[Federal Register Volume 68, Number 162 (Thursday, August 21, 2003)]
[Proposed Rules]
[Pages 50672-50679]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21203]



[[Page 50671]]

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Part IV





Department of the Treasury





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Fiscal Service



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31 CFR Part 210



Federal Government Participation in the Automated Clearing House; 
Proposed Rule

  Federal Register / Vol. 68, No. 162 / Thursday, August 21, 2003 / 
Proposed Rules  

[[Page 50672]]


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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 210

RIN 1510-AA93


Federal Government Participation in the Automated Clearing House

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Proposed rule with request for comment.

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SUMMARY: We are proposing to amend our regulation at 31 CFR part 210, 
which governs the use of the Automated Clearing House (ACH) system by 
Federal agencies (agencies). Part 210 adopts, with some exceptions, the 
ACH rules (ACH Rules) developed by NACHA--The Electronic Payments 
Association (NACHA) as the rules governing the use of the ACH system by 
agencies.
    The proposed rule addresses the circumstances in which checks 
presented or delivered to agencies may be converted to ACH debit 
entries. The proposed rule also addresses issues relating to the 
reclamation of Federal benefit payments and the receipt of misdirected 
Federal payments. We are requesting comment on all aspects of the 
proposed rule.

DATES: Comments on the proposed rule must be received by October 20, 
2003.

ADDRESSES: You can download the proposed rule at the following World 
Wide Web address: http://www.fms.treas.gov/ach. You may also inspect 
and copy the proposed rules at: Treasury Department Library, Freedom of 
Information Act (FOIA) Collection, Room 1428, Main Treasury Building, 
1500 Pennsylvania Ave., NW., Washington, DC 20220. Before visiting, you 
must call (202) 622-0990 for an appointment.
    You may send comments on the proposed rule electronically to the 
following address: [email protected]. You may also mail your 
comments to Stephen M. Vajs, Director, Risk Management Division, 
Financial Management Service, U.S. Department of the Treasury, Room 
423, 401 14th Street, SW., Washington, DC 20227.

FOR FURTHER INFORMATION CONTACT: John Galligan, Program Advisor, at 
(202) 874-6657 or [email protected]; Natalie H. Diana, Senior 
Counsel, at (202) 874-6680 or [email protected]; or Donald J. 
Skiles, Senior Financial Program Specialist, at (202) 874-6994 or 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    Part 210 governs the use of the ACH system by agencies. The ACH 
system is a nationwide electronic fund transfer (EFT) system that 
provides for the inter-bank clearing of credit and debit transactions 
and for the exchange of information among participating financial 
institutions. Part 210 incorporates the ACH Rules adopted by NACHA, 
with certain exceptions.
    We are issuing a proposed rule to amend part 210 in order to 
address the circumstances in which checks presented or delivered to 
agencies may be converted to ACH debit entries. In addition, the 
proposed rule amends several provisions of part 210 that address the 
reclamation of Federal benefit payments issued to deceased recipients 
and the receipt of misdirected Federal payments. We are requesting 
comment on the proposed rule.

II. Summary

A. Check Conversion

    On April 11, 2002, we published a final rule that amended part 210 
by permitting agencies that receive checks at points-of-purchase, 
dropboxes and via the mail to convert those checks to ACH debit 
entries. 67 FR 17895. The rule modified the ACH Rules governing check 
conversion to provide that presentment to an agency of a completed and 
signed check, following notice that the check will be converted, 
constitutes authorization for the conversion of the check to an ACH 
debit entry. The rule, which permits the conversion of both consumer 
and business checks, requires that agencies provide standard 
disclosures in connection with point-of-purchase and accounts 
receivable check conversion.
    Since we published the final rule, we have continued to develop and 
implement initiatives to promote check conversion. These initiatives 
have demonstrated that point-of-purchase and accounts receivable check 
conversion can result in substantial cost-savings and efficiencies for 
the Federal government. However, we have identified certain barriers 
that our current rule poses for the wider use of check conversion by 
agencies. We are therefore proposing several amendments to part 210 to 
eliminate these barriers. The proposed amendments support the 
continuation of the efforts of the Financial Management Service 
(Service) and agencies to move to an all-electronic environment for the 
processing of payments and collections.
1. Revised Accounts Receivable Disclosure
    Currently agencies that receive checks via the mail or at a dropbox 
may convert those checks to debit entries if the notice set forth at 
Appendix C to part 210 has been provided to the check writer. A number 
of agencies have indicated that the standard disclosure set forth in 
Appendix C is too lengthy to be included on many invoices and 
remittance documents. We recognize that there are space constraints on 
agency forms, which in many cases preclude the addition of several 
paragraphs of disclosure. We also believe that as check conversion and 
the use of electronic debits become more common, there is less of a 
need for very detailed disclosure. At the same time, it is important 
that consumers understand what is happening to their checks, 
particularly since an individual who sends a check to an agency is 
deemed to have authorized its conversion to an ACH debit on the basis 
of having been provided with prior notice of its conversion. We are 
requesting comment on whether the proposed disclosure strikes the 
appropriate balance between the need for a shorter notice and the need 
to ensure that consumers understand what is happening to their checks. 
We are also soliciting comment on whether the wording of the proposed 
notice is clear and understandable.
2. Expanded Accounts Receivable Check Conversion Applications
    Currently, part 210 permits agencies to originate ACH debit entries 
using checks received at points-of-purchase, dropboxes and via the 
mail. However, agencies accept or cash checks in a broad array of 
circumstances that fall outside typical commercial settings, e.g., 
retail sales locations and lockboxes. We have been asked to address a 
number of situations in which agencies accept or cash checks in 
circumstances that do not fall within the generally understood meanings 
of ``point-of-purchase,'' ``dropbox,'' or ``lockbox.'' For example, 
Army pay officers sometimes travel to remote, off-base locations in 
order to cash checks for soldiers. In those situations, pay officers 
cannot bring along the necessary equipment to scan and convert the 
check. Similarly, some National Park Service rangers collect park 
entrance fees at park entrances where check conversion equipment cannot 
be set up because there is not electric power or adequate enclosed and 
protected space. Additionally, in some situations checks are collected 
by agency representatives as an incident to their performance of 
ceremonial duties,

[[Page 50673]]

inspections or other responsibilities. These individuals may not have 
the authority to process payments, or it may not be appropriate to 
process the payments when they are received in light of the nature of 
the circumstances. In all of these situations, it is not possible to 
scan and return the voided check as required under the point-of-
purchase check conversion rules (31 CFR 210.6(g)), and we therefore 
have been asked whether these checks can be converted under the 
accounts receivable check conversion rules (31 CFR 210.6(h)).
    It is unclear whether situations such as those described above are 
more in the nature of a point-of-purchase or a dropbox transaction. The 
ACH Rules define a Point-of-Purchase (POP) entry as a debit entry 
initiated pursuant to a single entry authorization and a source 
document, provided to the Originator \1\ by the Receiver \2\ at the 
point-of-purchase to effect a transfer of funds. See ACH Rule 13.1.42. 
When we amended 31 CFR 210.6(g) to address point-of-purchase check 
conversion, we stated that the term ``point-of-purchase'' was intended 
to mean ``any location where an agency accepts checks as payment in 
connection with a contemporaneous transaction or any location where an 
agency cashes checks for employees or the public.'' 67 FR 17901.
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    \1\ In an ACH debit transaction, the Originator is the person or 
entity originating the debit entry to the account of the payor. In 
the transactions discussed in this section of the notice, the 
Originator is the agency collecting payment.
    \2\ In an ACH debit transaction, the Receiver is the person or 
entity making the payment (i.e., the payor) by authorizing a debit 
to an account. In this document, we may refer to a person or entity 
making a payment to a Federal agency as a payor, a Receiver, a 
customer, or a consumer, as appropriate.
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    The ACH Rules define an Accounts Receivable (ARC) entry as a 
``debit entry initiated pursuant to a source document provided to the 
Originator by the Receiver via the U.S. mail or at a dropbox 
location.'' When we amended 31 CFR 210.6(h) to address accounts 
receivable check conversion, we stated, ``A dropbox is similar to a 
lockbox except that a payor delivers a payment to a dropbox in person 
rather than mailing the payment.'' 67 FR 17901.
    When we amended part 210 to address check conversion, we envisioned 
check conversion as occurring at on-site agency locations--either 
agency locations where, in the usual course of business, checks are 
cashed or goods or services are sold (points-of-purchase) or locations 
where payments for accounts receivable are routinely received. We did 
not necessarily intend to preclude the conversion of checks in 
scenarios that do not precisely fit one of these two models; rather, we 
had not been presented with other potential scenarios at that time.
    Because it is not possible to comply with the point-of-purchase 
rules in converting checks in the situations discussed above, whereas 
it is possible to comply with the accounts receivable check conversion 
rules, we believe that the most reasonable approach to these situations 
is to treat them as accounts receivable check conversion. Under this 
approach, these checks would be converted using an ARC code (for 
consumer checks) or a Cash Concentration or Disbursement (CCD) code 
(for business checks), and the checks would be destroyed rather than 
returned to the check writer. We believe that the check writer's 
interests would be adequately protected by applying the accounts 
receivable rules because the check writer will receive prior written 
notice in the form of Appendix C to part 210 (with minor alterations, 
as appropriate) and because the physical check will be destroyed. We 
are requesting comment on this approach.
3. Conversion of Additional Instruments
    Part 210 incorporates the restrictions imposed under ACH Rules 
3.6.2 and 3.7.1 on the kinds of source documents that can be used to 
originate ARC and POP entries. In contrast to the ACH Rules, part 210 
does permit agencies to convert business checks received at points-of-
purchase, dropboxes and via the mail. However, agencies currently are 
not permitted to originate ACH debit entries using as a source document 
various other kinds of payment instruments, such as money orders, 
traveler's checks, certified bank checks, and credit card checks. A 
number of agencies routinely receive these kinds of payment instruments 
in addition to personal and business checks. In these instances it 
becomes a significant operational burden to sort these payments and 
process them separately. Some agencies have elected not to participate 
in check conversion for this reason. We are proposing to amend part 210 
to eliminate the regulatory prohibition against converting to ACH debit 
entries certain types of payment instruments that are commonly received 
at lockboxes and points-of-purchase.
    We recognize that there are significant operational barriers that 
currently prevent the conversion of money orders and similar 
instruments, including debit blocks or filters on the accounts on which 
these items are drawn. However, removing regulatory obstacles to the 
conversion of these instruments will enable agencies to be positioned 
to convert these instruments once it becomes operationally feasible to 
do so without the need to undertake an additional rulemaking process. 
Until conversion of these instruments is possible, we may use stored 
item images to create paper drafts of any items returned due to debit 
blocks or similar mechanisms and process these drafts through the check 
processing system. In most cases, the use of a paper draft makes 
possible many of the same efficiencies as check conversion (i.e., 
elimination of paper to process and deposit, enhanced reporting, 
archiving of documentation, increased speed of presentment and deposit 
of funds). In this regard, although we are not proposing to include 
U.S. Treasury checks among the items eligible for conversion, 
legislation currently in Congress would, if enacted, treat paper drafts 
created from images of U.S. Treasury checks as legally equivalent to 
the original checks.
    We are aware that authorization issues can arise in connection with 
converting these instruments because an individual presenting such an 
item to an agency does not have authority to act with respect to the 
account on which the check is drawn and therefore cannot authorize 
conversion of the item. However, we believe that the ACH Rules 
incorporated in part 210 provide an adequate framework to enable a 
Receiver to pursue recovery of an unauthorized debit to the Receiver's 
account.
4. Re-Presented Check Entry Service Fees
    Under the ACH Rules incorporated in part 210, agencies may use a 
Re-presented Check (RCK) entry to electronically re-present, via the 
ACH Network, a consumer check that has been returned unpaid due to 
insufficient funds. Some agencies that originate RCK entries also wish 
to use the ACH Network to collect a service fee from the issuer of the 
returned item. To collect such a fee, agencies must obtain the 
consumer's explicit authorization for the debit and must initiate a 
separate debit entry to the consumer's account. (Part 210 and the ACH 
Rules prohibit the addition of any service fee to the amount of the RCK 
entry.) Agencies often do not find it cost effective or customer 
friendly to obtain a written authorization from every check writer to 
collect a service fee electronically because only a small percentage of 
checks are returned unpaid.
    Regulation E, 12 CFR part 205, is the Federal Reserve's regulation 
governing

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Electronic Fund Transfer (EFT) payments. The Official Staff Commentary 
on Regulation E (Commentary) states that the electronic re-presentment 
of a returned check is not covered by Regulation E because the 
transaction is originated by check. Commentary, Section 205.3, 
Paragraph 3(c)(1). Regulation E does apply, however, to any fee 
authorized by the consumer to be debited electronically from the 
consumer's account because the check was returned for insufficient 
funds. Accordingly, such a fee may be collected by ACH debit only if 
authorized by the consumer. The Commentary states that a consumer 
authorizes a one-time EFT where the consumer receives notice that the 
transaction will be processed as an EFT and completes the transaction. 
Commentary, Section 205.3, Paragraph 3(b).
    Part 210 currently provides that agencies may collect a service fee 
by ACH debit in the case of accounts receivable and point-of-purchase 
entries that are returned for insufficient funds, provided that notice 
of the fee has been included in the required disclosure.\3\ We are 
proposing to expand this provision to allow agencies to originate an 
ACH debit entry in order to collect a service fee related to an RCK 
entry if notice of the fee is given to the Receiver before the agency 
accepts the Receiver's check.
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    \3\ Any agency that seeks to collect a service fee from the 
issuer of a returned check must have independent authority to do so. 
Part 210 does not authorize the collection of a service fee, but 
only provides an electronic means through which such a fee can be 
collected if authority exists.
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B. Reclamations; Misdirected Payments

    We are proposing to amend part 210 to address certain issues 
relating to the reclamation of Federal benefit payments and the receipt 
of misdirected Federal payments. The changes that we are proposing to 
make are:
    (1) To require financial institutions that learn that an account 
holder has died to return any subsequent Federal benefit payments using 
return reason code R15 (Beneficiary or Account Holder Deceased) or R14 
(Representative Payee Deceased), as appropriate;
    (2) To provide that financial institutions are not liable for post-
death benefit payments to which the recipient was entitled;
    (3) To require a financial institution that becomes aware that a 
Federal benefit payment was misdirected to notify the agency that sent 
the payment of the error;
    (4) To prohibit agencies from reclaiming payments that were made 
more than seven years prior to the date of the notice of reclamation;
    (5) To limit the information that agencies may request from 
financial institutions, in accordance with the Right to Financial 
Privacy Act; and
    (6) To allow financial institutions to notify an account owner of 
the receipt of a notice of reclamation ``promptly'' rather than 
``immediately.''
    We are also making several non-substantive changes to the wording 
of the reclamation provisions of part 210 in order to correct 
typographical errors and clarify its operation.
1. Mandatory Use of R15 or R14 Return Reason Code
    A financial institution is required to return any Federal benefit 
payment received after the institution learns of the death of the 
recipient. See 31 CFR 210.10(a). However, part 210 does not specify 
what ACH return reason code financial institutions must use in 
effecting these returns. In some cases, financial institutions use an 
R02 (Account Closed) code, whereas in other cases financial 
institutions use an R15 (Beneficiary or Account Holder Deceased) or R14 
(Representative Payee Deceased) code. Most Federal paying agencies that 
receive payments returned with an R15 code automatically stop payments 
to the recipient and begin an investigation. In contrast, when a 
payment is returned using an R02 or other non-death code, agencies may 
only temporarily suspend the payment rather than terminating further 
payments to the recipient. Thus, the use of the R02 or other non-death 
code to return a payment made to a deceased recipient may result in 
further payments being issued to the deceased beneficiary, creating a 
risk of loss of additional public funds.
    We are proposing to require financial institutions to return 
benefit payments using an R15 or R14 code, as appropriate, if the 
financial institution is aware that the recipient is deceased. This 
requirement would not impose any additional burden on financial 
institutions to take steps to learn of the death of account holders, 
but would simply require that, in circumstances where the financial 
institution is aware of the death of the recipient, the R15 or R14 code 
be used to return payments. We are also proposing to amend the 
regulation to provide that a Receiving Depository Financial Institution 
(RDFI) that returns a payment using the R15 or R14 code is deemed to 
have satisfied the requirement to notify an agency of the death of a 
payment recipient if the RDFI learns of the death from a source other 
than notice from the agency. We believe that the use of the R15 and R14 
codes is an efficient means of notifying agencies that a recipient is 
deceased because of the stop on subsequent payments and investigation 
that is automatically triggered when an agency receives an R15 returned 
payment. We request comment both from agencies and from financial 
institutions on this proposed rule change.
2. Post-Death Payments to Which Recipient Is Entitled
    We are proposing to amend part 210 to provide an exception to the 
general rule that an RDFI is liable to the Federal government for all 
post-death benefit payments unless the RDFI has the right to limit its 
liability. Currently, part 210 imposes on RDFIs partial or full 
liability for benefit payments received after the death or legal 
incapacity of a recipient. The allocation of this liability to RDFIs is 
based on the presumption that a post-death payment is improper because 
the recipient is not entitled to the payment. However, we have become 
aware that there are certain types of payments to which a recipient (or 
his or her estate) is legally entitled, and which an agency may not 
have the legal obligation or authority to recover, notwithstanding that 
the payment was issued following the recipient's death. For example, 
agencies sometimes issue payments that represent retroactive benefits 
owed to the recipient. The recipient's legal entitlement to such a 
payment does not necessarily end upon death.
    One of the premises underlying the allocation of liability to 
financial institutions for payments that agencies issue to deceased 
recipients is that because these payments are improper, there is a loss 
of public funds unless the payments are recovered. We do not believe 
that it is equitable to impose liability on a financial institution 
where there is no loss of public funds because the agency that 
certified the payment has determined that the payment was properly 
issued notwithstanding its issuance following the recipient's death. 
Accordingly, we are proposing to amend part 210 to address these 
situations. In determining whether to reclaim post-death payments, we 
will rely on the determination of the certifying agency as to whether a 
recipient is entitled to a post-death payment. It is our understanding 
that, for the vast majority of Federal benefit payments, death does in 
fact end the recipient's legal entitlement to the payments. Therefore, 
as a practical matter, the effect of this amendment would be that 
financial institutions may expect that a small

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number of post-death payments will not be the subject of a notice of 
reclamation. We request comment both from financial institutions and 
from agencies on this proposal.
3. Misdirected Federal Payments
    Although the vast majority of electronic Federal payments are 
delivered without incident to the intended recipient, on rare occasions 
a Federal payment is delivered to an account that does not belong to 
the entitled payee. This can occur, for example, if the payee 
mistakenly provides an incorrect account or routing number to the 
paying agency. RDFIs may rely on the account number alone in posting a 
payment, and have no obligation to verify that the payee name matches 
the name of the account holder on the RDFI's records.
    In some cases, the owner of an account to which a Federal payment 
was erroneously delivered has brought the erroneous payment to the 
attention of the RDFI. Sometimes the RDFI contacts the agency that 
originated the payment. In other instances, rather than notifying the 
agency, RDFIs have handled such errors by removing the funds from the 
account to which they were credited and crediting the funds to the 
account of the intended payee, based on the payee name and/or the 
individual identification number in the ACH information accompanying 
the payment. When this approach is taken, the agency that originated 
the payments remains unaware of any problem, meaning that the agency 
may continue to direct subsequent payments to the wrong account.
    The repeated delivery of payments to the wrong account, 
particularly where the account owner has taken steps to bring the 
mistake to the attention of the bank, undermines public confidence in 
the Federal government's use of the ACH system. We do not believe that 
it is unduly burdensome to require financial institutions to contact 
paying agencies in the small number of cases in which financial 
institutions are made aware that a Federal payment has been 
misdirected. We are requesting comment on this proposed amendment to 
part 210, including the means by which this notice to agencies could be 
most conveniently and effectively provided.
4. Seven Year Limit on Reclamations
    We are proposing to amend the limitation on the age of payments 
that an agency may reclaim. Part 210 currently prohibits (subject to 
one exception) an agency from reclaiming any post-death or post-
incapacity payment made more than six years prior to the most recent 
payment made by the agency to the recipient's account. There have, 
however, been situations in which the most recent payment that an 
agency made to a recipient's account took place several years before 
the reclamation was initiated. Thus, notwithstanding the existing 
limitation, there have been reclamations initiated by agencies for 
payments made many years ago. Although these reclamations are 
infrequent, they are particularly difficult and time-consuming to 
process because neither agencies nor financial institutions retain 
records indefinitely, meaning that very old payment records or related 
account information frequently is not available. We therefore are 
proposing to prohibit agencies from reclaiming any payment that was 
made more than seven years prior to the date of the notice of 
reclamation. The only exception to this limitation would be in a 
situation in which the account balance exceeds the total amount of the 
payments that the agency would otherwise be permitted to reclaim after 
applying the seven-year limitation.
5. Right to Financial Privacy Act Changes
    Part 210 currently provides that in order to limit its liability in 
a reclamation, a financial institution must respond to a notice of 
reclamation by providing the names, addresses, and ``any other relevant 
information'' regarding account co-owners and other persons who 
withdrew, or were authorized to withdraw, funds from the recipient's 
account after the death or legal incapacity of the recipient. 31 CFR 
210.11(b)(3)(i). This information is used by paying agencies to pursue 
the recovery of the payments from persons who have made use of the 
funds but who were not entitled to them.
    The information that an agency may obtain from a financial 
institution in connection with a reclamation is limited by the Right to 
Financial Privacy Act, 12 U.S.C. 3401 et seq. (Financial Privacy Act). 
The Financial Privacy Act prohibits, subject to some exceptions, 
agencies from obtaining from financial institutions any information 
contained in or derived from the financial records of any customer, 
except pursuant to an administrative or judicial subpena, a search 
warrant, or other method prescribed by the Act. The Financial Privacy 
Act contains two exceptions that permit agencies to obtain from a 
financial institution certain information related to an account to 
which an erroneous Social Security Federal Old-Age, Survivors, and 
Disability Insurance benefit payment, or a benefit payment made by the 
Railroad Retirement Board or Department of Veterans' Affairs (VA), was 
sent without following the Act's procedural requirements. The 
exceptions permit disclosure by a financial institution of the name and 
address of any customer ``where the disclosure of such information is 
necessary to, and such information is used solely for the purpose[s] 
of, the proper administration of'' title II of the Social Security Act 
(42 U.S.C. 401 et seq.), the Railroad Retirement Act (45 U.S.C. 231 et 
seq.) or benefits programs under laws administered by VA. 12 U.S.C. 
3413(k), (p). These exceptions permit disclosure only of names and 
addresses--not of other transaction information, such as dates and 
times of withdrawals.
    In order to clarify that the information that financial 
institutions are required to provide in connection with a reclamation 
is limited to the information specified in the Financial Privacy Act, 
we are proposing to revise the wording of subsection 210.11(b)(3)(i).
6. Notification to Account Owners
    We are proposing to revise Sec.  210.13 in order to allow financial 
institutions to notify an account owner of the receipt of a notice of 
reclamation ``promptly'' rather than ``immediately.'' We do not believe 
that the need to notify account owners of a reclamation is so urgent as 
to require immediate notification. This change is intended to reduce an 
unnecessary burden on financial institutions.

III. Section-by-Section Analysis

Section 210.2(d)

    We are proposing to revise the definition of Applicable ACH Rules 
at Sec.  210.2(d) by adding a new subparagraph (8) in order to exclude 
ACH Rules 3.6.2 and 3.7.1 from the definition. ACH Rules 3.6.2 and 
3.7.1, respectively, prohibit the origination of ARC entries and POP 
entries using, among other things, third-party checks, credit card 
checks, obligations of financial institutions (e.g., traveler's checks, 
cashier's checks, official checks, money orders, etc.), and checks 
drawn on a state or local government.

Section 210.2(i)

    We are proposing to add a new definition of ``business check'' to 
Sec.  210.2. The definition would include not only any check drawn on a 
corporate or business deposit account (including a third-party check), 
but also credit card checks; negotiable instruments issued by a 
financial

[[Page 50676]]

institution (e.g., traveler's checks, cashier's checks, official 
checks, money orders, etc.); and checks drawn on a state or local 
government. The new definition is used in proposed Sec.  210.6(g) and 
(h) in order to permit agencies to use these instruments as source 
documents in originating ACH debit entries.

Section 210.6(g)

    We are proposing to amend Sec.  210.6(g) in order to permit the 
origination of ACH debit entries at agency points-of-purchase using as 
source documents instruments included under the new definition of 
``business check'' set forth at proposed Sec.  210.2(i).

Section 210.6(h)

    We are proposing to revise Sec.  210.6(h) in order to provide that 
agencies may originate ACH debit entries using checks that are (1) 
received via the mail; (2) received at a dropbox; and (3) delivered in 
person in circumstances in which it is impossible or impractical for 
the agency to image and return the check at the time the check is 
delivered. In all cases, the disclosure set forth at Appendix C must be 
provided to the Receiver before the check is delivered. In situations 
in which the check is being delivered in person, the disclosures must 
be posted or handed to the Receiver. Proposed Sec.  210.6(h) uses the 
new term ``business check,'' as defined in proposed Sec.  210.2(i), in 
order to permit the conversion of certain instruments that agencies 
currently are not permitted to convert.

Section 210.6(i)

    We are proposing to revise Sec.  210.6(i) in order to permit 
agencies to originate ACH debit entries to collect one-time service 
fees in connection with RCK entries if prior notice of the fee is 
given. Section 210.6(i) would override the requirement in the ACH Rules 
that a Receiver authorize, in writing, the collection of a service fee 
and instead require that, prior to accepting the Receiver's check or 
source document, the agency disclose to the Receiver that a service fee 
may be collected. This provision does not create for agencies the 
authority to impose a service fee; rather, it permits an agency that 
has the authority to impose such a fee to collect the fee by ACH debit 
without a written authorization.

Section 210.8(d)

    We are proposing to add a new subsection to Sec.  210.8 in order to 
require an RDFI to promptly notify an agency if the RDFI becomes aware 
that the agency has originated an ACH credit entry to an account that 
is not owned by the payee whose name appears in the ACH payment 
information. ``Promptly'' will normally mean no later than two business 
days after the error has come to the RDFI's attention. An RDFI that 
fails to provide the notice may be liable to the Federal government for 
loss resulting from its failure to notify the paying agency pursuant to 
the general liability provision of 210.11(d).
    This subsection does not impose any duty on RDFIs to verify the 
account numbers on incoming payments against the receiver names. It 
does, however, require that if such an error is brought to the 
attention of an RDFI, the RDFI must notify the agency that originated 
the payment.

Section 210.10

    We are proposing to revise paragraph (a) of Sec.  210.10 to require 
that an RDFI use return reason code R15 (Beneficiary or Account Holder 
Deceased) or R14 (Representative Payee Deceased), as appropriate, to 
return any benefit payments received after the RDFI becomes aware of 
the death of a recipient or beneficiary. We are also proposing to add a 
sentence stating that the use of an R15 or R14 code will satisfy the 
RDFI's obligation to notify the agency after learning of the death of a 
recipient or beneficiary from a source other than notice from the 
agency.
    We are proposing to revise Sec.  210.10(c) to provide that an RDFI 
is not liable for a benefit payment received after the death of a 
recipient or beneficiary if the agency that certified the disbursement 
of the payment determines that the recipient or beneficiary is entitled 
to the post-death payment. It is the responsibility of the agency 
certifying the payment to make a determination regarding its legal 
obligation or authority to recover a post-death benefit payment. The 
Service will act in accordance with the agency's direction, as set 
forth at Sec.  210.9(b). (``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.'')
    We are proposing to revise Sec.  210.10(d) in order to amend the 
limitation on the age of payments that an agency may reclaim. Section 
210.10(d) currently prohibits, subject to one exception, an agency from 
reclaiming any post-death or post-incapacity payment made more than six 
years prior to the most recent payment made by the agency to the 
recipient's account. Proposed Sec.  210.10(d) would prohibit agencies 
from reclaiming any payment that was made more than seven years prior 
to the date of the notice of reclamation. The only exception to this 
limitation would be in a situation in which the account balance exceeds 
the total amount of the payments that the agency would otherwise be 
permitted to reclaim.
    Additional wording changes have been made to proposed Sec.  
210.10(d). The first sentence of Sec.  210.10(d) currently provides 
that an agency must initiate a reclamation within 120 calendar days 
after it receives notice of the death or legal incapacity of a 
recipient or death of a beneficiary. We are proposing to revise the 
wording of that sentence in order to provide that the 120 day period 
begins when an agency receives ``actual or constructive knowledge'' of 
the death or legal incapacity. This is the standard to which financial 
institutions are subject as a condition of limiting their liability for 
a reclamation under Sec.  210.11. In addition, the second sentence of 
proposed Sec.  210.10(d)(1) has been reworded in order to make it more 
clear that a notice of reclamation applies only to the type of payments 
which are the subject of the notice, and does not preclude reclamation 
actions by other agencies that may have issued payments to the 
recipient or by the same agency with respect to a different type of 
payment issued to the recipient. For example, the Social Security 
Administration issues two different types of benefit payments: Social 
Security Federal Old-Age, Survivors, and Disability Insurance (SSA) 
payments and Supplemental Security Income (SSI) payments. Some 
recipients receive both of these types of benefit payments. A notice of 
reclamation regarding SSA payments is separate from, and does not 
affect the potential liability of a financial institution under, a 
notice of reclamation for SSI payments issued to the same recipient.

Section 210.11

    We are proposing to revise Sec.  210.11 to limit the information 
that an RDFI is required to provide in order to limit its liability in 
a reclamation. First, the information regarding withdrawers and co-
owners is limited to the name and address of these individuals. Second, 
the information is to be provided only in cases involving the 
reclamation of Social Security Federal Old-Age, Survivors, and 
Disability Insurance benefit payments, or benefit payments certified by 
the Railroad Retirement Board or Department of Veterans' Affairs.

Section 210.13

    We are proposing to revise Sec.  210.13 to provide that an RDFI 
must promptly (rather than ``immediately,'' as currently

[[Page 50677]]

provided) notify account owner(s) of the receipt of a notice of 
reclamation.

Section 210.14

    We are proposing to correct an error in Sec.  210.14 by changing 
the word ``direct'' to ``directed.''

Appendix C

    We are proposing to amend Appendix C to the regulation by 
shortening the disclosure that agencies must provide in connection with 
ACH debit entries that they originate pursuant to Sec.  210.6(h).

IV. Procedural Requirements

Request for Comment on Plain Language

    Executive Order 12866 requires each agency in the Executive branch 
to write regulations that are simple and easy to understand. We invite 
comment on how to make the proposed rule clearer. For example, you may 
wish to discuss: (1) Whether we have organized the material to suit 
your needs; (2) whether the requirements of the rules are clear; or (3) 
whether there is something else we could do to make these rules easier 
to understand.

Executive Order 12866

    The proposed rule does not meet the criteria for a ``significant 
regulatory action'' as defined in Executive Order 12866. Therefore, the 
regulatory review procedures contained therein do not apply.

Regulatory Flexibility Act Analysis

    It is hereby certified that the proposed rule will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis under the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq) is not required.

Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 
1532 (Unfunded Mandates Act), requires that the agency prepare a 
budgetary impact statement before promulgating any rule likely to 
result in a Federal mandate that may result in the expenditure by 
State, local, and tribal governments, in the aggregate, or by the 
private sector, of $100 million or more in any one year. If a budgetary 
impact statement is required, section 205 of the Unfunded Mandates Act 
also requires the agency to identify and consider a reasonable number 
of regulatory alternatives before promulgating the rule. We have 
determined that the proposed rule will not result in expenditures by 
State, local, and tribal governments, or by the private sector, of $100 
million or more in any one year. Accordingly, we have not prepared a 
budgetary impact statement or specifically addressed any regulatory 
alternatives.

Executive Order 13132--Federalism Summary Impact Statement

    Executive Order 13132 requires agencies, including the Service, to 
certify their compliance with that Order when they transmit to the 
Office of Management and Budget (OMB) any draft final regulation that 
has federalism implications. Under the Order, a regulation has 
federalism implications if it has ``substantial direct effects on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government.'' In the case of a regulation that has 
federalism implications and that preempts State law, the Order imposes 
certain specific requirements that the agency must satisfy, to the 
extent practicable and permitted by law, prior to the formal 
promulgation of the regulation.
    In general, the Executive Order requires the agency to adhere 
strictly to Federal constitutional principles in developing rules that 
have federalism implications; provides guidance about an agency's 
interpretation of statutes that authorize regulations that preempt 
State law; and requires consultation with State officials before the 
agency issues a final rule that has federalism implications or that 
preempts State law.
    The proposed rule will not have substantial direct effects on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government.

List of Subjects in 31 CFR Part 210

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

Authority and Issuance

    For the reasons set forth in the preamble, we propose to amend part 
210 of title 31 of the Code of Federal Regulations as follows:

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

    1. The authority citation for part 210 continues to read as 
follows:

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

    2. Amend Sec.  210.2 as follows:
    A. Revise paragraph (d);
    B. Redesignate paragraphs (i) through (r) as (j) through (s);
    C. Add new paragraph (i).
    The revised and added text reads as follows:


Sec.  210.2  Definitions.

* * * * *
    (d) Applicable ACH Rules means the ACH Rules with an effective date 
on or before June 13, 2003, as published in Parts II, III, and IV of 
the ``2003 ACH Rules: A Complete Guide to Rules & Regulations Governing 
the ACH Network,'' including the supplement thereto approved February 
27, 2003 and effective June 13, 2003, 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; 2.2.1.10; Appendix Eight and Appendix Eleven 
(governing the enforcement of the ACH Rules, including self-audit 
requirements);
    (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);
    (6) ACH Rule 2.10.2.2 (requiring that originating depository 
financial institutions (ODFIs) establish exposure limits for 
Originators of Internet-initiated debit entries);
    (7) ACH Rule 2.11.3 (requiring reporting regarding unauthorized 
Telephone-initiated entries); and
    (8) ACH Rules 3.6.2 and 3.7.1 (restricting source documents for 
Accounts Receivable entries and Point-of-Purchase entries).
* * * * *
    (i) Business check means:
    (1) A check drawn on corporate or business deposit account, 
including a third-party check,
    (2) A credit card check,
    (3) A negotiable instrument issued by a financial institution 
(e.g., a traveler's check, cashier's check, official check, money 
order, etc.), and
    (4) A check drawn on a state or local government.
* * * * *
    3. Revise Sec. Sec.  210.6(g), (h) and (i) to read as follows:


Sec.  210.6  Agencies.

* * * * *
    (g) Point-of-purchase debit entries. An agency may originate an ACH 
debit entry using a business check or a check

[[Page 50678]]

drawn on a consumer account that is presented at a point-of-purchase. 
Agencies shall use the Point-of-Purchase (POP) Standard Entry Class 
(SEC) code for entries to consumer accounts and the Cash Concentration 
or Disbursement (CCD) SEC code for entries to business accounts. The 
requirements of ACH Rules 2.1.2 and 3.4 shall be met for such an entry 
if the Receiver presents the check at a location where the agency has 
posted a conspicuous notice at the point-of-purchase containing the 
disclosure set forth at Appendix A to this part and the agency makes 
available to the Receiver at the same location, in a form that the 
Receiver can retain, the disclosure set forth at Appendix B to this 
part. For purposes of ACH Rules 3.10 and 4.1.1, authorization shall 
consist of a copy of the notice and a copy of the Receiver's source 
document.
    (h) Accounts receivable check conversion.
    (1) Conversion of consumer checks. An agency may originate an 
Accounts Receivable (ARC) entry using a check drawn on a consumer 
account that is received via the mail or at a dropbox, or that is 
delivered in person in circumstances in which the agency cannot 
contemporaneously image and return the check. The notice and 
authorization requirements of ACH Rules 2.1.4 and 3.6.1 shall be met 
for an ARC entry only if an agency has provided the Receiver with the 
disclosure set forth at Appendix C to this part.
    (2) Conversion of business checks. An agency may originate an ACH 
debit using a business check that is received via the mail or at a 
dropbox, or that is delivered in person in circumstances in which the 
agency cannot contemporaneously image and return the check. The agency 
shall use the CCD SEC code for such entries, which shall be deemed to 
meet the requirements of ACH Rule 2.1.2 if the agency has provided the 
disclosure set forth at Appendix C to this part. For purposes of ACH 
Rules 3.10 and 4.1.1, authorization shall consist of a copy of the 
notice and a copy of the Receiver's source document.
    (i) Returned item service fee. An agency may originate an ACH debit 
entry to collect a one-time service fee in connection with a Re-
presented Check (RCK) entry or an ACH debit entry originated pursuant 
to paragraph (g) or (h) of this section that is returned due to 
insufficient funds. An entry originated pursuant to this paragraph 
shall meet the requirements of ACH Rules 2.1.2 and 3.4 if the agency 
has disclosed the collection of the fee to the Receiver as part of the 
disclosures required under paragraph (g) or (h) of this section or, in 
the case of a fee in connection with an RCK entry, prior to the 
acceptance of the check to which an RCK entry relates. For purposes of 
ACH Rule 3.10 and 4.1.1, authorization shall consist of a copy of the 
disclosure of the collection of the fee and a copy of the Receiver's 
check or source document.
    4. Add a new paragraph (d) to Sec.  210.8 to read as follows:


Sec.  210.8  Financial institutions.

* * * * *
    (d) Notice of misdirected payment. An RDFI shall promptly notify an 
agency if the RDFI becomes aware that the agency has originated an ACH 
credit entry to an account that is not owned by the payee whose name 
appears in the ACH payment information.
    5. Amend Sec.  210.10 by revising paragraphs (a), (c) and (d) to 
read as follows:


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 
210.11 of this part. An RDFI shall return any benefit payments received 
after the RDFI becomes aware 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, using return reason code R15 
(Beneficiary or Account Holder Deceased) or R14 (Representative Payee 
Deceased), as appropriate, in the case of a deceased recipient or 
beneficiary. If the RDFI becomes aware of the death or legal incapacity 
of a recipient or death of a beneficiary from a source other than 
notice from the agency issuing payments to the recipient, the RDFI 
shall immediately notify the agency of the death or incapacity. The use 
of the R15 or R14 return reason code shall be deemed to constitute such 
notice.
* * * * *
    (c) Exceptions to liability rule.
    (1) 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.
    (2) An RDFI shall not be liable for a benefit payment received 
after the death of a recipient or beneficiary if the agency that 
certified the disbursement of the payment determines that the recipient 
or beneficiary was entitled to the post-death payment.
    (d) Time limits. An agency that initiates a request for a 
reclamation must do so within 120 calendar days after the date that the 
agency first has actual or constructive knowledge of the death or legal 
incapacity of a recipient or the death of a beneficiary. An agency may 
not reclaim any post-death or post-incapacity payment made more than 
seven years prior to the date of the notice of reclamation; provided, 
however, that if the account balance at the time the RDFI receives the 
notice of reclamation exceeds the total amount of post-death or post-
incapacity payments made by the agency during such seven year period, 
this limitation shall not apply and the RDFI shall be liable for the 
total amount of all post-death or post-incapacity 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.
* * * * *
    6. Amend Sec.  210.11 by revising paragraph (b)(3)(i) to read as 
follows:


Sec.  210.11  Limited liability.

* * * * *
    (b) Qualification for limited liability.
* * * * *
    (3)(i) In cases involving the reclamation of Social Security 
Federal Old-Age, Survivors, and Disability Insurance benefit payments, 
or benefit payments certified by the Railroad Retirement Board or the 
Department of Veterans' Affairs, provide the name and address of the 
following person(s):
    (A) The recipient (last known address) and any co-owner(s) of the 
recipient's account;
    (B) All 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.
* * * * *
    7. Revise Sec.  210.13 to read as follows:


Sec.  210.13  Notice to account owners.

    Provision of notice by RDFI. Upon receipt by an RDFI of a notice of 
reclamation, the RDFI promptly 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.

[[Page 50679]]

    8. Amend Sec.  210.14 by revising paragraph (a) to read as follows:


Sec.  210.14  Erroneous death information.

    (a) Notification of error to the agency. If, after the RDFI 
responds fully to the notice of reclamation, the RDFI learns that the 
recipient or beneficiary is not dead or legally incapacitated or that 
the date of death is incorrect, the RDFI shall inform the agency that 
certified the underlying payment(s) and directed the Service to reclaim 
the funds in dispute.
* * * * *
    9. Revise Appendix C to part 210 to read as follows:

C. Appendix C to Part 210--Standard Disclosure for Accounts Receivable 
Conversion--Notice

    If you send us a check, it will be converted into an electronic 
fund transfer (EFT). This means we will copy your check and use the 
account information on it to electronically debit your account for the 
amount of the check. The debit from your account will usually occur 
within 24 hours, and will be shown on your regular account statement.
    You will not receive your original check back. We will destroy your 
original check, but we will keep the copy of it. If the EFT cannot be 
processed for technical reasons, you authorize us to process the copy 
in place of your original check. If the EFT cannot be completed because 
of insufficient funds, we may try to make the transfer up to 2 times 
[and we will charge you a one-time fee of $--------, which we will also 
collect by EFT].

    Note: This disclosure must be conspicuous. This means that it 
should be printed in reasonably large typeface. If this disclosure 
is combined with other information, it should be set off by 
contrasting color, by surrounding it with a box, or by using other 
means to ensure that it is prominently featured.

* * * * *

    Dated: August 14, 2003.
Richard L. Gregg,
Commissioner.
[FR Doc. 03-21203 Filed 8-20-03; 8:45 am]
BILLING CODE 4810-35-P