[Federal Register Volume 63, Number 21 (Monday, February 2, 1998)]
[Proposed Rules]
[Pages 5426-5445]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2042]



[[Page 5425]]

_______________________________________________________________________

Part III





Department of the Treasury





_______________________________________________________________________



Fiscal Service



_______________________________________________________________________



31 CFR Part 210



Federal Government Participation in the Automated Clearing House; 
Proposed Rule

  Federal Register / Vol. 63, No. 21 / Monday, February 2, 1998 / 
Proposed Rules  

[[Page 5426]]



DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 210

RIN 1510-AA39


Federal Government Participation in the Automated Clearing House

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Department of the Treasury, Financial Management Service, 
proposes to revise its regulation governing the use of the Automated 
Clearing House (ACH) system by Federal agencies. Part 210 defines the 
rights and liabilities of Federal agencies, Federal Reserve Banks, 
financial institutions, and the public, in connection with ACH credit 
entries, debit entries, and entry data originated or received by a 
Federal agency through the ACH system. As a result of the enactment of 
recent legislation, the Service expects to introduce up to 600 million 
new transactions into the ACH system by January 1, 1999. The Service 
anticipates that the ACH system will provide the dominant, though not 
exclusive, EFT system used by Federal agencies. Part 210 will provide 
the regulatory foundation for use of the ACH system by Federal 
agencies.

DATES: Comments must be received no later than May 4, 1998.

ADDRESSES: Comments should be addressed to Cynthia L. Johnson, 
Director, Cash Management Policy and Planning Division, Financial 
Management Service, U.S. Department of the Treasury, Room 420, 401 14th 
Street, S.W., Washington, DC 20227. A copy of the proposed rule is 
available at the Service's web site at: http://www.fms.treas.gov/ach. 
Comments on the proposed rule will be available for public inspection 
and downloading on the Internet and for public inspection and copying 
at the Department of the Treasury Library, Room 5030, 1500 Pennsylvania 
Avenue, N.W., Washington, D.C. To make an appointment to inspect 
comments and transcripts, please call (202) 622-0990.

FOR FURTHER INFORMATION CONTACT: Diana Shevlin, Financial Program 
Specialist, at (202) 874-7032; Donna Wilson, Financial Program 
Specialist, at (202) 874-6799; Christine Ricci, Senior Analyst, or 
Cynthia L. Johnson, Director, Cash Management Policy and Planning 
Division, at (202) 874-6590; or Natalie H. Diana, Attorney-Advisor, at 
(202) 874-6827.

SUPPLEMENTARY INFORMATION:

I. Background

    As the Federal Government's financial manager, the Financial 
Management Service (the Service) provides leadership and assistance to 
Federal agencies in cash management, payment policy, debt collection, 
and financial systems. The Service also collects and disburses funds 
for most Federal agencies. In fiscal year 1997, the Service issued over 
856 million payments, totaling in excess of $1.1 trillion, and 
collected over $1 trillion on behalf of Federal agencies, representing 
a variety of taxes, duties, fees, and fines.
    In fiscal year 1997, approximately 58% percent of Treasury payments 
were made through the Automated Clearing House (ACH) system. In 
addition, a growing number of transactions involving the collection of 
funds by Federal agencies are being made through the ACH system. The 
ACH system is a nationwide electronic funds transfer (EFT) system which 
provides for the interbank clearing of credit and debit transactions 
and for the exchange of information among participating financial 
institutions. The Federal Government is the largest single user of the 
ACH system, originating and receiving millions of transactions each 
month. In fiscal year 1997, the Service made 489 million payments 
through the ACH system. In addition, in fiscal year 1997, the Service 
collected over $711 billion in taxes and more than $28 billion in non-
tax collections using the ACH system.
    Federal agencies primarily use the ACH system to make recurring 
payments, such as salary payments. Federal agencies also use the ACH 
system to make non-recurring payments, such as travel reimbursements 
and tax refunds, as well as payments to vendors and to grant and 
program recipients. The ACH system also is used for non-tax 
collections, international funds settlement and for cash concentration 
from Treasury's more than 3,500 depositaries. The Service adopted a 
policy of accepting ACH credits to Treasury's General Account (TGA) in 
order to enable Federal agencies to collect payments such as fines, 
fees, and loan payments from the public by EFT.
    In addition to transactions that are used by the Federal Government 
as well as the private sector, Federal agencies have worked with 
financial institutions and the National Automated Clearing House 
Association (NACHA), the rulemaking body for the ACH system, to develop 
two new ACH entries and formats specifically designed to meet the needs 
of Federal agencies: The Automated Enrollment Entry (ENR) replaces the 
paper form used for enrollment in the Direct Deposit program. The Death 
Notification Entry (DNE) allows a Federal agency, such as the Social 
Security Administration (SSA), to notify a financial institution 
promptly of the death of a Social Security recipient. The DNE has 
reduced significantly the total dollar amount of post-death payments 
that SSA seeks to recover annually from financial institutions.
    Two recently enacted laws are increasing substantially the use of 
the ACH system by Federal agencies. Provisions in the North American 
Free Trade Agreement Implementation Act (NAFTA), Pub. L. No. 103-182, 
sec. 523 (codified at 26 U.S.C. 6302(h)), and provisions in the Debt 
Collection Improvement Act of 1996 (DCIA), Chapter 10 of the Omnibus 
Consolidated Rescission and Appropriations Act of 1996, Pub. L. 104-
134, mandate the use of EFT for the collection of certain Federal taxes 
and for Federal payments other than payments under the Internal Revenue 
Code of 1986. The DCIA defines EFT as ``any movement of funds, other 
than a transaction originated by cash, check, or similar paper 
instrument, that is initiated through an electronic terminal, 
telephone, computer, or magnetic tape, for the purpose of ordering, 
instructing, or authorizing a financial institution to debit or credit 
an account.'' DCIA, section 31001(x). EFT includes ACH, Fedwire, and 
transfers made at automated teller machines (ATMs) and point-of-sale 
(POS) terminals.
    To meet the NAFTA requirements, the Service, in conjunction with 
the Internal Revenue Service and Federal Reserve Banks, implemented the 
Electronic Federal Tax Payment System (EFTPS) which enables taxpayers 
to pay Federal taxes by EFT. The Service will soon issue final 
amendments to 31 CFR part 203--Treasury Tax and Loan Depositaries. Part 
203 addresses the rights and responsibilities of taxpayers, financial 
institutions, and Federal Reserve Banks in connection with EFTPS.
    Section 31001(x) of the DCIA amends 31 U.S.C. 3332 to require 
Federal agencies to convert from checks to EFT in two phases. During 
phase one, which began on July 26, 1996, all recipients of Federal 
payments (other than payments under the Internal Revenue Code of 1986) 
who become eligible to receive those payments on or after July 26, 
1996, must receive them electronically unless the recipient certifies 
that the recipient does not have an account at a

[[Page 5427]]

financial institution or an authorized payment agent.
    Phase two covers the conversion from checks to EFT for all Federal 
payments, except payments under the Internal Revenue Code of 1986. The 
DCIA provides that, subject to the Secretary of the Treasury's 
authority to grant waivers, all such payments made after January 1, 
1999, must be made by EFT.
    On July 26, 1996, the Service promulgated an interim rule, 31 CFR 
part 208, to implement those provisions of the DCIA that took effect on 
that date. 61 FR 39254. On September 16, 1997, the Service published 
for comment a proposed rule implementing the phase two requirements of 
the DCIA. 62 FR 48714.
    As a result of the enactment of the DCIA and NAFTA, the Service 
expects to introduce up to 600 million new transactions into the ACH 
system by January 1, 1999. The Service anticipates that the ACH system 
will provide the dominant, though not exclusive, EFT system used by 
Federal agencies. Part 210 will provide the regulatory foundation for 
use of the ACH system by Federal agencies.

II. The 1994 Notice of Proposed Rulemaking

    On September 30, 1994, the Service published a Notice of Proposed 
Rulemaking (NPRM) with respect to Part 210; that document is referred 
to herein as the 1994 NPRM. The purpose of the 1994 NPRM was ``to 
provide a regulatory basis for the broader use of the ACH system to 
meet the future payment, collection and information flow needs of the 
Government.'' 59 FR 50112.
    The Service received fifty-one comments from Federal agencies, 
financial institutions, NACHA and its regional affiliates, and private 
sector organizations. All commenters expressed strong support of the 
Service's efforts to provide a regulatory basis for broader use of the 
ACH system and to make the regulations more consistent with financial 
industry rules. Specific comments on the NPRM are discussed in the 
section-by-section analysis below.

III. This Notice of Proposed Rulemaking

A. Introduction

    After considering the comments received on the 1994 NPRM, and 
taking into account developments since the 1994 NPRM was issued, in 
particular the enactment of the DCIA and NAFTA, the Service believes it 
is appropriate to issue a new NPRM. While the organization and wording 
of this proposed rule is significantly different from the 1994 NPRM, 
the Service has not deviated from its determination, expressed in the 
1994 NPRM, that the ACH Rules, which apply to private entries made 
through the ACH system, also should apply to credit and debit entries 
and entry data originated or received by Federal agencies (Government 
entries), subject to certain exceptions necessary to protect the 
interests of the Treasury, other Federal agencies, and the public. The 
use of private industry rules reduces the regulatory burden on 
financial institutions which otherwise might have to comply with 
conflicting or duplicative requirements.
    Several commenters indicated that the 1994 NPRM did not explain 
clearly the relationship between the ACH Rules and Federal law or 
identify with sufficient clarity the ACH Rules which the Service was 
preempting with respect to Government entries. This NPRM clarifies that 
the Service proposes to adopt the ACH Rules as the rules governing all 
Government entries, with twelve exceptions discussed below, for which 
the Service proposes to establish special rules as a matter of Federal 
law.
    Under Federal law, Treasury has the authority and the duty to 
disburse and collect funds on behalf of executive Federal agencies. See 
31 U.S.C. Secs. 321(b)(1), 3301, 3321, 3327 and 3335. Treasury 
consistently has taken the position that state law, such as the Uniform 
Commercial Code, is inapplicable to Federal payments and collections 
and that Federal law applies whenever Treasury engages in its sovereign 
function of collecting and disbursing public funds, regardless of the 
method used to carry out the function. The Supreme Court affirmed this 
position in Clearfield Trust Co. v. United States, 318 U.S. 363, 366 
(1943). In Clearfield Trust, the Supreme Court found that the rights 
and duties of the United States with respect to commercial paper that 
it issues are governed by Federal law, not state law. Treasury has 
defended successfully the Clearfield Trust doctrine in a number of 
cases. See, e.g., Alnor Check Cashing Co. v. Katz, 821 F. Supp. 307, 
311 (E.D. Pa. 1993), aff'd 11 F.3d 27 (3rd Cir. 1993); Alaska National 
Bank of the North v. Federal Reserve Bank of San Francisco, No. A87-
156, slip op. at 10 (D. Alaska, Aug. 10, 1987).
    In 1942, when the Clearfield case was decided, the Federal 
Government disbursed funds primarily in the form of Treasury checks. 
However, the use of an electronic funds transfer system, such as the 
ACH system, instead of paper checks, does not change the legal 
principle that the rights and duties of the United States are governed 
by Federal law.
    Part 210, which relies upon and implements Treasury's statutory 
responsibility to collect and disburse public funds, regulates the 
rights and duties of parties to transactions originated or received by 
Federal agencies through the ACH system, just as other Treasury rules 
regulate the rights of parties to Treasury checks.1
---------------------------------------------------------------------------

    \1\  31 CFR part 240.
---------------------------------------------------------------------------

    The ACH Rules, which are developed and updated by NACHA, allocate 
rights and liabilities among participants to an ACH transaction. 
Financial institutions agree to be bound by the ACH Rules when they 
join an ACH association. The ACH Rules are structured upon the premise 
that five entities participate in the ACH system. They are: (1) The 
originator, which is the person or entity that agrees to initiate ACH 
entries in accordance with an arrangement with a receiver; (2) the 
originating depository financial institution (ODFI), which is the 
institution that receives payment instructions from the originator and 
forwards the entries to an ACH Operator; (3) the ACH Operator, which is 
a central clearing facility, operated by a Federal Reserve Bank or a 
private organization, that receives entries from ODFIs, distributes the 
entries to appropriate receiving depository financial institutions and 
performs the settlement function for the affected financial 
institutions; (4) the receiving depository financial institution 
(RDFI), which is the institution that receives ACH entries from the ACH 
Operator and posts them to the accounts of its depositors; and (5) the 
receiver, which is a natural person or organization that has authorized 
an originator to initiate an ACH entry to the receiver's account with 
the RDFI.
    In initiating and receiving Government entries, Federal agencies, 
Federal Reserve Banks and the Service operate in unique capacities that 
differ from the roles contemplated by the ACH Rules. These differences 
are a result of the statutory authorities that govern Federal 
Government payments and collections and that distinguish Federal 
Government payments from commercial payments involving private parties 
and financial institutions.
    Because the ACH Rules employ terminology that is based upon private 
industry financial institution-customer relationships, the definitions 
used in the ACH Rules do not address the roles of Federal agencies, the 
Service and the Federal Reserve Banks with respect to

[[Page 5428]]

the origination or receipt of an ACH entry. Due to the bifurcation of 
function between certifying and disbursing Federal agencies, Federal 
Government operations do not conform to the definitions in the ACH 
Rules. From a functional perspective, the Federal agency that certifies 
an ACH entry to the Service performs a function that is analogous to 
that of the originator of the entry for purposes of the ACH Rules. In 
disbursing the payment, the Service is acting as the ODFI and the 
Federal Reserve Bank is the originating ACH Operator with respect to 
the entry. Similarly, a Federal agency that receives a payment through 
the ACH system, functions as the receiver, while the Service functions 
as the RDFI, and the Federal Reserve Bank functions as the receiving 
ACH Operator for the entry.
    The ACH Rules generally require ODFIs and RDFIs to assume 
responsibility for entries originated and received by their customers. 
ODFIs and RDFIs must make certain warranties with respect to entries 
originated and received by their customers and are liable to other 
participants in the ACH system for breach of those warranties. The ACH 
Rules do not impose direct liability upon originators and receivers; 
any losses resulting from an act or omission by an originator or 
receiver are imposed on the ODFI or RDFI. The ODFI or RDFI can seek 
recourse against the originator or receiver if it has the right to do 
so under the contract between the parties and/or applicable state law.
    The Service does not believe that it is appropriate to assume 
liability arising from the acts and omissions of Federal agencies 
originating and receiving ACH entries. Accordingly, although it is the 
Service's view that Federal agencies operate as originators and 
receivers and the Service operates as an ODFI and RDFI from a 
functional perspective, the Service believes it is appropriate to 
impose upon Federal agencies that originate or receive ACH entries the 
obligations and liabilities imposed on ODFIs and RDFIs, respectively, 
for purposes of the ACH Rules. Proposed part 210 therefore is 
structured on the premise that Federal agencies are subject to all of 
the obligations and liabilities imposed on ODFIs and RDFIs under the 
ACH Rules, except as otherwise provided in part 210.
    The Service has reviewed the ACH Rules and determined that, given 
the special nature of Government entries, and the importance of 
protecting public funds, it is in the best interest of the public for 
the Service to preempt in part or in whole twelve provisions of the ACH 
Rules. The twelve provisions that the Service proposes to preempt in 
part or in whole are described briefly below, and are discussed in more 
detail in the section-by-section analysis. There are five provisions of 
the ACH Rules that the Service proposes to preempt completely. The 
following five ACH Rules are preempted entirely and are excluded 
specifically from part 210's definition of ``applicable ACH Rules'' 
(see proposed Sec. 210.2(d)):
    1. ACH members. Proposed part 210 preempts the limitation on the 
applicability of the ACH Rules to members of an ACH association.
    2. Compensation. Proposed part 210 preempts the compensation rules 
set forth in the ACH Rules.
    3. Arbitration. Proposed part 210 preempts the requirement under 
the ACH Rules that disputes among participants be settled by 
arbitration procedures set forth in the ACH Rules.
    4. Reclamation. The reclamation provisions of Subpart B preempt all 
ACH Rules related to the reclamation of entries and the liability of 
participants that otherwise would apply to benefit payments.
    5. Timing of Origination. Proposed part 210 preempts the 
requirement set forth in the ACH Rules that a credit entry be 
originated no more than two banking days before the settlement date of 
the entry.
    In addition to the foregoing five provisions of the ACH Rules which 
proposed part 210 entirely preempts through the definition of 
``applicable ACH Rules,'' seven other provisions of the ACH Rules are 
preempted in part by operation of specific sections of proposed part 
210. Those provisions are:
    1. Verification of identity of recipient (see proposed 
Secs. 210.4(a), 210.8(c)(2)). Under the ACH Rules, a receiver must 
authorize an entry before the entry may be originated and the ODFI must 
warrant that the authorization is valid. The ODFI thus bears the 
ultimate liability for any loss resulting from a forged authorization 
under the ACH Rules. Proposed part 210 imposes a different rule for 
Government entries. Specifically, under proposed Sec. 210.4(a), a 
financial institution that accepts an authorization from a recipient 
must verify the identity of the recipient. The financial institution is 
liable to the Federal Government for all entries made in reliance on a 
forged authorization that the institution has accepted. Thus, proposed 
part 210 preempts the ODFI warranty and liability provisions of the ACH 
Rules by allocating liability to the RDFI if it accepts a forged 
authorization.
    2. Authorization for debit entries to Federal agencies (see 
proposed Secs. 210.4(a)(2), 210.8(c)(1)). Proposed part 210 preempts 
the ACH Rules with respect to the form of authorization required to 
initiate debit entries to a Federal agency. The ACH Rules require that 
every entry be authorized by the receiver, but only require that the 
authorization be in writing in the case of debit entries to a consumer 
account. Under proposed Sec. 210.4(a), no person or entity (including 
any financial institution) may initiate or transmit a debit entry to a 
Federal agency unless the agency has expressly authorized in writing 
(or through a similarly authenticated authorization) the origination of 
the entry by that particular originator. An ODFI transmitting an entry 
in violation of this requirement would be liable for the amount of the 
transaction, plus interest, under proposed Sec. 210.8(c)(1).
    3. Prenotifications (see proposed Secs. 210.6(b), 210.8(a)). The 
Service is proposing to preempt the ACH Rules in two respects in 
connection with prenotifications. In order to reduce the potential for 
misdirected entries, proposed Sec. 210.8(a) requires a financial 
institution that receives a prenotification relating to Government 
entries to verify the account number and at least one other identifying 
data element in the prenotification. This requirement supersedes the 
ACH Rules which specifically permit financial institutions to rely on 
the account number alone in posting payment to an account.
    Second, the origination of a prenotification is optional for all 
entries under the ACH Rules. Proposed Sec. 210.6(b) preempts the ACH 
Rules by requiring that a Federal agency originate a prenotification 
before initiating a debit entry to a recipient's account. 
Prenotification is optional for all credit entries.
    4. Liability of the Federal Government. (a) Amount of damages (see 
proposed Sec. 210.6). In general, the ACH Rules impose liability on an 
RDFI or ODFI for all losses, liabilities or claims incurred by another 
depository financial institution (DFI), ACH Operator or Association as 
a result of the RDFI's or ODFI's breach of any warranty. Thus, under 
the ACH Rules, a Federal agency that originates payments, would be 
liable for all losses resulting from any breach by it of an applicable 
warranty under the ACH Rules. Similarly, a Federal agency that receives 
payments, would be liable for all losses resulting from any breach by 
it of an applicable warranty under the ACH Rules.
    Proposed Sec. 210.6 limits a Federal agency's liability to the 
amount of the

[[Page 5429]]

entry whether it is originating or receiving ACH entries. Therefore, a 
Federal agency would not be liable to a DFI, ACH Operator or an ACH 
association for interest, attorneys' fees, or other consequential 
damages. In addition, in certain circumstances, a Federal agency's 
liability may be reduced further by the amount of the loss caused by 
the financial institution's negligence.
    (b) Liability of Federal Reserve Banks (see proposed 
Sec. 210.7(a)). Proposed part 210 preempts article 11.5 of the ACH 
Rules, which provides that a Federal Reserve Bank is not the agent of 
an RDFI or ODFI. Proposed part 210 provides that Federal Reserve Banks 
are Fiscal Agents of the Treasury and are not liable to any party other 
than the Treasury for their actions under part 210.
    5. Liability of financial institutions (see proposed 
Sec. 210.8(c)). Proposed part 210 preempts the provisions of the ACH 
Rules that would operate to make a financial institution liable to the 
Federal Government for any loss, liability or claim relating to an 
entry in an amount exceeding the entry. As previously indicated, the 
ACH Rules impose liability on an RDFI or ODFI for all losses, 
liabilities or claims incurred by another DFI, ACH Operator or 
Association as a result of the RDFI's or ODFI's breach of any warranty. 
Under proposed part 210, a financial institution would not be liable to 
the Federal Government for interest, attorneys' fees, or other 
consequential damages, except in the case of an unauthorized debit to a 
Federal agency, as discussed above.
    6. Reversals (see proposed Sec. 210.6(g). Proposed part 210 
requires Federal agencies initiating reversals to certify that the 
reversal does not violate applicable law or regulations. This 
requirement is not imposed under the ACH Rules. In addition, proposed 
part 210 applies to the Federal Government the ACH Rules relating to 
indemnification, but limits the extent of the indemnification to the 
amount of the individual entry(ies) being reversed.
    7. Account requirements for benefit payments (see proposed 
Sec. 210.5). Proposed part 210 imposes a requirement with respect to 
ACH credit entries representing benefit payments that is not imposed 
under the ACH Rules, i.e., that such payments be deposited to an 
account at a financial institution ``in the name of'' the recipient, 
with two exceptions discussed in the section-by-section analysis. The 
term ``account'' for purposes of proposed Sec. 210.5 is intended to 
mean a deposit account and not a loan account or general ledger 
account. The Service is aware that NACHA has approved a change to the 
ACH Rules, which will become effective in March 1999, to permit the 
crediting of ACH credits to a financial institution general ledger 
account or to a loan account. The Service does not intend to accept 
this ACH Rule with respect to certain benefit payments.
    In addition to preempting the provisions of the ACH Rules listed 
above, Part 210 also establishes, as a matter of Federal law, certain 
rights and obligations that are not addressed in the ACH Rules. For 
example, the ACH Rules generally do not address the rights and 
liabilities between receivers and originators, nor do the ACH Rules 
address rights and liabilities between ODFIs and originators, or 
between RDFIs and receivers. Under the ACH Rules, an ODFI is 
responsible for entries originated by its customers. The ODFI must make 
certain warranties with respect to any entry originated by its 
customer, and is liable for breach of those warranties. The ODFI's 
ability to seek recourse against the originator in the event of a loss 
for which the ODFI is liable under the ACH Rules is beyond the purview 
of the ACH Rules and would be governed by the contract between the ODFI 
and originator and applicable state law.
    The Service is proposing to establish some of these rights in part 
210 with respect to Federal agencies vis-a-vis originators or receivers 
of Government entries. For example, proposed Part 210 provides that a 
Federal agency will be liable to a recipient for any loss sustained by 
the recipient as a result of the Federal agency's failure to originate 
a credit or debit entry in accordance with part 210, and limits that 
liability to the amount of the entry. Neither the basis nor the extent 
of an originator's liability to a receiver is addressed in the ACH 
Rules. In addition, the ACH Rules do not address the circumstances in 
which an entry, in fact, is ``authorized.'' The determination of 
whether a valid authorization exists ordinarily would depend on the 
contract between the parties and applicable state law. Proposed part 
210 establishes certain circumstances in which an entry shall be deemed 
to be unauthorized.

B. Vendor Payments, Enrollment, and Relationship to Other Regulations

    In this NPRM, the Service is soliciting comment on two issues of 
general interest: vendor payments and enrollment.
    Although the Service has encouraged companies doing business with 
Federal agencies to receive payment through the ACH system, 
participation by vendors has been low. Of the 16 million vendor 
payments disbursed by Treasury in fiscal year 1997, only 27% were made 
by EFT.
    The Service understands that the primary reason vendors do not use 
EFT is the non-receipt of remittance data with their payments, i.e., 
payments are credited to the vendor's deposit account without 
information indicating the purpose of the payment. Absent identifying 
information, it is difficult for vendors to reconcile their accounts 
receivable. The Service seeks public comment on this matter and on what 
actions could be taken, in particular by the financial industry, to 
make improvements. Specifically, the Service seeks comment on the 
following:
     What factors contribute to the non-receipt of remittance 
data (e.g., customer demand, costs)?
     What are the key reasons why electronic data interchange 
(EDI) has not been adopted widely by the financial industry?
     Does the approved amendment to the NACHA ACH Rules 
(effective September 18, 1998), which requires the RDFI to provide 
remittance information upon request, adequately address vendors' 
concerns?
     What alternative approaches/solutions are there to remedy 
this problem?
    With respect to enrollments, the Federal Government actively is 
promoting the use of automated enrollment for all payments. The Service 
has received many comments on how to improve the current process for 
enrolling vendors in EFT. The Service seeks public comment on how to 
expand the use of automated enrollment and what steps the Federal 
Government could take to improve the process.

C. Future Changes to Subpart B

    As discussed in greater detail in the section-by-section analysis 
below, the Service proposes in this NPRM to reorganize and rewrite 
Subpart B in order to allow for the increasing use of automated 
processes to effect reclamations, rather than requiring reclamations to 
be conducted on the basis of paper-driven procedures. The Service also 
is seeking to clarify in this NPRM the obligations and liabilities 
imposed on financial institutions under current subpart B. The Service 
is not proposing to change significantly those obligations and 
liabilities at this time. However, the Service is actively considering 
ways in which the reclamation process might be restructured in the 
future to operate more efficiently as a fully automated process. 
Because the Service recognizes

[[Page 5430]]

that many Federal agencies are not in a position to move to an 
automated reclamation process at this time, proposed Subpart B 
preserves the basic structure of the current paper-oriented process.
    The current reclamation process is a cumbersome and labor-intensive 
manual process involving a complicated formula for the allocation of 
liability. As the volume of Federal benefit payments made through the 
ACH system increases, the number of reclamations also will increase, 
significantly increasing the processing burden on both the Federal 
Government and financial institutions. The Service believes it would be 
in the best interests of the Federal Government and financial 
institutions to develop a more cost-effective and efficient reclamation 
process by simplifying the formula for allocating liability and 
eliminating the manual processing requirements upon which the current 
reclamation process is based.
    In order to begin formulating a preliminary approach to 
implementing an automated reclamation process, the Service is 
soliciting comment on the considerations which financial institutions 
and Federal agencies believe are important with respect to 
reclamations. For example, because the average number of payments 
involved in a reclamation is 1.5, the Service questions whether the 
protection afforded to financial institutions by the limited liability 
provisions of Subpart B is outweighed by the processing costs of 
handling reclamations. The Service thus is interested in comment on an 
approach in which an RDFI would be liable for the amount of any post-
death entries received, regardless of whether the RDFI had actual or 
constructive knowledge of the death. This liability structure would 
make it possible to streamline the reclamation process by eliminating 
the certification and informational requirements, thereby eliminating 
the need for the Federal Government and financial institutions to 
research and verify the circumstances of each reclamation. In addition, 
the Service welcomes comments on other possible ways in which the 
current reclamation process could be simplified.

D. Section-by-Section Analysis

    The Service proposes to change the title of this Part to ``Federal 
Government Participation in the Automated Clearing House'' to reflect 
the broadened scope of the regulation to cover all types of activities 
that are handled, or may in the future be handled, over the ACH system.
    This proposal contains two subparts. Subpart A sets forth rules 
applicable to all ACH credit and debit entries and entry data 
originated or received by a Federal agency which are defined in the 
proposed rule as ``Government entries.'' Subpart B contains the rules 
for the reclamation of benefit payments. Current part 210 contains an 
additional subpart, subpart C, dealing with discretionary salary 
allotments. In addition, the 1994 NPRM proposed to add a new subpart D 
dealing with savings allotments. The Service has determined that 
subparts C and D are unnecessary because they are redundant of rules 
that appear elsewhere. For example, regulations issued by the Office of 
Personnel Management, at 5 CFR part 550, address the circumstances 
under which salary and savings allotments may be made. Under 31 CFR 
part 208, Federal agencies are required to make all Federal payments, 
including allotments, by EFT. Subpart A of Part 210 sets forth the 
rules governing all ACH credit entries made by a Federal agency, 
including savings and salary allotment payments. Therefore, subparts C 
and D are deleted from proposed part 210.
Section 210.1--Scope; Relation to Other Regulations
    Current part 210 covers only ACH payments made by the Federal 
Government. In the 1994 NPRM, the Service proposed to broaden the scope 
of part 210 to cover all entries and entry data originated or received 
by a Federal agency through the ACH system. Entry data includes 
prenotifications, returned entries, adjustment entries, notifications 
of change and other notices or data transmitted through the ACH system. 
Thus, part 210 would apply to collections and the information entries 
which can now be handled through the ACH system, as well as to Federal 
payments made through the ACH system.
    Proposed part 210 establishes the general legal and operational 
framework applicable to all ``Government entries'' as defined in the 
proposed rule. Federal tax payments made by ACH debit or credit are 
governed by part 203, which sets forth the rights and responsibilities 
of taxpayers, financial institutions, and Federal Reserve Banks in 
connection with EFTPS. ACH credits and debits originated by the Bureau 
of Public Debt to pay principal or interest on, and to collect payment 
for the purchase of, United States securities are governed by 31 CFR 
part 370.
    Both part 203 and part 370 impose certain requirements with respect 
to the payments subject to those regulations that are inconsistent with 
the provisions of proposed part 210. For example, under proposed part 
210 a Federal agency is required to originate a prenotification before 
originating an ACH debit entry to an account; in contrast, under part 
370, a prenotification need not be originated before originating an ACH 
debit entry to an account. In this example, as a result of the 
operation of proposed Sec. 210.1, a prenotification would not be 
required before the Federal Government originates an ACH debit entry to 
an account for the purpose of collecting payment for the purchase of a 
United States security.
    Section 210.1 of the 1994 NPRM referenced the relationship of part 
210 to the savings allotment provisions of 31 CFR part 209. Effective 
January 27, 1997, the Service deleted part 209 because it was obsolete. 
61 FR 68155. Therefore, the reference to part 209 has been deleted from 
proposed part 210.
Section 210.2--Definitions
    The Service proposes to revise this section to explain that any 
term not defined in part 210 shall have the meaning given to that term 
in the ACH Rules. In addition, for clarity and simplification, the 
Service proposes to add, remove, or redesignate certain other terms, as 
indicated below.
    The Service proposes to delete certain definitions that appear in 
current part 210 and in the 1994 NPRM because proposed part 210 uses 
these terms in the same way as the ACH Rules. Thus, the definitions of 
the terms ``banking day,'' ``business day,'' ``erroneous payment,'' 
``prenotification'' and ``receiver'' have been deleted.
    Other terms defined in current part 210 have been deleted because 
they are not used in proposed part 210. The terms ``allotment'' and 
``allotter,'' which are defined both in current part 210 and the 1994 
NPRM, and the terms ``discretionary allotment'' and ``employee'' in 
current part 210, have been removed because the terms are used only in 
Subparts C or D. The terms ``payment'' and ``payment date'' in current 
part 210 have been replaced by the ACH terms ``entry'' or ``credit'' 
(rather than ``payment'') and ``settlement date'' (rather than 
``payment date''). The term ``payment instruction'' has been deleted as 
unnecessary in proposed part 210.
    The definition of ``Federal Reserve Bank'' in current part 210 and 
the definition of ``Government'' in the 1994 NPRM also are deleted as 
unnecessary.
    The Service proposes to add a definition of ``ACH Rules'' in 
proposed Sec. 210.2(a). This definition explains that the ACH Rules 
consist of the NACHA

[[Page 5431]]

Operating Rules and the NACHA Operating Guidelines.
    The Service also proposes to add a definition of ``actual or 
constructive knowledge'' at proposed Sec. 210.2(b). This phrase is used 
in subpart B in connection with determining a financial institution's 
liability for post-death and post-legal incapacity payments. The 
addition of this definition is intended to clarify that in reference to 
the death or legal incapacity of a recipient of benefit payments or the 
death of a beneficiary, the RDFI is deemed to have actual knowledge of 
the death or legal incapacity upon the receipt by whatever means of any 
information of the death or legal incapacity. Moreover, if the RDFI 
would have discovered the death or legal incapacity if it had followed 
commercially reasonable business practices, the RDFI will be deemed to 
have constructive knowledge of the death or legal incapacity. For 
example, an RDFI would have actual knowledge of a death or legal 
incapacity through a communication with an executor of the deceased 
recipient's or beneficiary's estate, a family member, another third 
party, or the Federal agency issuing the benefit payment. On the other 
hand, if an RDFI misplaced a letter sent through the mail containing 
notice of death or legal incapacity, or failed to open or read the 
letter, the RDFI would be deemed to have constructive knowledge of the 
death even though it did not have actual knowledge.
    Neither current part 210 nor the 1994 NPRM contain a definition of 
``actual or constructive knowledge,'' but the reclamation provisions of 
subpart B of current part 210 provide that a financial institution is 
deemed to have knowledge of the death or legal incapacity of a 
recipient or the death of a beneficiary if the financial institution 
would have discovered the death or legal incapacity if it had exercised 
due diligence. The Service does not intend to change that standard in 
this NPRM, but proposes to add this definition to clarify that the 
basis for determining whether a financial institution has constructive 
knowledge of the death or legal incapacity is whether commercially 
reasonable business practices would have resulted in discovery of the 
information.
    The Service proposes to add a definition of ``agency'' in 
Sec. 210.2(c) to mean any department, agency, or instrumentality of the 
Federal Government, or a corporation owned or controlled by the Federal 
Government. Current part 210 uses the term ``program agency.'' The 
proposed change is not intended to alter the scope of current part 210. 
The proposed definition is identical to the definition of agency in 
part 208, which sets forth rules governing the mandatory use of EFT by 
agencies, except that the definition of agency for purposes of part 210 
does not include a Federal Reserve Bank.
    For purposes of subpart B, which governs reclamations, ``agency'' 
means the agency that certified the benefit payment(s) being reclaimed.
    Section 210.2(d) of proposed part 210 defines the term ``applicable 
ACH Rules'' to mean the ``1997 ACH Rules,'' including all rule changes 
published therein with an effective date on or before September 19, 
1997, which are made applicable to ``Government entries'' pursuant to 
proposed Sec. 210.3. Proposed part 210 completely preempts those ACH 
Rules that: govern claims for compensation, arbitration, or reclamation 
of benefit payments; limit the applicability of the ACH Rules to 
members of an ACH association; or require that a credit entry be 
originated no more than two banking days before the settlement date of 
the entry. Therefore, these ACH Rules have been excluded from the term 
``applicable ACH Rules.'' As discussed above in the Introduction to 
this NPRM, proposed part 210 also preempts certain other provisions of 
the ACH Rules through operation of particular sections of part 210.
    It should be noted that any technical or timing requirements 
imposed upon DFIs under the ACH Rules constitute applicable ACH Rules, 
and will be binding on agencies and financial institutions, unless 
preempted. Thus, for example, agencies will be subject to the timing 
requirements for notifications of change and returns. Agencies would 
not be subject to the requirement that credit entries be originated no 
more than two banking days before the settlement date of the entry, 
since this requirement is excluded from the definition of applicable 
ACH Rules.
    The Service proposes to add a definition of ``authorized payment 
agent'' at Sec. 210.2(e) in connection with the account requirements 
for benefit payments set forth at proposed Sec. 210.5. The definition 
is identical to the definition of ``authorized payment agent'' for 
purposes of part 208. In the case of a beneficiary who is physically or 
mentally incapable of managing his or her payments, proposed Sec. 210.5 
would permit an authorized payment agent to receive the payments on 
behalf of the beneficiary.
    The Social Security Act, Veterans' Benefits Act, and the Railroad 
Retirement Act contain provisions permitting a benefit payment to be 
made to an individual or organization other than the beneficiary when 
doing so is in the best interest of the beneficiary.2 SSA 
and the Railroad Retirement Board use the term ``representative payee'' 
to refer to individuals and organizations that have been selected to 
receive benefits on behalf of a beneficiary who is ``legally 
incompetent or mentally incapable of managing benefit payments.'' The 
Department of Veterans Affairs uses the term ``fiduciary'' to refer to 
individuals or organizations appointed to serve in similar 
circumstances. The definition of the term ``recipient'' in current 
Sec. 210.2 refers to representative payees and fiduciaries.
---------------------------------------------------------------------------

    \2\ See 42 U.S.C. 1383(a)(2)(A)(ii)(I); 38 U.S.C. 5502(a)(1); 45 
U.S.C. 231k, respectively.
---------------------------------------------------------------------------

    Other agencies also may provide for payment to representative 
payees and fiduciaries. While not specifically mentioned by name, the 
phrase ``or other agency'' in the proposed definition is intended to 
refer to such agencies.
    In fiscal year 1997, approximately 10 percent of Social Security 
benefit payments (61 million payments) were made to approximately five 
million representative payees. SSA, the Railroad Retirement Board, and 
the Department of Veterans Affairs have issued detailed regulations 
addressing the qualifications and duties of representative payees and 
fiduciaries.3 The rules governing these representational 
relationships are longstanding and well established. Therefore, the 
Service believes that it is appropriate to rely on existing agency 
regulations in defining the term ``authorized payment agent.''
---------------------------------------------------------------------------

    \3\ See 20 CFR Parts 404, 410, 416, 266, and 348; and 38 CFR 
Part 13, respectively.
---------------------------------------------------------------------------

    The Service proposes to add a definition of ``Automated Clearing 
House or ACH'' in Sec. 210.2(f) to make it clear that the electronic 
fund transfers that are subject to part 210 are limited to those 
effected through an electronic fund transfer system that has adopted 
the ACH Rules.
    The proposed definition of ``beneficiary'' in Sec. 210.2(g) has 
been reworded slightly from the definition in current part 210 to 
reflect the addition of a definition of benefit payment, but 
substantively is unchanged from the definition in current part 210. 
Although the 1994 NPRM did not define specifically a beneficiary as a 
person other than a recipient, the term beneficiary was used in the 
1994 NPRM as meaning a party other than a recipient.
    The definition of ``benefit payment'' in proposed Sec. 210.2(h) is 
similar to the definition in current part 210. In the

[[Page 5432]]

1994 NPRM, the Service had proposed to move the specific classes of 
benefit payments enumerated in the definition to the Green Book. 
Several commenters objected to this proposed change and requested that 
the specific classes of benefit payments continue to be enumerated in 
the regulation itself. In light of these comments, the Service proposes 
to retain in the regulation a listing of several types of benefit 
payments for purposes of convenience and illustration. It should be 
noted, however, that the term ``benefit payment'' includes, but is not 
limited to, the specific examples set forth at proposed Sec. 210.2(h).
    The Service proposes to add to part 210 a definition of ``Federal 
payment.'' The proposed definition in Sec. 210.2(i) is identical to the 
definition of that term in part 208 except that the definition of 
Federal payment in part 208 excludes payments under the Internal 
Revenue Code of 1986, whereas the term ``Federal payment'' in proposed 
Sec. 210.2(i) includes those payments. Payments under the Internal 
Revenue Code of 1986 are excluded in part 208 because the DCIA 
expressly provides that payments under the Internal Revenue Code of 
1986 are not subject to the DCIA's mandatory EFT requirements. However, 
payments that the Internal Revenue Service elects to make using the ACH 
system would be subject to part 210 and thus are included within the 
definition of Federal payment at proposed Sec. 210.2(i).
    The proposed definition of ``financial institution'' in 
Sec. 210.2(j) is identical to the definition contained in Part 208 
except that the Service proposes to add a sentence noting that, in 
proposed part 210, a financial institution may be referred to as an 
Originating Depository Financial Institution (ODFI) or a Receiving 
Depository Financial Institution (RDFI), depending on whether it is 
originating or receiving entries to or from its ACH Operator.
    The proposed rule defines ``financial institution'' to mean a 
depository institution as defined in 12 U.S.C. 461(b)(1)(A), excluding 
subparagraphs (v) and (vii), and an agency or branch of a foreign bank 
as defined in 12 U.S.C. 3101. Under this definition, banks, savings 
banks, credit unions, savings associations, and United States-based 
foreign bank branches would be considered ``financial institutions.'' 
This definition has been designed to reflect the class of entities that 
can participate directly in the ACH system, i.e., financial 
institutions that are authorized by law to accept deposits.
    The term ``Government entry'' is defined in Sec. 210.2(k) as an ACH 
credit or debit entry or entry data originated or received by an 
agency. As noted above, current Part 210 applies only to credit entries 
originated by an agency for the purpose of making payments. Proposed 
Part 210 has a broader scope; it applies to all entries originated or 
received by an agency, whether made for the purpose of payments, 
collections or for information purposes.
    The Service proposes to add a definition of the Green Book in 
Sec. 210.2(l) to clarify that financial institutions that originate or 
receive Government entries are subject to the procedures and guidelines 
which are published in the Green Book, as provided at proposed 
Sec. 210.3(c).
    The Service proposes to define the term ``notice of reclamation'' 
at proposed Sec. 210.2(m) to mean a notice issued by the Federal 
Government in a paper, electronic, or other form in order to initiate a 
reclamation. This definition clarifies that the Federal Government is 
not limited to a paper-based means of communication and opens the way 
for an automated reclamation procedure. The definition of notice of 
reclamation is moved to the definition section of proposed part 210 
from Sec. 210.13(a) of current Part 210.
    The Service proposes to preserve the definition of ``outstanding 
total'' in current Part 210 without substantive change.
    The proposed definition of ``recipient'' in Sec. 210.2(o) is 
substantially similar to the corresponding definition in Part 208. The 
term would include an authorized payment agent that receives a payment 
on behalf of a beneficiary.
    The Service proposes to add the term ``Service'' to mean the 
Financial Management Service, Department of the Treasury.
    The Service proposes to add a definition of the Treasury Financial 
Manual in Sec. 210.2(q) to clarify that the Service may publish 
procedures and guidelines applicable to Government entries in the 
Treasury Financial Manual. The Treasury Financial Manual contains 
procedures to be observed by all agencies with respect to central 
accounting, financial reporting, and other Federal Government-wide 
fiscal responsibilities of the Treasury. The proposed definition is 
substantially unchanged from the definition set forth in the 1994 NPRM.
Section 210.3--Governing Law
    Proposed Sec. 210.3(a) provides that the rights and obligations of 
the United States and the Federal Reserve Banks with respect to all 
Government entries are governed by Part 210, which has the force and 
effect of Federal law. As discussed above, this approach is consistent 
with cases such as Clearfield Trust Co. v. United States, 318 U.S. 363 
(1943), and its progeny.
    Proposed Sec. 210.3(b) provides that Part 210 incorporates by 
reference the applicable ACH Rules in effect on September 19, 1997, as 
modified by this part. Since the publication of the 1994 NPRM, a number 
of amendments to the ACH Rules have been adopted. The Service will be 
bound by all amendments adopted since the publication of the 1994 NPRM 
up to and including those which took effect on September 19, 1997, 
except the rule that makes prenotifications optional for all payment 
types, which the Service is proposing to modify. In addition, as noted 
above, NACHA has approved an amendment to the ACH Rules that, effective 
March 19, 1999, will permit the crediting of entries to non-deposit 
accounts. The Service does not intend to accept this amendment for 
benefit payments subject to proposed Sec. 210.5.
    Proposed Sec. 210.3(b)(2) describes how subsequent amendments to 
the ACH Rules will be handled. The 1994 NPRM stated that Government 
entries would be governed by any amendment to the ACH Rules that became 
effective after a specified date only if the Service accepted the 
amendment by publishing notice to that effect. Twenty-six members of 
one ACH association were among the thirty-six commenters who urged the 
Service to change this position. Several financial institutions also 
recommended that the Service provide that amendments to the ACH Rules 
are deemed accepted unless the Service expressly rejects the amendment 
by publishing notice to that effect in the Federal Register. In 
contrast, one agency commented that ``* * * Federal agencies should be 
prohibited from implementing NACHA proposed amendments until 
specifically sanctioned by the Treasury Department for agency use.''
    Although the Service recognizes that its proposed policy may impose 
some additional burden on financial institutions that must track the 
status of ACH Rule amendments, the Service believes that the interests 
of the Federal Government outweigh these concerns. Amendments to the 
ACH Rules could have a significant effect on individual agencies and on 
the Federal Government as a whole. The Service believes that in order 
to assess the impact of an amendment on agencies, the Federal 
Government, and the public, the Service must review the amendments and 
consult with other agencies. Moreover, Federal regulations require that 
any changes to a

[[Page 5433]]

publication incorporated by reference in a Federal 
Register.4
---------------------------------------------------------------------------

    \4\ See 1 CFR Sec. 51.11.
---------------------------------------------------------------------------

    For the above reasons, proposed part 210 states that amendments 
effective after September 19, 1997, will not apply to Government 
entries unless the Service expressly accepts such amendments by 
publishing notice of acceptance in the Federal Register. In addition, 
proposed Sec. 210.3(b)(2) provides that with respect to any future 
amendment that the Service determines to accept, the date of 
applicability of the amendment to Government entries will be the 
effective date of the rulemaking specified by the Service in the 
Federal Register document that expressly accepts the amendment.
    The Service proposes to clarify at Sec. 210.3(c) of proposed part 
210 that any person or entity that originates or receives a Government 
entry must comply with the instructions and procedures issued by the 
Service, including the Treasury Financial Manual and the Green Book. As 
indicated in various places in this NPRM, the Service is proposing to 
remove to the Green Book and the Treasury Financial Manual certain 
requirements that currently are set forth in the regulation itself. 
Particularly in light of the proposed relocation of these provisions, 
the Service believes it is important to make explicit in the regulation 
the Service's longstanding policy that the requirements set forth in 
the Green Book and the Treasury Financial Manual are binding upon 
financial institutions and agencies to the same extent as the 
regulation itself.
    Some commenters on the 1994 NPRM were concerned that the Service 
would alter the substantive rights of parties to a Government entry 
through amendments to the Treasury Financial Manual, the Green Book and 
other operating guidelines. The commenters requested that such changes 
be made through amendments to part 210 and be published for public 
comment. The Treasury Financial Manual and the Green Book, as well as 
other operating guidelines published by the Service, provide specific 
operational directions and procedures that implement the regulatory 
requirements of part 210. The requirements set forth in the Green Book 
and the Treasury Financial Manual, including those provisions that the 
Service is proposing to relocate from the regulation to the Green Book 
or Treasury Financial Manual, are procedural, rather than substantive, 
in nature. Changes to the substantive rights and liabilities of parties 
to a Government entry will be made through amendments to part 210 
itself in accordance with administrative rulemaking requirements. 
However, as discussed above, agencies and financial institutions should 
be aware that the Service has the authority to issue binding procedures 
and guidance to implement part 210 and that the Service will enforce 
the requirements set forth in the Treasury Financial Manual and the 
Green Book in the same manner that it enforces regulations.
Section 210.4--Authorizations and Revocations of Authorizations
    Proposed Sec. 210.4(a) provides that each debit and credit entry 
subject to proposed part 210 must be authorized in accordance with the 
applicable ACH Rules and the additional requirements set forth in this 
section. The liability of a financial institution for failing to comply 
with the authorization requirements is set forth at proposed 
Sec. 210.8(c)(2).
    Proposed Sec. 210.4(a)(1) provides that the agency or RDFI that 
accepts the recipient's authorization shall verify the identity of the 
recipient and, in the case of a written authorization that bears the 
recipient's signature, the validity of the signature. Traditionally, 
recipients of benefit payments such as Social Security and Veterans 
benefits enrolled in Direct Deposit by completing a Form 1199A with the 
assistance of their financial institution. In order to encourage 
recipients to use Direct Deposit, in recent years, SSA and other 
agencies have become directly involved in the enrollment process by 
accepting Direct Deposit authorizations over the phone with the 
assistance of trained customer service representatives. Proposed part 
210 acknowledges that the enrollment process may be completed by the 
recipient's financial institution or by the agency. In addition, 
proposed Sec. 210.4(a) encourages automated enrollments by removing the 
requirement that the financial institution sign the authorization form. 
Proposed Sec. 210.4(a) recognizes that signature verification may not 
be possible or practical in an automated enrollment.
    The 1994 NPRM required that financial institutions exercise due 
diligence in verifying the identity of recipients. Commenters requested 
clarification of this standard. The Service proposes to delete the 
requirement that financial institutions exercise due diligence to 
verify the recipient's identity. Instead, proposed part 210 imposes an 
absolute requirement that the RDFI or agency accepting the 
authorization verify the recipient's identity and, where appropriate, 
the recipient's signature. The Service proposes to leave to the 
discretion of the financial institution or agency accepting an 
authorization the steps it will take to verify the recipient's 
identity. The Service continues to believe that the authorization 
process represents an opportunity to reduce fraud which could otherwise 
result in significant losses to the Federal Government. Because the 
party that accepts the authorization is in the best position to detect 
potential fraud, the Service believes it is appropriate to hold that 
party strictly liable for the identity of the recipient.
    Under proposed Sec. 210.4(a)(2), which is substantially similar to 
Sec. 210.3(a)(6) of the 1994 NPRM, an originator and an ODFI would be 
prohibited from initiating a debit entry to an agency without the 
express permission, in writing or similarly authenticated, of the 
agency. The Service has conducted pilot programs to test the initiation 
of debit entries to the Federal Government. These pilots indicate that 
the use of debit entries to the Federal Government is a cost-efficient 
payment mechanism that benefits both the Federal Government and the 
payee-recipient. However, in order to protect the interests of the 
Federal Government, the Service believes that it is appropriate to 
require the prior written (or similarly authenticated) authorization, 
just as the ACH Rules require prior written authorization in the case 
of debits to a consumer account. In the case of recurring entries, the 
agency would give authorization only once, prior to the first entry.
    Proposed Sec. 210.4(b), which is based on Sec. 210.3(b) of the 1994 
NPRM and Sec. 210.4(b) of current part 210, specifies the terms to 
which a recipient agrees by executing an authorization for an agency to 
initiate an ACH entry. Under Sec. 210.4(b)(1), a recipient agrees to be 
bound by part 210 and, under Sec. 210.4(b)(2), the recipient agrees to 
provide accurate information.
    Proposed Sec. 210.4(b)(3) provides that the recipient agrees to 
verify the recipient's identity to the satisfaction of the party that 
accepts the authorization, whether this is the RDFI or the agency. The 
imposition of this requirement on recipients complements the duty of 
the party accepting the authorization to verify the recipient's 
identity.
    Proposed Sec. 210.4(b)(4) provides that a new authorization 
supersedes any already existing authorization that is inconsistent with 
the new authorization. This provision is reworded, but substantively 
unchanged, from Sec. 210.3(b)(4) of the 1994 NPRM.

[[Page 5434]]

    Under proposed Sec. 210.4(b)(5), the recipient agrees that the 
Federal Government may reverse any duplicate or erroneous entry as 
provided in Sec. 210.6(g).
    The 1994 NPRM proposed that an authorization would be revoked in 
the event the RDFI was unable to process an item properly because of 
incorrect transaction instructions. The Service proposes to delete this 
provision in light of comments received indicating that the common 
practice by RDFIs that receive an item that cannot be processed is to 
return the item. This affords the ODFI an opportunity to correct 
erroneous information and resubmit the item. The Service agrees that 
the return and resubmission process is an appropriate mechanism to deal 
with such items.
    The Service also proposes to eliminate the provision contained in 
the 1994 NPRM that an authorization was revoked upon a determination by 
the Federal Government that the conditions of authorization have 
changed. Several commenters questioned the breadth and vagueness of 
this provision. The Service agrees that this provision is not 
necessary.
    In addition, the Service proposes to delete the provision in 
Sec. 210.4(e) of current part 210 and Sec. 210.3(d) of the 1994 NPRM 
that states that, except as authorized by law or other regulations, 
part 210 shall not be used to effect an assignment of a payment. The 
Service believes that a prohibition against assignments is not 
appropriate in part 210. Other Federal laws, such as the Social 
Security Act, govern the assignment of benefits.
    The Service also proposes to delete the provision in the 1994 NPRM 
that an authorization would terminate upon a failure by the recipient 
to meet any of the conditions specified in the terms of the 
authorization. This provision was intended to address circumstances in 
which a recipient failed to comply with a duty imposed on the recipient 
in the authorization under any applicable agency regulation, guideline, 
or agreement. Upon further consideration, the Service does not believe 
that this issue needs to be addressed in part 210, because the 
circumstances in which a recipient's right to receive benefit payments 
terminates as a result of violation of agency requirements are 
appropriately addressed by the agency regulations governing benefit 
payments.
    Proposed Sec. 210.4(c)(1) corresponds to Sec. 210.4(c)(2) of 
current part 210. This section provides that, in the case of benefit 
payments, a change in the ownership of the account results in the 
termination of the authorization. This provision is an extension to the 
authorization requirements relating to account ownership for recipients 
of benefit payments. The purpose of this provision is to ensure that 
payments are not deposited to an account to which a recipient no longer 
has access or in which the recipient's ownership interest has changed.
    Under proposed Sec. 210.4(c)(2), as under current part 210, the 
death or legal incapacity of a recipient of benefit payments or the 
death of a beneficiary results in the termination of the authorization.
    Proposed Sec. 210.4(c)(3), which corresponds to Secs. 210.4(c)(4) 
and 210.7(c) of current part 210, provides that the closing of the 
recipient's account at the RDFI results in termination of the 
authorization. In addition, this section requires the RDFI to provide 
30 days written notice to the recipient prior to closing the account 
except in cases of fraud. Some financial institutions commented that 
the thirty day notice requirement was an improper interference with 
their customer relationships. However, the Service believes that the 
notice requirement protects recipients from being deprived of timely 
access to their funds as a result of an account being closed without 
sufficient notice to allow the recipient to make other arrangements to 
receive the funds.
    In order to eliminate any unnecessary interruptions in ACH services 
to recipients when any of the events described in proposed 
Sec. 210.4(c)(4) occurs, the Service proposes to add a provision that 
states that an authorization will not terminate upon the insolvency or 
closure of the RDFI, provided that a successor is named for the 
institution. If no successor is named, the Federal Government may 
transfer temporarily the authorization to a consenting financial 
institution for a period of no longer than 120 days. Proposed 
Sec. 210.4(c)(4) is largely identical to Sec. 210.3(c)(9) of the 1994 
NPRM except that the Service proposes to add the term ``consenting'' to 
clarify that it will transfer authorizations only to an RDFI that 
consents to the transfer.
Section 210.5--Account requirements for Benefit Payments
    Proposed Sec. 210.5 imposes restrictions on the type of account to 
which benefit payments may be deposited. Proposed Sec. 210.5(a) sets 
forth a general rule that benefit payments must be deposited to an 
account at a financial institution in the name of the recipient. As 
explained above in connection with the definition of ``benefit 
payment,'' Federal retirement payments would not constitute benefit 
payments for purposes of the requirements of proposed Sec. 210.5. The 
reason for excluding Federal retirement payments from the requirement 
of proposed Sec. 210.5(a) is that in some circumstances these types of 
payments are made to accounts owned by someone other than the person 
authorized to receive the Federal retirement payment, such as a spouse.
    For purposes of proposed Sec. 210.5, the phrase ``account at a 
financial institution'' is intended to mean a deposit account. Proposed 
Sec. 210.5 would not prohibit the use of a joint account between the 
recipient and a spouse or other member of the recipient's family.
    Proposed Sec. 210.5(b) provides two exceptions from the general 
rule set forth at proposed Sec. 210.5(a) for situations that involve an 
authorized payment agent or an investment account established through a 
registered securities broker or dealer. Proposed Sec. 210.5(b)(1) 
addresses cases in which an authorized payment agent has been selected 
or designated. The term ``authorized payment agent'' is narrowly 
defined for purposes of this NPRM to mean a person or entity selected 
under certain agency regulations to act on behalf of a beneficiary. In 
such cases, the account may be titled in any manner that satisfies the 
regulations of the appropriate agency.
    Proposed Sec. 210.5(b)(2) permits an ACH credit entry representing 
a benefit payment to be deposited into an investment account in the 
name of a broker or dealer registered under the Securities Act of 1934, 
provided that the account and related records are structured so that 
the beneficiary's interest is protected under Federal or state deposit 
insurance regulations. The deposit of a benefit payment into an account 
owned by a third party raises concerns about the protection of the 
beneficiary's interests. The requirement that the account and related 
records be structured so that the beneficiary's interest is protected 
under Federal or state deposit insurance regulation is intended to 
address this concern.
    The phrase ``notwithstanding the applicable ACH Rules'' indicates 
that proposed Sec. 210.5 imposes a requirement not imposed under the 
applicable ACH Rules, i.e., that the account be ``in the name of'' the 
recipient, with the two exceptions noted above. This requirement is 
based on Sec. 210.4(a) of current part 210 and Sec. 210.3(a) of the 
1994 NPRM. Like those provisions, this proposed section is designed to 
ensure that benefit payments reach the intended recipient by requiring 
that

[[Page 5435]]

such payments be deposited into an account in which the recipient has 
an ownership interest. Proposed Sec. 210.5(a) is limited to benefit 
payments, however, because the Service is aware that under current 
commercial practices many vendors designate an account in a general 
corporate name to receive payments in the name of a subsidiary or 
designate a bank account in the name of an accountant or other service 
provider for the receipt of payments. In light of these business 
practices, the Service does not believe that it is appropriate to 
require that non-benefit payments be deposited into an account in which 
the recipient has an ownership interest.
    The ACH system in the past has not supported the transmission of 
ACH credit entries to a non-deposit account. The Service is aware that 
NACHA has approved an amendment to the ACH Rules (effective March 19, 
1999), which permits the crediting of entries to general ledger 
accounts and loan accounts. The Service does not intend to accept the 
amendment with respect to certain benefit payments.
    Current part 210 provides that the title of the account designated 
by the recipient must include the recipient's name. However, in 
response to inquiries, the Service has interpreted current Part 210 as 
permitting a master/subaccount arrangement in which the benefit 
payments are deposited into a master account established, for example, 
by a nursing home that is providing care for a number of Social 
Security recipients. Proposed Sec. 210.5 is consistent with this 
approach, but also allows benefit payments to be deposited into an 
investment account established by a registered securities broker or 
dealer, provided the recipient's name and ownership interest are 
indicated on the deposit account records.
Section 210.6--Agencies
    The title of this section has been changed from ``Federal 
Government'' to ``Agencies.'' Proposed Sec. 210.6 sets forth a number 
of obligations and liabilities to which agencies that initiate or 
receive Government entries are subject. These obligations and 
liabilities are in addition to, or different from, the obligations and 
liabilities that otherwise would be imposed under the applicable ACH 
Rules. For example, the authorization, prenotification, and reversal 
requirements of proposed Sec. 210.6(a), (b), and (g) constitute 
additional obligations. The liability provisions of Sec. 210.6(c), (d), 
(e), and (g) both expand and limit the liability that an agency would 
otherwise be subject to under the applicable ACH Rules. Specifically, 
an agency's liability is broader than it would be under the applicable 
ACH Rules because an agency is liable for a failure to act ``in 
accordance with this part [210].'' However, the extent of an agency's 
potential liability is capped by the amount of the entry(ies), which is 
a limitation on the liability generally provided for under the 
applicable ACH Rules.
    Proposed Sec. 210.6(a) is based on Sec. 210.6(e)(2) and 
Sec. 210.4(b) of the 1994 NPRM and requires an agency to obtain prior 
written authorization from the Service in order to receive ACH credit 
or debit entries. The Service requires this process in order to make 
software and operational changes to permit the receipt of entries by 
the agency. The Service proposes to delete the language from the 1994 
NPRM directing the Federal Reserve Bank to take ``appropriate action'' 
because this language refers to operational matters between the Service 
and the Federal Reserve Bank, and is not needed in the regulation. 
Proposed Sec. 210.6(a) is not intended to reduce or change the 
liability of originators or ODFIs for the initiation of an unauthorized 
entry to an agency; rather, it is an operational requirement imposed by 
the Service on agencies.
    Proposed Sec. 210.6(b) addresses prenotifications. A 
prenotification is a non-value informational entry sent through the ACH 
system that contains the same information that will be carried on 
subsequent entries (with the exception of the dollar amount and 
transaction code). The purpose of a prenotification is to verify the 
accuracy of the account information to ensure that when a live entry is 
received, it can be posted to the correct account.
    Proposed Sec. 210.6(b) is based on current Sec. 210.8(b) and deals 
with an agency's responsibilities for prenotifications in the context 
of both debits and credits. The duties of a financial institution with 
respect to prenotifications are addressed in Sec. 210.8(a).
    Under the ACH Rules, prenotifications are optional for all entries. 
Both the 1994 NPRM and proposed part 210 make prenotification optional 
for credit entries, but modify the ACH Rules by requiring 
prenotification for debit entries initiated by an agency. The Service 
believes that, in the case of debits initiated by the Federal 
Government, added precautions need to be taken to ensure that the debit 
is applied against the correct account at the intended financial 
institution.
    In response to questions raised by commenters, it should be noted 
that an agency must follow all operational requirements relating to 
prenotifications required under the ACH Rules when the agency initiates 
or receives a prenotification.
    Proposed Sec. 210.6(c)-(e) set forth an agency's liability to 
various parties in connection with Government entries. The 1994 NPRM 
proposed to limit generally the extent of an agency's liability to the 
amount of the entry(ies) at issue, but to permit an agency to agree to 
be bound by the compensation and arbitration procedures found in the 
ACH Rules, subject to the requirement that the agency fund any 
additional amount of liability and any arbitration costs. The Service 
has determined that it is not in the interest of the Federal Government 
to permit agencies to vary the liability of the Federal Government on a 
case-by-case basis. In order to preserve a uniform set of rules and 
liabilities for all Government entries, the Service has deleted from 
proposed part 210 the provision permitting agencies to opt into the ACH 
compensation and arbitration rules.
    Proposed Sec. 210.6(c) is based on current Sec. 210.10(a) and 
provides that an agency will be liable to the recipient for any loss 
sustained as a result of the agency's failure to originate a credit or 
debit entry in accordance with part 210. This section further provides 
that the agency's liability will be limited to the amount of the entry.
    The ACH Rules do not address the basis for, or the extent of, the 
liability of an originator or ODFI to a receiver. A receiver's rights 
against an originator or ODFI for failing to properly originate an 
entry ordinarily would be governed by contract and state law. Proposed 
Sec. 210.6(c) establishes a recipient's rights against an agency in 
these circumstances as a matter of Federal law: an agency will be 
liable for any loss sustained by a recipient, up to the amount of the 
entry, as a result of the agency's failure to originate a credit or 
debit entry in accordance with part 210.
    Proposed Sec. 210.6(d) is new. It establishes that an agency may be 
liable to an originator or an ODFI for any loss sustained by the 
originator or ODFI resulting from the agency's failure to credit an ACH 
entry to the agency's account in accordance with part 210. The agency's 
liability would be limited to the amount of the entry(ies). The ACH 
Rules do not address the liability of an RDFI to an originator. Under 
the ACH Rules, if an RDFI fails to properly credit an ACH entry to the 
designated account within the applicable time limitations, the RDFI 
will have breached a warranty to the ACH Operator, Association, and 
ODFI, and may be liable to one of those parties for any

[[Page 5436]]

losses resulting from the RDFI's breach. Whether the originator has any 
recourse in such a situation depends on its contract with its ODFI and 
state law.
    Proposed Sec. 210.6(d) would preempt the ACH Rules with respect to 
the extent of an agency's liability to an ODFI by limiting that 
liability to the amount of the entry(ies). In addition, proposed 
Sec. 210.6(d) establishes, as a matter of Federal law, that an agency 
may be liable directly to an originator in an amount not exceeding the 
amount of the entry(ies).
    Proposed Sec. 210.6(e) provides that an agency's liability to an 
RDFI for losses sustained by the RDFI in processing a duplicate or 
erroneous entry will be limited to the amount of the entry(ies). The 
phrase ``[e]xcept as otherwise provided in this part 210'' is intended 
to preserve the allocation to the RDFI of liability in connection with 
the RDFI's failure to comply with, for example, the authorization and 
prenotification verification requirements. Under current part 210 and 
the 1994 NPRM, an agency bears responsibility for processing errors; 
however, the Service believes that neither current part 210 nor the 
1994 NPRM are clear in describing the type of errors or the nature of 
the losses for which an agency would be liable. For this reason, this 
proposal refers specifically to duplicate and erroneous entries, which 
are defined in the ACH Rules.
    Under the ACH Rules, an ODFI is liable for losses caused by its 
origination of duplicate or erroneous entries. This proposed rule would 
subject agencies to the liability for originating erroneous and 
duplicate entries imposed on ODFIs under the ACH Rules, but would 
preempt the ACH Rules in three respects. First, under the proposal, an 
agency would not be liable for all costs incurred by the RDFI, such as 
attorneys fees, but would be liable only up to the amount of the entry. 
Second, the proposal uses comparative negligence and reduces an 
agency's liability to the extent the loss results from the financial 
institution's failure to follow standard commercial practices and 
exercise due diligence. Third, proposed Sec. 210.6(e) excludes credit 
entries received by an RDFI after the death of a recipient of benefit 
payments or the death or legal incapacity of a beneficiary. It should 
be noted that liability in connection with any benefit payment to a 
deceased recipient would not be covered under proposed Sec. 210.6(e), 
but would be governed solely by subpart B.
    Proposed Sec. 210.6(f) is substantially unchanged from 
Sec. 210.10(c) of current part 210 and Sec. 210.4(i) the 1994 NPRM.
    The Service proposes to add a new Sec. 210.6(g) to address the 
Federal Government's initiation of reversals. As discussed in the 
analysis of proposed Sec. 210.4(b) above, a recipient who executes an 
authorization agrees, among other things, that the Federal Government 
may reverse duplicate or erroneous entries or files, as provided in 
proposed Sec. 210.6(g).
    The ACH Rules permit an originator to reverse duplicate or 
erroneous entries and permit an ODFI, originator, or originating ACH 
Operator to reverse duplicate or erroneous files within five banking 
days of the settlement date of the duplicate or erroneous file or 
entry. For purposes of the ACH Rules, and as used herein, a duplicate 
entry is an entry that is a duplicate of an entry previously initiated 
by the originator or ODFI and an erroneous entry is an entry that 
orders payment to or from a receiver not intended to be credited or 
debited by the originator or that orders payment in a dollar amount 
different that what was intended by the originator.
    Under the ACH Rules, the ODFI and/or originating ACH Operator must 
indemnify the RDFI against any losses the RDFI incurs as a result of 
effecting a reversal. Consequently, in the event that the RDFI reverses 
an entry or file initiated by the ODFI, but the RDFI cannot recover the 
amount of the entry from the receiver (because, for example, the 
receiver has withdrawn the funds and closed the account), it is the 
ODFI or originator who bears the loss.
    The Social Security Administration (SSA) suffers annual losses of 
between one and two million dollars due to misdirected payments. SSA 
has expressed concern that, as the number of Direct Deposit payments 
dramatically increases, additional millions could be misdirected as a 
result of data entry errors. The ability to effect reversals is an 
important way in which the Federal Government can reduce losses 
resulting from overpayments and misdirected entries. If a reversal is 
effected expeditiously, in many cases the receiver may not be aware 
that the erroneous or duplicate entry occurred, and thus the funds may 
be available in the account for recovery by the RDFI and, ultimately, 
the Federal Government.
    With respect to certain types of payments, however, the Federal 
Government's ability to reverse a duplicate payment or overpayment to a 
recipient may be constrained due to the existence of various Federal 
statutory provisions governing the manner in which the Federal 
Government may recover overpayments. For example, in the context of 
Federal benefit payments, the Federal Government may be required to 
provide a notice and hearing prior to taking action to recover 
payments, or may be limited in the amount, timing or manner in which an 
overpayment is recovered. The Service is not proposing to address the 
operation of these requirements in Part 210 because the applicable 
requirements may vary depending on the type of the payment. It is the 
agency's responsibility to determine before certifying a reversal that 
the reversal will not violate any applicable laws or regulations.
    The 1994 NPRM addressed reversals in the context of recipient 
authorizations: By executing an authorization, a recipient agreed that 
the Federal Government reserved the right to use reversal entries in 
the event that it originated duplicate files or entries in error. 
Several commenters on the 1994 NPRM requested clarification as to 
whether the Federal Government, when initiating reversals, would be 
bound by any ACH Rule requirements that generally apply with respect to 
reversals, such as the five (5) day reversal deadline. It is the 
intention of the Service that all ACH Rule requirements would apply to 
Federal Government-initiated reversals except that the extent of the 
Federal Government's indemnification would be limited to the amount of 
the entry(ies). The proposed rule has been amended to clarify this 
point.
Section 210.7--Federal Reserve Banks
    The Service proposes to reorganize and expand Sec. 210.6 of current 
part 210 as Sec. 210.7 of proposed part 210 to more clearly present the 
role and responsibilities of the Federal Reserve Banks. As discussed 
below, most of proposed Sec. 210.7 either was previously proposed at 
Sec. 210.5 of the 1994 NPRM or is unchanged from current Sec. 210.6. 
However, one change from both the 1994 NPRM and current part 210 
relates to the timing of settlement and funds availability. In the 1994 
NPRM, the Service had proposed to combine subsections 210.6(c) and 
210.6(e) of current part 210 and to substitute the ACH term 
``settlement date'' for ``payment date,'' to reflect that for credit 
entries initiated by an agency, entry information and funds were to be 
made available by the Federal Reserve Bank no later than the opening of 
business on the settlement date.
    The settlement of ACH entries is determined by the ACH Operator 
which, in the case of Government entries, is a Federal Reserve Bank. 
The Service now proposes to delete as unnecessary the

[[Page 5437]]

provisions from both part 210 and the 1994 NPRM relating to funds 
availability since those requirements are addressed under the Federal 
Reserve Bank Uniform Operating Circular on ACH items.
    It should be noted that some commenters on the 1994 NPRM were 
concerned about the substitution of the term ``settlement date'' for 
the term ``payment date'' in current part 210. These commenters argued 
that the substitution of the term ``settlement date'' for ``payment 
date'' could result in delaying some payments beyond the statutorily 
required day on which payment must be made. The commenters further 
argued that payees who receive payments electronically would be 
disadvantaged as compared with check recipients. For example, Federal 
statutes require that certain annuity payments made by the Railroad 
Retirement Board or the Office of Personnel Management must be made on 
the first day of the month. These agencies pointed out that when the 
first day of the month falls on a Saturday, checks are dated for the 
first date of the month and delivered on Saturday. The commenters did 
not indicate what happens when the first of the month falls on a 
Sunday. The commenters pointed out that recipients who receive their 
payments by EFT will be at a disadvantage as compared with check 
recipients because check recipients will receive their payment on 
Saturday whereas other recipients will not receive payment until the 
``settlement date'', which would be Monday.
    Because the mandatory EFT provisions of the DCIA require all 
payments made by an agency, except tax refunds, to be made 
electronically, the equity issues raised by commenters in 1994 should 
be largely moot. Moreover, the substitution of the term ``settlement 
date'' for ``payment date'' will not change the date on which payment 
will be available under current part 210. Current part 210 defines the 
payment date as the date upon which funds are to be available for 
withdrawal by the recipient, and on which the funds are to be made 
available to the financial institution by the Federal Reserve Bank. 
Current Part 210 provides that ``if the payment date is not a business 
day for the financial institution receiving a payment, or for the 
Federal Reserve Bank from which it received such payment, then the next 
succeeding business day for both shall be deemed to be the payment 
date.'' Thus, under the example cited above, where the first of the 
months falls on a Saturday, payment currently would not be made until 
Monday. Therefore, this issue is not related to the use of the term 
``settlement date'' as opposed to ``payment date;'' rather, this issue 
is related to the nature of electronic payments and the banking 
industry generally.
    The Service recognizes that this issue will need to be addressed by 
those agencies subject to such constraints, and solicits comment on 
ways in which this issue could be addressed. For example, the Service 
solicits comment on the feasibility of initiating certain payments one 
or two days early in order to ensure that the recipient receives the 
funds on the day preceding the statutorily prescribed payment date, 
rather than one or two days later.
    The Service proposes to move current Sec. 210.6(a) and 
Sec. 210.6(f) to proposed Sec. 210.7(a). In addition, the Service 
proposes to specify in proposed Sec. 210.7(a) that each Federal Reserve 
Bank, as the Fiscal Agent of the Service, serves as the Federal 
Government's ACH Operator for Government entries. This language was 
previously proposed at Sec. 210.5(a) of the 1994 NPRM. Proposed 
Sec. 210.7(a) also incorporates the exclusion from liability set forth 
at Sec. 210.5(e) of the 1994 NPRM. The phrase ``notwithstanding the 
applicable ACH Rules'' has been added to clarify that the Service is 
preempting the ACH Rule that provides that a Federal Reserve Bank is 
not an agent of an RDFI or ODFI.
    The Service proposes to add Sec. 210.7(b) to ensure that the 
Service is aware of new ACH applications at an agency so that proper 
accounting can take place and correct credit can be given in the 
Treasury investment program as an agency receives ACH transactions. 
This provision was previously proposed by the Service at Sec. 210.5(b) 
of the 1994 NPRM.
Section 210.8--Financial Institutions
    Proposed Sec. 210.8 addresses the obligations of financial 
institutions with respect to Government entries, which are set forth at 
current Sec. 210.7. The Service proposes to remove as unnecessary many 
of the provisions of Sec. 210.7 of current part 210 because they are 
addressed in the ACH Rules. For example, current Sec. 210.7(e) has been 
deleted since the ACH Rules adequately cover the inability of an RDFI 
to credit an account indicated in an entry. In addition, Sec. 210.7(f), 
(f)(1), (f)(2), and (f)(4) of current Part 210 have been deleted since 
the ACH Rules address these provisions.
    Proposed Sec. 210.8(a) addresses an RDFI's obligations with respect 
to prenotifications. A prenotification, as described in the ACH Rules, 
is a non-dollar entry, sent through the ACH system, which contains the 
same information (with the exception of the dollar amount and Standard 
Entry Class Code) that will be carried on subsequent entries. The 
purpose of a prenotification is to verify the accuracy of the account 
data. Proposed Sec. 210.8(a) specifies that if an agency initiates a 
prenotification entry, the RDFI has certain obligations associated with 
that entry; specifically, the RDFI must verify that the account number 
and one other item of information in a prenotification entry both 
relate to the same account. This requirement is not imposed on RDFIs 
under the ACH Rules, as reflected by the phrase ``[n]otwithstanding the 
applicable ACH Rules.'' Therefore, the obligation imposed in this 
section, and the corresponding liability to which a financial 
institution would be subject under Sec. 210.8(c) if it failed to verify 
a prenotification, would supersede the ACH Rules with respect to 
agency-initiated prenotifications.
    The Service proposed to add this requirement to part 210 in the 
1994 NPRM. The 1994 NPRM proposed to require RDFIs to verify, in the 
prenotification, the recipient's account number and at least one other 
identifying data element. The 1994 NPRM gave the authorizing 
recipient's name as an example of an identifying data element. A number 
of financial institutions objected to this requirement on the basis 
that automated systems now in place at many large financial 
institutions cannot perform this verification and that financial 
institutions rely on account numbers only. Five commenters expressed 
specific concern over the recipient's name being used as an example of 
another identifying data element. Financial institution commenters 
pointed out that manual processing would be required to verify the 
recipient's name. Conversely, the Social Security Administration (SSA) 
suffers annual losses of between one and two million dollars due to 
misdirected payments. SSA has expressed concern that, as the number of 
Direct Deposit payments dramatically increases, additional millions 
could be misdirected as a result of data entry errors.
    The Service recognizes that the automated payments processing 
systems currently utilized by some financial institutions may not have 
the operational capability to verify recipients' names. However, the 
Service understands that some financial institutions are working toward 
implementing systems changes that will permit verification of 
recipients' names. The Service believes that the reduction

[[Page 5438]]

in misdirected entries that could be achieved by requiring verification 
of prenotifications is significant enough to warrant the requirement. 
Therefore, this proposal retains the additional ``identifying data 
element'' requirement.
    The Service proposes to redesignate Sec. 210.7(g) of current part 
210 as proposed Sec. 210.8(b) without making any substantive change.
    The Service proposes to add a new Sec. 210.8(c) to provide that 
financial institutions shall be subject to liability for failing to 
handle an entry in accordance with part 210 and that the amount of that 
liability will be limited to the amount of the entry, except as 
otherwise specifically provided in subsections 210.8(c)(1) and (2). The 
phrase ``[n]otwithstanding the applicable ACH Rules'' indicates the 
liabilities imposed on financial institutions under this section may be 
in addition to, or different from, the liabilities that otherwise would 
be imposed under the applicable ACH Rules. To the extent that part 210 
imposes duties on a financial institution not imposed under the 
applicable ACH Rules, proposed Sec. 210.8(c) correspondingly imposes 
liabilities on a financial institution not imposed under the applicable 
ACH Rules. However, the extent of the liability to which a financial 
institution would be subject under the applicable ACH Rules would not 
exceed the amount of the entry (except in the case of unauthorized 
debits).
    The ACH Rules generally provide that an RDFI or ODFI is liable for 
all claims, losses, liabilities, or expenses, including attorneys' fees 
and costs, resulting directly or indirectly from the breach by the RDFI 
or ODFI of its obligations. Under Article 4A of the Uniform Commercial 
Code, which would apply to credit entries to non-consumer accounts, the 
liability of financial institutions which fail to handle entries 
properly generally does not extend to all resulting losses, but does 
include imputed interest in certain circumstances. Because the Service, 
as a general matter, is proposing to limit the Federal Government's 
liability under part 210 to the amount of an entry, the Service 
believes that as a matter of equity the liability of financial 
institutions similarly should be limited. Accordingly, proposed 
Sec. 210.8(c) would preempt the extent of the liability to which 
financial institutions are subject under both the ACH Rules and Article 
4A by limiting that liability to the amount of the entry. Thus, for 
example, if an agency originated a credit entry to a corporate vendor 
and the RDFI failed to credit the entry to the vendor's account in a 
timely manner, Sec. 210.8(c) would limit the RDFI's liability to the 
Federal Government to the amount of the entry, thereby preempting the 
Article 4A rule that imposes liability on the financial institution for 
imputed interest for the period of the delay. Proposed Sec. 210.8(c) is 
not intended to affect a financial institution's liability under 
subpart B.
    Proposed Sec. 210.8(c) represents a change from the 1994 NPRM, 
which provided that a financial institution would be liable for losses 
sustained by the Federal Government ``if the Government has correctly 
handled the entry(ies).'' Several commenters pointed out that the 
language proposed in the 1994 NPRM could have the effect of imposing 
liability on a financial institution even where the financial 
institution had complied with its obligations under part 210. It is not 
the intention of the Service to impose liability on a financial 
institution under this section unless the financial institution has 
failed to meet an obligation to which it is subject. Rather, for any 
obligation imposed on financial institutions under part 210, proposed 
Sec. 210.8(c) would impose liability on a financial institution for a 
loss to the Federal Government resulting from the financial 
institution's failure to meet that obligation. For example, 
Sec. 210.6(f) of this NPRM provides that an agency generally will be 
liable to an RDFI for erroneous or duplicate entries originated by the 
agency. However, Sec. 210.8(a) of this NPRM requires that if the 
Federal Government initiates a prenotification, the RDFI must verify an 
entry item in addition to the account number. Thus, if the Federal 
Government initiated an erroneous entry and the RDFI failed to verify 
the prenotification, the RDFI would be liable for any loss to the 
Federal Government, up to the amount of the entry(ies), if the error 
would have been detected by verifying the prenotification.
    The Service proposes to add a new Sec. 210.8(c)(1) to make it 
absolutely clear that a financial institution may not originate or 
transmit a debit entry to an agency without the prior written 
authorization of the Service. As previously discussed, debit entries to 
the Treasury General Account (TGA) represent a significant security 
concern for the Service. By expanding the use of the ACH system to 
allow for Federal Government payments by a debit to the TGA, the 
possibility of unauthorized debits to the TGA arises. In carrying out 
its responsibility of protecting the public trust, the Service believes 
it is necessary to take precautions to ensure that such debits do not 
occur. Therefore the Service proposes to require special security 
measures not imposed under the ACH Rules.
    The ACH Rules provide that a receiver must have authorized the 
initiation of an entry to the receiver's account before the entry is 
originated and that the ODFI must warrant that the authorization is 
valid. Proposed Sec. 210.8(c)(1) goes beyond the ACH Rules by requiring 
that an agency authorize the debit entry, and that the authorization be 
in writing or similarly authenticated.
    Under the general rule that the Service is proposing, a financial 
institution would be liable for any unauthorized debit entries 
initiated to an agency in violation of this requirement. However, the 
Federal Government also must be able to recover the interest that it 
would have derived from the use of the debited funds had they remained 
in the TGA. Therefore, a financial institution's liability for 
unauthorized debit entries to the TGA would include imputed interest 
under proposed Sec. 210.8(c)(1). This provision is an exception to the 
general limitation of a financial institution's liability to the amount 
of an entry.
    Commenters on the 1994 NPRM objected to the proposal to permit the 
Service, in the case of unauthorized debits, to instruct the Federal 
Reserve Bank to debit the account used by the financial institution. 
Such action, if necessary, represents a last step in recovering funds 
that have not otherwise been recovered. Nevertheless, the right to 
debit through the Federal Reserve Bank is a right that needs to be 
retained by Treasury. This NPRM retains this provision because it is in 
the best interest of the Federal Government and it is protective of 
public funds.
    Section 210.8(c)(2) of this NPRM restates the third and fourth 
sentences of current Sec. 210.11(b). The Service proposes to expand 
this section to address fraud for authorizations of both debits and 
credits. Under the ACH Rules, a receiver must authorize an entry before 
the entry may be originated and the ODFI must warrant that the 
authorization is valid. The ODFI or the originator thus bears the 
ultimate liability for any loss resulting from a forged or invalid 
authorization. Similarly, under Article 4A, the ODFI or originator 
generally bears the risk of loss if an entry is originated to a 
receiver not entitled to the payment. Proposed Sec. 210.8(c)(2) 
operates to preempt these ACH and Article 4A rules in situations where 
a financial institution accepts the recipient's authorization and fails 
to verify the identity of the recipient. If the

[[Page 5439]]

financial institution accepts a forged authorization, the financial 
institution rather than the Federal Government will be liable for the 
entries effected in reliance on the forged authorization.
    Proposed Sec. 210.8(d) sets forth the conditions under which a 
financial institution's obligation for the amount of an entry is 
acquitted, and is unchanged from Sec. 210.4(i) of the 1994 NPRM.

Subpart B--Reclamation of Benefit Payments

    The Service proposes to restructure Subpart B of current Part 210 
by adding a new Sec. 210.9--Parties to the reclamation. The other five 
sections comprising proposed Subpart B (Secs. 210.10 through 210.14) 
are a reorganization of the four existing sections on reclamations in 
current Part 210. As discussed above, the reclamation provisions of 
Subpart B completely preempt the reclamation provisions of the ACH 
Rules with respect to benefit payments received by an RDFI after the 
death or legal incapacity of a recipient or the death of a beneficiary. 
Any provisions of the ACH Rules dealing with reclamation of benefit 
payments are not applicable ACH Rules as defined in proposed 
Sec. 210.2.
    In the 1994 NPRM, the Service proposed to revise Subpart B in order 
to provide a framework for paperless processing of reclamations. This 
NPRM is intended to make Subpart B more flexible by deleting references 
that would tend to limit the reclamation process to paper reclamations, 
as the Service intends to move toward a more automated environment for 
reclamations. In addition, however, in this NPRM the Service has 
reorganized and rewritten current Subpart B in an attempt to clarify 
the obligations and liabilities imposed on financial institutions under 
current Subpart B. The Service is not proposing to change significantly 
these obligations and liabilities at this time.
    In order to simplify the regulation and enhance its flexibility 
with respect to automating reclamations, the Service proposes to move 
procedure-oriented provisions from Subpart B to the Service's Green 
Book. Commenters on the 1994 NPRM requested that any reclamation 
procedures differing from ACH Rules be implemented through amendments 
to Part 210 itself rather than by amending the Green Book. As discussed 
above with respect to Subpart A, the Green Book does not introduce new 
rights and obligations that are not contained in the Code of Federal 
Regulations. Instead, the Green Book provides specific operational 
directions and procedures which put the regulatory requirements into 
practice. Therefore, the Service proposes in this NPRM to remove 
certain procedures and guidelines currently set forth in Part 210 to 
the Green Book or Treasury Financial Manual, as proposed in the 1994 
NPRM. All regulatory amendments would be promulgated for public comment 
in the Federal Register. It should be noted that the Service has the 
authority to enforce the requirements set forth in the Green Book and 
the Treasury Financial Manual in the same manner that it enforces 
regulations.
Section 210.9--Parties to the Reclamation
    The Service proposes to add this new section to delineate the 
differing roles of the financial institution, the Service, and the 
agency that certified the benefit payments in question.
    Proposed Sec. 210.9(a) restates provisions of Sec. 210.7(a) and 
Sec. 210.14(d) of current Part 210, which provide that by accepting and 
handling benefit payments, a financial institution agrees to the 
provisions of Subpart B, including the reclamation actions and the 
debiting of the financial institution's Federal Reserve Bank account 
for any reclamation amount for which it is liable.
    The Service proposes to add a new Sec. 210.9(b) to clarify that the 
Service performs only disbursing and collection functions on behalf of 
agencies and does not make decisions as to the underlying obligations 
themselves. For example, if a financial institution or recipient has a 
question about the amount of a reclamation, the Service will respond 
that the amount was determined by the appropriate agency. In addition, 
if a financial institution or recipient disputes the facts underlying a 
death or date of death, that party should discuss the dispute with the 
appropriate agency. After resolution, the Service will carry out the 
reclamation in accordance with the direction of the agency that 
certified the payment or directed the Service to reclaim the funds in 
question.
Section 210.10--RDFI Liability
    In this section the Service proposes to define more clearly the 
liability of RDFIs for benefit payments received after the death or 
legal incapacity of the recipient or death of the beneficiary, and to 
limit the extent of that liability.
    Proposed Sec. 210.10(a) restates the rule set forth at 
Sec. 210.12(a) of current part 210, but moves the limited liability 
provisions to the next section to make it clear that an RDFI is 
presumed liable for all benefit payments received after the death or 
legal incapacity of the recipient or death of the beneficiary unless 
the RDFI meets the qualifications for limited liability set forth in 
Sec. 210.11. An RDFI has no right to limit its liability with respect 
to benefit payments received after it knows of the death or incapacity 
of the recipient or death of the beneficiary. Accordingly, the RDFI is 
instructed to return all benefit payments received after it learns of 
the death or legal incapacity of the recipient or death of the 
beneficiary. This obligation applies whether the RDFI has received a 
notice of reclamation or learned of the death or legal incapacity on 
its own.
    The Service proposes to restate the provisions of Sec. 210.13(c) of 
current part 210 at proposed Secs. 210.10(b) and 210.10(c). Current 
Sec. 210.13(c) contains provisions governing both an RDFI's 
responsibilities upon its discovery, or imputed knowledge of, the death 
or legal incapacity of a recipient or death of a beneficiary and an 
RDFI's responsibilities upon receipt of a notice of reclamation. 
Dividing these provisions into two separate subsections provides a 
clearer delineation of an RDFI's responsibilities.
    In the 1994 NPRM, the Service proposed a six-year limitation on an 
RDFI's liability for post-death and post-incapacity payments in order 
to provide RDFIs with relief from otherwise potentially unlimited 
liability in situations where an agency is unaware of the death or 
legal incapacity of the recipient or the death of a beneficiary and 
continues to make payments to the account for a number of years. Cases 
in which such payments continue for more than six years are infrequent 
and therefore the proposed six-year limitation, while providing 
protection to RDFIs in these relatively rare circumstances, likely will 
have a minimal impact on the overall recovery of funds by the Federal 
Government. Financial institutions that commented on the 1994 NPRM 
generally supported the six-year limitation also supported requiring 
financial institutions to cooperate with the Federal Government's 
reclamation efforts after the expiration of any applicable time 
limitation.
    The six-year limitation has been reworded in proposed 
Sec. 210.10(d) of this NPRM to clarify that it is the most recent six 
years of payments (rather than the six years of payments immediately 
following the death or incapacity) that is relevant to determining the 
amount that an agency can reclaim. In addition, the Service is 
proposing to provide an exception to the six-year limitation where the 
amount in the account at the time the RDFI receives the notice of

[[Page 5440]]

reclamation exceeds the six-year amount for which the RDFI otherwise 
would be liable. In such a case, the RDFI would be liable for the total 
amount of all post-death or post-incapacity payments, up to the amount 
in the account. For example, if payments had been made for twenty years 
following the death of a recipient, and the amount in the account was 
equal to or exceeded the total amount of the payments made during the 
twenty years, the RDFI would be liable for the full amount of all 
payments made over the twenty-year period. In the foregoing example, if 
the amount in the account when the RDFI received the notice of 
reclamation was equal to the most recent ten years of payments (less 
than the full twenty years of payments but more than the six-year 
amount), the RDFI would be liable for an amount equal to the amount in 
the account, i.e., the most recent ten years of payments.
    Proposed Sec. 210.10(d) also incorporates a requirement proposed in 
the 1994 NPRM that an agency must initiate a reclamation within a 
certain period of time after learning of the death or incapacity of the 
recipient or death of the beneficiary. Section 210.10(g) of the 1994 
NPRM proposed a 12-month period following knowledge of the death or 
incapcity for initiation of the reclamation. The Service proposes in 
this NPRM to shorten that period to 120 days after the date that the 
agency receives notice of the death or incapacity of the recipient or 
death of the beneficiary. This provision is intended to encourage 
Federal agencies to act in a timely manner in initiating reclamations, 
and to protect RDFIs from liability in the event an agency does not act 
expeditiously.
    Proposed Sec. 210.10(e) restates a rule of reclamations set forth 
at Sec. 210.13 (c) and (d) of current part 210: the Federal Government 
has the right to debit the RDFI's reserve account at its Federal 
Reserve Bank for the full amount of all post-death or post-incapacity 
benefit payments owed to an agency or for a lesser amount as a result 
of the RDFI's ability to limit its liability. Such action, if 
necessary, represents a last step in reclaiming funds that have not 
otherwise been recovered.
    The 60-day time period for an RDFI to return funds, which is set 
forth at current Sec. 210.13(c), is a procedural item that may change 
with the automation of reclamations. Therefore, the Service proposes to 
relocate this requirement to the Green Book.
Section 210.11--Limited Liability
    The Service does not propose to change the criteria which an RDFI 
must meet in order to limit its liability under Subpart b. The Service 
does propose to reword the provisions setting forth the criteria to 
achieve greater clarity.
    Proposed Sec. 210.11(a) provides the basis for calculating an 
RDFI's liability if it is eligible to limit its liability because it 
did not have actual or constructive knowledge of the death or 
incapacity of a recipient or the death of a beneficiary. The formula is 
taken from Sec. 210.12(b) of current part 210 and, although reworded, 
does not change significantly the substantive operation of the current 
formula.
    Section 210.12(d) of current part 210 sets forth rules addressing 
the circumstances in which an RDFI is ``deemed to have knowledge'' of 
the death or incapacity using a standard of ``due diligence.'' The 
Service believes that the description of due diligence is confusing and 
difficult to apply. Therefore, the Service proposes to utilize the 
definition of ``actual or constructive knowledge'' set forth at 
proposed Sec. 210.2.
    Under current part 210, one of the factors relevant to determining 
the extent of an RDFI's limited liability is the amount in the account. 
Current Sec. 210.13(b)(2)(i) defines the ``amount in the account'' to 
mean the balance in the account when the RDFI has received a notice of 
reclamation and has had a reasonable time to take action based on its 
receipts, plus any additions to the account balance made before the 
RDFI returns the notice of reclamation to the Federal Government. 
Current part 210 provides that a reasonable time to take action is not 
later than the close of business on the day following the receipt of 
the notice of reclamation. In Sec. 210.10(i)(2)(ii) of the 1994 NPRM, 
the Service proposed to add that the amount in the account would not be 
reduced for debit card withdrawals, automated withdrawals, pre-
authorized debits, non-Federal Government reclamations, and forged 
checks or other comparable instruments made after the RDFI had 
knowledge of the death or incapacity of the recipient or death of the 
beneficiary. Some commenters on the 1994 NPRM objected to the proposed 
change on the basis that it would shift the risk of liability to the 
RDFI for all debits, both legitimate and fraudulent, made during this 
period.
    The Service has experienced many instances in which the ``amount in 
the account'' for reclamation purposes has been reduced by ATM 
withdrawals and the RDFI cannot provide information regarding the 
identity of the withdrawer. Without this information, the Service 
cannot pursue recovery from the withdrawer(s). The Service therefore 
believes that the funds recovered through the reclamation process can 
be increased if the Service does not allow ATM withdrawals and other 
debits to reduce the calculation of the amount in the account. Under 
proposed Subpart B, the amount in the account is the account balance at 
the time the RDFI receives the notice of reclamation. The ``reasonable 
time to take action'' language in current Sec. 210.13(b)(2)(i) has been 
eliminated; therefore, any withdrawals subsequent to the RDFI's receipt 
of the notice of reclamation will not reduce the ``amount in the 
account.'' RDFIs can take whatever steps may be permitted under their 
account agreements and applicable law to reduce their exposure, such as 
blocking debits to an account upon receipt of a notice of reclamation.
    Proposed Sec. 210.11(b) sets forth the steps an RDFI must take in 
order to qualify for limited liability. By requiring an RDFI to certify 
the information required in proposed Sec. 210.11(b)(1) and (2), the 
burden of demonstrating qualification for limited liability is placed 
on the RDFI. Failure to meet this burden results in the full liability 
of the RDFI under proposed Sec. 210.10.
    Proposed Sec. 210.11(b)(1) is taken from Sec. 210.13(b)(2) of 
current part 210. Proposed Sec. 210.11(b)(2) incorporates the last 
sentence of current Sec. 210.13(b)(1), and adds the requirement that 
the RDFI certify the date the RDFI first had information of the death 
or legal incapacity of the recipient or death of the beneficiary even 
if such information was obtained first through notice received from the 
agency. Requiring these certifications, in combination with the 
authority of the Federal Government to debit the RDFI's reserve account 
as provided in proposed Sec. 210.10(e), underscores that the burden is 
on the RDFI to demonstrate its qualification for limited liability.
    Section 210.13(b)(2)(ii) of current Part 210 has been relocated to 
proposed Sec. 210.11(b)(3).
    Section 210.11(c) provides the payment and collection procedures 
which apply if an RDFI qualifies for limited liability. After an RDFI 
returns the amount specified in proposed Sec. 210.11(a)(1), if the 
agency is unable to collect the remaining amount of the outstanding 
total, the Federal Government will debit the RDFI's reserve account at 
its Federal Reserve Bank (or the correspondent account utilized by the 
RDFI) for the amount specified in proposed Sec. 210.11(a)(2).
    Proposed Sec. 210.11(d) incorporates the current Sec. 210.12(e) and 
broadens the scope of an RDFI's forfeiture of its rights to limit its 
liability if the RDFI fails to

[[Page 5441]]

comply with any provision of Subpart B. 210.12--RDFI's rights of 
recovery
    Proposed Sec. 210.12(a) restates the principle set forth in current 
Sec. 210.14(c) and in Sec. 210.10(d) of the 1994 NPRM that in 
reclaiming funds from an RDFI, the Federal Government is not directing 
or authorizing the RDFI to debit the recipient's account. Any rights 
that an RDFI may have to recover the amount of reclaimed funds from a 
recipient are a matter of applicable state law and the contract between 
the RDFI and the recipient. Subpart B neither limits nor expands those 
rights.
    Proposed Sec. 210.12(b) restates without substantive change 
Sec. 210.14(d) of current Part 210, which was set forth at 
Sec. 210.10(h) of the 1994 NPRM.
Section 210.13--Notice to Account Owners
    Proposed Sec. 210.13 is based on Sec. 210.14(a) of current Part 
210, but has been changed slightly to provide for the possibility of an 
automated reclamation process by the addition of the phrase ``or 
otherwise provide to the account owner(s)'' to the existing requirement 
that notice be mailed. In addition, the phrase ``any notice required by 
the Service to be provided to account owners as specified in the Green 
Book'' has been substituted for the specific reference to the ``Notice 
to Account Owners'' to allow for more flexibility in changing the 
format of the required notice. The Service proposed in the 1994 NPRM to 
add language to the regulation indicating that the Federal Government 
might require proof that the RDFI had mailed written notice and that 
such proof might include (but would not be limited to) a file copy of 
the notice, a certified mail receipt, or documentation pertaining to 
the standard operating procedure of the RDFI that such a notice is sent 
routinely. The reference to a mailed written notice and the types of 
proof that might be appropriate in connection with such a notice have 
been deleted in this NPRM in keeping with the Service's effort to 
eliminate paper-oriented requirements from Subpart B.
    Section 210.14(b) of current Part 210 requires that RDFIs notify 
account owners of any actions to be taken by the RDFI with respect to 
the account in connection with a reclamation action. The Service 
believes that this requirement intrudes unnecessarily into the 
relationship between the RDFI and its customer and conflicts with the 
principle that reclamations are actions between the Federal Government 
and the RDFI, and not between the Federal Government and the recipient. 
Actions taken by an RDFI with respect to a customer account, and any 
notice to the customer in connection with those actions, are a matter 
of State law or contract, not Federal law.
Section 210.14--Erroneous Death Information
    This proposed section is based upon Sec. 210.15 of current part 
210, with certain additions and deletions. Much of current Sec. 210.15 
is procedural information which the Service proposes to move to the 
Green Book, where it is more appropriately located. In particular, the 
Service proposes to relocate to the Green Book the procedures that 
RDFIs are to follow in correcting erroneous death information (codified 
in current Sec. 210.15(a)(1) and (2) and Sec. 210.15(c)). The Service 
proposes to eliminate from the regulation and move to the Green Book 
the 60-day time limit for the RDFI to return the completed notice of 
reclamation to the Federal Government in order for the RDFI to limit 
its liability for the payments made after the death or legal incapacity 
of the recipient or death of the beneficiary. This 60-day limit is a 
requirement for the paper-based reclamation procedure. The Service is 
not eliminating this requirement as part of the paper reclamation 
process, but rather is placing it with other procedures and operational 
guidelines in the Green Book. Any automated reclamation procedures 
developed or used by the Federal Government would not be bound by the 
same time limit as the paper process since an automated procedure 
theoretically could be completed in less time.
    The provisions at proposed Sec. 210.14(b) that the Service proposes 
to add to this section seek to direct questions and disputes to the 
agency issuing directions on reclamations. These provisions clarify 
that the Service only performs disbursing and collection functions on 
behalf of the Federal agencies and does not make decisions as to the 
underlying obligations.

Subpart C--Discretionary Salary Allotments

    The Service proposes in this NPRM to remove subpart C from part 
210. Subpart C of current part 210 provides that discretionary 
allotments from Federal employees' wage and salary payments permitted 
by the issuing agency may be made through the ACH system and shall be 
subject to Part 210. The Service determined that subpart C is redundant 
since the substance of Subpart C is covered in other regulations. For 
example, regulations issued by the Office of Personnel Management, at 5 
CFR part 550, address the circumstances under which discretionary 
allotments may be made. Under Part 208, Federal agencies are required 
to make all Federal payments, including allotments, by EFT. Subpart A 
of Part 210 sets forth the rules governing all ACH credit entries made 
by an agency, including any savings and salary allotment payments. For 
these reasons, specific provisions for the use of the ACH system to 
allow for discretionary allotments in Part 210 are unnecessary.

Rulemaking Analysis

    Treasury has determined that this proposed regulation is not a 
significant regulatory action as defined in Executive Order 12866. It 
is hereby certified that this rule will not have a significant economic 
impact on a substantial number of small business entities. The proposed 
rule does not require any actions on the part of small entities. 
Accordingly, a Regulatory Flexibility Act analysis is not required.

List of Subjects in 31 CFR Part 210

    Automated Clearing House, Electronic funds transfer, Financial 
institutions, Fraud, Incorporation by reference

Authority and Issuance

    For the reasons set out in the preamble, 31 CFR part 210 is 
proposed to be revised to read as follows:

PART 210--FEDERAL GOVERNMENT PARTICIPATION IN THE AUTOMATED 
CLEARING HOUSE

Sec.
210.1  Scope; relation to other regulations.
210.2  Definitions.
210.3  Governing law.

Subpart A--General

210.4  Authorizations and revocations of authorizations.
210.5  Account requirements for benefit payments.
210.6  Agencies.
210.7  Federal Reserve Banks.
210.8  Financial institutions.

Subpart B--Reclamation of Benefit Payments

210.9  Parties to the reclamation.
210.10  RDFI liability.
210.11  Limited liability.
210.12  RDFI's rights of recovery.
210.13  Notice to account owners.
210.14  Erroneous death information.

    Authority: 5 U.S.C. 5525; 12 U.S.C. 391; 31 U.S.C. 321, 3301, 
3302, 3321, 3332, 3335, and 3720.


Sec. 210.1  Scope; relation to other regulations.

    This part governs all entries and entry data originated or received 
by an agency

[[Page 5442]]

through the Automated Clearing House (ACH) network, except as provided 
in paragraphs (a) and (b) of this section. This part also governs 
reclamations of benefit payments.
    (a) Federal tax payments received by the Federal Government through 
the ACH system that are governed by part 203 of this title shall not be 
subject to any provision of this part that is inconsistent with part 
203.
    (b) ACH credit or debit entries for the purchase of, or payment of 
principal and interest on, United States securities that are governed 
by part 370 of this title shall not be subject to any provision of this 
part that is inconsistent with part 370.


Sec. 210.2  Definitions.

    For purposes of this part, the following definitions apply. Any 
term that is not defined in this part shall have the meaning set forth 
in the ACH Rules.
    (a) ACH Rules means the Operating Rules and the Operating 
Guidelines published by the National Automated Clearing House 
Association (NACHA), a national association of regional member clearing 
house associations, ACH Operators and participating financial 
institutions located in the United States.
    (b) Actual or constructive knowledge, when used in reference to an 
RDFI's knowledge of the death or legal incapacity of a recipient or 
death of a beneficiary, means that the RDFI received information, by 
whatever means, of the death or incapacity or that the RDFI would have 
discovered the death or incapacity if it had followed commercially 
reasonable business practices.
    (c) Agency means any department, agency, or instrumentality of the 
Federal Government, or a corporation owned or controlled by the Federal 
Government. The term agency does not include a Federal Reserve Bank.
    (d) Applicable ACH Rules means the ACH Rules published in the 
``1997 ACH Rules,'' including all rule changes published therein with 
an effective date on or before September 19, 1997, except:
    (1) ACH Rule 1.1 (limiting the applicability of the ACH Rules to 
members of an ACH association);
    (2) ACH Rule 1.2.2 (governing claims for compensation);
    (3) ACH Rule 1.2.3 (governing the arbitration of disputes);
    (4) ACH Rules 2.2.1.8; 2.6; and 4.7 (governing the reclamation of 
benefit payments);
    (5) ACH Rule 8.3 and Appendix Two (requiring that a credit entry be 
originated no more than two banking days before the settlement date of 
the entry--see definition of ``Effective Entry Date'' in Appendix Two).
    (e) Authorized payment agent means any natural person or entity 
that is appointed or otherwise selected as a representative payee or 
fiduciary, under regulations of the Railroad Retirement Board, the 
Social Security Administration, the Department of Veterans Affairs, or 
other agency making benefit payments, to act on behalf of a 
beneficiary.
    (f) Automated Clearing House or ACH means a funds transfer system 
governed by the ACH Rules which provides for the interbank clearing of 
electronic entries for participating financial institutions.
    (g) Beneficiary means a natural person other than a recipient who 
is entitled to receive the benefit of all or part of a benefit payment.
    (h) Benefit payment is a payment for a Federal entitlement program 
or for an annuity, including, but not limited to, payments for Social 
Security, Supplemental Security Income, Black Lung, Civil Service 
Retirement, Railroad Retirement Board Retirement and Annuity, 
Department of Veterans Affairs Compensation and Pension, and Worker's 
Compensation. For purposes of Sec. 210.5 of this part, the term 
``benefit payment'' shall not include a Federal retirement payment.
    (i) Federal payment means any payment made by an agency. The term 
includes, but is not limited to:
    (1) Federal wage, salary and retirement payments;
    (2) Vendor and expense reimbursement payments;
    (3) Benefit payments; and
    (4) Miscellaneous payments, including but not limited to, 
interagency payments; grants; loans; fees; principal, interest, and 
other payments related to United States marketable and nonmarketable 
securities; overpayment reimbursements; and payments under Federal 
insurance or guarantee programs for loans.
    (j)(1) Financial institution means:
    (i) An entity described in section 19(b)(1)(A), excluding 
subparagraphs (v) and (vii), of the Federal Reserve Act (12 U.S.C. 
461(b)(1)(A)). Under section 19(b)(1)(A) of the Federal Reserve Act and 
for purposes of this part only, the term ``depository institution'' 
means:
    (A) Any insured bank as defined in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813) or any bank which is eligible to apply 
to become an insured bank under section 5 of such Act (12 U.S.C. 1815);
    (B) Any mutual savings bank as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813) or any bank which is eligible to 
apply to become an insured bank under section 5 of such Act (12 U.S.C. 
1815);
    (C) Any savings bank as defined in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813) or any bank which is eligible to apply 
to become an insured bank under section 5 of such Act (12 U.S.C. 1815);
    (D) Any insured credit union as defined in section 101 of the 
Federal Credit Union Act (12 U.S.C. 1752) or any credit union which is 
eligible to apply to become an insured credit union pursuant to section 
201 of such Act (12 U.S.C. 1781); or
    (E) Any savings association as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813) which is an insured depository 
institution as defined in such Act (12 U.S.C. 1811 et seq.) or is 
eligible to apply to become an insured depository institution under the 
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.); and
    (ii) Any agency or branch of a foreign bank as defined in section 
1(b) of the International Banking Act, as amended (12 U.S.C. 3101).
    (2) In this part, a financial institution may be referred to as an 
Originating Depository Financial Institution (ODFI) if it transmits 
entries to its ACH Operator for transmittal to a Receiving Depository 
Financial Institution (RDFI), or it may be referred to as an RDFI if it 
receives entries from its ACH Operator for debit or credit to the 
accounts of its customers.
    (k) Government entry means an ACH credit or debit entry or entry 
data originated or received by an agency.
    (l) Green Book means the manual issued by the Service which 
provides financial institutions with procedures and guidelines for 
processing Government entries. The Green Book is available for 
downloading at the Service's web site at http://www.fms.treas.gov/ or 
by calling (202) 874-6540, or writing the Product Promotion Division, 
Financial Management Service, Department of the Treasury, 401 14th 
Street, S.W., Room 309, Washington, D.C. 20227.
    (m) Notice of reclamation means notice sent by electronic, paper or 
other means by the Federal Government to an RDFI which identifies the 
benefit payments that should have been returned by the RDFI because of 
the death or legal incapacity of the recipient or death of the 
beneficiary.
    (n) Outstanding total means the sum of all benefit payments 
received by an RDFI from an agency after the death or legal incapacity 
of a recipient or the death of a beneficiary, minus any

[[Page 5443]]

amount returned to, or recovered by, the Federal Government.
    (o) Recipient means a natural person, corporation, or other public 
or private entity that is authorized to receive a Federal payment from 
an agency.
    (p) Service means the Financial Management Service, Department of 
the Treasury.
    (q) Treasury Financial Manual (TFM) means the manual issued by the 
Service containing procedures to be observed by all agencies and 
Federal Reserve Banks with respect to central accounting, financial 
reporting, and other Federal Government-wide fiscal responsibilities of 
the Department of the Treasury. The TFM is available for downloading at 
the Service's web site at http://www.fms.treas.gov/ or by calling (202) 
874-9940, or writing the Directives Management Branch, Financial 
Management Service, Department of the Treasury, 3700 East West Highway, 
Room 500C, Hyattsville, MD 20782.


Sec. 210.3  Governing Law.

    (a) Federal Law. The rights and obligations of the United States 
and the Federal Reserve Banks with respect to all Government entries, 
and the rights of any person or recipient against the United States and 
the Federal Reserve Banks in connection with any Government entry, are 
governed by this part, which has the force and effect of Federal law.
    (b) Incorporation by reference--applicable ACH Rules. (1) This part 
incorporates by reference the applicable ACH Rules published in the 
``1997 ACH Rules,'' including all rule changes published therein with 
an effective date on or before September 19, 1997. Copies of the ``1997 
ACH Rules'' are available from the National Automated Clearing House 
Association, 607 Herndon parkway, Suite 200, Herndon, Virginia 20170. 
Copies also are available for public inspection at the Office of the 
Federal Register, 800 North Capitol Street, N.W., Suite 700, 
Washington, D.C. 20001.
    (2) Any amendment to the applicable ACH Rules that takes effect 
after September 19, 1997, shall not apply to Government entries unless 
the Service expressly accepts such amendment by publishing notice of 
acceptance of the amendment to this part in the Federal Register. An 
amendment to the ACH Rules that is accepted by the Service shall apply 
to Government entries on the effective date of the rulemaking specified 
by the Service in the Federal Register document expressly accepting 
such amendment.
    (c) Application of this part. Any person or entity that originates 
or receives a Government entry agrees to be bound by this part and to 
comply with all instructions and procedures issued by the Service under 
this part, including the Treasury Financial Manual and the Green Book.

Subpart A--General


Sec. 210.4  Authorizations and revocations of authorizations.

    (a) Requirements for authorization. Each debit and credit entry 
subject to this part shall be authorized in accordance with the 
applicable ACH Rules and the following additional requirements:
    (1) The agency or the RDFI that accepts the recipient's 
authorization shall verify the identity of the recipient and, in the 
case of a written authorization requiring the recipient's signature, 
the validity of the recipient's signature.
    (2) Unless authorized in writing by an agency or similarly 
authenticated, no person or entity shall initiate or transmit a debit 
entry to that agency.
    (b) Terms of authorizations. By executing an authorization for an 
agency to initiate entries, a recipient agrees:
    (1) To the provisions of this part;
    (2) To provide accurate information;
    (3) To verify the recipient's identity to the satisfaction of the 
RDFI or agency, whichever has accepted the authorization;
    (4) That any new authorization inconsistent with a previous 
authorization shall supersede the previous authorization; and
    (5) That the Federal Government may reverse any duplicate or 
erroneous entry or file as provided in Sec. 210.6(g) of this part.
    (c) Termination and revocation of authorizations. An authorization 
shall remain valid until it is terminated or revoked by:
    (1) With respect to a recipient of benefit payments, a change in 
the ownership of a deposit account as reflected in the deposit account 
records, including the removal or addition of the name of a recipient, 
the addition of a power of attorney, or any action which alters the 
interest of the recipient;
    (2) The death or legal incapacity of a recipient of benefit 
payments or the death of a beneficiary;
    (3) The closing of the recipient's account at the RDFI by the 
recipient or by the RDFI. If an RDFI closes an account, it shall 
provide 30 calendar days' written notice to the recipient prior to 
closing the account, except in cases of fraud; or
    (4) The RDFI's insolvency, closure by any state or Federal 
regulatory authority or by corporate action, or the appointment of a 
receiver, conservator, or liquidator for the RDFI. In any such event, 
the authorization shall remain valid if a successor is named. The 
Federal Government may temporarily transfer authorizations to a 
consenting RDFI. The transfer is valid until either a new authorization 
is executed by the recipient, or 120 calendar days have elapsed since 
the insolvency, closure or appointment, whichever occurs first.


Sec. 210.5  Account requirements for benefit payments.

    (a) Notwithstanding ACH Rule 2.1.2, an ACH credit entry 
representing a benefit payment shall be deposited into an account at a 
financial institution and, except as provided in paragraph (b) of this 
section, such account shall be in the name of the recipient.
    (b)(1) Where an authorized payment agent has been selected, the 
benefit payment shall be deposited into an account titled in accordance 
with the regulations governing the authorized payment agent.
    (2) Where a benefit payment is to be deposited into an investment 
account established through a securities broker or dealer registered 
under the Securities Act of 1934, such payment may be deposited into an 
account in the name of the broker or dealer, provided the account and 
all associated records are structured so that the beneficiary's 
interest is protected under applicable Federal or state deposit 
insurance regulations.


Sec. 210.6  Agencies.

    Notwithstanding ACH Rules 2.2.3, 2.4.5, 2.5.2, 4.2, and 7.7.2, 
agencies shall be subject to the obligations and liabilities set forth 
in this section in connection with Government entries.
    (a) Receiving entries. An agency may receive ACH debit or credit 
entries only with the prior written authorization of the Service.
    (b) Prenotifications. An agency, at its discretion, may send a 
prenotification prior to origination of the first credit entry to a 
recipient. An agency shall send a prenotification prior to origination 
of the first debit entry to an account.
    (c) Liability to a recipient. An agency will be liable to the 
recipient for any loss sustained by the recipient as a result of the 
agency's failure to originate a credit or debit entry in accordance 
with this part. The agency's liability shall be limited to the amount 
of the entry(ies).
    (d) Liability to an originator. An agency will be liable to an 
originator or an ODFI for any loss sustained by the

[[Page 5444]]

originator or ODFI as a result of the agency's failure to credit an ACH 
entry to the agency's account in accordance with this part. The 
agency's liability shall be limited to the amount of the entry(ies).
    (e) Liability to an RDFI or ACH Association. Except as otherwise 
provided in this part, an agency will be liable to an RDFI for losses 
sustained in processing duplicate or erroneous credit and debit entries 
originated by the agency. An agency's liability shall be limited to the 
amount of the entry(ies), and shall be reduced by the amount of the 
loss resulting from the failure of the RDFI to exercise due diligence 
and follow standard commercial practices in processing the entry(ies). 
This section does not apply to credits received by an RDFI after the 
death or legal incapacity of a recipient of benefit payments or the 
death of a beneficiary as governed by subpart B. An agency shall not be 
liable to any ACH association.
    (f) Acquittance of the agency. The crediting of the amount of an 
entry to a recipient's account shall constitute full acquittance of the 
Federal Government.
    (g) Reversals. An agency may reverse any duplicate or erroneous 
entry, and the Federal Government may reverse any duplicate or 
erroneous file. In initiating a reversal, an agency shall certify to 
the Service that the reversal complies with applicable law related to 
the recovery of the underlying payment. An agency that reverses an 
entry shall indemnify the RDFI as provided in the applicable ACH Rules, 
but the agency's liability shall be limited to the amount of the entry. 
If the Federal Government reverses a file, the Federal Government shall 
indemnify the RDFI as provided in the applicable ACH Rules, but the 
extent of such liability shall be limited to the amount of the entries 
comprising the duplicate or erroneous file. Reversals under this 
section shall comply with the time limitations set forth in the 
applicable ACH Rules.


Sec. 210.7  Federal Reserve Banks.

    (a) Fiscal Agents. Each Federal Reserve Bank serves as Fiscal Agent 
of the Treasury in carrying out its duties as the Federal Government's 
ACH Operator under this part. As Fiscal Agent, each Federal Reserve 
Bank shall be responsible only to the Treasury and not to any other 
party for any loss resulting from the Federal Reserve Bank's action, 
notwithstanding ACH Rule 11.5 and Article 8 of the ACH Rules. Each 
Federal Reserve Bank may issue operating circulars not inconsistent 
with this part which shall be binding on financial institutions.
    (b) Routing Numbers. All routing numbers issued by a Federal 
Reserve Bank to an agency require the prior approval of the Service.


Sec. 210.8  Financial institutions.

    (a) Prenotifications. Notwithstanding ACH Rules 2.3 and 4.1.4, upon 
receipt of a prenotification originated by an agency, an RDFI shall 
verify the recipient's account number and at least one other 
identifying data element contained in the entry.
    (b) Status as a Treasury depositary. The origination or receipt of 
an entry subject to this part does not render an RDFI a Treasury 
depositary. An RDFI shall not advertise itself as a Treasury depositary 
on such basis.
    (c) Liability. Notwithstanding ACH Rules 2.2.3, 2.4.5, 2.5.2, 4.2, 
and 7.7.2, if the Federal Government sustains a loss as a result of a 
financial institution's failure to handle an entry in accordance with 
this part, the financial institution shall be liable to the Federal 
Government for the loss, up to the amount of the entry, except as 
otherwise provided in this section.
    (1) An ODFI that transmits a debit entry to an agency without the 
prior written or similarly authenticated authorization of the agency, 
shall be liable to the Federal Government for the amount of the 
transaction, plus interest. The Service may collect such funds using 
procedures established in the applicable ACH Rules or by instructing a 
Federal Reserve Bank to debit the ODFI's reserve account at the Federal 
Reserve Bank or the account of its designated correspondent. The 
interest charge shall be at a rate equal to the Federal funds rate plus 
two percent, and shall be assessed for each calendar day, from the day 
the Treasury General Account (TGA) was debited to the day the TGA is 
recredited with the full amount due.
    (2) An RDFI that accepts an authorization in violation of 
Sec. 210.4(a) shall be liable to the Federal Government for all credits 
or debits made in reliance on the authorization.
    (d) Acquittance of the financial institution. The crediting of the 
correct amount of an entry received and processed by the Federal 
Reserve Bank and posted to the TGA shall constitute full acquittance of 
the ODFI for the amount of the entry. Full acquittance of the ODFI 
shall not occur if the entries do not balance, are incomplete, are 
clearly incorrect, or are incapable of being processed.

Subpart B--Reclamation of Benefit Payments


Sec. 210.9  Parties to the reclamation.

    (a) Agreement of RDFI. An RDFI's acceptance of a benefit payment 
pursuant to this part shall constitute its agreement to this subpart. 
By accepting a benefit payment subject to this part, the RDFI 
authorizes the debiting of the Federal Reserve Bank account utilized by 
the RDFI in accordance with the provisions of Sec. 210.10(e).
    (b) The Federal Government. In processing reclamations pursuant to 
this subpart, the Service shall act pursuant to the direction of the 
agency that certified the benefit payment(s) being reclaimed.


Sec. 210.10  RDFI liability.

    (a) Full liability. An RDFI shall be liable to the Federal 
Government for the total amount of all benefit payments received after 
the death or legal incapacity of a recipient or the death of a 
beneficiary unless the RDFI has the right to limit its liability under 
Sec. 210.11 of this part. An RDFI shall return any benefit payments 
received after the RDFI learns of the death or legal incapacity of a 
recipient or the death of the beneficiary, regardless of the manner in 
which the RDFI discovers such information. If the RDFI learns of the 
death or legal incapacity of a recipient or death of a beneficiary 
other than from the agency, the RDFI shall immediately notify the 
agency of the death or incapacity.
    (b) Notice of Reclamation. Upon receipt of a notice of reclamation, 
an RDFI shall provide the information required by the notice of 
reclamation and return the amount specified in the notice of 
reclamation in a timely manner.
    (c) Exception to liability rule. An RDFI shall not be liable for 
post-death benefit payments sent to a recipient acting as a 
representative payee or fiduciary on behalf of a beneficiary, if the 
beneficiary was deceased at the time the authorization was executed and 
the RDFI did not have actual or constructive knowledge of the death of 
the beneficiary.
    (d) Time limits. An agency may initiate a reclamation within 120 
calendar days after the date that the agency receives notice of the 
death or legal incapacity of a recipient or death of a beneficiary. An 
agency shall not reclaim any post-death or post-incapacity payment(s) 
made more than six years prior to the most recent payment made by the 
agency to the recipient's account; provided, however, that if the 
amount in the account at the

[[Page 5445]]

time the RDFI receives the notice of reclamation exceeds the total 
amount of all payments made by the agency during such six-year period, 
this limitation shall not apply and the RDFI shall be liable for the 
total amount of all payments made, up to the amount in the account at 
the time the RDFI receives the notice of reclamation.
    (e) Debit of RDFI's account. If an RDFI does not return the full 
amount of the outstanding total or any other amount for which the RDFI 
is liable under this subpart in a timely manner, the Federal Government 
will collect the amount outstanding by instructing the appropriate 
Federal Reserve Bank to debit the reserve account utilized by the RDFI. 
The Federal Reserve Bank will provide advice of the debit to the RDFI.


Sec. 210.11  Limited liability.

    (a) Right to limit its liability. If an RDFI does not have actual 
or constructive knowledge of the death or legal incapacity of a 
recipient or the death of a beneficiary at the time it receives one or 
more benefit payments on behalf of the recipient, the RDFI's liability 
to the agency for those payments shall be limited to:
    (1) An amount equal to:
    (i) The amount in the account at the time the RDFI receives the 
notice of reclamation, plus any additional benefit payments made to the 
account by the agency before the RDFI responds in full to the notice of 
reclamation, or
    (ii) the outstanding total, whichever is less; plus
    (2) If the agency is unable to collect the entire outstanding 
total, an additional amount equal to:
    (i) The benefit payments received by the RDFI from the agency 
within 45 days after the death or legal incapacity of the recipient or 
death of the beneficiary, or
    (ii) The balance of the outstanding total, whichever is less.
    (b) Qualification for limited liability. In order to limit its 
liability as provided in this section, an RDFI shall:
    (1) Certify that at the time the benefit payments were credited to 
or withdrawn from the account, the RDFI had no actual or constructive 
knowledge of the death or legal incapacity of the recipient or death of 
the beneficiary;
    (2) Certify the date the RDFI first had information of the death or 
legal incapacity of the recipient or death of the beneficiary, even if 
such information was obtained first through notice received from the 
agency;
    (3)(i) Provide the name, address and any other relevant information 
of the following person(s):
    (A) Co-owner(s) of the recipient's account;
    (B) Other person(s) authorized to withdraw funds from the 
recipient's account; and
    (C) Person(s) who withdrew funds from the recipient's account after 
the death or legal incapacity of the recipient or death of the 
beneficiary.
    (ii) If persons are not identified for any of these subcategories, 
the RDFI must certify that no such information is available and why no 
such information is available; and
    (4) fully complete all certifications on the notice of reclamation 
and comply with the requirements of this part.
    (c) Payment of limited liability amount. If the RDFI qualifies for 
limited liability under this subpart, it shall immediately return to 
the Federal Government the amount specified in Sec. 210.11(a)(1). The 
agency will then attempt to collect the amount of the outstanding total 
not returned by the RDFI. If the agency is unable to collect that 
amount, the Federal Government will instruct the appropriate Federal 
Reserve Bank to debit the reserve account utilized by the RDFI at that 
Federal Reserve Bank for the amount specified in Sec. 210.11(a)(2).
    (d) Forfeiture of rights. An RDFI that fails to comply with any 
provision of this subpart in a timely and accurate manner, including 
but not limited to the certification requirements at Sec. 210.11(b) and 
the notice requirements at Sec. 210.13, shall be deemed to have 
forfeited its right to limit its liability under this subpart and shall 
be liable to the agency for the amount of the benefit payments at 
issue.


Sec. 210.12  RDFI's rights of recovery.

    (a) Matters between the RDFI and its customer. This subpart does 
not authorize or direct an RDFI to debit or otherwise affect the 
account of a recipient. Nothing in this subpart shall be construed to 
affect the right an RDFI has under state law or the RDFI's contract 
with a recipient to recover any amount from the recipient's account.
    (b) Liability unaffected. The liability of the RDFI under this 
subpart is not affected by actions taken by the RDFI to recover any 
portion of the outstanding total from any party.


Sec. 210.13  Notice to account owners.

    Provision of notice by RDFI. Upon receipt by an RDFI of a notice of 
reclamation, the RDFI immediately shall mail to the last known address 
of the account owner(s) or otherwise provide to the account owner(s) a 
copy of any notice required by the Service to be provided to account 
owners as specified in the Green Book. Proof that this notice was sent 
may be required by the Service.


Sec. 210.14  Erroneous death information.

    (a) Notification of error to the agency. If, after the RDFI 
responds fully to the notice of reclamation, the RDFI learns that the 
recipient or beneficiary is not dead or legally incapacitated or that 
the date of death is incorrect, the RDFI shall inform the agency that 
certified the underlying payment(s) and directed the Service to reclaim 
of the funds in dispute.
    (b) Resolution of dispute. The agency that certified the underlying 
payment(s) and directed the Service to reclaim the funds will attempt 
to resolve the dispute with the RDFI in a timely manner. If the agency 
determines that the reclamation was improper, in whole or in part, the 
agency shall notify the RDFI and shall return the amount of the 
improperly reclaimed funds to the RDFI. Upon certification by the 
agency of an improper reclamation, the Service may instruct the 
appropriate Federal Reserve Bank to credit the reserve account utilized 
by the RDFI at the Federal Reserve Bank in the amount of the improperly 
reclaimed funds.

    Dated: January 23, 1998.
Richard L. Gregg,
Acting Commissioner.
[FR Doc. 98-2042 Filed 1-30-98; 8:45 am]
BILLING CODE 4810-35-P