ach origination agreements - eventpedia

ACH Origination Agreements

Julie BobbVice President

Senior Product Manager

John Curtis, AAP, NCPSenior Vice PresidentEducation & Training

Paul Carrubbaof Counsel

© 2018 Western Payments Alliance. All rights reserved. No reproduction/distribution without prior written consent.

Presentation Content

THIS PRESENTATION IS DESIGNED TO PROVIDE

ACCURATE AND AUTHORITATIVE INFORMATION

REGARDING ITS SUBJECT MATTER.

IT IS PRESENTED WITH THE UNDERSTANDING THAT THE

PRESENTER IS NOT RENDERING LEGAL, ACCOUNTING,

OR OTHER PROFESSIONAL SERVICES.

IF LEGAL ADVICE OR OTHER EXPERT ASSISTANCE IS

REQUIRED, THE SERVICES OF A COMPETENT

PROFESSIONAL PERSON SHOULD BE SOUGHT.

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WesPay, as a Direct Member of NACHA, is a specially recognized and licensed

provider of ACH education, publications and support. Regional Payments

Associations are directly engaged in the NACHA rulemaking process and the

Accredited ACH Professional (AAP) program.

This material is derived from collaborative work product developed by NACHA ─ The

Electronic Payments Association and its member Regional Payments Associations. This

material is not intended to provide any warranties or legal advice, and is intended for

educational purposes only.

© 2018 Western Payments Alliance (WesPay). All rights reserved.

NACHA owns the copyright for the NACHA Operating Rules & Guidelines.

The Accredited ACH Professional (AAP) is a registered service mark of NACHA.

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Agenda


Before You Begin: Create a Plan

Documentation & Other Guidance

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The Agreement: Key Elements


Agenda


Before You Begin: Create a Plan

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Originator / ODFI Agreements

» Setting expectations

• “People rise to the level that’s expected of them”

• Agreement is final say in a court of law

• The value of education

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Determine your Risk Appetite

» Know Your Customer (KYC) and your customer’s

customer (KYCC)

» Define who you will bank?

» Banking 101

• Never bank a business type unless you have strong

working knowledge of the industry

» Determine risk tolerance levels for:

• Low risk Originators

• High risk Originators

• Prohibited Originators

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Low Risk

» Payroll for most businesses

• But not payroll companies

» B2B Payments

• Manufacturing

• Engineering

» Direct Payments

• Property Management (HOA/Apartments)

• Insurance

• Most lending (Auto, Mortgage, Credit Card)

o Not Payday Lenders

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High Risk

» Examples:

• Credit Repair

• Mail Order (telemarketing)

• Payday Lending

• Foreign Businesses (import / export)

• Pawn Brokers

• Precious Metal Dealers

• Third-Party Senders (TPS)

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Prohibited

» Examples:*

• Digital Content

• Online Tobacco / Liquor Sales

• Tax Shelters

• Online Gaming

• Cannabis Sales

• Any person or business under investigation

• Any business where FI lacks expertise

o Understand the business and how it works!

*Examples used are for some FIs. Your FI may have a different risk tolerance.

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Review ACH Policies

» Define allowable Entries

» What types of SEC Codes will you allow?

• PPD

• CCD

• CTX

• WEB

• TEL

• Check Conversion

» What about Same Day Entries?

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Addendum to Agreements

» Outlines more specific details to Originator

• Debit and Credit (Exposure) Limits

• File cutoff Time

• Allowable Entries:

o PPD

o CCD

o CTX

o Others may cause file to reject

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Addendum: Opportunity for Education

» Use of SEC Codes

• PPD = Payroll, Direct Debit, etc.

» NOCs

• This is what it looks like

• This is what you need to do

» You are a hacking target

• Don’t click on anything!

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Exposure

» Prefunding Considerations

» Prefunding Credit Origination

• Presentment Date Settlement

• Hold with Effective/Settlement Date Settlement

» Postfunding Debit Origination

• Place funds on hold

• How long?

• Tiered table?

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Agenda


Documentation & Other Guidance

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Types of Entities

» Corporation

• C Corp

• S Corp

» Partnership

» Sole Proprietorship

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Types of Entities (Cont.)

» Limited Partnership

» Non-Profit

» Limited Liability Company

» Professional Limited Liability Company

» Professional Association

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Governance Documents

» For Profit Corporation

• Articles of Incorporation

• Bylaws

» Limited Liability Company

• Certificate of Formation

• Operating Agreement

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Governance Documents (Cont.)

» Limited Partnership

• Certificate of Limited Partnership

• Limited Partnership Agreement

» Partnership

• Partnership Agreement

» Sole Proprietorship

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Governance Documents (Cont.)

» Nonprofits

• Articles of Incorporation

• Bylaws

• Determination Letter

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Cash Management Resolution

» Authorized Customer Representative Authorized to:

• Execute Agreement

• Designate Company Agents With Specific Authority

• Add, Delete, or Change Products or Services

» Transactions Made In Accordance with Security

Procedures Are Authorized

» Prior Acts Ratified and Authorized

» Company Authorized To Execute Agreements

Electronically

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Cash Management Resolution - Multiple Access

» Resolved:

• Best Interest To Enter Into Account Access

Agreement

• Approve, Adopts, and Confirms Access Agreement

• Authorizes Agent To Execute Agreement

• Ratifies Previous Acts

• Agent May Execute Other Agreements

• Continuing Authority

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Cash Management Resolution - Multiple Access

» Resolved:

• Account Owner Designates Agent

• Authorized To Enter Into Agency Agreement

• Agent Authorized to:

• Execute Agreements

• Appoint and Delegate Persons Who May Act On

Behalf of Account Owner

• Add, Delete, Change Services or Products

• Perform Any Acts Pursuant To Agreements

• Transactions Made in Accordance With Security Procedures

Authorized

• Account Owner and Agent Indemnify Bank

• Account Owner Must Monitor Agent

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Consistency With Agreements

» Deposit Agreement

» Treasury Management Terms & Conditions

» Other Payment Orders

» Definitions / Glossary

» May amend “from time to time”

» When in doubt – don’t leave it out

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FFIEC Authentication Guidance

» 2001 Original Guidance

» 2005 Update

» 2011 Supplement to 2005 Guidance

» Summary of Requirements

• Single-Factor Authentication Inadequate

• Authentication should be Appropriate

• Multifactor Authentication

• Layered Security

• Monitoring of Transactions

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UCC 4A and Unauthorized Transfers

UCC ARTICLE 4A

Applies to Funds Transfers

» Does Not Apply to Transfers Governed by EFTA (Reg. E)

» Authorized Transfers Enforceable

» Unauthorized Transfers Enforceable if:

• Verified Pursuant to Security Procedure

• Security Procedure is Commercially Reasonable

• Bank Accepted it in Good Faith and in Compliance with Security Procedure

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UCC 4A

UCC ARTICLE 4A

» Unauthorized Transfers Not Enforceable if:

• Bank Agrees not to Enforce

• No Security Procedure

• Security Procedure is not Commercially Reasonable

• Not Made by Authorized Person or Person Entrusted with Security Procedure

• Not Made by Person who Obtained to Access to Transmitting Facility

• Made by Person that Obtained Security Procedure from a Source not Controlled by the Customer

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Security Procedures

Security Procedure

» Procedure to Verify Authenticity

» Procedure to Detect Error

Commercially Reasonable Security Procedure

» Question of Law Considering

• Circumstances Known to Bank

• Alternative Security Procedures Offered

• Security Procedures in General Use

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Cases

» Experi-Metal v. Comerica Bank

» Patco Construction Company, Inc. v. Peoples United Bank

» Choice Escrow and Land Title, LLC v. BancorpSouth

» Bank’s Procedure Not Commercially Reasonable

» Bank did not Follow the Procedure

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Agenda


The Agreement: Key Elements

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General Recitals

» Agrees to be bound to ACH Rules

» Agrees not to violate U.S. Law

• Provisions of OFAC

» Agrees to restrictions on types of origination

» Gives ODFI right to terminate

» Gives ODFI right to Audit

» Choice of Law

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Uniform Commercial Code

» Choice of Law

» Credit given to RDFI is provisional

• As is to Receiver

» If Settlement does not occur, RDFI entitled to a refund

from Receiver

• Receiver considered not to be paid

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Transmittal of Entries

» Transmit to specified locations

» Transmit in agreed upon format

» Compliance with Security Procedures

» Transmission / web application security

» Authentication of accountholder and NOT Entries

» FI accepts Entries in good faith

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Rejection of Entries

» Non-compliance with data format requirements

» Non-compliance with security procedures

» Invalid or Stale Effective Entry Date

• May process as SDA

» State how Originator will be notified of exceptions

o Phone

o Mail / Email

o SMS

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Cancellation/Amendment by Originator

» No right to cancel or amend after receipt by FI

» FI may make reasonable efforts

» Unable to cancel after sent to Operator

» Client retains liability for cancellations / amendments

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A Few Exceptions

» FI will monitor returns for excess activity• State your limits

• What is excessive?

o .5% Unauthorized

o 3% Administrative

o 15% Overall

» Notice of Returns / NOCs

• How will you notify Originator?

• NOCs to be corrected

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Exposure Limits

» No obligation to fund in excess limit

» Overlimit files “may” not be processed

» Prefunding• Still subject to approval

• Settle Entries on Presentment or Settlement Date?

• Impact to FI

o Originator files Chapter 11 or funds seized by LEO

• Impact to Originator

o Loss of Earnings Credit

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Payment for Entries

» Originator to pay FI for credits / returned debits

» FI to fund Originator for debits / returned credits

» FI may obtain payment from any and all accounts

without prior notice

» Consider referring back to Deposit Agreement

• Originator to maintain sufficient balances

• Account may be debited for services

• Right of Offset

• Overdraft interest

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Originator Obligations

» Receiver has authorized Entries

» Authorization in force at time of transmittal

» Entries limited to those agreed by FI and Originator

» Entries remain within nature of stated business

» Indemnifies FI against loss, liability, expense resulting from breach

• Includes fines, attorney fees, research and other costs

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FI Responsibilities

» May rely on information provided by Originator

» Not responsible for• Data errors sent by Originator (TPS)

• Originator (TPS) acts or omissions

• Amount / Accuracy / Timeliness / Authorization

• Acts performed by ACH Operator or RDFI

» FI is responsible for;• Performing services as defined by agreement

• Negligence or willful misconduct

• Actual damageso Not consequential, incidental, punitive, etc.

» UCC

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Other Obligations

» Inconsistency of Name and Account Number

• RDFI may post on Account Number only

• Rule applies to ODFI for On-Us

• Originator still obligated to fund Entries

» Payment for Services

• Originator (TPS) to pay for services provided

• Fees subject to change

• May not include taxes (dependent on location)

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Data Retention

» Originator retains data in compliance with Rules

• Authorizations: 2 years after settlement

o Or revocation

o RCK: 7 years

» Originator to provide data to FI upon request

o Within (X) days

o Give yourself time to respond if needed

» Originator provides documentation at own expense

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Cooperation

» Originator agrees to cooperate in the event of damages or liability incurred by FI or Originator arising due to Originator’s originations

» All parties will undertake efforts to provide documentation and work together in recovery efforts

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Questions?

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Supplement:


ACH Origination Checklist

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ACH Origination Agreement Checklist

» Bind the Originator to the Rules

» ODFI Authorization to Originate Entries

» Compliance with the Rules and US Law

» Types of Entries

» Security Procedures/Encryption

» Physical and Electronic Security

» Credit Approval

» Security Interest

» Third Party Service Providers

» Settlement (Pre-funding)

» Reserves

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ACH Origination Agreement

» Processing Schedule

» Same Day ACH

» Right to Reject Files or Entries

» Cancellation or Amendment by Originator

» Originator’s Reg. E Obligation

» Identification of Receiver

» Remaking Rejected Files or Entries

» Prohibited Transactions

» Reversal of Entries

» Returns and NOC

» Provisional Settlement

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» Records Retention

» Prenotification

» Exposure Limits

» Operator or RDFI Delays or Errors

» Funds Availability

» Obtain and Retain Valid Authorization

» Errors and Duplicate Entries

» Payment of Fees

» Originator Warranty

» Indemnification

» ODFI Right to Audit

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» Right to Terminate

» Limitation of Liability

» Amendments to Agreement

» Financial Information

» Force Majeure

» Arbitration and Waiver of Jury Trial

» Company As Receiver

» Incorporate Deposit Account Agreement

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