[Federal Register Volume 64, Number 68 (Friday, April 9, 1999)]
[Rules and Regulations]
[Pages 17472-17491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8873]



[[Page 17471]]

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Part IV





Department of the Treasury





_______________________________________________________________________
Fiscal Service
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31 CFR Part 210



Federal Government Participation in the Automated Clearing House; Final 
Rule

  Federal Register / Vol. 64, No. 68 / Friday, April 9, 1999 / Rules 
and Regulations  

[[Page 17472]]



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: Final Rule.

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SUMMARY: The Department of the Treasury, Financial Management Service 
(Service), is revising its regulation, 31 CFR Part 210 (Part 210), 
governing the use of the Automated Clearing House (ACH) system by 
Federal agencies (agencies). The ACH system is the primary electronic 
funds transfer (EFT) system used by agencies to make payments, and the 
Service anticipates that agencies increasingly will use the ACH system 
to collect funds. Part 210 provides the regulatory foundation for use 
of the ACH system by agencies. It defines the rights and liabilities of 
agencies, Federal Reserve Banks, financial institutions, and the 
public, in connection with ACH credit entries, debit entries, and entry 
data originated or received by an agency through the ACH system.

DATES: This rule is effective May 10, 1999. The incorporation by 
reference of the publication listed in the rule is approved by the 
Director of the Federal Register as of May 10, 1999.

ADDRESSES: This rule is available on the Financial Management Service's 
ACH web site at the following address: http://www.fms.treas.gov/ach/.

FOR FURTHER INFORMATION CONTACT: Walt Henderson, Senior Financial 
Program Specialist, at (202) 874-6705; Mary Bailey, Financial Program 
Specialist, at (202) 874-6749; Natalie H. Diana at (202) 874-6590; 
Cynthia L. Johnson, Director, Cash Management Policy and Planning 
Division, at (202) 874-6590; or Margaret Marquette, Senior Attorney, at 
(202) 874-6681.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

    The ACH system is a nationwide 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 (Government) is the largest single user of the ACH 
system, originating and receiving millions of transactions each month. 
As the Government's financial manager, the Service collects and 
disburses funds for most agencies. In fiscal year 1998, approximately 
63% of payments made by the Department of the Treasury (Treasury) were 
made through the ACH system. In addition, a growing number of 
transactions involving the collection of funds by agencies are being 
made through the ACH system. In fiscal year 1998, over $1.1 trillion in 
corporate tax payments was collected electronically.
    Two laws are responsible for the substantial increase in the use of 
the ACH system by 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)) mandate the use of EFT for the 
collection of certain Federal taxes. Provisions in the Debt Collection 
Improvement Act of 1996 (DCIA), Pub. L. No. 104-134, require that most 
Federal payments (other than payments under the Internal Revenue Code 
of 1986) be made by EFT.
    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. 31 CFR Part 203 (Payment of Federal Taxes 
and the Treasury Tax and Loan Program) addresses the rights and 
responsibilities of taxpayers, financial institutions, and Federal 
Reserve Banks in connection with EFTPS. 63 FR 5644.
    On September 25, 1998, Treasury published a final rule, 31 CFR Part 
208 (Part 208), implementing the requirement of the DCIA that agencies 
convert from check to EFT payments, subject to the waiver authority of 
the Secretary of the Treasury. 63 FR 51490.
    The Service anticipates that the ACH system will be the dominant, 
though not exclusive, EFT system used by agencies to make payments and 
to collect funds. Part 210 provides the regulatory foundation for use 
of the ACH system by agencies.

B. Proposed Rulemakings

    On September 30, 1994, the Service published a Notice of Proposed 
Rulemaking with respect to Part 210. 59 FR 50112. After considering the 
comments received on the 1994 proposed rule, and taking into account 
developments since that proposal was issued, the Service issued a new 
Notice of Proposed Rulemaking on February 2, 1998 (NPRM). 63 FR 5426. 
The NPRM proposed to adopt the ACH rules developed by the National 
Automated Clearing House Association (NACHA) (ACH Rules) as the rules 
governing all Government ACH transactions, with twelve exceptions for 
which the Service proposed to establish special rules as a matter of 
Federal law.
    The Service received 26 comment letters on the NPRM. Commenters 
generally supported the adoption of the ACH Rules as the rules 
governing Government ACH transactions, but had differing views 
regarding the twelve proposed exceptions. Some financial institutions 
commented that Federal payments should be subject to the ACH Rules 
without variation or exception, commenting that imposing liability on 
financial institutions for losses resulting from Government errors and 
omissions will damage efforts to expand the use of the ACH as a vehicle 
for making Federal payments, and may have pricing implications for 
recipients of Federal payments. Other financial institutions and 
agencies commented that certain of the twelve proposed exceptions were 
not appropriate. Specific comments are discussed in the section-by-
section analysis below.

C. Final Rule

    Part 210, which implements Treasury's statutory responsibility to 
collect and disburse public funds, establishes the rights and duties of 
parties to transactions originated or received by 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 
(RDFIs), and performs the settlement function for the affected 
financial institutions; (4) the RDFI, which is the institution that 
receives ACH entries from the ACH Operator and posts them to the 
accounts

[[Page 17473]]

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, 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 Government payments and 
collections and that distinguish 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 agencies, the 
Service, and the Federal Reserve Banks with respect to the origination 
or receipt of an ACH entry. Due to the bifurcation of function between 
certifying and disbursing agencies, Government operations do not 
conform to the definitions in the ACH Rules. From a functional 
perspective, the 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, an 
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 agencies originating 
and receiving ACH entries. Accordingly, although it is the Service's 
view that 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 agencies that originate or 
receive ACH entries the obligations and liabilities imposed on ODFIs 
and RDFIs, respectively, for purposes of the ACH Rules. Part 210 
therefore is structured on the premise that 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.
    After reviewing the comments and further considering the issues 
raised, the Service has determined to preempt 11 provisions of the ACH 
Rules.2 In view of the special nature of Government entries, 
and the importance of protecting public funds, the Service believes 
that it is in the best interest of the public to preempt the 11 
provisions of the ACH Rules described briefly below, for reasons 
discussed in more detail in the section-by-section analysis.
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    \2\ The NPRM proposed to preempt 12 provisions of the ACH Rules. 
As discussed in the section-by-section analysis, the final rule 
deletes from the listing of provisions to be preempted the provision 
related to arbitration and replaces it with a provision related to 
rules enforcement. In addition, the provision related to 
prenotifications has been deleted, leaving a total of 11 provisions 
to be preempted.
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    The following five ACH Rules are preempted entirely and are 
excluded specifically from Part 210's definition of ``applicable ACH 
Rules'' (see Sec. 210.2(d)):
    1. ACH members. Part 210 preempts the limitation on the 
applicability of the ACH Rules to members of an ACH association.
    2. Compensation. Part 210 preempts the compensation rules set forth 
in the ACH Rules.
    3. Rules Enforcement. Part 210 preempts the requirement under the 
ACH Rules that participants agree to be subject to a national system of 
fines to ensure compliance with 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. 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 
Part 210 entirely preempts through the definition of ``applicable ACH 
Rules,'' six other provisions of the ACH Rules are preempted in part by 
operation of specific sections of Part 210. Those provisions are:
    1. Verification of identity of recipient (see Secs. 210.4(a) and 
210.8(b)(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. 
Part 210 imposes a different rule for Government entries. Specifically, 
under 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 Government for 
all entries made in reliance on a forged authorization that the 
institution has accepted. Thus, 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 agencies (see 
Secs. 210.4(a)(2) and 210.8(b)(1)). Part 210 preempts the ACH Rules 
with respect to the form of authorization required to initiate debit 
entries to an 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 
Sec. 210.4(a), no person or entity (including any financial 
institution) may initiate or transmit a debit entry to an agency, other 
than a reversal of a credit entry, 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 Sec. 210.8(b)(1).
    3. Liability of the Government
    (a) Amount of damages (see 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 ACH Association as a result of the RDFI's or ODFI's breach 
of any warranty. Thus, under the ACH Rules, an 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, an agency 
that receives payments would be liable for all losses resulting from 
any breach by it of an applicable warranty under the ACH Rules.
    Section 210.6 limits an agency's liability to the amount of the 
entry whether it is originating or receiving

[[Page 17474]]

ACH entries. Therefore, an agency would not be liable to a DFI, ACH 
Operator, or ACH Association for interest, attorneys' fees, or other 
consequential damages. In addition, in certain circumstances, an 
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 Sec. 210.7(a)). Part 
210 preempts section 11.5 of the ACH Rules, which provides that a 
Federal Reserve Bank is not the agent of an RDFI or ODFI. Part 210 
provides that Federal Reserve Banks are Fiscal Agents of the Treasury 
in carrying out their duties as the Government's ACH Operator and are 
not liable to any party other than the Treasury for their actions under 
Part 210.
    4. Liability of financial institutions (see Sec. 210.8(b)). Part 
210 preempts the provisions of the ACH Rules that would operate to make 
a financial institution liable to the Government for any loss, 
liability or claim relating to an entry in an amount exceeding the 
entry. The ACH Rules impose liability on an RDFI or ODFI for all 
losses, liabilities, or claims incurred by another DFI, ACH Operator, 
or ACH Association as a result of the RDFI's or ODFI's breach of any 
warranty. Under Part 210, a financial institution would not be liable 
to the Government for interest, attorneys' fees, or other consequential 
damages, except in the case of an unauthorized debit to an agency, as 
discussed above.
    5. Reversals (see Sec. 210.6(f)). Part 210 requires 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, Part 210 applies the ACH Rules relating to 
indemnification to the Government, but limits the extent of the 
indemnification to the amount of the individual entry(ies) being 
reversed.
    6. Account requirements for Federal payments (see Sec. 210.5). Part 
210 imposes a requirement with respect to ACH credit entries 
representing Federal payments other than vendor 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 three exceptions discussed in the section-by-section analysis. The 
term ``account'' for purposes of 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 September 2000, to permit the crediting 
of ACH credits to a financial institution general ledger account or to 
a loan account. Because of the consumer protections associated with the 
crediting of Federal payments to a deposit account, including those 
available under Regulation E (12 CFR Part 205) and Regulation DD (12 
CFR Part 230), as well as the availability of Federal deposit or share 
insurance, the Service does not intend to accept this ACH Rule with 
respect to payments other than vendor 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 establishing some of these rights in Part 210 with 
respect to agencies vis-a-vis originators or receivers of Government 
entries. For example, Part 210 provides that an agency will be liable 
to a 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 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. Part 210 establishes certain circumstances in 
which an entry shall be deemed to be unauthorized.

D. Future Changes to Subpart B

    The NPRM solicited preliminary comment on the reorganization of 
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. In addition, the 
Service requested comment on ways in which the reclamation process 
might be restructured in the future to operate more efficiently as a 
fully automated process.
    In order to begin formulating a preliminary approach to 
implementing an automated reclamation process, the Service solicited 
comment on whether the protection afforded to financial institutions by 
the limited liability provisions of Subpart B is outweighed by the 
processing costs of handling reclamations. In particular, the Service 
requested 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.
    Although commenters generally expressed conceptual support for 
increased automation of reclamation processing, most commenters did not 
favor moving toward an automated reclamation process at this time. One 
agency questioned the business case for replacing the current paper 
reclamation process with a form of automated reclamation. That agency 
indicated that the use of death notification entries (DNEs) has 
significantly reduced the number of reclamation requests produced and 
that, at the same time, payment cycling is causing a significant 
reduction in reclamations because the agency has additional time to 
receive and act on reports of recipients' deaths. The agency commented 
that these enhancements reduce the need for a future electronic 
reclamation process.
    Some financial institutions commented that the approach outlined in 
the NPRM would substantially increase financial institutions' losses 
from reclamations without a corresponding reduction in expenses. One 
financial institution pointed out that it would expect to perform much 
of the same research under the Service's suggested approach as it 
currently does in order to pursue reimbursement from the surviving 
depositor(s) or the estate of the decedent. Another financial 
institution expressed support for assuming liability for any payments 
received within a one-year period of the recipient's death, but 
recommended that the Service continue the existing limitations on 
financial institution liability for payments received more than one 
year after the death of the recipient.

[[Page 17475]]

II. Section-by-Section Analysis of Part 210

    The title of Part 210 has been changed to ``Federal Government 
Participation in the Automated Clearing House'' to reflect the 
broadened scope of the regulation to cover all types of transactions 
that are handled, or that may in the future be handled, over the ACH 
system.
    As revised, Part 210 is comprised of two subparts. Subpart A sets 
forth rules applicable to all ACH credit and debit entries and entry 
data originated or received by an agency, which are defined in the 
proposed rule as ``Government entries.'' Subpart B contains the rules 
for the reclamation of benefit payments. Subpart C, which dealt with 
discretionary salary allotments, has been deleted as unnecessary 
because it is 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.

Section 210.1--Scope; Relation to Other Regulations

    Part 210 formerly covered only ACH payments made by the Government. 
In the NPRM, the Service proposed to broaden the scope of Part 210 to 
cover all entries and entry data originated or received by an agency 
through the ACH system. Section 210.1 is revised as proposed in the 
NPRM. Thus, Part 210 as amended applies to collections and the 
information entries that are handled through the ACH system, as well as 
to Federal payments made through the ACH system.
    Part 210 establishes the general legal and operational framework 
applicable to all ``Government entries'' as defined in the rule. 
Federal tax payments made by ACH debit or credit are governed by 31 CFR 
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 the 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 Part 210. Federal tax payments received by the 
Government through the ACH system that are governed by Part 203 and ACH 
entries for the purchase of, or payment of principal and interest on, 
United States securities that are governed by Part 370 are not subject 
to any provision of Part 210 that is inconsistent with Part 203 or Part 
370, respectively.

Section 210.2--Definitions

    The Service is revising this section, as proposed, to provide 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 is adding, removing, or redesignating certain other terms, as 
indicated below.
    The Service is deleting certain definitions from Part 210 because 
Part 210, as revised, uses these terms in the same way as the ACH 
Rules. Thus, the definitions of the terms ``banking day,'' ``business 
day,'' and ``prenotification,'' have been deleted. In addition, the 
term ``payment'' is not defined in revised Part 210 because Part 210 
uses instead the ACH terms ``entry'' and ``credit.'' Similarly, the 
term ``payment date'' is not defined because Part 210 uses instead the 
ACH term ``settlement date.''
    Other terms previously defined in Part 210, such as ``allotment,'' 
``allotter,'' ``discretionary allotment,'' ``employee,'' and 
``nonbenefit payment'' have been deleted because they are not used in 
revised Part 210. The terms ``account,'' ``payment instruction,'' and 
``Federal Reserve Bank'' have been deleted as unnecessary.
    The Service has added a definition of ``ACH Rules'' at 
Sec. 210.2(a). This definition explains that the ACH Rules consist of 
the NACHA Operating Rules and the NACHA Operating Guidelines.
    The Service also has added a definition of ``actual or constructive 
knowledge'' at 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 when it has received, by whatever means, any 
information of the death or incapacity and has had a reasonable 
opportunity to act upon the information. 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 incapacity. For example, an 
RDFI would have actual knowledge of a death or legal incapacity through 
a communication of that fact by an executor of the deceased recipient's 
or beneficiary's estate, a family member, another third party, or the 
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.
    Although Part 210 previously did not contain a definition of 
``actual or constructive knowledge,'' the reclamation provisions of 
Subpart B of Part 210 provided 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 is not changing that standard, but is adding 
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.
    Financial institutions questioned whether the addition of a 
definition of ``actual or constructive knowledge'' might be viewed to 
broaden the circumstances under which a financial institution can be 
liable in reclamation cases. Several commenters asked whether financial 
institutions would have an obligation to check obituaries, noting that 
Part 210 previously provided expressly that there is no such 
obligation. One commenter stated that banks should not be responsible 
for acting on the basis of unconfirmed information, regardless of its 
source, and therefore suggested that the definition of actual or 
constructive knowledge include the concept that the information should 
come from an official source such as a death certificate, written 
communication from a decedent's personal representative, or a copy of a 
court order adjudicating a recipient's incapacity. The same commenter 
pointed out that under the proposed standard, a bank might be deemed to 
have knowledge of death prior to the time when the information is, or 
should have been, brought to the attention of an employee who handles 
benefit payments. The commenter urged that banks be permitted an 
opportunity to communicate the information to the responsible 
individual or department.
    The deletion of the language formerly in Part 210 stating that 
financial institutions are not required to check obituaries does not 
mean that financial

[[Page 17476]]

institutions must check obituaries. The standard of constructive 
knowledge set forth in the final rule, i.e., whether commercially 
reasonable business practices would have resulted in discovery of the 
recipient's death or incapacity, is a flexible concept. For example, 
what is a commercially reasonable practice for a large money center 
bank may not be commercially reasonable for a small rural bank. 
Similarly, business practices that are not today technologically 
feasible or cost-effective may become standard industry practices at 
some future time. Thus, with regard to whether financial institutions 
should be responsible for acting on the basis of unconfirmed 
information, the Service declines to adopt a rule under which a 
financial institution has knowledge of the death of a recipient only if 
the information comes from an ``official source.'' Rather, whether a 
financial institution would be deemed to have knowledge of a 
recipient's death would depend on whether, given all the facts and 
circumstances, a similarly situated financial institution would 
reasonably conclude that the information was reliable.
    The Service agrees that financial institutions need a reasonable 
period of time to act on information of death or incapacity and, as 
indicated above, has incorporated a provision to this effect in the 
final definition. Some commenters indicated that banks utilizing batch 
processing systems cannot activate a hold on an account following 
receipt of notice until evening or the following day, depending on the 
processing schedule. Accordingly, the Service believes that a 
reasonable period of time will not exceed one business day, i.e., 
twenty four hours, excluding weekends or holidays.
    The Service has added a definition of ``agency'' at Sec. 210.2(c) 
to mean any department, agency, or instrumentality of the United States 
Government, or a corporation owned or controlled by the Government of 
the United States. Part 210 formerly used the term ``program agency.'' 
The change is not intended to alter the scope of Part 210. The 
definition is identical to the definition of agency in Part 208, which 
sets forth rules governing the mandatory use of EFT by Federal 
agencies, except that the definition of agency for purposes of Part 210 
expressly excludes Federal Reserve Banks.
    For purposes of Subpart B, which governs reclamations, ``agency'' 
means the agency that certified the benefit payment(s) being reclaimed.
    Section 210.2(d) defines the term ``applicable ACH Rules'' to mean 
the ACH Rules with an effective date on or before September 17, 1999, 
which are made applicable to ``Government entries'' pursuant to 
Sec. 210.3. Part 210 completely preempts those ACH Rules that: govern 
claims for compensation or reclamation of benefit payments; provide for 
rules enforcement procedures; 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, Part 
210 also preempts certain other provisions of the ACH Rules through 
operation of particular sections of Part 210.
    In the NPRM, the Service proposed to preempt the requirement under 
the ACH Rules that disputes among participants be settled by 
arbitration procedures set forth in the ACH Rules. Since the ACH Rules 
have been amended, effective March 19, 1999, to make arbitration 
voluntary rather than mandatory, the Service no longer believes it is 
necessary to preempt the arbitration provisions of the ACH Rules. 
However, since publication of the NPRM, NACHA has adopted a rule that 
became effective on December 18, 1998, establishing a national system 
of fines applicable to both financial institutions and access 
participants for violation of the provisions of the ACH Rules. The 
Service does not believe it is in the public interest to subject the 
Treasury General Account (TGA) to an unquantified liability based on an 
untested system of fines; therefore, at this time the Service is not 
incorporating in Part 210 those provisions of the ACH Rules dealing 
with enforcement for noncompliance. However, the Service intends to 
work with agencies to achieve Government-wide compliance with all ACH 
Rule requirements, including applicable time frames.
    Other than the requirement that credit entries be originated no 
more than two banking days before the settlement date of the entry, any 
technical or timing requirements imposed on 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 reversals and returns.
    Many commenters objected to permitting agencies to originate an 
entry more than two banking days before the settlement date of the 
entry. Some financial institutions pointed out that production and 
storage costs are incurred by an RDFI to warehouse ACH entries and that 
expanding the origination window increases the risk to which the RDFI 
is exposed. For example, several financial institutions pointed out 
that a DNE is ineffective to cause the automated return of a benefit 
payment that has already been received but is being held or warehoused 
pending settlement. Some agencies also indicated that there is no 
reason that the Government cannot adhere to the two-day origination 
deadline eventually, and that it would benefit the Government to do so 
by allowing agencies more time to process reports that affect 
continuing payment entitlement. The Service anticipates that in the 
future agencies will be able to adhere to the two-day window and 
expects to revise Part 210 accordingly at that time. However, because 
there is not uniform operational capability to meet the two-day window 
at this time, the Service has retained this preemption of the ACH Rules 
in the final rule.
    The Service is adding a definition of ``authorized payment agent'' 
at Sec. 210.2(e) in connection with the account requirements set forth 
at Sec. 210.5. The definition has been reworded slightly from the 
proposed definition in order to correspond 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, Sec. 210.5 would permit an 
authorized payment agent to receive the payments on behalf of the 
beneficiary. The Social Security Act, the 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.3 The Social Security Administration (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 former 
Sec. 210.2 refers to representative payees and fiduciaries. SSA, the 
Railroad Retirement Board, and the Department of Veterans Affairs have 
issued detailed regulations addressing the qualifications

[[Page 17477]]

and duties of representative payees and fiduciaries.4 The 
rules governing these representational relationships are longstanding 
and well established. Therefore, the Service believes that it is 
appropriate to rely on existing agency regulations in defining the term 
``authorized payment agent.''
---------------------------------------------------------------------------

    \3\ See 42 U.S.C. 1383(a)(2)(A)(ii)(i); 38 U.S.C. 5502(a)(1); 45 
U.S.C. 231k, respectively.
    \4\ See 20 CFR Parts 404, 410, 416, 266, and 348; and 38 CFR 
Part 13, respectively.
---------------------------------------------------------------------------

    Other agencies also may provide for payment to representative 
payees and fiduciaries. While not specifically mentioned by name, the 
phrase ``or other agency'' in the definition is intended to refer to 
such agencies.
    The Service has added 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 EFT system that has adopted the ACH Rules.
    The definition of ``beneficiary'' in Sec. 210.2(g) has been 
reworded slightly from the definition previously set forth in Part 210 
to reflect the addition of a definition of benefit payment, but 
substantively is unchanged from the previous definition.
    The definition of ``benefit payment'' in Sec. 210.2(h) is similar 
to the definition previously set forth in Part 210. The regulation 
lists 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 Sec. 210.2(h).
    The Service has added to Part 210 a definition of ``Federal 
payment.'' The 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 
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 or a taxpayer elects to make 
using the ACH system are subject to Part 210 and thus are included 
within the definition of Federal payment at Sec. 210.2(i).
    The definition of ``financial institution'' in Sec. 210.2(j) is 
identical to the definition contained in Part 208 except that the 
Service has added a sentence noting that, in 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 definition of ``financial institution'' makes specific 
reference to banks, savings banks, credit unions, savings associations, 
and United States-based foreign bank branches. The 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, Part 210 previously applied only to credit 
entries originated by an agency for the purpose of making payments. As 
amended, Part 210 has a broader scope; it applies to all entries 
originated or received by an agency, whether made for the purpose of 
payments or collections or for information purposes.
    The Service has added 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 
published by the Service in the Green Book, as provided at 
Sec. 210.3(c).
    The term ``notice of reclamation'' at Sec. 210.2(m) means a notice 
issued by the Government in a paper, electronic, or other form in order 
to initiate a reclamation. This definition clarifies that the 
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 Part 
210 from Sec. 210.13(a), where it was previously located.
    The Service has preserved the definition of ``outstanding total'' 
in Part 210 without substantive change.
    The definition of ``recipient'' in Sec. 210.2(o) is substantially 
similar to the corresponding definition in Part 208. The term includes 
an authorized payment agent that receives a payment on behalf of a 
beneficiary.
    The term ``Service'' has been added at Sec. 210.2(p) to mean the 
Financial Management Service, Department of the Treasury.
    The term ``Treasury'' has been added at Sec. 210.2(q) to mean the 
United States Department of the Treasury.
    The Service has added a definition of the term ``Treasury Financial 
Manual'' at Sec. 210.2(r) 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 Government-wide fiscal 
responsibilities of the Treasury.

Section 210.3--Governing Law

    Section 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. This approach is consistent with Clearfield 
Trust Co. v. United States, 318 U.S. 363 (1943), and its progeny, which 
support the principle that the Government can establish the rules that 
govern 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 
this function.
    One commenter requested clarification regarding the extent to which 
Article 4A of the Uniform Commercial Code (UCC Article 4A) is 
applicable to Government entries. Treasury consistently has taken the 
position that under Clearfield Trust, state law, including the Uniform 
Commercial Code, is inapplicable to Federal payments and collections, 
except to the extent that the state law is incorporated in Federal law. 
However, UCC Article 4A is incorporated in the ACH Rules, which the 
Service is adopting, and, therefore, will apply to Government entries 
except as preempted in Part 210.
    Section 210.3(b)(1) provides that Part 210 incorporates by 
reference the applicable ACH Rules published in Parts I, II, and IV of 
the 1999 NACHA Rule Book (including any rule changes in effect on or 
before September 17, 1999), as modified by Part 210. NACHA has approved 
an amendment to the ACH Rules that, effective September 2000, will 
permit the crediting of entries to non-deposit accounts. The Service 
does not intend to accept this amendment for payments subject to 
Sec. 210.5.
    Section 210.3(b)(2) describes how subsequent amendments to the ACH 
Rules will be handled. The proposed rule provided 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. Many commenters urged 
the Service to change this position. Several financial institutions and 
agencies recommended that the Service provide that amendments to the 
ACH Rules are deemed accepted unless

[[Page 17478]]

the Service expressly rejects the amendment by publishing notice to 
that effect in the Federal Register.
    Federal regulations require that any changes to a publication 
incorporated by reference in a Federal regulation be published in the 
Federal Register.5 Accordingly, the Service may not adopt an 
approach whereby amendments to the ACH Rules are deemed accepted unless 
expressly rejected. In order to mitigate the uncertainty and 
inconvenience to financial institutions that would result from a lag in 
addressing ACH Rule amendments, the Service intends to work closely 
with NACHA to track proposed ACH Rule changes and to respond to such 
changes in a timely manner. The Service anticipates that it will 
publish a Federal Register notice addressing ACH Rule changes within 90 
days of NACHA's publication of its rule book, which is published 
annually.
---------------------------------------------------------------------------

    \5\ See 1 CFR 51.11.
---------------------------------------------------------------------------

    For the above reasons, Part 210 states that amendments effective 
after September 17, 1999, will not apply to Government entries unless 
the Service expressly accepts such amendments by publishing notice of 
acceptance in the Federal Register. In addition, 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 notice that expressly 
accepts the amendment.
    Section 210.3(c) provides 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 above, the Service has moved 
certain requirements that previously were set forth in the regulation 
itself to the Green Book and the Treasury Financial Manual. 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.
    The requirements set forth in the Green Book and the Treasury 
Financial Manual, including those provisions that the Service is 
relocating 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.

Section 210.4--Authorizations and Revocations of Authorizations

    Section 210.4(a) provides that each debit and credit entry subject 
to 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 Sec. 210.8(b)(2).
    Section 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 recent years, in 
order to encourage recipients to use Direct Deposit, 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. Part 210 
acknowledges that the enrollment process may be completed by the 
recipient's financial institution or by the agency. In addition, 
Sec. 210.4(a) encourages automated enrollments by removing the 
requirement that the financial institution sign the authorization form. 
Section 210.4(a) recognizes that signature verification may not be 
possible or practical in an automated enrollment process.
    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 leaves to the 
discretion of the financial institution or agency accepting an 
authorization the steps it will take to verify the recipient's 
identity.
    Some commenters requested that the Service clarify that a financial 
institution that accepts an authorization is not required to verify 
that the recipient, in fact, is entitled to receive the payment(s) in 
question. Financial institutions, in particular, commented that the 
RDFI is not in a position to determine who is entitled to the payment 
being authorized. The Service agrees that the financial institution is 
not in a position to know whether the customer, in fact, is entitled to 
the payment(s) being authorized. Section 210.4(a) requires only that 
the identity of the recipient be verified; the financial institution is 
not liable for determining whether the customer is entitled to the 
payment.
    Agencies and other commenters supported the requirement that the 
RDFI verify the identity of the recipient as a means of reducing fraud. 
Financial institutions and ACH associations generally objected to the 
imposition of liability on financial institutions that accept and 
process enrollments, rather than on the ODFI, as provided for in the 
ACH Rules. Financial institutions further commented that if the ACH 
Rules are preempted in this respect, financial institutions should not 
be held to a strict liability standard. These institutions urged the 
Service to adopt a ``commercially reasonable business practices'' 
standard of care, or an ``actual or constructive knowledge'' of a fraud 
standard. Financial institutions argued that they cannot be an insurer 
against all fraud and that a strict liability standard creates a 
disincentive for financial institutions to participate in the 
enrollment process.
    The Service continues to believe that the authorization process 
represents an opportunity to reduce fraud which could otherwise result 
in significant losses to the Government. Because a financial 
institution that accepts an authorization from a customer has an 
obligation to know the customer and is in a position to verify a 
written signature, the Service believes it is appropriate to hold the 
financial institution strictly liable for verifying the identity of the 
customer.
    Under Sec. 210.4(a)(2), an originator and an ODFI are prohibited 
from initiating a debit entry to an agency, other than a reversal of a 
credit entry, 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 Government. These pilots 
indicate that the use of debit entries to the Government is a cost-
efficient payment mechanism that benefits both the Government and the 
payee-recipient. However, in order to protect the interests of the 
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 is 
required to give an authorization only once, prior to the first entry.

[[Page 17479]]

    As proposed, Sec. 210.4(a)(2) did not provide an exception from the 
authorization requirements for a reversal of a credit entry previously 
sent to an agency. Since a reversal of a credit entry is a debit entry, 
some commenters questioned whether proposed Sec. 210.4(a)(2) would 
limit or restrict a financial institution's right to reverse a credit 
entry. It was not the Service's intention to require a prior written 
authorization before the initiation of a reversal, and the final rule 
has been revised to clarify this point.
    Section 210.4(b) 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.
    Section 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.
    Section 210.4(b)(4) provides that a new authorization supersedes 
any existing authorization that is inconsistent with the new 
authorization.
    Under Sec. 210.4(b)(5), the recipient agrees that the Government 
may reverse any duplicate or erroneous entry as provided in 
Sec. 210.6(f).
    Section 210.4(c)(1) provides that, in the case of a recipient of 
benefit payments, a change in the recipient's ownership of the account 
results in the termination of the authorization. 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.
    Some commenters questioned whether an authorization is revoked as a 
result of any change in the ownership of an account, even if that 
change does not affect the recipient's ownership interest in the 
account. These commenters questioned whether, for example, the addition 
of a co-signatory on the account would cause the authorization to be 
revoked. It is not the Service's intent that an authorization be 
revoked as a result of a change in ownership of an account where the 
recipient's interest is not adversely affected. The wording of 
210.4(c)(1) has been changed accordingly.
    Under Sec. 210.4(c)(2), the death or legal incapacity of a 
recipient of benefit payments or the death of a beneficiary results in 
the termination of the authorization.
    Section 210.4(c)(3) 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 to which benefit 
payments currently are being sent, except in cases of fraud.
    Final Sec. 210.4(c)(3) is unchanged from the NPRM except that the 
30-day notice requirement is limited in the final rule to accounts to 
which benefit payments currently are being sent. Most financial 
institutions commented that the 30-day notice requirement was an 
improper interference with their customer relationships. Financial 
institutions pointed out that banks routinely close accounts in cases 
of excessive overdrafts or in instances of fraud, and noted that the 
30-day period would require banks to establish a separate account 
closing process for accounts receiving Federal ACH transactions. Some 
agencies also questioned whether it was appropriate for the Service to 
regulate account closing in this fashion, indicating that they had not 
had a problem with closed accounts. 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. Because the Service is concerned 
that a recipient of benefit payments may suffer hardship if the account 
to which his or her benefit payments are being sent is closed, the 
final rule has been limited to address this class of recipients.
    One agency commenting on the proposed rule requested clarification 
regarding situations in which payments are sent to an account that has 
been kept open by a financial institution notwithstanding the 
recipient's request that the account be closed. The agency stated that, 
in its view, ``the only criterion that should apply in such a situation 
is whether the recipient has closed the account at the financial 
institution. . . . When a recipient can provide proof that an account 
has been closed, all Federal payments subsequently received by the 
financial institution must be returned.''
    The effect of 210.4(c) is that payments sent to an account that has 
been closed must be returned by the financial institution. However, 
Part 210 does not establish the circumstances in which a financial 
institution can or must close an account. A financial institution's 
right or obligation to close a customer's account is established by the 
terms of the account agreement between the financial institution and 
the customer and applicable state or Federal laws. Thus, a recipient's 
assertion that an account has been closed is not necessarily sufficient 
to require the financial institution to return funds sent to the 
account. There may be situations in which a recipient wishes to close 
an account but does not have a legal right to do so. This could occur, 
for example, when the account has been overdrawn and language in the 
deposit contract provides that the financial institution may keep the 
account open until the overdraft is settled. In such a case, a 
financial institution's obligation to return a payment depends on 
whether the closing of the account, in fact, has been accomplished, not 
upon the recipient's desire to close the account or belief that the 
account has been closed. The Service emphasizes that it is the actual 
closing of the account as a legal matter, and not the recipient's 
desire or attempts to close the account, that imposes an obligation on 
the financial institution to return payments under Sec. 210.4(c).
    In order to eliminate any unnecessary interruptions in ACH services 
to recipients when any of the events described in Sec. 210.4(c)(4) 
occurs, Sec. 210.4(c)(4) 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 
Government may transfer temporarily the authorization to a consenting 
financial institution for a period of no longer than 120 days.
    The Service has deleted the provision formerly contained in 
Sec. 210.4(e) that stated 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.

Section 210.5--Account Requirements for Federal Payments

    Section 210.5 imposes restrictions on the type of account to which 
Federal payments may be deposited. Section 210.5(a) reiterates the 
general rule set forth in Part 208 that Federal payments other than 
vendor payments must be deposited to an account at a financial 
institution in the name of the recipient. The phrase ``notwithstanding 
ACH Rule 2.1.2'' indicates that 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 certain exceptions discussed below. 
This section is designed to ensure that payments reach

[[Page 17480]]

the intended recipient by requiring that such payments be deposited 
into an account in which the recipient has an ownership interest. 
Vendor payments are excluded under Sec. 210.5(a) 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.
    Proposed Sec. 210.5 would have imposed these restrictions only on 
benefit payments, which by definition excluded Federal retirement 
payments. Upon further consideration, the Service has determined that 
Federal retirement payments need not be excluded from the account 
restrictions. In the situation most often cited, that in which a 
surviving spouse is entitled to a deceased recipient's retirement 
payment, the surviving spouse is considered to be the recipient and, 
therefore, the payment would be deposited into the surviving spouse's 
account. The final rule parallels Part 208, which requires that all 
Federal payments other than vendor payments be deposited to an account 
in the name of the recipient, with two exceptions.
    The first exception, related to authorized payment agents, is 
unchanged from the proposed rule. The second exception, related to 
investment accounts, contains two changes from the proposed rule. 
First, the exception has been expanded to cover investment accounts 
established through an investment company registered under the 
Investment Company Act of 1940, in addition to investment accounts 
established through a securities broker or dealer registered under the 
Securities Exchange Act of 1934. Second, the requirement contained in 
the proposed rule that the investment account and all associated 
records be structured so that the recipient's interest is protected 
under applicable Federal or State deposit insurance regulations has 
been deleted. The reasons for these changes are discussed in detail in 
the final rulemaking for Part 208. 63 FR 51490, 51500. Additionally, in 
order to ensure consistency with Part 208, Sec. 210.5(b)(3) has been 
added. Section 210.5(b)(3) provides that the Secretary of the Treasury 
may waive the requirements of Sec. 210.5(a) in any case or class of 
cases.
    A number of commenters requested additional guidance on various 
aspects of Sec. 210.5. Some commenters questioned whether the account 
must be solely in the name of the recipient, which would preclude the 
use of joint accounts, and whether master-subaccounts can be 
established with limited access by the beneficiary. One agency 
commented that it has no way of knowing the account title at the 
financial institution and cannot be expected to monitor industry 
practices in this regard.
    The part 208 final rulemaking release contains an extensive 
discussion of the restrictions on accounts to which Federal payments 
can be sent, and addresses the issues raised by commenters on proposed 
Sec. 210.5. See 63 FR 51490, 51499. The Service does not believe it is 
necessary to duplicate that discussion here, and refers readers to the 
Part 208 rulemaking release. However, in response to the question 
raised by commenters as to whether Sec. 210.5 would prohibit the use of 
a joint account between the recipient and a spouse or other member of 
the recipient's family, the Service emphasizes that Sec. 210.5 does not 
require that the recipient's name be the only name on the account, and 
thus would not prohibit the use of such a joint account. In addition, 
as discussed in the Part 208 rulemaking release, Sec. 210.5 does not 
prevent recipients of Federal salary payments from making discretionary 
allotments, as such allotments are made prior to the time the 
recipient's payment is deposited into an account at a financial 
institution.
    The Service is aware that NACHA has approved an amendment to the 
ACH Rules (effective September 2000), which permits the crediting of 
entries to general ledger accounts and loan accounts. The Service does 
not intend to accept that amendment with respect to Federal payments 
other than vendor payments.

Section 210.6--Agencies

    The title of this section has been changed from ``The Federal 
Government'' to ``Agencies.'' Section 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 and reversal requirements of Secs. 210.6(a) and (f) 
constitute additional obligations. The liability provisions of 
Secs. 210.6(b), (c), (d), and (f) expand as well as 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.
    Section 210.6 is largely unchanged from the NPRM except that 
Sec. 210.6(b) of the NPRM, relating to prenotifications, has been 
deleted and the subsections of Sec. 210.6 have been renumbered 
accordingly. 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). Under the ACH Rules, prenotifications are 
optional for all entries. The Service had proposed at Sec. 210.6(b) of 
the NPRM to modify the ACH Rules by requiring prenotifications for 
debit entries initiated by an agency. The purpose of the proposed 
requirement was to ensure that a debit initiated by an agency would be 
applied against the correct account at the intended financial 
institution.
    In light of comments received, the Service has deleted this 
requirement from the final rule. 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. 
However, a prenotification does not provide notice to the owner of the 
account to be debited, and thus does not serve as a protection against 
a debit to an incorrect account. Moreover, requiring prenotifications 
for debit entries may impede the implementation and operation of 
programs such as point-of-sale check payment capture, in which ACH 
debits are initiated against a consumer account at the time a purchase 
of goods or services takes place. Requiring prenotification also would 
effectively preclude agencies from effecting reversals of credit 
entries, as a number of commenters pointed out. For these reasons, the 
Service has deleted from the final rule the requirement that agencies 
utilize prenotifications before initiating debit entries.
    Section 210.6(a) 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. 
Section 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;

[[Page 17481]]

rather, it is an operational requirement imposed by the Service on 
agencies.
    Sections 210.6(b)-(d) set forth an agency's liability to various 
parties in connection with Government entries. Section 210.6(b) 
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.
    Several financial institutions urged the Service to reconsider this 
limitation on liability, pointing out that losses resulting from agency 
errors may be shifted unfairly to the RDFI. One commenter gave an 
example of an agency's initiation of a duplicate debit entry to a 
receiver's account, in which case the account might become overdrawn, 
resulting in returned checks and related charges for which the receiver 
would attempt to recover compensation. If the receiver's right of 
recovery from the Government were limited to the amount of the entry, 
the receiver might seek compensation from the RDFI for a refund of 
charges and other damages resulting from the return of checks, loss of 
use of funds, etc.
    To address this concern, Sec. 210.8(b) of the final rule provides 
that a financial institution will not be liable to any party for any 
loss resulting from an agency's error or omission in originating an 
entry. This provision does not affect a financial institution's 
responsibilities to its customer to resolve errors under the Electronic 
Fund Transfer Act or Regulation E. Rather, this provision establishes 
that a financial institution is not liable for consequential damages 
resulting from an agency's error.
    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. Section 
210.6(b) 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.
    Section 210.6(c) 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, ACH Association, and ODFI, and 
may be liable to one of those parties for any 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 on state law.
    Section 210.6(c) preempts 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, Sec. 210.6(c) 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).
    Section 210.6(d) 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 
requirements. While Part 210 previously addressed processing errors by 
an agency, the final rule refers to duplicate and erroneous entries, as 
defined in the ACH Rules, in order to describe specifically the type of 
errors or the nature of the losses for which an agency is liable.
    Under the ACH Rules, an ODFI is liable for losses caused by its 
origination of duplicate or erroneous entries. Part 210 subjects 
agencies to the liability imposed on ODFIs under the ACH Rules for 
originating erroneous and duplicate entries, but preempts the ACH Rules 
in three respects. First, an agency is not liable for all costs 
incurred by the RDFI, such as attorneys' fees, but is liable only up to 
the amount of the entry. Second, Sec. 210.6(d) 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, Sec. 210.6(d) 
excludes credit entries received by an RDFI after the death or legal 
incapacity of a recipient of benefit payments or the death of a 
beneficiary. It should be noted that liability in connection with any 
benefit payment to a deceased recipient is not covered under 
Sec. 210.6(d), but is governed solely by Subpart B.
    Several commenters questioned how the comparative negligence 
standard would be administered and what negligence would consist of in 
this context. One commenter questioned whether the costs of 
apportioning negligence might exceed the benefit to the Government of 
limiting its liability in this fashion.
    What will constitute negligence on the part of a financial 
institution in a particular context depends on the relevant facts and 
circumstances. Although the Service recognizes that there may be costs 
associated with investigating and determining the causes of a 
particular loss, the Service believes it is important to retain this 
provision in order to apportion liability appropriately in cases where 
an agency and a financial institution share responsibility for a loss. 
For example, if an agency erroneously originated a credit entry to an 
incorrect account, and the person who received the misdirected funds 
brought the mistake to the attention of the financial institution, the 
financial institution could incur liability if it failed to take 
appropriate action and the agency subsequently was unable to recover 
the erroneously transmitted funds.
    Section 210.6(e) is unchanged from Sec. 210.6(f) of the proposed 
rule, except that the word ``final'' has been added in recognition that 
a Federal Reserve Bank's crediting of an account can be reversed if 
actual and final funds are not collected in settlement of a credit item 
at or before 8:30 a.m. Eastern Time on the banking day following the 
settlement date.
    Section 210.6(f) addresses the Government's initiation of 
reversals. As discussed in the analysis of Sec. 210.4(b) above, a 
recipient who executes an authorization agrees, among other things, 
that the Government may reverse duplicate or erroneous entries or 
files, as provided in Sec. 210.6(f).
    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 than 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

[[Page 17482]]

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 ability to effect reversals is an important way for the 
Government to 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 Government.
    With respect to certain types of payments, however, the 
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 Government may 
recover overpayments. For example, in the context of Federal benefit 
payments, the Government may be required to provide notice and a 
hearing prior to taking action to recover payments, or may be limited 
in the amount, timing, or manner in which an overpayment is recovered. 
Part 210 does not address the operation of these requirements because 
the applicable requirements may vary depending on the type of payment. 
It is the agency's responsibility to determine before certifying a 
reversal that the reversal will not violate any applicable laws or 
regulations.
    One commenter requested that the Service clarify how the 
certification requirement of Sec. 210.6(f) affects the indemnification 
of the RDFI and other parties to a transaction as provided under ACH 
Rule 2.4.5. The certification requirement represents an additional 
obligation of any agency that originates a reversal. The certification 
requirement is intended to function as an intra-Governmental warranty 
and is not intended to affect the indemnification of the RDFI or other 
parties to a transaction under ACH Rule 2.4.5. and Part 210.
    Several commenters requested clarification as to whether the 
Government, when initiating reversals, would be bound by any ACH Rule 
requirements that generally apply with respect to reversals, such as 
the five-day reversal deadline. It is the intention of the Service that 
all ACH Rule requirements apply to Government-initiated reversals 
except that the extent of the Government's indemnification would be 
limited to the amount of the entry(ies). Therefore, an agency that 
reverses a Government entry must do so within the five-day deadline.

Section 210.7--Federal Reserve Banks

    Section 210.7 sets forth the role and responsibilities of the 
Federal Reserve Banks.
    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 has deleted as unnecessary the provisions previously in 
Part 210 relating to funds availability since those requirements are 
addressed under Federal Reserve Bank Operating Circular No. 4 on ACH 
Items.
    Some commenters were concerned that a change in the timing of 
payments would result from the deletion from Sec. 210.7 of language 
stating that Federal Reserve Banks are to make available to the 
financial institution the amount specified in a payment instruction, 
and debit the TGA, on the payment date. Part 210 previously defined 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, and 
provided 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.'' The 
Service is not changing the foregoing timing requirements, which are 
consistent with the Federal Reserve Bank Operating Circular on ACH 
items.
    Some agencies indicated that the time frame of settlement under the 
ACH system may conflict with statutory requirements regarding when 
certain payments must be made. For example, the Office of Personnel 
Management (OPM) commented that the Civil Service annuity benefit is 
payable ``on the first business day of the month after the month or 
period for which it has accrued.'' Therefore, OPM indicated that it 
cannot legally request another payment date when the first day of the 
month is on a Saturday, which is a business day for purposes of the 
relevant statute, but which is not a settlement date under the ACH 
Rules. The Railroad Retirement Board commented that the Railroad 
Retirement Act prohibits issuing payments before the first day of the 
next calendar month.
    The Service recognizes that agencies subject to statutory 
constraints on payment dates will need to address the interaction of 
those constraints with the timing of ACH payments. Because different 
statutes present different issues and limitations, the Service believes 
that these issues must be addressed on a case-by-case basis. Where 
statutory payment requirements potentially conflict with the use of the 
ACH system, the Service urges the paying agency to work with the 
Service in order to resolve those issues. For example, a statute that 
requires that payment be made no later than the first business day of 
the month may allow for the initiation of payments one or two days 
early in order to ensure that the recipient receives the funds no later 
than the statutorily prescribed payment date. On the other hand, this 
approach would not be a viable solution in the context of a statute 
that requires that payment be made no earlier than the first business 
day of the month. Because statutes differ, the Service is not in a 
position to adopt a uniform approach to these issues.
    Section 210.7(a), which is unchanged from the proposed rule, 
specifies that each Federal Reserve Bank, as the Fiscal Agent of the 
Treasury, serves as the Government's ACH Operator for Government 
entries. The phrase ``notwithstanding Section 11.5 and Article 8 of the 
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.
    Section 210.7(b), also unchanged from the proposed rule, has been 
added to Part 210 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. Agencies desiring a routing number 
should obtain approval from the Service prior to requesting a routing 
number from a Federal Reserve Bank.

Section 210.8--Financial Institutions

    Section 210.8 addresses the obligations of financial institutions 
with respect to Government entries, which were previously set forth at 
Sec. 210.7. The Service has removed as unnecessary many of the 
provisions of previous Sec. 210.7 because they are addressed in the ACH 
Rules. For example, former 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, former Secs. 210.7(f)(1), (f)(2), 
and (f)(4) have been deleted since the ACH Rules address these 
provisions.
    The Service had proposed at Sec. 210.8(a) of the NPRM to require 
RDFIs to verify that the account number and one other item of 
information in a prenotification entry both relate to the

[[Page 17483]]

same account. 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 ACH Rules 
do not require that RDFIs verify prenotifications in this manner; thus, 
the proposed requirement and the corresponding liability to which a 
financial institution would have been subject for failing to verify a 
prenotification would have superseded the ACH Rules with respect to 
agency-initiated prenotifications.
    Several agencies commenting on the proposed rule supported the 
verification requirement because, in the words of one commenter, 
``[t]his will ensure that subsequent Federal direct deposit payments 
are credited to the intended party, not just into an account that 
happens to coincide with a valid account number at the RDFI.'' Other 
agencies indicated that they did not intend to use prenotifications and 
did not believe the proposed verification requirement was necessary.
    All of the financial institutions commenting on the NPRM objected 
to the proposed requirement. Financial institutions commented that they 
rely on account numbers alone in processing entries, as permitted by 
the ACH Rules and UCC Article 4A, and that they presently cannot 
perform the proposed verification in an automated processing 
environment. Therefore, in order to comply with the requirement, 
financial institutions would be required either to manually process 
Government entries or to develop and implement new processing systems. 
Many banks commented that they cannot invest in new processing systems 
at this time, especially in view of Year 2000 requirements and related 
systems testing. Some financial institutions indicated that if the 
verification requirement were imposed, the costs of processing 
Government entries would increase and they might shift these costs to 
payment recipients. Some commenters also noted that, in the case of 
payments made to representative payees, beneficiary information 
relating to the payment may not be listed on the account in any manner 
since financial institutions typically have information only on persons 
who are authorized to sign on the account.
    Financial institutions also argued that shifting losses to banks is 
inconsistent with basic principles of electronic payment law, pointing 
out that both UCC Article 4A and the ACH Rules provide that the RDFI 
may make payment on the basis of account number alone.
    After considering the comments received, the Service has decided 
not to include in Part 210 a requirement that upon receipt of a 
prenotification an RDFI verify one other identifying data element in 
addition to the recipient's account number. The Service does not 
believe it is in the best interest of the public to implement a 
requirement that would make it more expensive for financial 
institutions to receive and process electronic Government payments or 
that would require manual processing of Government entries. The Service 
acknowledges the rationale for allowing RDFIs to rely on account number 
alone, as set forth in the commentary to UCC Article 4A-207(b)(1): ``If 
the [RDFI] has both the account number and the name of the beneficiary 
supplied by the originator of the funds transfer, it is possible for 
the [RDFI] to determine whether the name and number refer to the same 
person, but if a duty to make that determination is imposed on the 
[RDFI] the benefits of an automated payment are lost. Manual handling 
of payment orders is both expensive and subject to human error.''
    Moreover, the Service believes that more data is needed regarding 
the causes of misdirected Government entries. Without information as to 
the types of Government entries that are misdirected and the reasons 
for such mistakes, the Service is concerned that the verification 
requirement would eliminate any incentive for agencies to follow 
commercially reasonable standards in initiating payments. The Service 
does not believe it is appropriate to impose on financial institutions 
liability for losses resulting from agency errors.
    Although data regarding misdirected entries is not available, the 
Service has anecdotal information that suggests that many misdirected 
entries are a result of human error by agency personnel who key in 
account numbers. The Service is particularly concerned with agency 
practices in which account information is processed through a single 
manual key entry, and urges agencies to review their enrollment 
practices and to consider adopting more stringent key entry procedures 
such as scanning a voided check or performing a double-key entry, or 
instituting some other verification procedure to avoid key entry 
mistakes. The Service encourages agencies to review their enrollment 
practices and intends to work with agencies to develop data regarding 
the extent and causes of misdirected ACH entries and to formulate ways 
of reducing such errors.
    The Service also understands that, in some cases, misdirected 
entries occur as a result of financial institutions' errors in 
enrolling recipients or in transmitting notifications of change (NOCs). 
The Service believes that it is appropriate to hold financial 
institutions responsible for losses caused by their errors in enrolling 
recipients and has revised Sec. 210.8(b)(2) accordingly, as discussed 
below.
    The Service has redesignated former Sec. 210.7(g) of Part 210 as 
Sec. 210.8(a) without making any substantive change.
    Section 210.8(b) provides 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 
Secs. 210.8(b)(1) and (2). The phrase ``[n]otwithstanding ACH Rules 
2.2.3, 2.4.5, 2.5.2, 4.2, and 7.7.2'' indicates that 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, Sec. 210.8(b) 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 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 UCC Article 4A, which would apply to 
credit entries to non-consumer accounts, the liability of financial 
institutions that fail to handle entries properly generally does not 
extend to all resulting losses, but does include imputed interest in 
certain circumstances. Because Part 210, as a general matter, limits 
the Government's liability 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, Sec. 210.8(b) 
preempts the extent of the liability to which financial institutions 
are subject under both the ACH Rules and UCC 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

[[Page 17484]]

in a timely manner, Sec. 210.8(b) would limit the RDFI's liability to 
the Government to the amount of the entry, thereby preempting the UCC 
Article 4A rule that imposes liability on the financial institution for 
imputed interest for the period of the delay. Section 210.8(b) does not 
affect a financial institution's liability under Subpart B.
    Although financial institutions generally objected to changing the 
liability provisions of the ACH Rules for Government entries, most 
financial institutions indicated that if the final rule limited the 
liability of the Government to the amount of an entry, the liability of 
financial institutions should be correspondingly limited under 
Sec. 210.8(b).
    Section 210.8(b) of the final rule also provides that a financial 
institution will not be liable to any third party for any loss 
resulting from an agency's error or omission in originating an entry. 
The Service has added this provision to the final rule to address 
comments by several financial institutions that limiting an agency's 
liability to the amount of an entry, as set forth at Sec. 210.6, may 
have the effect of shifting losses resulting from an agency error to 
the RDFI. As discussed above, one commenter gave an example of an 
agency's initiation of a duplicate debit entry to a receiver's account, 
in which case the account might become overdrawn, resulting in returned 
checks and related charges for which the receiver would attempt to 
recover compensation. If the receiver's right of recovery from the 
Government were limited to the amount of the entry, the receiver might 
seek compensation from the RDFI for a refund of charges and other 
damages resulting from the return of checks, loss of use of funds, etc. 
Section 210.8(b) addresses this situation by providing that the 
receiver cannot recover against the RDFI for these damages.
    Section 210.8(b)(1) is unchanged from the proposed rule except that 
the reference to ``reserve account'' has been changed to ``account'' in 
response to comments that Federal Reserve Banks also maintain clearing 
accounts for financial institutions in some cases. Section 210.8(b)(1) 
clarifies that a financial institution may not originate or transmit a 
debit entry to an agency without the prior written authorization of the 
agency. As previously discussed, debit entries to the TGA represent a 
significant security concern for the Service. By expanding the use of 
the ACH system to allow for Government payments by a debit to the TGA, 
the possibility of unauthorized debits to the TGA arises. In carrying 
out its fiscal responsibility, the Service believes it is necessary to 
take precautions to ensure that such debits do not occur. Therefore 
Part 210 requires 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. Section 210.8(b)(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 Part 210 as amended, a financial institution is liable for 
any unauthorized debit entries initiated to an agency in violation of 
this requirement. In connection with this, the 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 
includes imputed interest under Sec. 210.8(b)(1). This provision is an 
exception to the general limitation of a financial institution's 
liability to the amount of an entry. The Service believes it is 
necessary to impose this additional liability in order to avoid any 
potential loss of public funds resulting from an unauthorized debit to 
the TGA.
    Section 210.8(b)(2) restates the third and fourth sentences of 
former Sec. 210.11(b) and addresses the RDFI's liability in situations 
where the financial institution accepts a forged authorization. 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 UCC 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. Section 210.8(b)(2) operates to preempt these ACH and UCC 
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 financial institution accepts a forged authorization, 
the financial institution rather than the Government will be liable for 
the entries effected in reliance on the forged authorization.
    The Service has revised Sec. 210.8(b)(2) of the final rule to 
provide that an RDFI that transmits to an agency an authorization 
containing an incorrect account number shall be liable for any 
resulting loss, up to the amount of the payment(s) made on the basis of 
the incorrect number. With respect to NOCs that contain incorrect 
account information, the Service believes that the treatment of 
erroneous NOCs are appropriately addressed under the ACH Rules. The ACH 
Rules provide that an RDFI that transmits an NOC warrants that the 
information contained within the NOC is correct, and that the RDFI is 
liable for any loss or liability resulting from a breach of this 
warranty. (See ACH Rules, Article Five, Section 5.3) Accordingly, a 
financial institution that transmits to an agency an NOC containing 
erroneous information will be liable to the agency for the amount of 
any resulting misdirected entry.
    In the case of a misdirected entry that an agency believes was the 
result of an incorrect account number in an authorization or NOC 
transmitted by an RDFI, the agency shall carry out an investigation to 
determine the cause of the error. If the agency determines that the 
loss in fact resulted from an RDFI's transmission of an incorrect 
account number, the agency may instruct the Service to direct the 
appropriate Federal Reserve Bank to debit the RDFI's account for the 
amount of the misdirected payment(s). The agency may not issue such an 
instruction until it has notified the RDFI of the results of its 
investigation and provided the RDFI a reasonable opportunity to 
respond.
    Section 210.8(c) sets forth the conditions under which the 
obligation for the amount of an entry is acquitted. The word ``final'' 
has been added to the wording in the proposed rule in recognition that 
a credit entry may be reversed after crediting by a Federal Reserve 
Bank if the Reserve Bank does not receive actually and finally 
collected funds in settlement of the item at or before 8:30 a.m. 
Eastern Time on the banking day following the settlement date. Section 
210.8(c) also has been revised from the proposed rule to clarify that 
the originator's obligation, in addition to any obligation of the ODFI, 
is discharged upon final crediting. The final rule also provides that, 
in the case of a debit entry originated by an agency against an 
account, full acquittance does not occur until the underlying payment 
is final.

Subpart B--Reclamation of Benefit Payments

    The Service has restructured Subpart B of Part 210 by adding a new 
Sec. 210.9--Parties to the reclamation. The other five sections 
comprising Subpart B (Secs. 210.10 through 210.14) are a

[[Page 17485]]

reorganization of the four previous sections on reclamations in 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 Sec. 210.2. The 
Service has not changed significantly the obligations and liabilities 
of agencies and financial institutions in effect under former Part 210.
    In order to simplify the regulation and enhance its flexibility 
with respect to automating reclamations, the Service has moved certain 
procedures and guidelines from Subpart B to the Service's Green Book or 
Treasury Financial Manual. As discussed above with respect to Subpart 
A, the Green Book and the Treasury Financial Manual do not introduce 
new rights and obligations that are not contained in Part 210. Instead, 
they provide specific operational directions and procedures which put 
the regulatory requirements into practice. 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 has added this new section to delineate the differing 
roles of the financial institution, the Service, and the agency that 
certified the benefit payments in question.
    Section 210.9(a) restates provisions of former Secs. 210.7(a) and 
210.14(d) of Part 210, which provided 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.
    Section 210.9(b) clarifies 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

    This section defines the liability of RDFIs for benefit payments 
received after the death or legal incapacity of a recipient or death of 
a beneficiary, and limits the extent of that liability.
    Section 210.10(a) restates the rule set forth at Sec. 210.12(a) of 
previous 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 a 
recipient or death of a 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 a recipient or 
death of a beneficiary and has had a reasonable opportunity to act on 
that knowledge. Accordingly, the RDFI is required to return all benefit 
payments received after it learns of the death or legal incapacity of a 
recipient or death of a beneficiary. This obligation applies whether 
the RDFI has received a notice of reclamation or learned of the death 
or legal incapacity on its own.
    In addition, Sec. 210.10(a) requires that the RDFI immediately 
notify a paying agency if the RDFI learns of the death or legal 
incapacity of a recipient or death of a beneficiary from a source other 
than notice from the agency. Some financial institutions, while 
recognizing that it may be in the institution's best interest to 
provide agencies with such notice, commented that financial 
institutions should not incur further liability by failing to provide 
the notice.
    Under Sec. 210.11(d) as proposed, an RDFI that failed to notify an 
agency as required by Sec. 210.10(a) would have forfeited its right to 
limit its liability. The Service agrees that proposed Sec. 210.11(d) 
could potentially impose a harsh result in some circumstances, 
particularly where no loss is caused by the RDFI's failure to comply 
with the notice requirement. Accordingly, the Service has amended 
Sec. 210.11(d) to provide that an RDFI that fails to comply with any 
provision of Subpart B in a timely and accurate manner, including the 
notice requirements at Sec. 210.13, will be liable to the Government 
for any loss resulting from its act or omission.
    Section 210.10(d) provides that an RDFI's liability for post-death 
and post-incapacity payments is limited to the most recent six years of 
payments. Previously, RDFIs were subject under Part 210 to 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. Financial institutions that commented on the proposed rule 
supported shortening the time frame for initiating reclamations, 
although several financial institutions urged the Service to adopt a 
shorter period than six years. Some agencies supported the proposed 
time limit, while other agencies objected to it.
    Section 210.10(d) also provides an exception to the six-year 
limitation where the amount in the account when the RDFI receives the 
notice of reclamation and has had a reasonable opportunity to act on 
the notice 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.
    In addition, Sec. 210.10(d) requires that an agency that initiates 
a reclamation must do so within 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 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. Some 
agencies commented that the 120-day period was an adequate and 
appropriate period deadline, whereas other agencies commented that 120 
days is too short a period in view of exception processing delays on 
the part of the Service that occur with respect to certain non-
recurring entries. Financial institutions commenting on this provision 
supported a shortened deadline for initiating reclamations and 
generally felt that 120 days was appropriate.
    Section 210.10(e) is unchanged from the proposed rule except that 
the reference to ``reserve account'' has been changed to ``account'' to 
reflect the fact that a Federal Reserve Bank may also maintain clearing 
accounts for financial institutions in some cases. Section 210.10(e) 
restates a rule of reclamations previously set forth at Secs. 210.13(c) 
and (d): the Government has the right to debit the RDFI's 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,

[[Page 17486]]

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 was 
previously set forth at Sec. 210.13(c), is a procedural item that may 
change with the automation of reclamations. Therefore, the Service has 
relocated this requirement to the Green Book.

Section 210.11--Limited Liability

    The Service has not changed the criteria that an RDFI must meet in 
order to limit its liability under Subpart B, but has reworded the 
provisions setting forth the criteria for greater clarity.
    Section 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 
previous Sec. 210.12(b) and, although reworded, does not change 
significantly the substantive operation of the previous formula.
    Former Sec. 210.12(d) of Part 210 contained 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, 
believing that the description of due diligence may be confusing or 
difficult to apply in this context, proposed to utilize a definition of 
``actual or constructive knowledge'' set forth at proposed Sec. 210.2.
    Formerly under Part 210, one of the factors relevant to determining 
the extent of an RDFI's limited liability was the amount in the 
account. Former Sec. 210.13(b)(2)(i) defined 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 Government. 
Part 210 previously provided that a reasonable time to take action was 
not later than the close of business on the day following the receipt 
of the notice of reclamation.
    The Service has experienced many instances in which the ``amount in 
the account'' for reclamation purposes has been reduced by automated 
teller machine (ATM) withdrawals and the RDFI cannot provide 
information regarding the identity of the withdrawer. The Service 
therefore proposed in the NPRM to define the ``amount in the account'' 
as the account balance at the time the RDFI receives the notice of 
reclamation and to eliminate the ``reasonable time to take action'' 
language formerly at Sec. 210.13(b)(2)(i).
    A number of financial institutions commenting on the proposed rule 
objected to the calculation of the amount in the account on the basis 
that they cannot take immediate action to prevent withdrawals upon 
receipt of a notice of death. One commenter noted that approximately 
one-half of community banks utilize batch processing systems, in which 
a hold placed on an account cannot be activated until evening or the 
following day, depending on the processing schedule. As discussed above 
with respect to the definition of ``actual and constructive 
knowledge,'' the Service has revised the definition to provide 
financial institutions with a reasonable opportunity to take action 
after receiving notice of death or incapacity. The Service believes 
that one business day will normally constitute a reasonable opportunity 
to take action.
    Section 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 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.
    Section 210.11(b)(2) incorporates the last sentence of former 
Sec. 210.13(b)(1), and adds the requirement that the RDFI certify the 
date the RDFI first had actual or constructive knowledge of the death 
or legal incapacity of the recipient or death of the beneficiary even 
if such knowledge was obtained first through notice received from the 
agency. As proposed, Sec. 210.11(b)(2) stated that the RDFI must 
certify the date the RDFI first had ``information'' of the death or 
incapacity. Some commenters questioned the meaning of the word 
``information,'' as opposed to the phrase ``actual or constructive 
knowledge.'' Because ``information'' was intended to refer to actual or 
constructive knowledge, Sec. 210.11(b)(2) has been revised to eliminate 
any apparent inconsistency.
    Requiring these certifications, in combination with the authority 
of the Government to debit the RDFI's account as provided in 
Sec. 210.10(e), underscores that the burden is on the RDFI to 
demonstrate its qualification for limited liability.
    Former Sec. 210.13(b)(2)(ii) has been relocated to 
Sec. 210.11(b)(3) of the final rule.
    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 Sec. 210.11(a)(1), if the agency is 
unable to collect the remaining amount of the outstanding total, the 
Government will debit the RDFI's account at its Federal Reserve Bank 
(or the correspondent account utilized by the RDFI) for the amount 
specified in Sec. 210.11(a)(2), which is the lesser of: (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. It should be noted that 
in no instance will the RDFI be liable for more than the outstanding 
total because the amount potentially recoverable under 
Sec. 210.11(a)(2) cannot exceed the balance of the unrecovered 
outstanding total.
    As proposed in the NPRM, Sec. 210.11(d) would have provided that an 
RDFI would forfeit its right to limit its liability if the RDFI failed 
to comply with any provision of Subpart B. One financial institution 
commented that the proposed expanded liability in Sec. 210.11(d) was 
inappropriate and unfair, and that only a violation of those provisions 
that relate directly to the qualifications for limited liability stated 
in Sec. 210.11(a) and (b) should cause a financial institution to lose 
its right to limit its liability. The Service has revised 
Sec. 210.11(d) to provide that a financial institution that violates 
any provision of Subpart B shall be liable to the Government for any 
loss resulting from its act or omission, in addition to any amount(s) 
for which the RDFI is liable under Sec. 210.10 or Sec. 210.11(a).

Section 210.12--RDFI's Rights of Recovery

    Section 210.12(a) restates the principle set forth in former 
Sec. 210.14(c) that in reclaiming funds from an RDFI, the 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.
    Section 210.12(b) restates without substantive change former 
Sec. 210.14(d) of Part 210.

Section 210.13--Notice to Account Owners

    Section 210.13 is based on former Sec. 210.14(a) of Part 210, but 
has been changed slightly to provide for the possibility of an 
automated reclamation process by the addition of the phrase

[[Page 17487]]

``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.
    Part 210 formerly required 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 may intrude unnecessarily into the relationship between the 
RDFI and its customer and conflicts with the principle that 
reclamations are actions between the Government and the RDFI, and not 
between the 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 section is based upon former Sec. 210.15 of Part 210, with 
certain additions and deletions. Much of former Sec. 210.15 was 
procedural information which the Service has moved to the Green Book, 
where it is more appropriately located. In particular, the Service has 
relocated to the Green Book the procedures that RDFIs are to follow in 
correcting erroneous death information (previously codified in 
Sec. 210.15(a)(1) and (2) and Sec. 210.15(c)). The Service also has 
moved to the Green Book the 60-day time limit for the RDFI to return 
the completed notice of reclamation to the 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. 
Any automated reclamation procedures developed or used by the 
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 Sec. 210.14(b) 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 agencies and does not make decisions as to the underlying 
obligations.

Subpart C--Discretionary Salary Allotments

    The Service has removed Subpart C from Part 210. Subpart C provided 
that discretionary allotments from Federal employees' wage and salary 
payments permitted by the issuing agency could be made through the ACH 
system and were subject to Part 210. The Service determined that 
Subpart C was redundant since the substance of Subpart C was 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. 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.

III. Rulemaking Analysis

    Treasury has determined that this 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 entities. Accordingly, 
a Regulatory Flexibility Act analysis is not required.
    There is no collection of information contained in this rule and, 
therefore, the Paperwork Reduction Act does not apply.

List of Subjects in 31 CFR Part 210

    Automated Clearing House, Electronic funds transfers, Fraud, 
Incorporation by reference.

Authority and Issuance

    For the reasons set out in the preamble, 31 CFR Part 210 is 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 Federal 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 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 and has had a reasonable 
opportunity to act on such information or that the RDFI would have 
learned of the death or incapacity if it had followed commercially 
reasonable business practices.
    (c) Agency means any department, agency, or instrumentality of the 
United States Government, or a corporation owned or controlled by the 
Government of the United States. The term agency does not include a 
Federal Reserve Bank.
    (d) Applicable ACH Rules means the ACH Rules with an effective date 
on or

[[Page 17488]]

before September 17, 1999, as published in Parts I, II, and IV of the 
``1999 ACH Rules: A Complete Guide to Rules & Regulations Governing the 
ACH Network,'' 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 1.2.4 and Appendix Eleven (governing the enforcement 
of the ACH Rules);
    (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 individual or entity that is 
appointed or otherwise selected as a representative payee or fiduciary, 
under regulations of the Social Security Administration, the Department 
of Veterans Affairs, the Railroad Retirement Board, or other agency 
making Federal payments, to act on behalf of an individual entitled to 
a Federal payment.
    (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 annuity and Railroad Unemployment and 
Sickness benefits, Department of Veterans Affairs Compensation and 
Pension, and Worker's Compensation.
    (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) 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);
    (ii) 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);
    (iii) 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);
    (iv) 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);
    (v) 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
    (vi) 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.
    (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 a recipient or death of a 
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 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 means the United States Department of the Treasury.
    (r) Treasury Financial Manual 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 Treasury.


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, 
including rule changes with an effective date on or before September 
17, 1999, as published in Parts I, II, and IV of the ``1999 ACH Rules: 
A Complete Guide to Rules & Regulations Governing the ACH Network.'' 
The Director of the Federal Register approves this incorporation by 
reference in accordance with 5 U.S.C. 552(a) and 1 CFR Part 51. Copies 
of the ``1999 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 17, 1999, 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

[[Page 17489]]

Register notice 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. 
The Treasury Financial Manual 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. The Green Book is available for 
downloading at the Service's web site at http://www.fms.treas.gov/
fmsnews.html 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.

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, or similarly authenticated, by an 
agency, no person or entity shall initiate or transmit a debit entry to 
that agency, other than a reversal of a credit entry previously sent to 
the 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(f) 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 recipient's ownership of the deposit account as reflected in the 
deposit account records, including the removal of the name of the 
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. With respect to a recipient of benefit 
payments, if an RDFI closes an account to which benefit payments 
currently are being sent, 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 Federal payments.

    (a) Notwithstanding ACH Rule 2.1.2, an ACH credit entry 
representing a Federal payment shall be deposited into an account at a 
financial institution. For all payments other than vendor payments, the 
account at the financial institution shall be in the name of the 
recipient, except as provided in paragraph (b) of this section.
    (b)(1) Where an authorized payment agent has been selected, the 
Federal payment shall be deposited into an account titled in accordance 
with the regulations governing the authorized payment agent.
    (2) Where a Federal payment is to be deposited into an investment 
account established through a securities broker or dealer registered 
with the Securities and Exchange Commission under the Securities 
Exchange Act of 1934, or an investment account established through an 
investment company registered under the Investment Company Act of 1940 
or its transfer agent, such payment may be deposited into an account 
designated by such broker or dealer, investment company, or transfer 
agent.
    (3) The Secretary of the Treasury may waive the requirements of 
paragraph (a) of this section in any case or class of cases.


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) 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).
    (c) Liability to an originator. An agency will be liable to an 
originator or an ODFI for any loss sustained by the 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).
    (d) 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 of this part. An agency 
shall not be liable to any ACH association.
    (e) Acquittance of the agency. The final crediting of the amount of 
an entry to a recipient's account shall constitute full acquittance of 
the Federal Government.
    (f) 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

[[Page 17490]]

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 Section 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) Status as a Treasury depositary. The origination or receipt of 
an entry subject to this part does not render a financial institution a 
Treasury depositary. A financial institution shall not advertise itself 
as a Treasury depositary on such basis.
    (b) 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. A financial institution shall not 
be liable to any third party for any loss or damage resulting directly 
or indirectly from an agency's error or omission in originating an 
entry. Nothing in this section shall affect any obligation or liability 
of a financial institution under Regulation E, 12 CFR part 205, or the 
Electronic Funds Transfer Act, 12 U.S.C. 1693 et seq.
    (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 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. An RDFI that transmits 
to an agency an authorization containing an incorrect account number 
shall be liable to the Federal Government for any resulting loss, up to 
the amount of the payment(s) made on the basis of the incorrect number. 
If an agency determines, after appropriate investigation, that a loss 
has occurred because an RDFI transmitted an authorization or 
notification of change containing an incorrect account number, the 
agency may instruct the Service to direct a Federal Reserve Bank to 
debit the RDFI's account for the amount of the payment(s) made on the 
basis of the incorrect number. The agency shall notify the RDFI of the 
results of its investigation and provide the RDFI with a reasonable 
opportunity to respond before initiating such a debit.
    (c) Acquittance of the financial institution. The final 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 and the originator for the amount of the entry. Full 
acquittance shall not occur if the entries do not balance, are 
incomplete, are incorrect, or are incapable of being processed. In the 
case of funds collected by an agency through origination of a debit 
entry, full acquittance shall not occur until the underlying payment 
becomes final.

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 a 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 from 
a source other than notice 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 that initiates a reclamation must do so 
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 account balance at the time the RDFI receives the 
notice of reclamation exceeds the total amount of all post-death or 
post-incapacity 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 and has 
had a reasonable opportunity (not to exceed one business day) to act on 
the notice.
    (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

[[Page 17491]]

debit the 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 and has had a reasonable 
opportunity (not to exceed one business day) to act on the notice, 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 actual or constructive 
knowledge of the death or legal incapacity of the recipient or death of 
the beneficiary, regardless of how and where such information was 
obtained;
    (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 and accurately 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 account utilized by the RDFI at that Federal 
Reserve Bank for the amount specified in Sec. 210.11(a)(2).
    (d) Violation of Subpart B. 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 liable to the Federal 
Government for any loss resulting from its act or omission. Any such 
liability shall be in addition to the amount(s) for which the RDFI is 
liable under Sec. 210.10 or Sec. 210.11, as applicable.


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 direct the Service to reclaim 
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 account utilized by the 
RDFI at the Federal Reserve Bank in the amount of the improperly 
reclaimed funds.

    Dated: April 6, 1999.
Richard L. Gregg,
Commissioner.
[FR Doc. 99-8873 Filed 4-8-99; 8:45 am]
BILLING CODE 4810-35-P