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NACHA's Rule Change: Unauthorized Return Rates

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Topic 1- Reducing the Unauthorized Return Rate Threshold ​

The Rule will reduce the current return rate threshold for unauthorized debit Entries (Return Reason Codes R05, R07, R10, R29, and R51) from 1.0 percent to 0.5 percent. This revised threshold is still more than 16 times higher than the average Network return rate of 0.03 percent for unauthorized debit Entries for calendar year 2013. NACHA believes that unauthorized debit returns at 0.5 percent would still indicate problematic origination practices, and therefore would be a useful tool to enable NACHA to focus on outliers of poor quality origination activity.

The Rule will not change any of the existing risk investigation or enforcement processes related to the unauthorized return rate threshold. An ODFI that has an Originator or Third-Party Sender that breaches the lower threshold would be subject to the same obligations and potential enforcement as currently set forth in the Rules for the existing return rate threshold for unauthorized debits. 

Topic 2- Establishing Inquiry Process For Administrative and Overall Return Rate Levels 

The Rule will establish an inquiry process that will provide NACHA with a preliminary evaluation point to research the facts behind an Originator’s ACH activity. Preliminary research, as part of the inquiry process, begins when any Originator exceeds the established administrative return rate or overall return rate level. The review process involves eight steps, and includes an opportunity for NACHA and an industry review panel to review an Originator’s ACH activity prior to any decision to require a reduction in a return rate. The inquiry process does not automatically trigger a Rules enforcement activity.

The established administrative return rate level of 3.0 percent would apply to debit entries returned due to administrative or account data errors (Return Reason Codes R02, R03 and R04). This level is more than 9 times higher than the industry average ACH Network debit return rate for account data errors of 0.33 percent in 2013. This breakpoint would be a useful tool to enable NACHA to look more closely at an Originator’s or Third-Party Sender’s origination practices to determine whether poor origination practices are leading to high return rates that should be reduced. A return rate level above 3.0 percent will not automatically be considered a Rules violation or result in a Rules enforcement proceeding. Rather, a return rate above the level will be considered a starting point for a review of the Originator’s or Third-Party Sender’s origination activity to determine if a reduction is warranted.
 
The established overall return rate level of 15.0 percent would apply to all debit entries (excluding RCK entries) that are returned for any reason. This level is approximately 10.5 times higher than the overall industry return rate average of 1.42 percent in 2013. While some level of returns, including for funding-related issues such as insufficient funds, may be unavoidable, excessive total returns also can be indicative of problematic origination practices.

As with the administrative return rate level, a level of 15 percent would be a useful tool to enable NACHA to look more closely at an Originator’s or Third-Party Sender’s origination practices to determine whether poor origination practices are leading to high return rates that should be reduced. The Rule sets the return rate level at a point that is not so high that it fails to identify unnecessarily high-risk Origination practices, nor so low that it identifies many businesses in industries that experience higher than normal return rates as a matter of course but that otherwise would not be considered problematic.

How to Calculate The New ACH Network Unauthorized Return Rate Threshold

NACHA’s new ACH Network Risk and Enforcement Rule, which lowers the existing unauthorized return rate threshold, and establishes an inquiry process and evaluation points if an Originator or Third-Party Sender exceeds specific administrative and/or overall return rate levels, effective Sept. 18, 2015. To support ODFIs with implementation of the Rule and to help ensure accurate monitoring of the return rates of their Originators and Third-Party Senders, NACHA developed an infographic to visually illustrate how to calculate the new return rates. >> See Infograph Calculation <<


 
Topic 3 - Reinitiation of Entries 

Reinitiation is the method permitted in the Rules by which a Returned Entry may be resubmitted. 

In July 2013, NACHA issued ACH Operations Bulletin #3-2013 titled “Reinitiation of Returned Debit Entries” in an attempt to clarify that various types of Entries used by such Originators are indeed “reinitiated” Entries and therefore already are restricted, and in some cases prohibited, by the existing Reinitiation Rule. Nonetheless, in order to leave no ambiguity in this regard, the Rule formally incorporates into the Rules several clarifying changes to the Reinitiation Rule consistent with the principles set forth in ACH Operations Bulletin #3-2013.
 
Most fundamentally, Subsection 2.12.4 of the Rules implicitly prohibits the reinitiation of Entries outside of the express limited circumstances under which they are permitted under the Rules. The Rule makes this prohibition explicit. 
 
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 change will allow reinitiations to correct administrative errors, but prohibit reinitiation of Entries that may be attempts to evade the limitation on the reinitiation of returned Entries by varying the content of the Entry.
 
Finally, the Rule addresses two technical issues associated with the Reinitiation Rule. First, the ODFI would be 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 would notify the Receiver that the Entry relates to a previously Returned Entry, and will facilitate research and dispute resolution for RDFIs. Second, there is not currently a separate Return code for an RDFI to indicate when an Entry is being returned for a violation of the Reinitiation Rule. The Rule will allow such returns to use Return Code R10 (currently used for Extended Returns) to include a Return for a violation of the Reinitiation Rule, since most violations of the Reinitiation Rule are likely to be identified via a customer complaint after the expiration of the “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 will need to obtain a Written Statement of Unauthorized Debit. 

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