Electronic Check Conversion - NACHA Amends Operating Rules To Reflect Regulation E Requirements
By Laura Carey
Regulation E Amendments
January 1, 2007 marked the mandatory compliance date under the Federal Reserve Board’s final amendments to Regulation E [press release] (which implements the Electronic Fund Transfer Act) for parties involved in electronic check conversion (ECK) transactions. Merchants and other payees that convert payments made by checks into electronic funds transfers are now covered by Regulation E for purposes of authorization, thus giving the Federal Trade Commission enforcement authority over unregulated service providers.
In order to comply with Regulation E authorization requirements, merchants and other payees must provide written notice to the consumer, in advance of the transaction, that their check will (or may) be converted into an electronic fund transfer (EFT), and after such notice the consumer elects to continue with the transaction. While the authorization rules are the same for point of purchase (POP) transactions and accounts receivable or dropbox (ARC) transactions, implementation of the rules will differ depending on the type of transaction involved.
In the case of a POP transaction, a merchant or service provider accepts a check for payment at a point of sale. Regulation E requires that the merchant or service provider notify the customer prior to accepting the check that the check will (or may) be converted into an electronic payment, and after being notified, the customer authorizes the conversion by signing an authorization form. The conversion occurs at the register when payment information is captured, an image of the check is retained for archival purposes, and the original “voided” check is returned to the consumer. If the consumer decides against the ECK transaction, the consumer can opt-out by using a different form of payment. Regulation E mandates that the merchant or service provider post the required notice in a prominent and conspicuous location (i.e. on signage at point of purchase), and provide a copy of the notice to the consumer at the time of the transaction (i.e. on receipt given to consumer). Regulation E also requires that merchants post a temporary notice until December 31, 2009, notifying the consumer that funds may be debited from the consumer’s account as soon as the same day that payment is received (even if the merchant can not or will not process same day); however, the rule does not require that a copy of the temporary notice be given to the consumer.
For ARC transactions, the consumer places a check in a dropbox or mails a check to the merchant or service provider in response to a bill for payment. Regulation E requires that the merchant or service provider notify the customer of its intent to process the payment using check conversion, and the customer authorizes the conversion by going forward with the transaction after receiving the notice. The notice can be printed on the consumer’s billing or periodic statement, or can be an enclosure in the bill. The conversion occurs when the paper check is received by the merchant or service provider, and payment information is captured, an image of the check is retained for archival purposes, and the original check is “truncated”, meaning that it is destroyed and does not get returned by the merchant to the consumer or to the consumer’s financial institution. Regulation E requires that the notice in periodic or billing statements be clear and readily understandable, and that it be included on each statement, except for coupon books, in which case the notice does not have to be printed on each coupon and can appear once on the inside front cover or the first page of the coupon book that the consumer can retain. For ARC transactions, Regulation E also requires that the merchants or service providers give temporary notice (until December 31, 2009) to the consumer that funds may be debited from the consumer’s account as soon as the same day that payment is received, and that the check will not be returned by the consumer’s financial institution.
The Board’s final amendments to Regulation E also require that merchants and other payees obtain separate authorizations from the consumer for the collection of service fees or NSF fees for check or EFT transactions. Authorization obtained from the consumer for the initial ECK transaction does not constitute authorization to collect NSF fees, and a separate authorization is required. Similar to the authorization requirements for the initial POP transaction, the final rules require that merchants and other payees disclose the dollar amount of the NSF fee (if the fee varies, they may disclose how the fee will be calculated) by posting the notice and by providing a copy of such notice to the consumer. In recognition of the expenses associated with reprogramming of point of sale terminals by the January 1, 2007 compliance date, the Board provided a one year delayed compliance date (until January 1, 2008) for the requirement to disclose the amount of the NSF fees on a notice to be given to the consumer.
Amendments to NACHA Operating Rules
In order to bring its operating rules in line with the new Regulation E requirements, the National Automated Clearing House Association (NACHA) amended several of its rules related to POP and ARC entries, and back office conversion (BOC) entries. NACHA‘s amendment related to POP and ARC entries became effective January 1, 2007, and its amendments related to BOC entries will become effective March 16, 2007.
For POP entries, NACHA amended its authorization requirements to include both written authorization from the consumer and notice to the consumer. The operating rules require that notice be posted in a prominent and conspicuous location, and that a copy of the notice be provided to the consumer (which copy should contain substantially similar language to the posted notice). NACHA provides a safe harbor for merchants and other payees who use specific language in their notice to consumers found in the operating rules, or language substantially similar thereto. The operating rules also state that until January 1, 2010, the posted notice must contain additional language found in the rules, or language substantially similar thereto, informing the consumer that funds may be withdrawn from the consumer’s account as soon as the same day the payment is made. This additional language is not required to be on the copy of the notice to be given to the consumer, however. Finally, NACHA amended its rules for POP entries to clarify that if both the written authorization from the consumer and the notice to the consumer are not met, the entry would not be authorized, and thus can be returned.
NACHA amended its rules for ARC entries similar to the rule changes made for POP entries. The notice to the consumer must be provided in a clear and conspicuous manner, and until January 1, 2010, such notice must contain the additional language pertaining to same day withdrawal of funds, as well as text that the consumer will not receive the check back from the financial institution. If the merchant uses NACHA’s suggested language or substantially similar language in its notice to the consumer, a safe harbor will apply for ARC entries as with POP entries.
In the case of BOC entries, the consumer makes an accounts receivable payment “in person”, rather than mailing a payment in response to a billing statement or using a drop box (which is an ARC entry under the NACHA operating rules). For example, if a consumer makes a payment in person at a doctor’s office by handing a check to the receptionist or billing clerk, the transaction should be submitted as a BOC entry, not as an ARC entry. Since the consumer will not receive the required notice on a billing statement under BOC entries, the operating rules require that the notice to the consumer be posted in a prominent and conspicuous location, and a copy of the notice containing language substantially similar to the posted notice must be provided to the consumer. The NACHA rules applicable to BOC entries also require that the merchant provide its phone number for the consumer to call in the case of inquires. Finally, as with the amended rules for ARC entries, the rules for BOC entries require that until January 1, 2010, the notice must contain the additional language pertaining to same day withdrawal of funds and a statement that the consumer will not receive the check back from the financial institution.