[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
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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.
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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
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\1\ 31 CFR part 240.
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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.
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\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.
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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.''
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\3\ See 20 CFR Parts 404, 410, 416, 266, and 348; and 38 CFR
Part 13, respectively.
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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
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\4\ See 1 CFR Sec. 51.11.
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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
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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
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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
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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