ACH FUNDAMENTALS: UNDER THE MICROSCOPE Heather Spencer, AAP Implementation Coordinator, MY CU Services, LLC www.mycuservices.com Disclaimer This material is not intended to provide any warranties or legal advice, and is intended for educational purposes only. NACHA owns the copyright for the NACHA Operating Rules & Guidelines. 1
Agenda ACH Network History Legal Requirements The ACH Network ACH Participants and their Roles ACH Transaction Flow Settlement of ACH Transactions Terminology and Acronyms Types of Returns ACH Network History Early 1970s SCOPE Special Committee On Paperless Entries 1972 - First Automated Clearing House 1974 NACHA formed National Automated Clearing House Association 1978 - Local ACHs Electronically Linked 2
ACH Network History 1993 All Electronic ACH 1993 Present SEC Codes continue to be developed 2016 Same Day ACH Legal Requirements Regulation CC Funds Availability Return time frames Re-presented Check Entries (RCK) Regulation D Reserve Requirements Transaction vs. non-transaction accounts Regulation E Basic rights and obligations of consumers and financial institutions for Electronic Funds transfer 3
Legal Requirements Uniform Commercial Code Article 4A Body of laws which cover wholesale EFT payments, primarily wire transfer but also commercial ACH items Title 31 Code of Federal Regulations Part 210 (31 C.F.R. Part 210) Governs all entries originated or received by an agency through the Automated Clearing House (ACH) network including reclamation of benefit payments Legal Requirements OFAC Office of Foreign Asset Control A division of the U.S. Department of the Treasury Administers and enforces economic and trade sanctions against countries, individuals, companies and organizations considered to be a threat to U.S. national security and U.S. foreign policy Sanctions are based on United Nations or other international mandates Requires FIs to screen for Specially Designated Nationals and block any of their accounts 4
The ACH Network Automated Clearing House Nationwide batch oriented electronic funds transfer system Stores and forwards transactions Debit or Credit Entry Savings or Checking Account General Ledger Account Credit to a Loan Account Single or recurring entry Same or Next Day payment system ACH Participants and Their Roles ACH Participants Originator Originating Depository Financial Institution (ODFI) ACH Operator (FED or EPN) Receiving Depository Financial Institution (RDFI) Receiver 5
ACH Participants and Their Roles Originator Party which initiates the ACH transaction Can be a company, a government agency or a person Must have Authorization from the Receiver Examples: Electric company initiating drafts Bill Pay Direct Deposit ACH Participants and Their Roles ODFI The Financial Institution which originates the ACH transactions after receiving payment instructions from an originator There will be an agreement between the ODFI and the Originator Except customer initiated entries ODFI must also act as an RDFI 6
ACH Participants and Their Roles ODFI An ODFI is responsible for all entries originated through the ODFI, whether by an Originator or Third- Party Sender, including entries sent through Direct Access An ODFI is responsible for its Originators and Third- Party Senders compliance with these rules ACH Participants and Their Roles ACH Operator(s) There are 2 ACH Operators Federal Reserve Electronic Payments Network Central clearing facility for Financial Institutions Establish processing and exchange schedules for the ACH Network Deliver entries (according to predetermined processing schedules) to the receiving point(s) 7
RDFI ACH Participants and Their Roles The Financial Institution which receives an ACH transaction for posting to the Receiver s account Does not have to be an ODFI Must accept all types of ACH entries, including government entries Agrees to post items to depositor s account by settlement date May solely post based on account number only ACH Participants and Their Roles Receiver Party which receives the ACH transaction Has authorized the Originator to initiate the ACH entry May be a company, government agency or an individual 8
ACH Transaction Flow Employer Originator ODFI ACH Operator Employee Receiver RDFI ACH Transaction Flow Third-Party Service Provider An Organization that performs any functions on behalf of the Originator, the Third-Party Sender, the ODFI, or the RDFI (not including the Originator, ODFI, or RDFI acting in such capacity for such Entries) related to the processing of Entries, including the creation of the files or acting as a Sending Point or Receiving Point on behalf of a Participating DFI. 9
ACH Transaction Flow Third Party Service Provider Credit Union ODFI Originator MY CU Services, LLC Third- Party Service Provider Member Receiver RDFI ACH Operator Third-Party Sender ACH Transaction Flow Service Provider that acts as an intermediary in Transmitting Entries between an Originator and an ODFI, including through Direct Access, and acts on behalf of an Originator or another Third-Party Sender Never the Originator for Entries it Transmits on behalf of another Organization. Third-Party Sender of Entries may also be an Originator of other Entries 10
ACH Transaction Flow Third Party Sender Employer Originator ODFI Payroll Processor Third-Party Sender Employee Receiver RDFI ACH Operator ACH Transaction Flow Third Party Senders Third Party Senders are a type of Third Party Service Providers A Third Party Sender is considered to be a Third Party Service Provider where there is no contractual agreement between the ODFI and the Originator. Third Party Service Providers Do NOT always act as a Third Party Sender 11
Settlement of ACH Transactions What Makes Up an ACH Transaction? Company Name Company Entry Description Effective Date Settlement Date Routing Number, Account Number and Name Standard Entry Class Code (SEC) Transaction Type Code (Debit or Credit) Trace Number (which contains the ODFI RT) For Research and Returns Settlement of ACH Transactions Effective Entry Date is the date (YYMMDD) inserted by the Originator or ODFI of when they would like the Entry to settle Settlement Date Inserted by the ACH Operator Date on which the DFI or its correspondent is scheduled to be debited or credited by the Federal Reserve Settlement Date is the date assigned by the ACH Operator based upon the effective entry date 12
Settlement of ACH Transactions RDFI should rely on Settlement Date for posting These dates are not always the same Note: Any Originated ACH item that contains current business day as the effective date or an invalid effective date and/or stale date will be processed as a Same Day ACH Settlement of ACH Transactions Settlement When the Federal Reserve debits or credits money for ACH transactions affecting the FED Accts of the respective DFIs Funds Availability When the RDFI makes the money available in the Receivers account for withdrawal 13
Settlement of ACH Transactions Credit Entries that are made available to an RDFI by its ACH Operator by 5:00 pm on the banking day prior to the Settlement Date must be made available by opening of business (no later than 9:00am) on the day of Settlement Debits must not be posted prior to the Settlement Date Terminology and Acronyms SEC (Standard Entry Class) Code Identifies the format of the Entry Detail Record Varies based on SEC Code Consumer vs. Corporate Certain rules apply when processing the type of payment (based on SEC Code) Trans Codes (Debit or Credit) 14
Terminology and Acronyms SEC Codes SEC codes identify the type of ACH entry and determine the rules governing the entry Identify the SEC code for the item. The appropriate return reason code for the entry will be contingent upon the SEC code used Codes are located within the Company/Batch Header Record of an ACH file The exception item report should also indicate the SEC code for each item Terminology and Acronyms Corporate Credit or Debit Entry (CCD) Entry initiated by an Organization to transfer funds to or from an account of that Organization or another Organization 15
Terminology and Acronyms Prearranged Payment and Deposit Entry (PPD) Direct Deposit and Direct Payment Most common ACH transaction Typically recurring payments Terminology and Acronyms Internet Initiated/Mobile Entry or P2P (WEB) Consumer debits authorized via the Internet or mobile device; or person-to-person (P2P) credit regardless of initiation method. Single or Recurring debit Entries Only for use when authorization was given via the internet Pre-existing authorizations are not WEB 16
Terminology and Acronyms Telephone-Initiated Entry (TEL) A debit Entry initiated by an Originator pursuant to an oral authorization obtained over the telephone to transfer funds from a Consumer Account of the Receiver Single or Recurring Debit Only Terminology and Acronyms Transaction Codes Two-digit numeric codes that define various types of debits and credit entries Savings/Shares begins with 3 Codes 32 CRs, 37 DBs, 31 NOC/Ret CRs, 36 NOC/Ret DBs Checking/DDA/Share draft begins with 2 Codes 22 CRs, 27 DBs, 21, NOC/Ret CRs, 26 NOC/Ret DBs 17
Terminology and Acronyms Transaction Codes Loans begins with 5 Code 52 CR s, 55 DB but used only for REVERSALS General Ledger begins with 4 Codes 42 CR s, 47 DBs, 41, NOC/Ret CRs, 46 NOC/Ret DBs Terminology and Acronyms NOCs A Notification of Change (NOC) is a zero-dollar entry sent by an RDFI to the ODFI which in turn notifies the Originator of the item that an entry was posted to the Receiver s account, the entry contains invalid information that must be changed going forward COR is the actual SEC code used when sending a NOC. It is recommended that an NOC not be sent to change an account number 18
Reclamations Terminology and Acronyms The Federal government s right to reclaim funds with respect to Federal benefit payments Federal agencies must initiate a reclamation within 120 calendar days after the date they receive notification of death The RDFI is considered to have knowledge of death if they have learned of the death by following reasonable business practices Terminology and Acronyms Return Entries A credit or debit Entry initiated by an RDFI or ACH Operator, that returns a previously originated credit or debit Entry to the ODFI within the time frames established by the Rules 19
Types of Returns Consumer Initiated Returns Administrative Return Codes Miscellaneous Exception Situations Benefit Payment Return Codes International Only Return Codes ACH Operator Return Codes Rejected ENR Codes Dishonored Returns Contested Dishonored Returns Types of Returns Consumer Initiated Returns Not Authorized Includes incorrect date and/or incorrect amount Authorization Revoked Must be made available to the ODFI at the opening of business on the 60 th calendar day following the Settlement Date Requires a Written Statement of Unauthorized Debit 20
Types of Returns 60 day Return Time Frame *Codes Requiring a Written Statement of Unauthorized Debit *R05 *R07 *R10 R33 *R37 R38 *R51 R52 *R53 Types of Returns Administrative Returns Items which the RDFI cannot post. Must be made available to the ODFI at the opening of business on the second banking day following the Settlement Date 2 day Return Time Frame R01 R12 R02 R16 R03 R20 R04 R24 R09 21
Exception Items RDFI Responsibilities Types of Returns Three Options for Processing Manually post (Accept it) Manually post and initiate a NOC (Correct it) Return (Reject it) Must be posted on a timely basis or returned in their proper time frames Resources NACHA Operating Rules Legal framework for the ACH Network Published annually Implementation New Rules implemented quarterly March, June, Sept, Dec 22
Resources Green Book - https://www.fiscal.treasury.gov/fsreports/ref/green Book/greenbook_home.htm Your local Regional Payment Association Any Questions? 23
Contact Information Heather Spencer, AAP hspencer2@mycuservices.com 888-985-7280 ext. 1622 24