Skip to content
BOL Conferences

New Reply Thread Options
#2289051 - 09/25/23 08:15 PM ACH Standard Entry Class Use - Liability Question
Anonymous
Unregistered

Dear AAP and, Risk and Compliance Experts:

Does the use of an improper or impermissible SEC code (e.g., CCD vs PPD), in and of itself, break the authorization on an ACH entry?

Return to Top Reply Quote Quick Reply Quick Quote
#2289060 - 09/25/23 09:51 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

That is:

If a receiver (customer) otherwise authorizes a transaction, but through mistake or inadvertence the ODFI processes the entry with the incorrect SEC code, does that prospectively breach the authorization anyway and/or the NACHA warranties?

Return to Top Reply Quote Quick Reply Quick Quote
#2289071 - 09/26/23 12:45 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
HappyGilmore Offline
10K Club
Joined: Jun 2004
Posts: 20,075
Pulling people out of the ditc...
if i understand the question:

Bill buys a new car, financed through New Car Loan Inc (NCLI). Bill provides authorization to NCLI to debit his account on the 1st of each month for his car note of $125. As Bill is a consumer, NCLI should be using the SEC code PPD, assuming the authorization was done in person and is set to be a recurring debit for the same amount and each month on the same date, no changes in payment date or method. Now, come the 1st of the month, and NCLI uses the SEc code CCD instead of PPD. which is incorrect.

your question is does that invalidate the original authorization Bill provided to NCLI? I would say it does not.

And if the RDFI caught the improper SEC code, should have used r05 to enact a return, which notifies NCLI they goofed on the SEC code and resend correctly.
_________________________
Providing alternative truths since the invention of time

Return to Top Reply Quote Quick Reply Quick Quote
#2289115 - 09/26/23 07:21 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

Yes, that is an excellent answer with respect to one such scenario.

What if it is a one-time transaction (no recurring bill payment authorization on file), e.g., a funds transfer or otherwise, and the same occurs (ODFI utilizes, through mistake/inadvertence/willful disregard) an improper SEC code (such as CCD), would the consumer receiver be in a position to disclaim the entire debit transaction? With some legal footing to boot?

Return to Top Reply Quote Quick Reply Quick Quote
#2289120 - 09/26/23 08:05 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
HappyGilmore Offline
10K Club
Joined: Jun 2004
Posts: 20,075
Pulling people out of the ditc...
i'd say the same scenario above i outlined still holds true, they authorized a debit, wrong SEC code was used, item is returned and they fix and resend the debit. doesn't rescind the fact that they authorized a debit.
_________________________
Providing alternative truths since the invention of time

Return to Top Reply Quote Quick Reply Quick Quote
#2289121 - 09/26/23 08:33 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 85,417
Galveston, TX
I guess I would like to know what predicated these questions - what is the goal as far as the bank is concerned and why does it matter? Is the customer complaining? Did the bank suffer some sort of loss?
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top Reply Quote Quick Reply Quick Quote
#2289122 - 09/26/23 09:05 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

An originator on our platform may have sent out consumer debits using an impermissible entry code.

I'm aware of R05 reversals/returns, but I am actually concerned about our institution's exposure and liability as to a breach of warranty (or other late return process, or even a legal claim) beyond the parameters of a 60-day return window.

Our back office has been of the view that such transactions cannot be, on a strict procedural grounds alone, properly "authorized" or immune to a warranty breach claim, whether or not the receiver actually approved the debit to have been processed in the first place.

Any additional perspective or color would be much appreciated.

Return to Top Reply Quote Quick Reply Quick Quote
#2289124 - 09/26/23 09:52 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
John_Burnett Offline
Platinum Poster
John_Burnett
Joined: Feb 2013
Posts: 562
Cape Cod
What entry codes should have been used and what incorrect codes were used?
_________________________



Return to Top Reply Quote Quick Reply Quick Quote
#2289126 - 09/26/23 09:57 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

PPD or WEB. CCD used.

Receiver accounts against which the debits were presented are presumably consumer.

Return to Top Reply Quote Quick Reply Quick Quote
#2289127 - 09/26/23 09:59 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

I'm looking for more of a theoretical/legal rather than practical insight on such transactions.

Return to Top Reply Quote Quick Reply Quick Quote
#2289129 - 09/26/23 10:02 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

It seems to us that an incorrect SEC may not necessarily be any different than some other fault in the entry (e.g., wrong recipient designated, incorrect date, etc.), and that the differences between "unauthorized" and "warranty breach" are academic at best in such a context.

Return to Top Reply Quote Quick Reply Quick Quote
#2289131 - 09/26/23 10:15 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

So, can the orginator's customer effectively (and validly) say that our bank had no business debiting his/her account, force or demand a return (or make a warranty claim), and whatever issues there may happen to be with the originator being properly paid would be yet another layer to the onion to be worked out between it and its customer?

Return to Top Reply Quote Quick Reply Quick Quote
#2289160 - 09/27/23 05:04 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
HappyGilmore Offline
10K Club
Joined: Jun 2004
Posts: 20,075
Pulling people out of the ditc...
the customer authorized the debit to his account. he doesn't authorize the SEC code that should be used, consumers are clueless what a SEC code is. using the incorrect one does not negate the authorization, but it may delay the final debit of the RDFI chooses to return it for improper SEC code, but then the originator fixes and sends through with the correct.

i've never heard of a Nacha Rule Violation fine for using an improper code. nothing in the rules (at least that i can find) states using the improper code invalidates the authorization or transfers the liability to the RDFI is they accept and post it. i suppose if you think there is such liability, then pay your bank counsel to weigh in on it, call your local Nacha affiliate to get their take, or contact Nacha directly and ask the question.
_________________________
Providing alternative truths since the invention of time

Return to Top Reply Quote Quick Reply Quick Quote
#2289168 - 09/27/23 05:50 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

Thank you for your response. The only issue with the RDFI sending it back R05, from that perspective, is that it invalidates the recurring authorization, the same way an R10 would. And NOC and R11 are not really applicable to that type of situation. So simply re-billing with a corrected entry would not ensure compliance with the Rules.

Return to Top Reply Quote Quick Reply Quick Quote
#2289169 - 09/27/23 05:52 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

We're the ODFI. The RDFI can--perhaps--accept it and post it on the basis of the account number alone, but the liabilities for a return, violation, or claim are borne most immediately by the ODFI.

Return to Top Reply Quote Quick Reply Quick Quote
#2289194 - 09/27/23 09:45 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 85,417
Galveston, TX
If the customer coded the transaction incorrectly and for some reason it gets kicked back, you charge it back to them. What is the big deal, did this customer skip town? Also, "it invalidates the recurring authorization" - how is that so? You are talking in circles.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top Reply Quote Quick Reply Quick Quote
#2289198 - 09/28/23 12:02 AM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

We need to balance our relationship with corporate originator clients, with our compliance and exposure to certain risks.

If an RFDI sends an R05, or R10, the ODFI cannot properly re-debit the receiver's account on the basis of the original authorization (if any), unless and until the receiver enters into a new authorization with the originator. While that might not be as complicated as it sounds, it still is not the same as simply taking the liberty of 'correcting' the entry and running it again unannounced.

Return to Top Reply Quote Quick Reply Quick Quote
#2289199 - 09/28/23 12:10 AM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

The fact that these electronic transactions are loosely akin to paper item world of collecting checks without proper endorsement, but with the unusual twist that the acquiring bank or its own customer is legally at fault rather than the payor and payee. I agree that there isn't much literature addressing this aspect of entry class codes.

I could find some references to this line of discussion in ancient materials from the late 1980s and early 1990s; I suspect most such issues, if they reach a certain threshold, are handled by the payments consortia or NACHA internally through their system of fines, but this I think is an unexplored compliance risk that should be more clearly delineated by NACHA and the AAP community.

Return to Top Reply Quote Quick Reply Quick Quote
#2289200 - 09/28/23 12:29 AM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

We believe, although this position is apparently not well received on this forum, that without the proper entry class code, which is an operational issue attributable at the end of the day to the ODFI, more than "authorization" issues would be to due diligence failures by originator, the black letter law (but perhaps not in equity) of the NACHA rules would be that it simply isn't a good payment order (borrowing an imprecise term from remittance transfer rules).

Return to Top Reply Quote Quick Reply Quick Quote
#2289204 - 09/28/23 01:02 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 85,417
Galveston, TX
Originally Posted by Anonymous
If an RFDI sends an R05, or R10, the ODFI cannot properly re-debit the receiver's account on the basis of the original authorization (if any), unless and until the receiver enters into a new authorization with the originator. While that might not be as complicated as it sounds, it still is not the same as simply taking the liberty of 'correcting' the entry and running it again unannounced.

I still do not understand the issue from an ODFI perspective. Your customer, that is the originator, made a mistake or did this on purpose. The consumer on the other end claimed the transaction was unauthorized. It is up to your customer to abide by the NACHA rules, of which, you are required to provide them a copy of, in order to obtain a reauthorization to continue any ACH activity with the consumer that they are trying to debit. Maybe their customer accidently gave them the wrong account number, etc., but its' up to them to figure it out. If I had an originator for which I was getting more than a couple of R05s or even R10s or R11s over a short period of time, I would be having a sit-down visit with this customer and determine whether or not to sever the relationship.

Why is this risk any different than any other risk for unauthorized transactions that are presented to an ODFI by an originator. That is why you are required to do a detailed risk analysis prior to offering this product.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top Reply Quote Quick Reply Quick Quote
#2289211 - 09/28/23 02:25 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
HappyGilmore Offline
10K Club
Joined: Jun 2004
Posts: 20,075
Pulling people out of the ditc...
R10 is authorization revoked

R05 is incorrect SEC code used on consumer account

The first revokes authorization and the originator can't do another entry unless a new authorization is received. The 2nd notifies of a coding error, and does not invalidate authorization. it allows the originator to fix and resend without getting any additional authorization.

You can continue "to believe" otherwise, but nothing in Nacha Rules backs up your belief.
_________________________
Providing alternative truths since the invention of time

Return to Top Reply Quote Quick Reply Quick Quote
#2289247 - 09/29/23 02:01 AM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

R05 is identical in every respect to R10, with the exceptions that it

[1] alerts the network, and ACH operators, if any, that an incorrect (CCD or CTX) purpose code was used, which is used to compile statistics and determine fee revenue for the reversal entry,

and

[2] allows a return on a corporate transaction with ODFIs whose software might otherwise dishonor or reject the return if it were sent back R29.

The authorization, if there was indeed one in the first place, is nullified once the R05 return is transmitted.

Return to Top Reply Quote Quick Reply Quick Quote
#2289248 - 09/29/23 02:12 AM Re: ACH Standard Entry Class Use - Liability Question Anonymous
Anonymous
Unregistered

There is currently no facility, Notice of Change or reversing entry, that is intended to merely correct a "coding fault" in the entry class portion of the ACH metadata.

Return to Top Reply Quote Quick Reply Quick Quote
#2289252 - 09/29/23 12:42 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 85,417
Galveston, TX
Sorry - what is your point? You still have failed to tell us how this would represent a different risk to the bank from a loss perspective than any other transaction that you allow the originator to send. How does this specific transaction type that you are referencing have a different impact on your responsibility for measuring or monitoring exposure limits as a part of daily operations when processing ACH Files on behalf of its Originators?
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top Reply Quote Quick Reply Quick Quote
#2289253 - 09/29/23 12:50 PM Re: ACH Standard Entry Class Use - Liability Question Anonymous
HappyGilmore Offline
10K Club
Joined: Jun 2004
Posts: 20,075
Pulling people out of the ditc...
Quote
The authorization...is nullified once the R05 return is transmitted.

can you please point out for me where in the Nacha rules this is stated?
_________________________
Providing alternative truths since the invention of time

Return to Top Reply Quote Quick Reply Quick Quote
Quick Reply:
HTML is disabled
UBBCode is enabled




Moderator:  MagicCity, P*Q, Truffle Royale