance on what is reasonable

Reinitiation Competing Company Entry Descriptions 9 Issue The recently effective Reinitiation Rule defines a standard use of the Company Entry Description field for a reinitiated entry that supersedes the original content of the field. Originators/ODFIs must include an entry description of RETRY PYMT for any reinitiated entry. The Reinitiation Rule was not explicit that this applies in cases in which the original entry also used standard content required for original entries Proposed Solution Clarify within the Rules that for reinitiated entries, the description of RETRY PYMT supersedes other Entry Descriptions Rules sections affected Article Two Subsection 2.12.4.2 (Formatting Requirements for Reinitiated Entries) Part 3.2 (Glossary of ACH Record Format Data Elements) Company Entry Description

10 Corrected Entries Issue Questions have been received related to the applicability of the reinitiation rules when a corrected entry is submitted after receiving an R03/R04 return? Not original intent; original entry did not post to the Receiver s account An entry bearing RETRY PYMT would not make sense to a Receiver Proposed Solution Clarify within the Rules that for reinitiated entries that a corrected entry transmitted subsequent to a return bearing return reason codes R03/R04 is considered a new entry to the correct account and is not a reinitiation Rules sections affected Article Two Subsection 2.12.4 (Reinitiated Entries)

Rules Enforcement Monitoring Class 2 Violations 11 Issue The Rules define the monitoring period for Class 2 rules violations as one year from the resolution date of the original entry. There is problem of recurring Class 2 rule violations that are not resolved at the end of the year following the initial violation, but they drop out of the System of Fines solely because of the expiration of the initial violation resolution period. This results in on-going infractions and does not result in the resolution of an on-going compliance issue. Proposed Solution Revise the enforcement rules to define a recurrence of a Class 2 rule violation as the same rules infraction having been committed by the same parties within one year of the date of the resolution date of the immediately preceding infraction Rules sections affected Appendix Ten, subpart 10.4.7.4 (Class 2 Rules Violation)

Protection from Liability for ACH Rules Enforcement Panel 12 Issue The Rules do not currently include language to provide the ACH Rules Enforcement Panel with express protection from liability when acting in their official capacity to enforce the NACHA Operating Rules and to issue related fines. Proposed Solution Revise Appendix Ten (Rules Enforcement) to establish an indemnification for, and a limitation on, any liability incurred by both NACHA and the ACH Rules Enforcement Panel when exercising their good-faith efforts to enforce the NACHA Operating Rules. Rules sections affected Appendix Ten, Subpart 10.4.6 (ACH Rules Enforcement Panel)

13 IAT Entries Originating DFI Identification Issue For Outbound IAT Entries, the Rules currently require the Originating DFI Identification field within the 4 th IAT Addenda record to contain the routing number of the U.S. ODFI. In certain business models, the funding for an Outbound IAT Entry comes from an financial institution in another country. In these cases, the required field contents, as defined within the Rules, are incorrect. Proposed Solution Revise the description of the Originating DFI Identification field as it relates to Outbound IAT Entries to include the possibility that the financial institution identified as the source of the funds is located in an foreign country. Rules sections affected Appendix Three, subpart 3.2 (Glossary of ACH Record Format Data Elements)

14 Risk and Quality The work group is handling proposal to require ODFIs to register their Third-Party Senders with NACHA through a centralized registry A limited set of initial registration information would keep registration simple for ODFIs Supplemental registration information could be requested by NACHA when necessary to conduct risk investigations

15 Audience Polling Question Does your credit union have criteria defined in the ACH Origination application process to identify potential Third Party Senders? Yes No

16 Third-Party Sender Registration Proposal The purpose of the registry is to improve quality in the ACH Network Increase ODFI and industry understanding of Third-Party Senders and improve their KYC due diligence While leveling the playing field with ODFIs that already perform such due diligence Serve as a tool for ACH Network risk management Provides a census on Third-Party Senders in the ACH Network Identifies instances in which a Third-Party Sender uses multiple ODFIs Identifies instances in which a Third-Party Sender is terminated by one ODFI but is registered by another Facilitates risk investigations when necessary

17 Third-Party Sender Registration RFC Request for Comment distributed August 17, 2015, closed October 9, 2015 90 responses received Includes 7 comment letters Responses from 32 direct members Responses from 16 Third-Party Senders 58% of respondents that answered indicated support for the proposal Support was highest among financial institutions 64% Support was lowest among Third-Parties 31% Many others would support with changes

18 ODFI Registration Charge As proposed, the costs of the registry would be covered through a registration charge to ODFIs for each Third- Party Sender registered 76% of respondents that answered did not support the concept of an ODFI registration charge Most common response for a reasonable per-tps charge is $100 (58% among those that answered) Some respondents did not support the overall proposal solely due to the proposed ODFI registration charge

19 ODFI Registration Charge - Comments Comments: Benefit is to the entire ACH Network, so costs should be covered by Network Administration Fees Burden on small ODFIs and small Third-Party Senders Could deter use of the ACH Network Uncertainty on the amount of the charge Opposition to any registration charge to ODFIs Response: Modify proposal to eliminate proposed ODFI registration charge

20 Applicability to All ODFIs NACHA received comment that to be fully effective, a rule should require all ODFIs to state whether they originate for TPS or not All ODFIs would be prompted to ensure they understand their customer bases before making such a statement This would aid in identifying ODFIs that don t register at all This would be consistent with the existing rule on Direct Access registration NACHA is evaluating this suggestion for potential modification to the overall proposal

21 Supplemental Registration Comments: Define the circumstances in which NACHA would contact an ODFI for supplemental registration information. Be more specific than from time to time Response: NACHA is working with outside counsel on defining the parameters for a risk event that would trigger a contact for supplemental registration. Generally, a risk event is a circumstance that poses an escalated risk of financial loss, excessive returns, or a significant violation of the Rules.

22 Would NACHA Contact TPSs Directly? Comment: Would NACHA contact my (ODFI s) customer? Response: No, NACHA will contact the ODFI first regarding its TPS customer. NACHA would only contact the TPS directly in the event of a risk event in which the ODFI is non-responsive.

23 Registration Data Elements Responses generally supported initial registration data elements Range of 80-97% support for most as required registration information Concern about Company ID in cases in which each Originator of a TPS has an individual Company ID Responses generally supported supplemental information as well, but at slightly lower levels Range of 60-80% support for most as required supplemental information Lowest support for List of Principals 48% supported as required information; additional 23% supported as optional 5 ODFI respondents (12% of ODFI respondents) do not maintain registration-type information

24 Registration Data Elements Comment: Why does NACHA need information such as List of Principals and corporate phone numbers? Response: These are critical pieces of information to have when investigating risk events. This data would only be submitted in cases of supplemental registration, but they are critical pieces of information in tracking relationships and activity across interlocking corporate ownership structures, and TPSs that originate via multiple ODFIs.

25 Registry Logistics - Comments Initial registration 62% of those that answered supported initial registration within 30 days of origination Most common other response was 60 days (35%), followed closely by 90 days (30%) Because TPS relationships may be difficult to identify, some respondents requested the ability to register within a defined period of becoming aware of a TPS relationship Supplemental registration 51% of those that answered supported providing supplemental registration within 10 banking days Most common other response was 30 days (90%)

26 Registration Logistics Comment: Provide longer registration period for initial registration (i.e., from proposed 30 days) Provide longer to response to NACHA request for longer supplemental registration (i.e., from 10 banking days) Response: Longer periods could lead to the registration information not being available or useful when needed i.e., not timely to use during a risk event. With respect to a longer response period for supplemental registration information, the risk event could be over before the information is due.

27 Registration Logistics Comments: There should not be any automatic enforcement or fines Allow a process and grace period to correct oversights and inadvertent omissions Response: The enforcement approach would be intended to encourage registration rather than asses fines. A process and grace period can be incorporated to allow ODFI to register a TPS when it becomes aware of a TPS relationship without a penalty, even after the initial 30 days.

28 Audience Polling Question Does your credit union know where to find/receive notification related to the existence of NACHA s Requests for Comment? Yes No

Rules Implementing in 2016

30 Recrediting Receiver - Removal of the Fifteen-Calendar Day Notification Timeframe Clarification of RDFI Warranties for Notifications of Change ODFI Statement Requirements for CIE and WEB Credits Encryption Zero Dollar Entry EFFECTIVE JANUARY 1, 2016

31 Disclosure Requirements for POS Entries EFFECTIVE MARCH 18, 2016

32 Compliance and Operational Topic approved date: September 4, 2015 effective date: March 18, 2016 Disclosure Requirements for POS Entries Establishes an Originator/Third-Party Service Provider obligation to provide consumer Receivers with certain disclosures when providing those consumers with cards used to initiate ACH Point of Sale (POS) Entries Requires the following disclosures in written or electronic, retainable form to a consumer prior to activation: The ACH card is not issued by the consumer s Depository Financial Institution. POS Entries made with the ACH card that exceed the balance in the consumer s financial institution account may result in overdrafts and associated fees, regardless of whether the consumer has opted to allow overdrafts with respect to debit cards issued by the Depository Financial Institution that holds the consumer s account. Benefits and protections for transactions made using the ACH card may vary from those available through debit cards issued by the consumer s Depository Financial Institution.

33 Compliance and Operational Topic approved date: September 4, 2015 effective date: March 18, 2016 Disclosure Requirements for POS Entries Also establishes a new defined term, ACH Card Not limited to physical, includes other types of access devices and virtual access Sample disclosure language will be provided in 2016 Guidelines and at www.nacha.org

34 Same Day ACH EFFECTIVE SEPTEMBER 23, 2016 (PHASE 1)

35 Audience Polling Question Has your credit union begun work to implement Same Day ACH for: Receipt Origination Both Neither

36 Same Day ACH New Rule Basics approved date: May 18, 2015 effective date: September 23, 2016 (Phase 1) The ACH Operators will offer two new same-day processing windows, estimated at 10:30 a.m. and 2:45 p.m. Eastern Time. ODFIs will be able to submit files of same-day ACH payments through two new clearing windows that can reach all RDFIs in the ACH Network. A morning window at 10:30 a.m. ET, with settlement occurring at 1:00 p.m. ET An afternoon window at 2:45 p.m. ET, with settlement occurring at 5:00 p.m. ET All RDFIs will be mandated to receive Same Day ACH payments, thereby giving ODFIs and Originators the surety of being able to send same-day ACH payments to accounts at all RDFIs in the ACH Network. RDFIs will make funds available from ACH credits (such as payroll Direct Deposits) to depositors by 5:00 p.m. local time. (Phase 3 requirement) A Same Day fee paid from the ODFI to the RDFI will provide some cost recovery for RDFIs to enable Same Day ACH, in the amount of 5.2 cents.

A Phased Approach to Implementing New ACH Network Functionality 37 To allow the industry to acclimate to a faster processing environment, as well as to ease the industry s implementation effort, these new capabilities would become effective over three phases beginning in September 2016. Functionality Phase 1 Sept. 2016 Transaction Eligibility ($25,000 limit; IAT not eligible) Phase 2 Sept. 2017 Phase 3 March 2018 Credits only Credits and debits Credits and debits New Same Day ACH Processing Windows 10:30 am ET and 2:45 pm ET 10:30 am ET and 2:45 pm ET 10:30 am ET and 2:45 pm ET New Settlement Time(s) 1:00 pm ET and 5:00 pm ET 1:00 pm ET and 5:00 pm ET 1:00 pm ET and 5:00 pm ET ACH Credit Funds Availability End of RDFI s processing day End of RDFI s processing day 5:00 pm RDFI local time

38 Returns and Same Day Capabilities Returns would not be required to be sent on the same day, but would be permitted to be processed through the two new same-day windows. Returns would be settled at the next available settlement opportunity, which could be the same day. Same-day returns would not be subject to the eligibility limits of forward transactions (i.e., the per-entry dollar limit, and IATs); these returns can already be sent through the ACH Operators existing same-day return services. Same-day returns would not be subject to the interbank fee (nor would Notifications of Change (NOCs), which are also sent from RDFIs to ODFIs).

39 Optional Same Day Identification An optional, standardized method is provided for ODFIs to use, at their discretion, with their Originators in validating the intent for same day settlement. In the Company Descriptive Date field (in the Batch Header Record), an ODFI could require an Originator to use the convention SDHHMM where the SD denotes the intent for same-day settlement, and the hours/minutes correspond to the desired settlement timing of either 1:00 p.m. ET or 5:00 p.m. ET. Valid content would be either SD1300 or SD1700

40 Effective Entry Date Exception Settlement The ACH Operators will settle ACH transactions with invalid or stale Effective Entry Dates at the next available settlement opportunity, which could be the same day, rather than automatically as next-day transactions. This is important for handling late files, such as late payroll files, without requiring ODFIs to modify their Originators ACH files. ACH transactions with invalid or stale Effective Entry Dates that are processed as same-day transactions would be subject to the interbank fee An ODFI that wants to avoid same-day settlement can hold the file and submit it to the ACH Operator after the deadline for the last same-day processing window. The batch is given next-day settlement, and no interbank fees are assessed. The ODFI does not have to modify or edit the Originator s file.

41 Same Day ACH Effective Dates The effective dates of the three phases are: Phase 1 September 23, 2016 (16 months from ballot) Phase 2 September 15, 2017 (28 months from ballot) Phase 3 March 16, 2018 (34 months from ballot)

42 Improving ACH Network Quality Unauthorized Entry Fee EFFECTIVE OCTOBER 3, 2016

43 Improving ACH Network Quality - Unauthorized Entry Fee Effective: October 3, 2016 The Rule will improve ACH quality and reduce exceptions by establishing economic incentives for ODFIs to improve the quality of the ACH transactions they originate. The Rule requires an ODFI to pay a $4.50 fee to an RDFI for any ACH debit returned due to a reason of unauthorized - includes return reason codes R05, R07, R10, R29 and R51. Does not include R08 (stop payments). Does not include IAT Entries. A methodology is defined in the Rules in which NACHA staff set and review the amount every three years. NACHA is not the beneficiary of any of the fees. No portion of any fees under this Rule would be passed to NACHA for NACHA s benefit. NACHA and the ACH Operators will arrange a system to collect and distribute the fees. The charges and credits for these fees will appear on the FI s statement from its Operator.

44 Improving ACH Network Quality - Unauthorized Entry Fee Effective Date: This Rule will become effective beginning with applicable return entries that have a Settlement Date of October 3, 2016 (a Monday, and the first banking day of the quarter). This effective date provides the ACH Operators and financial institutions approximately 25 months to prepare and implement the Rule. NACHA and the ACH Operators will need time complete and implement the billing system to collect and disburse the fees. ODFIs and RDFIs will need time to properly account for fees paid and received. ODFIs will need time to work with their Originators, if desired, on implementing systems, tools and processes to reduce returns and thereby minimizing fees they incur. ODFIs in particular should note that fees applied to return entries as of October 3, 2016 would relate to forward entries initiated as early as August 1, 2016. Prior to October 3, 2016, NACHA and the ACH Operators intend to provide a 1- or 2- month trial period, during which the Operators respective billing systems would show ODFIs and RDFIs the number of returns that would become subject to the fees, but for which no fees would be assessed. This trial period will give ODFIs and RDFIs an additional opportunity to understand the impact of the fees on their institutions, and for ODFIs, to work with their Originators and Third-Party Senders.

Thank You! amorris@nacha.org