I have a bank client whose system closes an account if it is brought to a zero balance. However, until the account is purged from the system (not sure how long that is), the account can be reopened (with file maintenance) if the customer makes a deposit. The bank returned an ACH debit entry for a customer whose account had been closed in this manner. Subsequent to that return the customer made a deposit and the account was reopened.

Two questions:
1. Is this account REALLY closed if it can be reopened?
2. Is the ACH Return Code of R02 "account closed" the appropriate code in this situation?

My feeling is the account is not REALLY closed if it can be reopened. The customer never explicitly stated "I am closing my account"; she only brought it to zero with a normal transaction. I realize you don't want zero-balance accounts sitting on the system (nor does the bank want to be charged for them). However, if the account isn't effectively closed to where it cannot be reopened under the same account number I don't see how you can return an ACH item using R02. I feel like R01 "Insufficient Funds" is the more appropriate ACH Return Code.

I'd appreciate any thoughts on this.

According to you system, it is closed. To avoid such situations, we employ a 37-day (?) wait period. Unless the customer explicitly asks for the account to be closed (for which we use a particular tran code), the account stays open until it has had a zero balance for those 37 days. After that it is closed and we would return an ACH debit as account closed; prior to that 37-day, it would be returned as insufficient funds.

What does the legal contract with the depositor say???

every day I get in my car, I close my car door. When I want to get back out, I reopen the door.

accounts at most banks are the same way...yes an account can be closed if a balance hits $0, but the ability to reopen it is usually there, at least for a period of time.

if the core system is set to close it at a certain point, then returning an ACH transaction as "account closed" is correct. If the customer never comes to make a deposit, eventually (based on bank settings), it drops off the system. If you return as NSF, this indicates to the originator the account is in good standing but just short funds - which does not match what the core system reflects on the account status.

Then you also have the argument if the account is closed it can't have fees against it, but if you reflect the transaction as NSF then fees would go against the account. But that is another topic for another day.

You can make all the arguments you want to based on "core settings", but the only thing that determines whether the account is closed is the official termination of the depositor's contract. That either happens automatically based on the contract language, the customer has to initiate the closing of the account, or the bank has to notify the customer that the bank has chosen to close the account. There are no other options. If you automatically close an account because of a zero balance and your contract does not support that feature and the customer suffers some sort of loss because of it (same thing if you re-open an account without customer knowledge, consent and re-disclosure) the bank is going to end up paying.

A friend of mine "closed" a joint account. His soon to be ex-wife "re-opened" it so she could deposit a check made payable to both of them.

My friend, a former FDIC examiner, got angry. Bank looked stupid.

Love to hear how the bank tried to justify that to your friend.

They "justified" it by writing him a check. He was satisfied with half of the amount. Not everyone would be so gracious.

This is the type of situation where, though there is no rule that says you cannot, banks would be wise to use common sense and keep things very simple with bright lines for both staff and customers.

Limit the time and expense of defending such actions by not allowing it to happen in the first place.

Hooking on the this question in a similar vein-
What about an account that was closed correctly and according to deposit contract but a loan officer had the account 're-opened' to collect $'s that were coming in ACH in order to make a loan payment with that $. As much as I know this is very wrong, I am having a hard time coming up with some strong arguments to ensure this is deterred in the future..any help would be very appreciated.

Start with violating NACHA rules to start with.

Thanks rlcarey,
I'm afraid that will not be a strong enough reason to deter loan officers.

Oh for criminey sakes, just tell them to grow up. There are all kinds of problems with it. Regulation E violations and UDAAP come to mind - suggest that they can go in front of the board of directors and explain it to them when the bank is under a cease and desist after you made the recommendation in writing that they not do it.

Thanks for the blunt answer

It may require that you be equally as blunt -- use "straightforward" if you prefer -- with the lenders who try this approach.