[Federal Register Volume 69, Number 54 (Friday, March 19, 2004)]
[Rules and Regulations]
[Pages 13184-13190]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6092]



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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; Final 
Rule

  Federal Register / Vol. 69, No. 54 / Friday, March 19, 2004 / Rules 
and Regulations  

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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: Final rule.

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SUMMARY: We are amending our regulation at 31 CFR Part 210 (Part 210), 
which governs the use of the Automated Clearing House (ACH) system by 
Federal agencies (agencies). The ACH network is a nationwide electronic 
funds 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 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.
    This document includes changes to Subpart A and Subpart B, as well 
as Appendix C, of Part 210. We are amending Subpart A to clarify and 
shorten the notification statement contained in Appendix C, which is 
required for converting checks to ACH payments, and to expand the 
circumstances in which agencies may accept checks for conversion to ACH 
payments. We are amending Subpart B of the rule to address certain 
issues relating to the reclamation of Federal benefit payments and the 
receipt of misdirected Federal payments.

DATES: This rule is effective April 19, 2004.

ADDRESSES: You can download this rule at the following World Wide Web 
address: http://www.fms.treas.gov/ach.

FOR FURTHER INFORMATION CONTACT: Donald Clark, Senior Financial Program 
Specialist, at (202) 874-7092 or [email protected]; or Natalie H. 
Diana, Senior Counsel, at (202) 874-6680 or 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    We published a notice of proposed rulemaking (NPRM) to amend Part 
210 on August 21, 2003. See 68 FR 50672. This proposed rule addressed 
the circumstances in which checks presented or delivered to agencies 
may be converted to ACH debit entries and issues relating to the 
reclamation of Federal benefit payments and the receipt of misdirected 
payments. We requested comment on the NPRM. We received comments from 5 
credit unions, 11 banks, 5 government agencies, 19 trade and 
professional groups, and two individual citizens. Several of the 
proposed amendments to Part 210 were generally supported by commenters, 
and we are adopting those proposals without substantive change.
    A number of commenters, however, strongly opposed certain proposed 
amendments to allow for the wider use of check conversion by agencies. 
In light of these comments and the enactment in October 2003 of the 
Check Clearing for the 21st Century Act (Check 21), we have modified or 
eliminated certain proposed changes to Part 210 relating to check 
conversion, as discussed in Section II below.
    We plan to use check conversion for consumer checks that we receive 
over-the-counter and at lockboxes to the extent that appropriate notice 
can be provided. We will not convert consumer checks submitted to a 
lockbox where notice is not feasible. Instead, we will wait until Check 
21 becomes effective and initially use either a substitute check or, 
where possible, an electronic image for presentment. Eventually, we 
hope to clear all of these items by image exchange.
    We are currently converting a nominal number of business checks to 
ACH at some operational locations, but we will not expand these 
operational locations to convert more business checks. We will not 
convert business checks at new operational locations received over-the-
counter or at our lockboxes. Instead, we will wait until Check 21 
becomes effective and initially use either a substitute check or an 
electronic image, where possible, for presentment. Eventually we would 
want to have all of these items cleared by image exchange.
    We do not plan to convert other types of payment instruments such 
as money orders, traveler's checks, certified bank checks and credit 
card checks. We will wait until Check 21 becomes effective and those 
items then will be cleared either using a substitute check or an 
electronic image, where possible.
    We have decided not to allow agencies to originate an ACH debit 
entry to collect a service fee related to a Re-presented Check (RCK) 
entry for which the agency has not obtained explicit authorization. 
Agencies will be able to originate a debit to collect such a fee if 
they have obtained express authorization.

II. Summary

A. Check Conversion

    In this final rule, we are shortening the disclosure statement that 
agencies must provide before converting checks that they receive at 
lockboxes, and we are expanding the circumstances in which agencies may 
accept checks for conversion to ACH debit entries. We are not adopting 
the proposal to broaden the definition of ``business check'' to include 
additional instruments such as money orders, traveler's checks, 
certified bank checks and credit card checks. We also are not adopting, 
for reasons discussed below, the proposal to allow agencies to 
originate an ACH debit entry to collect a service fee related to an RCK 
entry where the agency has provided prior notice of the fee, but has 
not obtained the Receiver's express authorization.
    In the NPRM, we proposed to amend Part 210 to allow agencies to 
convert to ACH debit entries certain types of payment instruments that 
are commonly received at lockboxes and points-of-purchase, including 
money orders, traveler's checks, certified bank checks and credit card 
checks. The proposal was to broaden the definition of business checks 
to include these additional payment instruments, thereby allowing 
agencies to convert these items to ACH debit entries. We received 33 
comments on this proposed change. Five commenters agreed with the 
proposal and 28 commenters disagreed with the proposal. Those agreeing 
with the proposed change noted the efficiencies to be gained. 
Commenters who opposed the change expressed a variety of concerns. A 
number of financial institutions commented that the proposal would 
hinder their ability to detect fraudulent items; interfere with check 
processing capabilities inherent to the paper check (e.g., stop 
payments, account reconciliation services, controlled disbursement, and 
services such as positive pay and payee verification); and create a 
greater number of exception items, all of which would result in 
significant costs to the financial services industry. Some commenters 
suggested that these costs could exceed $100 million, and that the 
proposal thus constituted a ``significant regulatory action'' for 
purposes of Executive Order 12866.
    Issuers of money orders indicated that, to establish that a money 
order has been altered (e.g., amount increased, endorsement forged, or 
payee name forged) it is often necessary to view the original money 
order. Some issuers of money orders commented that the

[[Page 13185]]

proposed change would undermine their anti-money laundering compliance 
programs under the Bank Secrecy Act. Other commenters noted that the 
presenter of a cashier's check, official check, money order or 
traveler's check is not the owner of the account on which the 
instrument is drawn, and thus cannot properly authorize the 
instrument's conversion to an ACH debit. One commenter noted that for 
credit card checks and some other instruments, the account contained in 
the Magnetic Ink Character Recognition (MICR) line is not an account 
that is reachable through the ACH processes at the Receiving Depository 
Financial Institution (RDFI), meaning that, in every case, the ACH 
entry will be returned.
    We have considered all of these comments and also the passage of 
Check 21, which will become effective on October 28, 2004, in deciding 
not to proceed with the proposal to convert additional instruments. At 
the time the NPRM was published, Check 21 had not yet been enacted. The 
Financial Management Service (FMS) believes that Check 21 presents an 
alternative to check conversion that may make possible many of the same 
benefits and efficiencies of check conversion without raising the 
issues identified by commenters. Accordingly, as we continue our 
efforts to move to an all-electronic environment for the processing of 
payments and collections, we will be evaluating the use of check 
conversion, substitute checks and, ultimately, electronic image 
presentment, for all items that are received.
    In the NPRM, we proposed 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. We received 7 comments agreeing, and 14 comments 
disagreeing with this proposal. All credit unions that commented agreed 
with this proposal. Two banks agreed with this proposal, while five 
disagreed. All professional and trade organizations opposed the 
proposal. The opposing commenters noted that NACHA had considered a 
``notice equals authorization'' approach and had determined that this 
approach raised significant issues. Accordingly, the ACH Rules require 
explicit authorization to collect a service fee related to an RCK 
entry. Commenters also pointed out that the NPRM, if adopted, would 
create another discrepancy from ACH Rules. Some commenters stated that 
state attorneys general are responding to consumer complaints regarding 
check conversions and that the proposal would likely generate 
additional consumer complaints. After considering the merits of these 
comments, we have decided not to proceed with this proposal.
Revised Accounts Receivable Disclosure
    We are amending Part 210 to shorten the disclosure that agencies 
must provide for accounts receivable check conversion because the 
existing disclosure is too lengthy to be included on many invoices and 
remittance documents. We received 17 comments on this proposal. Eight 
commenters agreed with the proposal and 9 commenters disagreed with the 
proposal. Those who disagreed voiced concern that the public is not yet 
knowledgeable and comfortable with the check conversion process. They 
suggested that more explanation is better than less. One commenter that 
supported the change stated that the ``proposed language seems to 
address in plain language what [check conversion] would do with the 
customer's check.'' We agree that more work is required to educate the 
public regarding check conversion. To that end, FMS has joined NACHA's 
Check Conversion Education Coalition, which is working to advance 
public education. However, we also believe that the disclosure need not 
be lengthy to be clear. To the contrary, as one commenter noted: ``The 
current disclosure is too long and the consumer is probably not reading 
it.'' We are adopting this proposal without substantive change.
Expanded Accounts Receivable Check Conversion Applications
    We are amending Part 210 to allow agencies to convert checks using 
accounts receivable check conversion rules in certain circumstances 
that fall outside typical accounts receivable and point-of-purchase 
settings. Our proposal addressed situations in which agencies accept 
checks in unusual circumstances, such as when Army pay officers 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 checks. Thus, pay officers cannot convert 
these checks using point-of-purchase check conversion. However, neither 
does the acceptance of checks in these circumstances constitute an 
accounts receivable (lockbox) setting, meaning that these checks cannot 
be converted using accounts receivable check conversion either. 
Similarly, National Park Service rangers collect park entrance fees at 
park entrances where check conversion equipment cannot always be used 
because there is not adequate enclosed and protected space, or proper 
connectivity. In some other situations, agency employees accept checks 
but do not have authority to process those checks. For example, U.S. 
Customs agents may be required to accept check payments incident to 
their inspection duties, but in some cases these agents don't have 
authority to process the payments. In all of these circumstances, 
checks are received in situations that don't fall within the 
conventional meaning of a lockbox or an accounts receivable setting, 
but it is not possible to scan and return the voided check, as required 
in the rules governing point-of-purchase (POP) entries. We therefore 
proposed to amend Part 210 to permit the conversion of checks presented 
in these kinds of circumstances using the rules governing accounts 
receivable check conversion.
    We received 19 comments on this proposal. Four commenters expressed 
full support for the proposal, 3 commenters either conditionally 
supported or partially opposed the proposal, and 12 commenters opposed 
the proposal. The primary concern of the commenters who opposed or 
expressed reservations regarding the proposal was that the expansion of 
circumstances in which checks may be converted could result in the 
conversion of additional business checks to ACH entries. Commenters 
noted that agencies convert business checks using the Cash 
Concentration or Disbursement (CCD) Standard Entry Class, and voiced 
concern that check conversion using this format would confuse Receivers 
and RDFIs. Commenters expressed concern over the conversion of 
additional business checks to ACH debits and described the difficulty 
RDFIs experience in distinguishing these entries from other CCD debit 
entries. They commented that converted business checks require unique 
processing by these RDFIs. Some commenters also noted their concern 
that this proposal represented another deviation from the ACH Rules.
    The great majority of checks received in the situations we are 
seeking to address are consumer checks, in which case the checks will 
be converted using the ARC standard entry class code. We do not plan to 
begin converting new collection flows with business checks. When Check 
21 becomes effective, we will consider using either a substitute check 
or an electronic image to process these items.

B. Reclamations; Misdirected Payments

    We are amending several of the reclamation provisions of Part 210, 
as

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discussed below. We are not proceeding with the proposal 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. This proposal was 
intended to recognize that in a small number of situations, an agency 
may properly issue a payment after the death of the recipient and may 
not wish to reclaim that payment. The proposal would have allowed 
agencies to choose not to attempt to recover certain post-death 
payments to which the recipient is entitled, and to relieve RDFIs of 
liability for those payments. Six commenters agreed with the proposal 
and four commenters disagreed with the proposal. A concern noted by 
commenters was that financial institutions should not be required to 
determine eligibility for Federal payments.
    The proposal would not have allowed, or required, financial 
institutions to determine a recipient's eligibility for a Federal 
payment. However, it is clear from the comments that this proposal 
created significant confusion for RDFIs with respect to their role in 
determining to which post-death payments a deceased recipient is 
entitled. In light of the small number of situations in which agencies 
do not seek to reclaim post-death benefit payments, we have decided not 
to proceed with this proposed amendment.
    We have also determined not to proceed with the proposed amendment 
to Part 210 that would have required RDFIs to notify an account owner 
of receipt of a notice of reclamation ``promptly'' rather than 
``immediately.'' We received seven comments on this proposal. Three 
credit unions and two banks agreed with the proposal, but observed that 
most financial institutions already notify account holders as soon as 
possible. Two government agencies were critical of the proposed change. 
One commenter felt that the term ``promptly'' is too vague and that a 
specific deadline should be provided.
    Although the intent of the proposal was to reduce unnecessary 
burden on financial institutions, a review of the comments suggests 
this change could be a source of confusion and debate among agencies 
and financial institutions as to what period of time constitutes prompt 
notification. Accordingly, we have decided not to adopt this change.
Use of R15 or R14 Return Reason Code
    We are amending Part 210 to provide that an RDFI that returns a 
payment using return reason code R15 (Beneficiary or Account Holder 
Deceased) or R14 (Representative Payee Deceased) 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. However, we are not proceeding with the 
proposal to require financial institutions that learn that an account 
holder has died to return any subsequent Federal benefit payments using 
an R15 or R14 code.
    Under Part 210, a financial institution that learns of the death of 
a recipient from a source other than the agency is required to notify 
the agency of the death. Also, 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 currently 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), or other 
non-death code, whereas in other cases financial institutions use an 
R15 or R14 code. Most 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. To reduce the potential for such losses, we proposed to require 
financial institutions to use an R15 or R14 code when they return post-
death payments.
    We received 9 comments on this proposal that supported the proposal 
and 10 comments that opposed the proposal. Those opposing the proposal 
stated that many financial institutions have systems in place to 
automatically generate an R02 code when an account has been closed for 
any reason, whether due to the account holder's death or for another 
reason. Therefore, complying with this proposal would require 
substantial systems changes at great cost.
    Rather than finalize the amendment as proposed, we are amending 
Part 210 to provide that the use of an R15 or R14 code will satisfy the 
financial institution's obligation to notify the agency. A financial 
institution may use a code other than R15 or R14 to effect these 
returns, but in that case the financial institution will still have the 
obligation to separately notify the agency of the recipient's death. 
FMS will revise the Guide to Federal Government ACH Payments and 
Collections (Green Book) to encourage financial institutions to use 
return Reason Code R15 or R14 if the financial institution learns of 
the death from a source other than the agency. By using one of these 
codes, the financial institution will satisfy both the requirement to 
return post-death payments and the requirement to notify the agency of 
the death of the recipient.
Misdirected Federal Payments
    We are amending Part 210 to provide that if an RDFI becomes aware 
that an agency has directed a payment to the wrong account, the RDFI 
shall notify the agency, and that the origination of a Notification of 
Change (NOC) entry or the return of the funds with an appropriate 
return reason code constitutes such notice.
    On rare occasions, a Federal payment is directed to an account that 
does not belong to the entitled payee because, for example, the payee 
mistakenly provided an incorrect account and/or routing number to the 
paying agency. FMS recognizes that RDFIs may rely on the account number 
alone in posting a payment, and that RDFIs have no obligation to verify 
that the payee name matches the name of the account holder on the 
RDFI's records. However, in some cases, the owner of an account to 
which a Federal payment was erroneously delivered has brought the error 
to the attention of the RDFI. The RDFI, rather than notifying the 
agency, has removed the funds from the account to which they were 
credited and credited 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 an RDFI decides to 
transfer a Federal payment to an account other than the account 
indicated in the ACH payment information, it does so at its own risk 
and may be liable to the issuing agency if the RDFI's judgment 
regarding the intended payee is incorrect and there is a resulting loss 
to the agency. Moreover, when this approach is taken, and the RDFI does 
not in some way notify the agency that originated the payments, the 
agency will remain unaware of any problem and may continue to direct 
subsequent payments to the wrong account.
    We received five comments in support of the proposal, three 
comments that conditionally supported the proposal and seven comments 
that disagreed with the proposal.

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Commenters did not disagree with the importance of notifying the agency 
when an RDFI recredits a payment to an account number other than that 
contained in the ACH entry. However, several commenters indicated that 
it would be burdensome to have to make telephone calls or use some 
other non-automated way to contact the agency. These commenters 
expressed a preference, instead, for using the NOC process as a means 
of providing notice.
    In light of these comments, we are amending the regulation to 
provide that, where appropriate, the use of an NOC entry will 
constitute notice to the agency. We recognize that the normal time 
limit for originating NOC entries is two banking days and that the 
financial institution is likely to learn of the misdirected payment 
after this deadline has passed. However, agencies do not return NOCs 
that they receive after the two-day cutoff, and an NOC initiated after 
the two-day cutoff will constitute proper notice to the agency. 
Alternatively, as another commenter suggested, the RDFI may return the 
payment to the agency with an appropriate return reason code, rather 
than deposit it to another account that the RDFI believes to be 
correct. These are not the only means of notice that an RDFI may use, 
but they are in all cases a sufficient means of notice.
Six Year Limit on Reclamations
    We are amending Part 210 to prohibit agencies from reclaiming 
payments that were made more than six 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 six-year limitation.
    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 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. These 
reclamations are difficult and time-consuming to process because 
neither agencies nor financial institutions retain records 
indefinitely, meaning that very old payment records and related account 
information frequently are not available.
    In the NPRM, we proposed to prohibit agencies from reclaiming 
payments that were made more than seven years prior to the date of the 
notice of reclamation. We received three comments in favor of the 
proposed change--two from banks and one from an agency. One credit 
union agreed with the change, with the condition that FMS should work 
with NACHA to lengthen their record retention period to coincide with 
the FMS proposal. Nine commenters, including five banks and four 
payment associations, opposed to the change. Commenters supported the 
proposal that the lookback period begin from the date of the notice of 
reclamation and not the date on which the last payment was issued. 
However, commenters who disagreed with the proposal uniformly commented 
that it would not be consistent with the ACH Rule, in that the period 
that banks are required to retain documentation under the ACH Rules is 
limited to six years. On the basis of these comments, we have 
determined that agencies will be limited to reclaiming payments made up 
to six years prior to the date of the notice of reclamation, rather 
than seven years.
Right to Financial Privacy Act Changes
    We are amending Part 210 to limit the information that agencies may 
request from financial institutions, in accordance with the Right to 
Financial Privacy Act. 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 subpoena, 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 (SSA) 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 proposed in the NPRM to revise the wording of subsection 
210.11(b)(3)(i). Treasury received five comments agreeing with this 
proposal and none that opposed it. We are proceeding with the amendment 
as proposed.

III. Section-by-Section Analysis

Section 210.6(h)

    We are revising 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.

Section 210.8(d)

    We are adding a new subsection to Sec.  210.8 in order to provide 
that 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. ``Promptly'' will normally mean no later than two business 
days after the error has come to the RDFI's attention. Although Sec.  
210.8(d) does not dictate the means of

[[Page 13188]]

notice, it does provide that notification may be accomplished by either 
originating a NOC entry through the ACH, or by returning the payment to 
the agency with the appropriate reason code. 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 Sec.  210.11(d).
    This subsection does not impose any duty on RDFIs to verify the 
account numbers on incoming payments against the receiver names.

Section 210.10

    We are adding a sentence to Sec.  210.10(a) 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. This is not the only means 
that an RDFI may use to provide the required notice, but it is in all 
cases a sufficient form of notice.
    We are revising Sec.  210.10(d) in order to amend the limitation on 
the age of payments that an agency may reclaim. Revised Sec.  210.10(d) 
prohibits agencies from reclaiming any payment that was made more than 
six years prior to the date of the notice of reclamation. The only 
exception to this limitation is in a situation in which the account 
balance exceeds the total amount of the payments that the agency would 
otherwise be permitted to reclaim.
    In addition, we are revising the wording of the first sentence of 
Sec.  210.10(d) to provide that the 120-day period for initiating a 
reclamation 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. Also, the second 
sentence of Sec.  210.10(d) 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: 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 revising 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 SSA benefit payments, or benefit payments certified by the Railroad 
Retirement Board or Department of Veterans' Affairs.

Section 210.14

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

Appendix C

    We are amending Appendix C to the regulation by shortening the 
disclosure that agencies must provide in connection with ACH debit 
entries 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 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 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

    It is hereby certified that the rule will not have a significant 
economic impact on a substantial number of small entities. The changes 
to the regulation related to check conversion will not result in 
significant costs for individuals or financial institutions affected by 
the changes, including financial institutions that are small entities. 
The changes to the regulation related to reclamations will generally 
reduce costs for financial institutions affected by the changes. The 
changes to the regulation related to notice of misdirected payments 
will involve minimal costs to financial institutions, particularly 
since an automated means of notice may be used, and therefore 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 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.

[[Page 13189]]

    The 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 ClearingHouse, Electronic funds transfer, Financial 
Institutions, Fraud, Incorporation by reference.

Authority and Issuance

0
For the reasons set forth in the preamble, we are amending part 210 of 
title 31 of the Code of Federal Regulations as follows:

PART 210--FEDERAL GOVERNMENT PARTICIPATION IN THE AUTOMATED 
CLEARINGHOUSE

0
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.


0
2. Revise Sec.  210.6(h) to read as follows:


Sec.  210.6  Agencies.

* * * * *
    (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.
* * * * *

0
3. Add a new paragraph (d) to Sec.  210.8 to read as follows:


Sec.  210.8  Financial institutions.

* * * * *
    (d) Notice of misdirected payment. If an RDFI becomes aware that an 
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, 
the RDFI shall promptly notify the agency. An RDFI that originates a 
Notification of Change (NOC) entry with the correct account and/or 
Routing and Transit Number information, or returns the original ACH 
credit entry to the agency with an appropriate return reason code, 
shall be deemed to have satisfied this requirement.

0
4. Amend Sec.  210.10 by revising paragraphs (a) 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 
Sec.  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. 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 issuing payments to the 
recipient, the RDFI shall immediately notify the agency of the death or 
incapacity. The proper use of the R15 or R14 return reason code shall 
be deemed to constitute such notice.
* * * * *
    (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 
six 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 six-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 to act on the notice 
(not to exceed one business day).
* * * * *

0
5. 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 last known 
address of the following person(s):
    (A) The recipient 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) All person(s) who withdrew funds from the recipient's account 
after the death or legal incapacity of the recipient or death of the 
beneficiary.
* * * * *

0
6. 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.
* * * * *

0
7. Revise appendix C to part 210 to read as follows:

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

Notice to Customers Making Payment by Check

    If you send us a check, it will be converted into an electronic 
funds 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].


[[Page 13190]]


    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: March 15, 2004.
Richard L. Gregg,
Commissioner.
[FR Doc. 04-6092 Filed 3-18-04; 8:45 am]
BILLING CODE 4810-35-P