[Federal Register Volume 64, Number 68 (Friday, April 9, 1999)]
[Rules and Regulations]
[Pages 17472-17491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8873]
[[Page 17471]]
_______________________________________________________________________
Part IV
Department of the Treasury
_______________________________________________________________________
Fiscal Service
_______________________________________________________________________
31 CFR Part 210
Federal Government Participation in the Automated Clearing House; Final
Rule
Federal Register / Vol. 64, No. 68 / Friday, April 9, 1999 / Rules
and Regulations
[[Page 17472]]
DEPARTMENT OF THE TREASURY
Fiscal Service
31 CFR Part 210
RIN 1510-AA39
Federal Government Participation in the Automated Clearing House
AGENCY: Financial Management Service, Fiscal Service, Treasury.
ACTION: Final Rule.
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SUMMARY: The Department of the Treasury, Financial Management Service
(Service), is revising its regulation, 31 CFR Part 210 (Part 210),
governing the use of the Automated Clearing House (ACH) system by
Federal agencies (agencies). The ACH system is the primary electronic
funds transfer (EFT) system used by agencies to make payments, and the
Service anticipates that agencies increasingly will use the ACH system
to collect funds. Part 210 provides the regulatory foundation for use
of the ACH system by agencies. It defines the rights and liabilities of
agencies, Federal Reserve Banks, financial institutions, and the
public, in connection with ACH credit entries, debit entries, and entry
data originated or received by an agency through the ACH system.
DATES: This rule is effective May 10, 1999. The incorporation by
reference of the publication listed in the rule is approved by the
Director of the Federal Register as of May 10, 1999.
ADDRESSES: This rule is available on the Financial Management Service's
ACH web site at the following address: http://www.fms.treas.gov/ach/.
FOR FURTHER INFORMATION CONTACT: Walt Henderson, Senior Financial
Program Specialist, at (202) 874-6705; Mary Bailey, Financial Program
Specialist, at (202) 874-6749; Natalie H. Diana at (202) 874-6590;
Cynthia L. Johnson, Director, Cash Management Policy and Planning
Division, at (202) 874-6590; or Margaret Marquette, Senior Attorney, at
(202) 874-6681.
SUPPLEMENTARY INFORMATION:
I. Background
A. Introduction
The ACH system is a nationwide EFT system which provides for the
interbank clearing of credit and debit transactions and for the
exchange of information among participating financial institutions. The
Federal Government (Government) is the largest single user of the ACH
system, originating and receiving millions of transactions each month.
As the Government's financial manager, the Service collects and
disburses funds for most agencies. In fiscal year 1998, approximately
63% of payments made by the Department of the Treasury (Treasury) were
made through the ACH system. In addition, a growing number of
transactions involving the collection of funds by agencies are being
made through the ACH system. In fiscal year 1998, over $1.1 trillion in
corporate tax payments was collected electronically.
Two laws are responsible for the substantial increase in the use of
the ACH system by agencies. Provisions in the North American Free Trade
Agreement Implementation Act (NAFTA), Pub. L. No. 103-182, sec. 523
(codified at 26 U.S.C. 6302(h)) mandate the use of EFT for the
collection of certain Federal taxes. Provisions in the Debt Collection
Improvement Act of 1996 (DCIA), Pub. L. No. 104-134, require that most
Federal payments (other than payments under the Internal Revenue Code
of 1986) be made by EFT.
To meet the NAFTA requirements, the Service, in conjunction with
the Internal Revenue Service and Federal Reserve Banks, implemented the
Electronic Federal Tax Payment System (EFTPS) which enables taxpayers
to pay Federal taxes by EFT. 31 CFR Part 203 (Payment of Federal Taxes
and the Treasury Tax and Loan Program) addresses the rights and
responsibilities of taxpayers, financial institutions, and Federal
Reserve Banks in connection with EFTPS. 63 FR 5644.
On September 25, 1998, Treasury published a final rule, 31 CFR Part
208 (Part 208), implementing the requirement of the DCIA that agencies
convert from check to EFT payments, subject to the waiver authority of
the Secretary of the Treasury. 63 FR 51490.
The Service anticipates that the ACH system will be the dominant,
though not exclusive, EFT system used by agencies to make payments and
to collect funds. Part 210 provides the regulatory foundation for use
of the ACH system by agencies.
B. Proposed Rulemakings
On September 30, 1994, the Service published a Notice of Proposed
Rulemaking with respect to Part 210. 59 FR 50112. After considering the
comments received on the 1994 proposed rule, and taking into account
developments since that proposal was issued, the Service issued a new
Notice of Proposed Rulemaking on February 2, 1998 (NPRM). 63 FR 5426.
The NPRM proposed to adopt the ACH rules developed by the National
Automated Clearing House Association (NACHA) (ACH Rules) as the rules
governing all Government ACH transactions, with twelve exceptions for
which the Service proposed to establish special rules as a matter of
Federal law.
The Service received 26 comment letters on the NPRM. Commenters
generally supported the adoption of the ACH Rules as the rules
governing Government ACH transactions, but had differing views
regarding the twelve proposed exceptions. Some financial institutions
commented that Federal payments should be subject to the ACH Rules
without variation or exception, commenting that imposing liability on
financial institutions for losses resulting from Government errors and
omissions will damage efforts to expand the use of the ACH as a vehicle
for making Federal payments, and may have pricing implications for
recipients of Federal payments. Other financial institutions and
agencies commented that certain of the twelve proposed exceptions were
not appropriate. Specific comments are discussed in the section-by-
section analysis below.
C. Final Rule
Part 210, which implements Treasury's statutory responsibility to
collect and disburse public funds, establishes the rights and duties of
parties to transactions originated or received by agencies through the
ACH system, just as other Treasury rules regulate the rights of parties
to Treasury checks.1
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\1\ 31 CFR Part 240.
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The ACH Rules, which are developed and updated by NACHA, allocate
rights and liabilities among participants to an ACH transaction.
Financial institutions agree to be bound by the ACH Rules when they
join an ACH association. The ACH Rules are structured upon the premise
that five entities participate in the ACH system. They are: (1) The
originator, which is the person or entity that agrees to initiate ACH
entries in accordance with an arrangement with a receiver; (2) the
originating depository financial institution (ODFI), which is the
institution that receives payment instructions from the originator and
forwards the entries to an ACH Operator; (3) the ACH Operator, which is
a central clearing facility, operated by a Federal Reserve Bank or a
private organization, that receives entries from ODFIs, distributes the
entries to appropriate receiving depository financial institutions
(RDFIs), and performs the settlement function for the affected
financial institutions; (4) the RDFI, which is the institution that
receives ACH entries from the ACH Operator and posts them to the
accounts
[[Page 17473]]
of its depositors; and (5) the receiver, which is a natural person or
organization that has authorized an originator to initiate an ACH entry
to the receiver's account with the RDFI.
In initiating and receiving Government entries, agencies, Federal
Reserve Banks, and the Service operate in unique capacities that differ
from the roles contemplated by the ACH Rules. These differences are a
result of the statutory authorities that govern Government payments and
collections and that distinguish Government payments from commercial
payments involving private parties and financial institutions.
Because the ACH Rules employ terminology that is based upon private
industry financial institution-customer relationships, the definitions
used in the ACH Rules do not address the roles of agencies, the
Service, and the Federal Reserve Banks with respect to the origination
or receipt of an ACH entry. Due to the bifurcation of function between
certifying and disbursing agencies, Government operations do not
conform to the definitions in the ACH Rules. From a functional
perspective, the agency that certifies an ACH entry to the Service
performs a function that is analogous to that of the originator of the
entry for purposes of the ACH Rules. In disbursing the payment, the
Service is acting as the ODFI and the Federal Reserve Bank is the
originating ACH Operator with respect to the entry. Similarly, an
agency that receives a payment through the ACH system functions as the
receiver, while the Service functions as the RDFI, and the Federal
Reserve Bank functions as the receiving ACH Operator for the entry.
The ACH Rules generally require ODFIs and RDFIs to assume
responsibility for entries originated and received by their customers.
ODFIs and RDFIs must make certain warranties with respect to entries
originated and received by their customers and are liable to other
participants in the ACH system for breach of those warranties. The ACH
Rules do not impose direct liability upon originators and receivers;
any losses resulting from an act or omission by an originator or
receiver are imposed on the ODFI or RDFI. The ODFI or RDFI can seek
recourse against the originator or receiver if it has the right to do
so under the contract between the parties and/or applicable state law.
The Service does not believe that it is appropriate to assume
liability arising from the acts and omissions of agencies originating
and receiving ACH entries. Accordingly, although it is the Service's
view that agencies operate as originators and receivers and the Service
operates as an ODFI and RDFI from a functional perspective, the Service
believes it is appropriate to impose upon agencies that originate or
receive ACH entries the obligations and liabilities imposed on ODFIs
and RDFIs, respectively, for purposes of the ACH Rules. Part 210
therefore is structured on the premise that agencies are subject to all
of the obligations and liabilities imposed on ODFIs and RDFIs under the
ACH Rules, except as otherwise provided in Part 210.
After reviewing the comments and further considering the issues
raised, the Service has determined to preempt 11 provisions of the ACH
Rules.2 In view of the special nature of Government entries,
and the importance of protecting public funds, the Service believes
that it is in the best interest of the public to preempt the 11
provisions of the ACH Rules described briefly below, for reasons
discussed in more detail in the section-by-section analysis.
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\2\ The NPRM proposed to preempt 12 provisions of the ACH Rules.
As discussed in the section-by-section analysis, the final rule
deletes from the listing of provisions to be preempted the provision
related to arbitration and replaces it with a provision related to
rules enforcement. In addition, the provision related to
prenotifications has been deleted, leaving a total of 11 provisions
to be preempted.
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The following five ACH Rules are preempted entirely and are
excluded specifically from Part 210's definition of ``applicable ACH
Rules'' (see Sec. 210.2(d)):
1. ACH members. Part 210 preempts the limitation on the
applicability of the ACH Rules to members of an ACH association.
2. Compensation. Part 210 preempts the compensation rules set forth
in the ACH Rules.
3. Rules Enforcement. Part 210 preempts the requirement under the
ACH Rules that participants agree to be subject to a national system of
fines to ensure compliance with the ACH Rules.
4. Reclamation. The reclamation provisions of Subpart B preempt all
ACH Rules related to the reclamation of entries and the liability of
participants that otherwise would apply to benefit payments.
5. Timing of Origination. Part 210 preempts the requirement set
forth in the ACH Rules that a credit entry be originated no more than
two banking days before the settlement date of the entry.
In addition to the foregoing five provisions of the ACH Rules which
Part 210 entirely preempts through the definition of ``applicable ACH
Rules,'' six other provisions of the ACH Rules are preempted in part by
operation of specific sections of Part 210. Those provisions are:
1. Verification of identity of recipient (see Secs. 210.4(a) and
210.8(b)(2)). Under the ACH Rules, a receiver must authorize an entry
before the entry may be originated and the ODFI must warrant that the
authorization is valid. The ODFI thus bears the ultimate liability for
any loss resulting from a forged authorization under the ACH Rules.
Part 210 imposes a different rule for Government entries. Specifically,
under Sec. 210.4(a), a financial institution that accepts an
authorization from a recipient must verify the identity of the
recipient. The financial institution is liable to the Government for
all entries made in reliance on a forged authorization that the
institution has accepted. Thus, Part 210 preempts the ODFI warranty and
liability provisions of the ACH Rules by allocating liability to the
RDFI if it accepts a forged authorization.
2. Authorization for debit entries to agencies (see
Secs. 210.4(a)(2) and 210.8(b)(1)). Part 210 preempts the ACH Rules
with respect to the form of authorization required to initiate debit
entries to an agency. The ACH Rules require that every entry be
authorized by the receiver, but only require that the authorization be
in writing in the case of debit entries to a consumer account. Under
Sec. 210.4(a), no person or entity (including any financial
institution) may initiate or transmit a debit entry to an agency, other
than a reversal of a credit entry, unless the agency has expressly
authorized in writing (or through a similarly authenticated
authorization) the origination of the entry by that particular
originator. An ODFI transmitting an entry in violation of this
requirement would be liable for the amount of the transaction, plus
interest, under Sec. 210.8(b)(1).
3. Liability of the Government
(a) Amount of damages (see Sec. 210.6). In general, the ACH Rules
impose liability on an RDFI or ODFI for all losses, liabilities, or
claims incurred by another depository financial institution (DFI), ACH
Operator, or ACH Association as a result of the RDFI's or ODFI's breach
of any warranty. Thus, under the ACH Rules, an agency that originates
payments would be liable for all losses resulting from any breach by it
of an applicable warranty under the ACH Rules. Similarly, an agency
that receives payments would be liable for all losses resulting from
any breach by it of an applicable warranty under the ACH Rules.
Section 210.6 limits an agency's liability to the amount of the
entry whether it is originating or receiving
[[Page 17474]]
ACH entries. Therefore, an agency would not be liable to a DFI, ACH
Operator, or ACH Association for interest, attorneys' fees, or other
consequential damages. In addition, in certain circumstances, an
agency's liability may be reduced further by the amount of the loss
caused by the financial institution's negligence.
(b) Liability of Federal Reserve Banks (see Sec. 210.7(a)). Part
210 preempts section 11.5 of the ACH Rules, which provides that a
Federal Reserve Bank is not the agent of an RDFI or ODFI. Part 210
provides that Federal Reserve Banks are Fiscal Agents of the Treasury
in carrying out their duties as the Government's ACH Operator and are
not liable to any party other than the Treasury for their actions under
Part 210.
4. Liability of financial institutions (see Sec. 210.8(b)). Part
210 preempts the provisions of the ACH Rules that would operate to make
a financial institution liable to the Government for any loss,
liability or claim relating to an entry in an amount exceeding the
entry. The ACH Rules impose liability on an RDFI or ODFI for all
losses, liabilities, or claims incurred by another DFI, ACH Operator,
or ACH Association as a result of the RDFI's or ODFI's breach of any
warranty. Under Part 210, a financial institution would not be liable
to the Government for interest, attorneys' fees, or other consequential
damages, except in the case of an unauthorized debit to an agency, as
discussed above.
5. Reversals (see Sec. 210.6(f)). Part 210 requires agencies
initiating reversals to certify that the reversal does not violate
applicable law or regulations. This requirement is not imposed under
the ACH Rules. In addition, Part 210 applies the ACH Rules relating to
indemnification to the Government, but limits the extent of the
indemnification to the amount of the individual entry(ies) being
reversed.
6. Account requirements for Federal payments (see Sec. 210.5). Part
210 imposes a requirement with respect to ACH credit entries
representing Federal payments other than vendor payments that is not
imposed under the ACH Rules, i.e., that such payments be deposited to
an account at a financial institution ``in the name of'' the recipient,
with three exceptions discussed in the section-by-section analysis. The
term ``account'' for purposes of Sec. 210.5 is intended to mean a
deposit account and not a loan account or general ledger account. The
Service is aware that NACHA has approved a change to the ACH Rules,
which will become effective in September 2000, to permit the crediting
of ACH credits to a financial institution general ledger account or to
a loan account. Because of the consumer protections associated with the
crediting of Federal payments to a deposit account, including those
available under Regulation E (12 CFR Part 205) and Regulation DD (12
CFR Part 230), as well as the availability of Federal deposit or share
insurance, the Service does not intend to accept this ACH Rule with
respect to payments other than vendor payments.
In addition to preempting the provisions of the ACH Rules listed
above, Part 210 also establishes, as a matter of Federal law, certain
rights and obligations that are not addressed in the ACH Rules. For
example, the ACH Rules generally do not address the rights and
liabilities between receivers and originators, nor do the ACH Rules
address rights and liabilities between ODFIs and originators, or
between RDFIs and receivers. Under the ACH Rules, an ODFI is
responsible for entries originated by its customers. The ODFI must make
certain warranties with respect to any entry originated by its
customer, and is liable for breach of those warranties. The ODFI's
ability to seek recourse against the originator in the event of a loss
for which the ODFI is liable under the ACH Rules is beyond the purview
of the ACH Rules and would be governed by the contract between the ODFI
and originator and applicable state law.
The Service is establishing some of these rights in Part 210 with
respect to agencies vis-a-vis originators or receivers of Government
entries. For example, Part 210 provides that an agency will be liable
to a recipient for any loss sustained by the recipient as a result of
the agency's failure to originate a credit or debit entry in accordance
with Part 210, and limits that liability to the amount of the entry.
Neither the basis nor the extent of an originator's liability to a
receiver is addressed in the ACH Rules. In addition, the ACH Rules do
not address the circumstances in which an entry, in fact, is
``authorized.'' The determination of whether a valid authorization
exists ordinarily would depend on the contract between the parties and
applicable state law. Part 210 establishes certain circumstances in
which an entry shall be deemed to be unauthorized.
D. Future Changes to Subpart B
The NPRM solicited preliminary comment on the reorganization of
Subpart B in order to allow for the increasing use of automated
processes to effect reclamations, rather than requiring reclamations to
be conducted on the basis of paper-driven procedures. In addition, the
Service requested comment on ways in which the reclamation process
might be restructured in the future to operate more efficiently as a
fully automated process.
In order to begin formulating a preliminary approach to
implementing an automated reclamation process, the Service solicited
comment on whether the protection afforded to financial institutions by
the limited liability provisions of Subpart B is outweighed by the
processing costs of handling reclamations. In particular, the Service
requested comment on an approach in which an RDFI would be liable for
the amount of any post-death entries received, regardless of whether
the RDFI had actual or constructive knowledge of the death.
Although commenters generally expressed conceptual support for
increased automation of reclamation processing, most commenters did not
favor moving toward an automated reclamation process at this time. One
agency questioned the business case for replacing the current paper
reclamation process with a form of automated reclamation. That agency
indicated that the use of death notification entries (DNEs) has
significantly reduced the number of reclamation requests produced and
that, at the same time, payment cycling is causing a significant
reduction in reclamations because the agency has additional time to
receive and act on reports of recipients' deaths. The agency commented
that these enhancements reduce the need for a future electronic
reclamation process.
Some financial institutions commented that the approach outlined in
the NPRM would substantially increase financial institutions' losses
from reclamations without a corresponding reduction in expenses. One
financial institution pointed out that it would expect to perform much
of the same research under the Service's suggested approach as it
currently does in order to pursue reimbursement from the surviving
depositor(s) or the estate of the decedent. Another financial
institution expressed support for assuming liability for any payments
received within a one-year period of the recipient's death, but
recommended that the Service continue the existing limitations on
financial institution liability for payments received more than one
year after the death of the recipient.
[[Page 17475]]
II. Section-by-Section Analysis of Part 210
The title of Part 210 has been changed to ``Federal Government
Participation in the Automated Clearing House'' to reflect the
broadened scope of the regulation to cover all types of transactions
that are handled, or that may in the future be handled, over the ACH
system.
As revised, Part 210 is comprised of two subparts. Subpart A sets
forth rules applicable to all ACH credit and debit entries and entry
data originated or received by an agency, which are defined in the
proposed rule as ``Government entries.'' Subpart B contains the rules
for the reclamation of benefit payments. Subpart C, which dealt with
discretionary salary allotments, has been deleted as unnecessary
because it is redundant of rules that appear elsewhere. For example,
regulations issued by the Office of Personnel Management, at 5 CFR Part
550, address the circumstances under which salary and savings
allotments may be made.
Section 210.1--Scope; Relation to Other Regulations
Part 210 formerly covered only ACH payments made by the Government.
In the NPRM, the Service proposed to broaden the scope of Part 210 to
cover all entries and entry data originated or received by an agency
through the ACH system. Section 210.1 is revised as proposed in the
NPRM. Thus, Part 210 as amended applies to collections and the
information entries that are handled through the ACH system, as well as
to Federal payments made through the ACH system.
Part 210 establishes the general legal and operational framework
applicable to all ``Government entries'' as defined in the rule.
Federal tax payments made by ACH debit or credit are governed by 31 CFR
Part 203, which sets forth the rights and responsibilities of
taxpayers, financial institutions, and Federal Reserve Banks in
connection with EFTPS. ACH credits and debits originated by the Bureau
of the Public Debt to pay principal or interest on, and to collect
payment for the purchase of, United States securities are governed by
31 CFR Part 370.
Both Part 203 and Part 370 impose certain requirements with respect
to the payments subject to those regulations that are inconsistent with
the provisions of Part 210. Federal tax payments received by the
Government through the ACH system that are governed by Part 203 and ACH
entries for the purchase of, or payment of principal and interest on,
United States securities that are governed by Part 370 are not subject
to any provision of Part 210 that is inconsistent with Part 203 or Part
370, respectively.
Section 210.2--Definitions
The Service is revising this section, as proposed, to provide that
any term not defined in Part 210 shall have the meaning given to that
term in the ACH Rules. In addition, for clarity and simplification, the
Service is adding, removing, or redesignating certain other terms, as
indicated below.
The Service is deleting certain definitions from Part 210 because
Part 210, as revised, uses these terms in the same way as the ACH
Rules. Thus, the definitions of the terms ``banking day,'' ``business
day,'' and ``prenotification,'' have been deleted. In addition, the
term ``payment'' is not defined in revised Part 210 because Part 210
uses instead the ACH terms ``entry'' and ``credit.'' Similarly, the
term ``payment date'' is not defined because Part 210 uses instead the
ACH term ``settlement date.''
Other terms previously defined in Part 210, such as ``allotment,''
``allotter,'' ``discretionary allotment,'' ``employee,'' and
``nonbenefit payment'' have been deleted because they are not used in
revised Part 210. The terms ``account,'' ``payment instruction,'' and
``Federal Reserve Bank'' have been deleted as unnecessary.
The Service has added a definition of ``ACH Rules'' at
Sec. 210.2(a). This definition explains that the ACH Rules consist of
the NACHA Operating Rules and the NACHA Operating Guidelines.
The Service also has added a definition of ``actual or constructive
knowledge'' at Sec. 210.2(b). This phrase is used in Subpart B in
connection with determining a financial institution's liability for
post-death and post-legal incapacity payments. The addition of this
definition is intended to clarify that in reference to the death or
legal incapacity of a recipient of benefit payments or the death of a
beneficiary, the RDFI is deemed to have actual knowledge of the death
or legal incapacity when it has received, by whatever means, any
information of the death or incapacity and has had a reasonable
opportunity to act upon the information. Moreover, if the RDFI would
have discovered the death or legal incapacity if it had followed
commercially reasonable business practices, the RDFI will be deemed to
have constructive knowledge of the death or incapacity. For example, an
RDFI would have actual knowledge of a death or legal incapacity through
a communication of that fact by an executor of the deceased recipient's
or beneficiary's estate, a family member, another third party, or the
agency issuing the benefit payment. On the other hand, if an RDFI
misplaced a letter sent through the mail containing notice of death or
legal incapacity, or failed to open or read the letter, the RDFI would
be deemed to have constructive knowledge of the death even though it
did not have actual knowledge.
Although Part 210 previously did not contain a definition of
``actual or constructive knowledge,'' the reclamation provisions of
Subpart B of Part 210 provided that a financial institution is deemed
to have knowledge of the death or legal incapacity of a recipient or
the death of a beneficiary if the financial institution would have
discovered the death or legal incapacity if it had exercised due
diligence. The Service is not changing that standard, but is adding
this definition to clarify that the basis for determining whether a
financial institution has constructive knowledge of the death or legal
incapacity is whether commercially reasonable business practices would
have resulted in discovery of the information.
Financial institutions questioned whether the addition of a
definition of ``actual or constructive knowledge'' might be viewed to
broaden the circumstances under which a financial institution can be
liable in reclamation cases. Several commenters asked whether financial
institutions would have an obligation to check obituaries, noting that
Part 210 previously provided expressly that there is no such
obligation. One commenter stated that banks should not be responsible
for acting on the basis of unconfirmed information, regardless of its
source, and therefore suggested that the definition of actual or
constructive knowledge include the concept that the information should
come from an official source such as a death certificate, written
communication from a decedent's personal representative, or a copy of a
court order adjudicating a recipient's incapacity. The same commenter
pointed out that under the proposed standard, a bank might be deemed to
have knowledge of death prior to the time when the information is, or
should have been, brought to the attention of an employee who handles
benefit payments. The commenter urged that banks be permitted an
opportunity to communicate the information to the responsible
individual or department.
The deletion of the language formerly in Part 210 stating that
financial institutions are not required to check obituaries does not
mean that financial
[[Page 17476]]
institutions must check obituaries. The standard of constructive
knowledge set forth in the final rule, i.e., whether commercially
reasonable business practices would have resulted in discovery of the
recipient's death or incapacity, is a flexible concept. For example,
what is a commercially reasonable practice for a large money center
bank may not be commercially reasonable for a small rural bank.
Similarly, business practices that are not today technologically
feasible or cost-effective may become standard industry practices at
some future time. Thus, with regard to whether financial institutions
should be responsible for acting on the basis of unconfirmed
information, the Service declines to adopt a rule under which a
financial institution has knowledge of the death of a recipient only if
the information comes from an ``official source.'' Rather, whether a
financial institution would be deemed to have knowledge of a
recipient's death would depend on whether, given all the facts and
circumstances, a similarly situated financial institution would
reasonably conclude that the information was reliable.
The Service agrees that financial institutions need a reasonable
period of time to act on information of death or incapacity and, as
indicated above, has incorporated a provision to this effect in the
final definition. Some commenters indicated that banks utilizing batch
processing systems cannot activate a hold on an account following
receipt of notice until evening or the following day, depending on the
processing schedule. Accordingly, the Service believes that a
reasonable period of time will not exceed one business day, i.e.,
twenty four hours, excluding weekends or holidays.
The Service has added a definition of ``agency'' at Sec. 210.2(c)
to mean any department, agency, or instrumentality of the United States
Government, or a corporation owned or controlled by the Government of
the United States. Part 210 formerly used the term ``program agency.''
The change is not intended to alter the scope of Part 210. The
definition is identical to the definition of agency in Part 208, which
sets forth rules governing the mandatory use of EFT by Federal
agencies, except that the definition of agency for purposes of Part 210
expressly excludes Federal Reserve Banks.
For purposes of Subpart B, which governs reclamations, ``agency''
means the agency that certified the benefit payment(s) being reclaimed.
Section 210.2(d) defines the term ``applicable ACH Rules'' to mean
the ACH Rules with an effective date on or before September 17, 1999,
which are made applicable to ``Government entries'' pursuant to
Sec. 210.3. Part 210 completely preempts those ACH Rules that: govern
claims for compensation or reclamation of benefit payments; provide for
rules enforcement procedures; limit the applicability of the ACH Rules
to members of an ACH association; or require that a credit entry be
originated no more than two banking days before the settlement date of
the entry. Therefore, these ACH Rules have been excluded from the term
``applicable ACH Rules.'' As discussed above in the Introduction, Part
210 also preempts certain other provisions of the ACH Rules through
operation of particular sections of Part 210.
In the NPRM, the Service proposed to preempt the requirement under
the ACH Rules that disputes among participants be settled by
arbitration procedures set forth in the ACH Rules. Since the ACH Rules
have been amended, effective March 19, 1999, to make arbitration
voluntary rather than mandatory, the Service no longer believes it is
necessary to preempt the arbitration provisions of the ACH Rules.
However, since publication of the NPRM, NACHA has adopted a rule that
became effective on December 18, 1998, establishing a national system
of fines applicable to both financial institutions and access
participants for violation of the provisions of the ACH Rules. The
Service does not believe it is in the public interest to subject the
Treasury General Account (TGA) to an unquantified liability based on an
untested system of fines; therefore, at this time the Service is not
incorporating in Part 210 those provisions of the ACH Rules dealing
with enforcement for noncompliance. However, the Service intends to
work with agencies to achieve Government-wide compliance with all ACH
Rule requirements, including applicable time frames.
Other than the requirement that credit entries be originated no
more than two banking days before the settlement date of the entry, any
technical or timing requirements imposed on DFIs under the ACH Rules
constitute applicable ACH Rules, and will be binding on agencies and
financial institutions, unless preempted. Thus, for example, agencies
will be subject to the timing requirements for reversals and returns.
Many commenters objected to permitting agencies to originate an
entry more than two banking days before the settlement date of the
entry. Some financial institutions pointed out that production and
storage costs are incurred by an RDFI to warehouse ACH entries and that
expanding the origination window increases the risk to which the RDFI
is exposed. For example, several financial institutions pointed out
that a DNE is ineffective to cause the automated return of a benefit
payment that has already been received but is being held or warehoused
pending settlement. Some agencies also indicated that there is no
reason that the Government cannot adhere to the two-day origination
deadline eventually, and that it would benefit the Government to do so
by allowing agencies more time to process reports that affect
continuing payment entitlement. The Service anticipates that in the
future agencies will be able to adhere to the two-day window and
expects to revise Part 210 accordingly at that time. However, because
there is not uniform operational capability to meet the two-day window
at this time, the Service has retained this preemption of the ACH Rules
in the final rule.
The Service is adding a definition of ``authorized payment agent''
at Sec. 210.2(e) in connection with the account requirements set forth
at Sec. 210.5. The definition has been reworded slightly from the
proposed definition in order to correspond to the definition of
``authorized payment agent'' for purposes of Part 208.
In the case of a beneficiary who is physically or mentally
incapable of managing his or her payments, Sec. 210.5 would permit an
authorized payment agent to receive the payments on behalf of the
beneficiary. The Social Security Act, the Veterans' Benefits Act, and
the Railroad Retirement Act contain provisions permitting a benefit
payment to be made to an individual or organization other than the
beneficiary when doing so is in the best interest of the
beneficiary.3 The Social Security Administration (SSA) and
the Railroad Retirement Board use the term ``representative payee'' to
refer to individuals and organizations that have been selected to
receive benefits on behalf of a beneficiary who is ``legally
incompetent or mentally incapable of managing benefit payments.'' The
Department of Veterans Affairs uses the term ``fiduciary'' to refer to
individuals or organizations appointed to serve in similar
circumstances. The definition of the term ``recipient'' in former
Sec. 210.2 refers to representative payees and fiduciaries. SSA, the
Railroad Retirement Board, and the Department of Veterans Affairs have
issued detailed regulations addressing the qualifications
[[Page 17477]]
and duties of representative payees and fiduciaries.4 The
rules governing these representational relationships are longstanding
and well established. Therefore, the Service believes that it is
appropriate to rely on existing agency regulations in defining the term
``authorized payment agent.''
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\3\ See 42 U.S.C. 1383(a)(2)(A)(ii)(i); 38 U.S.C. 5502(a)(1); 45
U.S.C. 231k, respectively.
\4\ See 20 CFR Parts 404, 410, 416, 266, and 348; and 38 CFR
Part 13, respectively.
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Other agencies also may provide for payment to representative
payees and fiduciaries. While not specifically mentioned by name, the
phrase ``or other agency'' in the definition is intended to refer to
such agencies.
The Service has added a definition of ``Automated Clearing House or
ACH'' in Sec. 210.2(f) to make it clear that the electronic fund
transfers that are subject to Part 210 are limited to those effected
through an EFT system that has adopted the ACH Rules.
The definition of ``beneficiary'' in Sec. 210.2(g) has been
reworded slightly from the definition previously set forth in Part 210
to reflect the addition of a definition of benefit payment, but
substantively is unchanged from the previous definition.
The definition of ``benefit payment'' in Sec. 210.2(h) is similar
to the definition previously set forth in Part 210. The regulation
lists several types of benefit payments for purposes of convenience and
illustration. It should be noted, however, that the term ``benefit
payment'' includes, but is not limited to, the specific examples set
forth at Sec. 210.2(h).
The Service has added to Part 210 a definition of ``Federal
payment.'' The definition in Sec. 210.2(i) is identical to the
definition of that term in Part 208 except that the definition of
Federal payment in Part 208 excludes payments under the Internal
Revenue Code of 1986, whereas the term ``Federal payment'' in
Sec. 210.2(i) includes those payments. Payments under the Internal
Revenue Code of 1986 are excluded in Part 208 because the DCIA
expressly provides that payments under the Internal Revenue Code of
1986 are not subject to the DCIA's mandatory EFT requirements. However,
payments that the Internal Revenue Service or a taxpayer elects to make
using the ACH system are subject to Part 210 and thus are included
within the definition of Federal payment at Sec. 210.2(i).
The definition of ``financial institution'' in Sec. 210.2(j) is
identical to the definition contained in Part 208 except that the
Service has added a sentence noting that, in Part 210, a financial
institution may be referred to as an Originating Depository Financial
Institution (ODFI) or a Receiving Depository Financial Institution
(RDFI), depending on whether it is originating or receiving entries to
or from its ACH Operator.
The definition of ``financial institution'' makes specific
reference to banks, savings banks, credit unions, savings associations,
and United States-based foreign bank branches. The definition has been
designed to reflect the class of entities that can participate directly
in the ACH system, i.e., financial institutions that are authorized by
law to accept deposits.
The term ``Government entry'' is defined in Sec. 210.2(k) as an ACH
credit or debit entry or entry data originated or received by an
agency. As noted above, Part 210 previously applied only to credit
entries originated by an agency for the purpose of making payments. As
amended, Part 210 has a broader scope; it applies to all entries
originated or received by an agency, whether made for the purpose of
payments or collections or for information purposes.
The Service has added a definition of the ``Green Book'' in
Sec. 210.2(l) to clarify that financial institutions that originate or
receive Government entries are subject to the procedures and guidelines
published by the Service in the Green Book, as provided at
Sec. 210.3(c).
The term ``notice of reclamation'' at Sec. 210.2(m) means a notice
issued by the Government in a paper, electronic, or other form in order
to initiate a reclamation. This definition clarifies that the
Government is not limited to a paper-based means of communication and
opens the way for an automated reclamation procedure. The definition of
``notice of reclamation'' is moved to the definition section of Part
210 from Sec. 210.13(a), where it was previously located.
The Service has preserved the definition of ``outstanding total''
in Part 210 without substantive change.
The definition of ``recipient'' in Sec. 210.2(o) is substantially
similar to the corresponding definition in Part 208. The term includes
an authorized payment agent that receives a payment on behalf of a
beneficiary.
The term ``Service'' has been added at Sec. 210.2(p) to mean the
Financial Management Service, Department of the Treasury.
The term ``Treasury'' has been added at Sec. 210.2(q) to mean the
United States Department of the Treasury.
The Service has added a definition of the term ``Treasury Financial
Manual'' at Sec. 210.2(r) to clarify that the Service may publish
procedures and guidelines applicable to Government entries in the
Treasury Financial Manual. The Treasury Financial Manual contains
procedures to be observed by all agencies with respect to central
accounting, financial reporting, and other Government-wide fiscal
responsibilities of the Treasury.
Section 210.3--Governing Law
Section 210.3(a) provides that the rights and obligations of the
United States and the Federal Reserve Banks with respect to all
Government entries are governed by Part 210, which has the force and
effect of Federal law. This approach is consistent with Clearfield
Trust Co. v. United States, 318 U.S. 363 (1943), and its progeny, which
support the principle that the Government can establish the rules that
govern Federal payments and collections and that Federal law applies
whenever Treasury engages in its sovereign function of collecting and
disbursing public funds, regardless of the method used to carry out
this function.
One commenter requested clarification regarding the extent to which
Article 4A of the Uniform Commercial Code (UCC Article 4A) is
applicable to Government entries. Treasury consistently has taken the
position that under Clearfield Trust, state law, including the Uniform
Commercial Code, is inapplicable to Federal payments and collections,
except to the extent that the state law is incorporated in Federal law.
However, UCC Article 4A is incorporated in the ACH Rules, which the
Service is adopting, and, therefore, will apply to Government entries
except as preempted in Part 210.
Section 210.3(b)(1) provides that Part 210 incorporates by
reference the applicable ACH Rules published in Parts I, II, and IV of
the 1999 NACHA Rule Book (including any rule changes in effect on or
before September 17, 1999), as modified by Part 210. NACHA has approved
an amendment to the ACH Rules that, effective September 2000, will
permit the crediting of entries to non-deposit accounts. The Service
does not intend to accept this amendment for payments subject to
Sec. 210.5.
Section 210.3(b)(2) describes how subsequent amendments to the ACH
Rules will be handled. The proposed rule provided that Government
entries would be governed by any amendment to the ACH Rules that became
effective after a specified date only if the Service accepted the
amendment by publishing notice to that effect. Many commenters urged
the Service to change this position. Several financial institutions and
agencies recommended that the Service provide that amendments to the
ACH Rules are deemed accepted unless
[[Page 17478]]
the Service expressly rejects the amendment by publishing notice to
that effect in the Federal Register.
Federal regulations require that any changes to a publication
incorporated by reference in a Federal regulation be published in the
Federal Register.5 Accordingly, the Service may not adopt an
approach whereby amendments to the ACH Rules are deemed accepted unless
expressly rejected. In order to mitigate the uncertainty and
inconvenience to financial institutions that would result from a lag in
addressing ACH Rule amendments, the Service intends to work closely
with NACHA to track proposed ACH Rule changes and to respond to such
changes in a timely manner. The Service anticipates that it will
publish a Federal Register notice addressing ACH Rule changes within 90
days of NACHA's publication of its rule book, which is published
annually.
---------------------------------------------------------------------------
\5\ See 1 CFR 51.11.
---------------------------------------------------------------------------
For the above reasons, Part 210 states that amendments effective
after September 17, 1999, will not apply to Government entries unless
the Service expressly accepts such amendments by publishing notice of
acceptance in the Federal Register. In addition, Sec. 210.3(b)(2)
provides that with respect to any future amendment that the Service
determines to accept, the date of applicability of the amendment to
Government entries will be the effective date of the rulemaking
specified by the Service in the Federal Register notice that expressly
accepts the amendment.
Section 210.3(c) provides that any person or entity that originates
or receives a Government entry must comply with the instructions and
procedures issued by the Service, including the Treasury Financial
Manual and the Green Book. As indicated above, the Service has moved
certain requirements that previously were set forth in the regulation
itself to the Green Book and the Treasury Financial Manual. In light of
the proposed relocation of these provisions, the Service believes it is
important to make explicit in the regulation the Service's longstanding
policy that the requirements set forth in the Green Book and the
Treasury Financial Manual are binding upon financial institutions and
agencies to the same extent as the regulation itself.
The requirements set forth in the Green Book and the Treasury
Financial Manual, including those provisions that the Service is
relocating from the regulation to the Green Book or Treasury Financial
Manual, are procedural, rather than substantive, in nature. Changes to
the substantive rights and liabilities of parties to a Government entry
will be made through amendments to Part 210 itself in accordance with
administrative rulemaking requirements.
Section 210.4--Authorizations and Revocations of Authorizations
Section 210.4(a) provides that each debit and credit entry subject
to Part 210 must be authorized in accordance with the applicable ACH
Rules and the additional requirements set forth in this section. The
liability of a financial institution for failing to comply with the
authorization requirements is set forth at Sec. 210.8(b)(2).
Section 210.4(a)(1) provides that the agency or RDFI that accepts
the recipient's authorization shall verify the identity of the
recipient and, in the case of a written authorization that bears the
recipient's signature, the validity of the signature. Traditionally,
recipients of benefit payments, such as Social Security and Veterans
benefits, enrolled in Direct Deposit by completing a Form 1199A with
the assistance of their financial institution. In recent years, in
order to encourage recipients to use Direct Deposit, SSA and other
agencies have become directly involved in the enrollment process by
accepting Direct Deposit authorizations over the phone with the
assistance of trained customer service representatives. Part 210
acknowledges that the enrollment process may be completed by the
recipient's financial institution or by the agency. In addition,
Sec. 210.4(a) encourages automated enrollments by removing the
requirement that the financial institution sign the authorization form.
Section 210.4(a) recognizes that signature verification may not be
possible or practical in an automated enrollment process.
Part 210 imposes an absolute requirement that the RDFI or agency
accepting the authorization verify the recipient's identity and, where
appropriate, the recipient's signature. The Service leaves to the
discretion of the financial institution or agency accepting an
authorization the steps it will take to verify the recipient's
identity.
Some commenters requested that the Service clarify that a financial
institution that accepts an authorization is not required to verify
that the recipient, in fact, is entitled to receive the payment(s) in
question. Financial institutions, in particular, commented that the
RDFI is not in a position to determine who is entitled to the payment
being authorized. The Service agrees that the financial institution is
not in a position to know whether the customer, in fact, is entitled to
the payment(s) being authorized. Section 210.4(a) requires only that
the identity of the recipient be verified; the financial institution is
not liable for determining whether the customer is entitled to the
payment.
Agencies and other commenters supported the requirement that the
RDFI verify the identity of the recipient as a means of reducing fraud.
Financial institutions and ACH associations generally objected to the
imposition of liability on financial institutions that accept and
process enrollments, rather than on the ODFI, as provided for in the
ACH Rules. Financial institutions further commented that if the ACH
Rules are preempted in this respect, financial institutions should not
be held to a strict liability standard. These institutions urged the
Service to adopt a ``commercially reasonable business practices''
standard of care, or an ``actual or constructive knowledge'' of a fraud
standard. Financial institutions argued that they cannot be an insurer
against all fraud and that a strict liability standard creates a
disincentive for financial institutions to participate in the
enrollment process.
The Service continues to believe that the authorization process
represents an opportunity to reduce fraud which could otherwise result
in significant losses to the Government. Because a financial
institution that accepts an authorization from a customer has an
obligation to know the customer and is in a position to verify a
written signature, the Service believes it is appropriate to hold the
financial institution strictly liable for verifying the identity of the
customer.
Under Sec. 210.4(a)(2), an originator and an ODFI are prohibited
from initiating a debit entry to an agency, other than a reversal of a
credit entry, without the express permission, in writing or similarly
authenticated, of the agency. The Service has conducted pilot programs
to test the initiation of debit entries to the Government. These pilots
indicate that the use of debit entries to the Government is a cost-
efficient payment mechanism that benefits both the Government and the
payee-recipient. However, in order to protect the interests of the
Government, the Service believes that it is appropriate to require the
prior written or similarly authenticated authorization, just as the ACH
Rules require prior written authorization in the case of debits to a
consumer account. In the case of recurring entries, the agency is
required to give an authorization only once, prior to the first entry.
[[Page 17479]]
As proposed, Sec. 210.4(a)(2) did not provide an exception from the
authorization requirements for a reversal of a credit entry previously
sent to an agency. Since a reversal of a credit entry is a debit entry,
some commenters questioned whether proposed Sec. 210.4(a)(2) would
limit or restrict a financial institution's right to reverse a credit
entry. It was not the Service's intention to require a prior written
authorization before the initiation of a reversal, and the final rule
has been revised to clarify this point.
Section 210.4(b) specifies the terms to which a recipient agrees by
executing an authorization for an agency to initiate an ACH entry.
Under Sec. 210.4(b)(1), a recipient agrees to be bound by Part 210 and,
under Sec. 210.4(b)(2), the recipient agrees to provide accurate
information.
Section 210.4(b)(3) provides that the recipient agrees to verify
the recipient's identity to the satisfaction of the party that accepts
the authorization, whether this is the RDFI or the agency. The
imposition of this requirement on recipients complements the duty of
the party accepting the authorization to verify the recipient's
identity.
Section 210.4(b)(4) provides that a new authorization supersedes
any existing authorization that is inconsistent with the new
authorization.
Under Sec. 210.4(b)(5), the recipient agrees that the Government
may reverse any duplicate or erroneous entry as provided in
Sec. 210.6(f).
Section 210.4(c)(1) provides that, in the case of a recipient of
benefit payments, a change in the recipient's ownership of the account
results in the termination of the authorization. The purpose of this
provision is to ensure that payments are not deposited to an account to
which a recipient no longer has access or in which the recipient's
ownership interest has changed.
Some commenters questioned whether an authorization is revoked as a
result of any change in the ownership of an account, even if that
change does not affect the recipient's ownership interest in the
account. These commenters questioned whether, for example, the addition
of a co-signatory on the account would cause the authorization to be
revoked. It is not the Service's intent that an authorization be
revoked as a result of a change in ownership of an account where the
recipient's interest is not adversely affected. The wording of
210.4(c)(1) has been changed accordingly.
Under Sec. 210.4(c)(2), the death or legal incapacity of a
recipient of benefit payments or the death of a beneficiary results in
the termination of the authorization.
Section 210.4(c)(3) provides that the closing of the recipient's
account at the RDFI results in termination of the authorization. In
addition, this section requires the RDFI to provide 30 days written
notice to the recipient prior to closing the account to which benefit
payments currently are being sent, except in cases of fraud.
Final Sec. 210.4(c)(3) is unchanged from the NPRM except that the
30-day notice requirement is limited in the final rule to accounts to
which benefit payments currently are being sent. Most financial
institutions commented that the 30-day notice requirement was an
improper interference with their customer relationships. Financial
institutions pointed out that banks routinely close accounts in cases
of excessive overdrafts or in instances of fraud, and noted that the
30-day period would require banks to establish a separate account
closing process for accounts receiving Federal ACH transactions. Some
agencies also questioned whether it was appropriate for the Service to
regulate account closing in this fashion, indicating that they had not
had a problem with closed accounts. However, the Service believes that
the notice requirement protects recipients from being deprived of
timely access to their funds as a result of an account being closed
without sufficient notice to allow the recipient to make other
arrangements to receive the funds. Because the Service is concerned
that a recipient of benefit payments may suffer hardship if the account
to which his or her benefit payments are being sent is closed, the
final rule has been limited to address this class of recipients.
One agency commenting on the proposed rule requested clarification
regarding situations in which payments are sent to an account that has
been kept open by a financial institution notwithstanding the
recipient's request that the account be closed. The agency stated that,
in its view, ``the only criterion that should apply in such a situation
is whether the recipient has closed the account at the financial
institution. . . . When a recipient can provide proof that an account
has been closed, all Federal payments subsequently received by the
financial institution must be returned.''
The effect of 210.4(c) is that payments sent to an account that has
been closed must be returned by the financial institution. However,
Part 210 does not establish the circumstances in which a financial
institution can or must close an account. A financial institution's
right or obligation to close a customer's account is established by the
terms of the account agreement between the financial institution and
the customer and applicable state or Federal laws. Thus, a recipient's
assertion that an account has been closed is not necessarily sufficient
to require the financial institution to return funds sent to the
account. There may be situations in which a recipient wishes to close
an account but does not have a legal right to do so. This could occur,
for example, when the account has been overdrawn and language in the
deposit contract provides that the financial institution may keep the
account open until the overdraft is settled. In such a case, a
financial institution's obligation to return a payment depends on
whether the closing of the account, in fact, has been accomplished, not
upon the recipient's desire to close the account or belief that the
account has been closed. The Service emphasizes that it is the actual
closing of the account as a legal matter, and not the recipient's
desire or attempts to close the account, that imposes an obligation on
the financial institution to return payments under Sec. 210.4(c).
In order to eliminate any unnecessary interruptions in ACH services
to recipients when any of the events described in Sec. 210.4(c)(4)
occurs, Sec. 210.4(c)(4) states that an authorization will not
terminate upon the insolvency or closure of the RDFI, provided that a
successor is named for the institution. If no successor is named, the
Government may transfer temporarily the authorization to a consenting
financial institution for a period of no longer than 120 days.
The Service has deleted the provision formerly contained in
Sec. 210.4(e) that stated that, except as authorized by law or other
regulations, Part 210 shall not be used to effect an assignment of a
payment. The Service believes that a prohibition against assignments is
not appropriate in Part 210. Other Federal laws, such as the Social
Security Act, govern the assignment of benefits.
Section 210.5--Account Requirements for Federal Payments
Section 210.5 imposes restrictions on the type of account to which
Federal payments may be deposited. Section 210.5(a) reiterates the
general rule set forth in Part 208 that Federal payments other than
vendor payments must be deposited to an account at a financial
institution in the name of the recipient. The phrase ``notwithstanding
ACH Rule 2.1.2'' indicates that Sec. 210.5 imposes a requirement not
imposed under the applicable ACH Rules, i.e., that the account be ``in
the name of'' the recipient, with certain exceptions discussed below.
This section is designed to ensure that payments reach
[[Page 17480]]
the intended recipient by requiring that such payments be deposited
into an account in which the recipient has an ownership interest.
Vendor payments are excluded under Sec. 210.5(a) because the Service is
aware that under current commercial practices many vendors designate an
account in a general corporate name to receive payments in the name of
a subsidiary or designate a bank account in the name of an accountant
or other service provider for the receipt of payments.
Proposed Sec. 210.5 would have imposed these restrictions only on
benefit payments, which by definition excluded Federal retirement
payments. Upon further consideration, the Service has determined that
Federal retirement payments need not be excluded from the account
restrictions. In the situation most often cited, that in which a
surviving spouse is entitled to a deceased recipient's retirement
payment, the surviving spouse is considered to be the recipient and,
therefore, the payment would be deposited into the surviving spouse's
account. The final rule parallels Part 208, which requires that all
Federal payments other than vendor payments be deposited to an account
in the name of the recipient, with two exceptions.
The first exception, related to authorized payment agents, is
unchanged from the proposed rule. The second exception, related to
investment accounts, contains two changes from the proposed rule.
First, the exception has been expanded to cover investment accounts
established through an investment company registered under the
Investment Company Act of 1940, in addition to investment accounts
established through a securities broker or dealer registered under the
Securities Exchange Act of 1934. Second, the requirement contained in
the proposed rule that the investment account and all associated
records be structured so that the recipient's interest is protected
under applicable Federal or State deposit insurance regulations has
been deleted. The reasons for these changes are discussed in detail in
the final rulemaking for Part 208. 63 FR 51490, 51500. Additionally, in
order to ensure consistency with Part 208, Sec. 210.5(b)(3) has been
added. Section 210.5(b)(3) provides that the Secretary of the Treasury
may waive the requirements of Sec. 210.5(a) in any case or class of
cases.
A number of commenters requested additional guidance on various
aspects of Sec. 210.5. Some commenters questioned whether the account
must be solely in the name of the recipient, which would preclude the
use of joint accounts, and whether master-subaccounts can be
established with limited access by the beneficiary. One agency
commented that it has no way of knowing the account title at the
financial institution and cannot be expected to monitor industry
practices in this regard.
The part 208 final rulemaking release contains an extensive
discussion of the restrictions on accounts to which Federal payments
can be sent, and addresses the issues raised by commenters on proposed
Sec. 210.5. See 63 FR 51490, 51499. The Service does not believe it is
necessary to duplicate that discussion here, and refers readers to the
Part 208 rulemaking release. However, in response to the question
raised by commenters as to whether Sec. 210.5 would prohibit the use of
a joint account between the recipient and a spouse or other member of
the recipient's family, the Service emphasizes that Sec. 210.5 does not
require that the recipient's name be the only name on the account, and
thus would not prohibit the use of such a joint account. In addition,
as discussed in the Part 208 rulemaking release, Sec. 210.5 does not
prevent recipients of Federal salary payments from making discretionary
allotments, as such allotments are made prior to the time the
recipient's payment is deposited into an account at a financial
institution.
The Service is aware that NACHA has approved an amendment to the
ACH Rules (effective September 2000), which permits the crediting of
entries to general ledger accounts and loan accounts. The Service does
not intend to accept that amendment with respect to Federal payments
other than vendor payments.
Section 210.6--Agencies
The title of this section has been changed from ``The Federal
Government'' to ``Agencies.'' Section 210.6 sets forth a number of
obligations and liabilities to which agencies that initiate or receive
Government entries are subject. These obligations and liabilities are
in addition to, or different from, the obligations and liabilities that
otherwise would be imposed under the applicable ACH Rules. For example,
the authorization and reversal requirements of Secs. 210.6(a) and (f)
constitute additional obligations. The liability provisions of
Secs. 210.6(b), (c), (d), and (f) expand as well as limit the liability
that an agency would otherwise be subject to under the applicable ACH
Rules. Specifically, an agency's liability is broader than it would be
under the applicable ACH Rules because an agency is liable for a
failure to act ``in accordance with this part [210].'' However, the
extent of an agency's potential liability is capped by the amount of
the entry(ies), which is a limitation on the liability generally
provided for under the applicable ACH Rules.
Section 210.6 is largely unchanged from the NPRM except that
Sec. 210.6(b) of the NPRM, relating to prenotifications, has been
deleted and the subsections of Sec. 210.6 have been renumbered
accordingly. A prenotification is a non-value informational entry sent
through the ACH system that contains the same information that will be
carried on subsequent entries (with the exception of the dollar amount
and transaction code). Under the ACH Rules, prenotifications are
optional for all entries. The Service had proposed at Sec. 210.6(b) of
the NPRM to modify the ACH Rules by requiring prenotifications for
debit entries initiated by an agency. The purpose of the proposed
requirement was to ensure that a debit initiated by an agency would be
applied against the correct account at the intended financial
institution.
In light of comments received, the Service has deleted this
requirement from the final rule. The purpose of a prenotification is to
verify the accuracy of the account information to ensure that when a
live entry is received, it can be posted to the correct account.
However, a prenotification does not provide notice to the owner of the
account to be debited, and thus does not serve as a protection against
a debit to an incorrect account. Moreover, requiring prenotifications
for debit entries may impede the implementation and operation of
programs such as point-of-sale check payment capture, in which ACH
debits are initiated against a consumer account at the time a purchase
of goods or services takes place. Requiring prenotification also would
effectively preclude agencies from effecting reversals of credit
entries, as a number of commenters pointed out. For these reasons, the
Service has deleted from the final rule the requirement that agencies
utilize prenotifications before initiating debit entries.
Section 210.6(a) requires an agency to obtain prior written
authorization from the Service in order to receive ACH credit or debit
entries. The Service requires this process in order to make software
and operational changes to permit the receipt of entries by the agency.
Section 210.6(a) is not intended to reduce or change the liability of
originators or ODFIs for the initiation of an unauthorized entry to an
agency;
[[Page 17481]]
rather, it is an operational requirement imposed by the Service on
agencies.
Sections 210.6(b)-(d) set forth an agency's liability to various
parties in connection with Government entries. Section 210.6(b)
provides that an agency will be liable to the recipient for any loss
sustained as a result of the agency's failure to originate a credit or
debit entry in accordance with Part 210. This section further provides
that the agency's liability will be limited to the amount of the entry.
Several financial institutions urged the Service to reconsider this
limitation on liability, pointing out that losses resulting from agency
errors may be shifted unfairly to the RDFI. One commenter gave an
example of an agency's initiation of a duplicate debit entry to a
receiver's account, in which case the account might become overdrawn,
resulting in returned checks and related charges for which the receiver
would attempt to recover compensation. If the receiver's right of
recovery from the Government were limited to the amount of the entry,
the receiver might seek compensation from the RDFI for a refund of
charges and other damages resulting from the return of checks, loss of
use of funds, etc.
To address this concern, Sec. 210.8(b) of the final rule provides
that a financial institution will not be liable to any party for any
loss resulting from an agency's error or omission in originating an
entry. This provision does not affect a financial institution's
responsibilities to its customer to resolve errors under the Electronic
Fund Transfer Act or Regulation E. Rather, this provision establishes
that a financial institution is not liable for consequential damages
resulting from an agency's error.
The ACH Rules do not address the basis for, or the extent of, the
liability of an originator or ODFI to a receiver. A receiver's rights
against an originator or ODFI for failing to properly originate an
entry ordinarily would be governed by contract and state law. Section
210.6(b) establishes a recipient's rights against an agency in these
circumstances as a matter of Federal law: an agency will be liable for
any loss sustained by a recipient, up to the amount of the entry, as a
result of the agency's failure to originate a credit or debit entry in
accordance with Part 210.
Section 210.6(c) establishes that an agency may be liable to an
originator or an ODFI for any loss sustained by the originator or ODFI
resulting from the agency's failure to credit an ACH entry to the
agency's account in accordance with part 210. The agency's liability
would be limited to the amount of the entry(ies). The ACH Rules do not
address the liability of an RDFI to an originator. Under the ACH Rules,
if an RDFI fails to properly credit an ACH entry to the designated
account within the applicable time limitations, the RDFI will have
breached a warranty to the ACH Operator, ACH Association, and ODFI, and
may be liable to one of those parties for any losses resulting from the
RDFI's breach. Whether the originator has any recourse in such a
situation depends on its contract with its ODFI and on state law.
Section 210.6(c) preempts the ACH Rules with respect to the extent
of an agency's liability to an ODFI by limiting that liability to the
amount of the entry(ies). In addition, Sec. 210.6(c) establishes, as a
matter of Federal law, that an agency may be liable directly to an
originator in an amount not exceeding the amount of the entry(ies).
Section 210.6(d) provides that an agency's liability to an RDFI for
losses sustained by the RDFI in processing a duplicate or erroneous
entry will be limited to the amount of the entry(ies). The phrase
``[e]xcept as otherwise provided in this Part 210'' is intended to
preserve the allocation to the RDFI of liability in connection with the
RDFI's failure to comply with, for example, the authorization
requirements. While Part 210 previously addressed processing errors by
an agency, the final rule refers to duplicate and erroneous entries, as
defined in the ACH Rules, in order to describe specifically the type of
errors or the nature of the losses for which an agency is liable.
Under the ACH Rules, an ODFI is liable for losses caused by its
origination of duplicate or erroneous entries. Part 210 subjects
agencies to the liability imposed on ODFIs under the ACH Rules for
originating erroneous and duplicate entries, but preempts the ACH Rules
in three respects. First, an agency is not liable for all costs
incurred by the RDFI, such as attorneys' fees, but is liable only up to
the amount of the entry. Second, Sec. 210.6(d) uses comparative
negligence and reduces an agency's liability to the extent the loss
results from the financial institution's failure to follow standard
commercial practices and exercise due diligence. Third, Sec. 210.6(d)
excludes credit entries received by an RDFI after the death or legal
incapacity of a recipient of benefit payments or the death of a
beneficiary. It should be noted that liability in connection with any
benefit payment to a deceased recipient is not covered under
Sec. 210.6(d), but is governed solely by Subpart B.
Several commenters questioned how the comparative negligence
standard would be administered and what negligence would consist of in
this context. One commenter questioned whether the costs of
apportioning negligence might exceed the benefit to the Government of
limiting its liability in this fashion.
What will constitute negligence on the part of a financial
institution in a particular context depends on the relevant facts and
circumstances. Although the Service recognizes that there may be costs
associated with investigating and determining the causes of a
particular loss, the Service believes it is important to retain this
provision in order to apportion liability appropriately in cases where
an agency and a financial institution share responsibility for a loss.
For example, if an agency erroneously originated a credit entry to an
incorrect account, and the person who received the misdirected funds
brought the mistake to the attention of the financial institution, the
financial institution could incur liability if it failed to take
appropriate action and the agency subsequently was unable to recover
the erroneously transmitted funds.
Section 210.6(e) is unchanged from Sec. 210.6(f) of the proposed
rule, except that the word ``final'' has been added in recognition that
a Federal Reserve Bank's crediting of an account can be reversed if
actual and final funds are not collected in settlement of a credit item
at or before 8:30 a.m. Eastern Time on the banking day following the
settlement date.
Section 210.6(f) addresses the Government's initiation of
reversals. As discussed in the analysis of Sec. 210.4(b) above, a
recipient who executes an authorization agrees, among other things,
that the Government may reverse duplicate or erroneous entries or
files, as provided in Sec. 210.6(f).
The ACH Rules permit an originator to reverse duplicate or
erroneous entries and permit an ODFI, originator, or originating ACH
Operator to reverse duplicate or erroneous files within five banking
days of the settlement date of the duplicate or erroneous file or
entry. For purposes of the ACH Rules, and as used herein, a duplicate
entry is an entry that is a duplicate of an entry previously initiated
by the originator or ODFI and an erroneous entry is an entry that
orders payment to or from a receiver not intended to be credited or
debited by the originator or that orders payment in a dollar amount
different than what was intended by the originator.
Under the ACH Rules, the ODFI and/or originating ACH Operator must
indemnify the RDFI against any losses the RDFI incurs as a result of
effecting
[[Page 17482]]
a reversal. Consequently, in the event that the RDFI reverses an entry
or file initiated by the ODFI, but the RDFI cannot recover the amount
of the entry from the receiver (because, for example, the receiver has
withdrawn the funds and closed the account), it is the ODFI or
originator who bears the loss.
The ability to effect reversals is an important way for the
Government to reduce losses resulting from overpayments and misdirected
entries. If a reversal is effected expeditiously, in many cases the
receiver may not be aware that the erroneous or duplicate entry
occurred, and thus the funds may be available in the account for
recovery by the RDFI and, ultimately, the Government.
With respect to certain types of payments, however, the
Government's ability to reverse a duplicate payment or overpayment to a
recipient may be constrained due to the existence of various Federal
statutory provisions governing the manner in which the Government may
recover overpayments. For example, in the context of Federal benefit
payments, the Government may be required to provide notice and a
hearing prior to taking action to recover payments, or may be limited
in the amount, timing, or manner in which an overpayment is recovered.
Part 210 does not address the operation of these requirements because
the applicable requirements may vary depending on the type of payment.
It is the agency's responsibility to determine before certifying a
reversal that the reversal will not violate any applicable laws or
regulations.
One commenter requested that the Service clarify how the
certification requirement of Sec. 210.6(f) affects the indemnification
of the RDFI and other parties to a transaction as provided under ACH
Rule 2.4.5. The certification requirement represents an additional
obligation of any agency that originates a reversal. The certification
requirement is intended to function as an intra-Governmental warranty
and is not intended to affect the indemnification of the RDFI or other
parties to a transaction under ACH Rule 2.4.5. and Part 210.
Several commenters requested clarification as to whether the
Government, when initiating reversals, would be bound by any ACH Rule
requirements that generally apply with respect to reversals, such as
the five-day reversal deadline. It is the intention of the Service that
all ACH Rule requirements apply to Government-initiated reversals
except that the extent of the Government's indemnification would be
limited to the amount of the entry(ies). Therefore, an agency that
reverses a Government entry must do so within the five-day deadline.
Section 210.7--Federal Reserve Banks
Section 210.7 sets forth the role and responsibilities of the
Federal Reserve Banks.
The settlement of ACH entries is determined by the ACH Operator
which, in the case of Government entries, is a Federal Reserve Bank.
The Service has deleted as unnecessary the provisions previously in
Part 210 relating to funds availability since those requirements are
addressed under Federal Reserve Bank Operating Circular No. 4 on ACH
Items.
Some commenters were concerned that a change in the timing of
payments would result from the deletion from Sec. 210.7 of language
stating that Federal Reserve Banks are to make available to the
financial institution the amount specified in a payment instruction,
and debit the TGA, on the payment date. Part 210 previously defined the
payment date as the date upon which funds are to be available for
withdrawal by the recipient, and on which the funds are to be made
available to the financial institution by the Federal Reserve Bank, and
provided that ``if the payment date is not a business day for the
financial institution receiving a payment, or for the Federal Reserve
Bank from which it received such payment, then the next succeeding
business day for both shall be deemed to be the payment date.'' The
Service is not changing the foregoing timing requirements, which are
consistent with the Federal Reserve Bank Operating Circular on ACH
items.
Some agencies indicated that the time frame of settlement under the
ACH system may conflict with statutory requirements regarding when
certain payments must be made. For example, the Office of Personnel
Management (OPM) commented that the Civil Service annuity benefit is
payable ``on the first business day of the month after the month or
period for which it has accrued.'' Therefore, OPM indicated that it
cannot legally request another payment date when the first day of the
month is on a Saturday, which is a business day for purposes of the
relevant statute, but which is not a settlement date under the ACH
Rules. The Railroad Retirement Board commented that the Railroad
Retirement Act prohibits issuing payments before the first day of the
next calendar month.
The Service recognizes that agencies subject to statutory
constraints on payment dates will need to address the interaction of
those constraints with the timing of ACH payments. Because different
statutes present different issues and limitations, the Service believes
that these issues must be addressed on a case-by-case basis. Where
statutory payment requirements potentially conflict with the use of the
ACH system, the Service urges the paying agency to work with the
Service in order to resolve those issues. For example, a statute that
requires that payment be made no later than the first business day of
the month may allow for the initiation of payments one or two days
early in order to ensure that the recipient receives the funds no later
than the statutorily prescribed payment date. On the other hand, this
approach would not be a viable solution in the context of a statute
that requires that payment be made no earlier than the first business
day of the month. Because statutes differ, the Service is not in a
position to adopt a uniform approach to these issues.
Section 210.7(a), which is unchanged from the proposed rule,
specifies that each Federal Reserve Bank, as the Fiscal Agent of the
Treasury, serves as the Government's ACH Operator for Government
entries. The phrase ``notwithstanding Section 11.5 and Article 8 of the
ACH Rules'' has been added to clarify that the Service is preempting
the ACH Rule that provides that a Federal Reserve Bank is not an agent
of an RDFI or ODFI.
Section 210.7(b), also unchanged from the proposed rule, has been
added to Part 210 to ensure that the Service is aware of new ACH
applications at an agency so that proper accounting can take place and
correct credit can be given in the Treasury investment program as an
agency receives ACH transactions. Agencies desiring a routing number
should obtain approval from the Service prior to requesting a routing
number from a Federal Reserve Bank.
Section 210.8--Financial Institutions
Section 210.8 addresses the obligations of financial institutions
with respect to Government entries, which were previously set forth at
Sec. 210.7. The Service has removed as unnecessary many of the
provisions of previous Sec. 210.7 because they are addressed in the ACH
Rules. For example, former Sec. 210.7(e) has been deleted since the ACH
Rules adequately cover the inability of an RDFI to credit an account
indicated in an entry. In addition, former Secs. 210.7(f)(1), (f)(2),
and (f)(4) have been deleted since the ACH Rules address these
provisions.
The Service had proposed at Sec. 210.8(a) of the NPRM to require
RDFIs to verify that the account number and one other item of
information in a prenotification entry both relate to the
[[Page 17483]]
same account. A prenotification, as described in the ACH Rules, is a
non-dollar entry, sent through the ACH system, which contains the same
information (with the exception of the dollar amount and Standard Entry
Class Code) that will be carried on subsequent entries. The ACH Rules
do not require that RDFIs verify prenotifications in this manner; thus,
the proposed requirement and the corresponding liability to which a
financial institution would have been subject for failing to verify a
prenotification would have superseded the ACH Rules with respect to
agency-initiated prenotifications.
Several agencies commenting on the proposed rule supported the
verification requirement because, in the words of one commenter,
``[t]his will ensure that subsequent Federal direct deposit payments
are credited to the intended party, not just into an account that
happens to coincide with a valid account number at the RDFI.'' Other
agencies indicated that they did not intend to use prenotifications and
did not believe the proposed verification requirement was necessary.
All of the financial institutions commenting on the NPRM objected
to the proposed requirement. Financial institutions commented that they
rely on account numbers alone in processing entries, as permitted by
the ACH Rules and UCC Article 4A, and that they presently cannot
perform the proposed verification in an automated processing
environment. Therefore, in order to comply with the requirement,
financial institutions would be required either to manually process
Government entries or to develop and implement new processing systems.
Many banks commented that they cannot invest in new processing systems
at this time, especially in view of Year 2000 requirements and related
systems testing. Some financial institutions indicated that if the
verification requirement were imposed, the costs of processing
Government entries would increase and they might shift these costs to
payment recipients. Some commenters also noted that, in the case of
payments made to representative payees, beneficiary information
relating to the payment may not be listed on the account in any manner
since financial institutions typically have information only on persons
who are authorized to sign on the account.
Financial institutions also argued that shifting losses to banks is
inconsistent with basic principles of electronic payment law, pointing
out that both UCC Article 4A and the ACH Rules provide that the RDFI
may make payment on the basis of account number alone.
After considering the comments received, the Service has decided
not to include in Part 210 a requirement that upon receipt of a
prenotification an RDFI verify one other identifying data element in
addition to the recipient's account number. The Service does not
believe it is in the best interest of the public to implement a
requirement that would make it more expensive for financial
institutions to receive and process electronic Government payments or
that would require manual processing of Government entries. The Service
acknowledges the rationale for allowing RDFIs to rely on account number
alone, as set forth in the commentary to UCC Article 4A-207(b)(1): ``If
the [RDFI] has both the account number and the name of the beneficiary
supplied by the originator of the funds transfer, it is possible for
the [RDFI] to determine whether the name and number refer to the same
person, but if a duty to make that determination is imposed on the
[RDFI] the benefits of an automated payment are lost. Manual handling
of payment orders is both expensive and subject to human error.''
Moreover, the Service believes that more data is needed regarding
the causes of misdirected Government entries. Without information as to
the types of Government entries that are misdirected and the reasons
for such mistakes, the Service is concerned that the verification
requirement would eliminate any incentive for agencies to follow
commercially reasonable standards in initiating payments. The Service
does not believe it is appropriate to impose on financial institutions
liability for losses resulting from agency errors.
Although data regarding misdirected entries is not available, the
Service has anecdotal information that suggests that many misdirected
entries are a result of human error by agency personnel who key in
account numbers. The Service is particularly concerned with agency
practices in which account information is processed through a single
manual key entry, and urges agencies to review their enrollment
practices and to consider adopting more stringent key entry procedures
such as scanning a voided check or performing a double-key entry, or
instituting some other verification procedure to avoid key entry
mistakes. The Service encourages agencies to review their enrollment
practices and intends to work with agencies to develop data regarding
the extent and causes of misdirected ACH entries and to formulate ways
of reducing such errors.
The Service also understands that, in some cases, misdirected
entries occur as a result of financial institutions' errors in
enrolling recipients or in transmitting notifications of change (NOCs).
The Service believes that it is appropriate to hold financial
institutions responsible for losses caused by their errors in enrolling
recipients and has revised Sec. 210.8(b)(2) accordingly, as discussed
below.
The Service has redesignated former Sec. 210.7(g) of Part 210 as
Sec. 210.8(a) without making any substantive change.
Section 210.8(b) provides that financial institutions shall be
subject to liability for failing to handle an entry in accordance with
Part 210 and that the amount of that liability will be limited to the
amount of the entry, except as otherwise specifically provided in
Secs. 210.8(b)(1) and (2). The phrase ``[n]otwithstanding ACH Rules
2.2.3, 2.4.5, 2.5.2, 4.2, and 7.7.2'' indicates that the liabilities
imposed on financial institutions under this section may be in addition
to, or different from, the liabilities that otherwise would be imposed
under the applicable ACH Rules. To the extent that Part 210 imposes
duties on a financial institution not imposed under the applicable ACH
Rules, Sec. 210.8(b) correspondingly imposes liabilities on a financial
institution not imposed under the applicable ACH Rules. However, the
extent of the liability to which a financial institution would be
subject would not exceed the amount of the entry (except in the case of
unauthorized debits).
The ACH Rules generally provide that an RDFI or ODFI is liable for
all claims, losses, liabilities, or expenses, including attorneys' fees
and costs, resulting directly or indirectly from the breach by the RDFI
or ODFI of its obligations. Under UCC Article 4A, which would apply to
credit entries to non-consumer accounts, the liability of financial
institutions that fail to handle entries properly generally does not
extend to all resulting losses, but does include imputed interest in
certain circumstances. Because Part 210, as a general matter, limits
the Government's liability to the amount of an entry, the Service
believes that as a matter of equity the liability of financial
institutions similarly should be limited. Accordingly, Sec. 210.8(b)
preempts the extent of the liability to which financial institutions
are subject under both the ACH Rules and UCC Article 4A by limiting
that liability to the amount of the entry. Thus, for example, if an
agency originated a credit entry to a corporate vendor and the RDFI
failed to credit the entry to the vendor's account
[[Page 17484]]
in a timely manner, Sec. 210.8(b) would limit the RDFI's liability to
the Government to the amount of the entry, thereby preempting the UCC
Article 4A rule that imposes liability on the financial institution for
imputed interest for the period of the delay. Section 210.8(b) does not
affect a financial institution's liability under Subpart B.
Although financial institutions generally objected to changing the
liability provisions of the ACH Rules for Government entries, most
financial institutions indicated that if the final rule limited the
liability of the Government to the amount of an entry, the liability of
financial institutions should be correspondingly limited under
Sec. 210.8(b).
Section 210.8(b) of the final rule also provides that a financial
institution will not be liable to any third party for any loss
resulting from an agency's error or omission in originating an entry.
The Service has added this provision to the final rule to address
comments by several financial institutions that limiting an agency's
liability to the amount of an entry, as set forth at Sec. 210.6, may
have the effect of shifting losses resulting from an agency error to
the RDFI. As discussed above, one commenter gave an example of an
agency's initiation of a duplicate debit entry to a receiver's account,
in which case the account might become overdrawn, resulting in returned
checks and related charges for which the receiver would attempt to
recover compensation. If the receiver's right of recovery from the
Government were limited to the amount of the entry, the receiver might
seek compensation from the RDFI for a refund of charges and other
damages resulting from the return of checks, loss of use of funds, etc.
Section 210.8(b) addresses this situation by providing that the
receiver cannot recover against the RDFI for these damages.
Section 210.8(b)(1) is unchanged from the proposed rule except that
the reference to ``reserve account'' has been changed to ``account'' in
response to comments that Federal Reserve Banks also maintain clearing
accounts for financial institutions in some cases. Section 210.8(b)(1)
clarifies that a financial institution may not originate or transmit a
debit entry to an agency without the prior written authorization of the
agency. As previously discussed, debit entries to the TGA represent a
significant security concern for the Service. By expanding the use of
the ACH system to allow for Government payments by a debit to the TGA,
the possibility of unauthorized debits to the TGA arises. In carrying
out its fiscal responsibility, the Service believes it is necessary to
take precautions to ensure that such debits do not occur. Therefore
Part 210 requires special security measures not imposed under the ACH
Rules.
The ACH Rules provide that a receiver must have authorized the
initiation of an entry to the receiver's account before the entry is
originated and that the ODFI must warrant that the authorization is
valid. Section 210.8(b)(1) goes beyond the ACH Rules by requiring that
an agency authorize the debit entry, and that the authorization be in
writing or similarly authenticated.
Under Part 210 as amended, a financial institution is liable for
any unauthorized debit entries initiated to an agency in violation of
this requirement. In connection with this, the Government also must be
able to recover the interest that it would have derived from the use of
the debited funds had they remained in the TGA. Therefore, a financial
institution's liability for unauthorized debit entries to the TGA
includes imputed interest under Sec. 210.8(b)(1). This provision is an
exception to the general limitation of a financial institution's
liability to the amount of an entry. The Service believes it is
necessary to impose this additional liability in order to avoid any
potential loss of public funds resulting from an unauthorized debit to
the TGA.
Section 210.8(b)(2) restates the third and fourth sentences of
former Sec. 210.11(b) and addresses the RDFI's liability in situations
where the financial institution accepts a forged authorization. Under
the ACH Rules, a receiver must authorize an entry before the entry may
be originated and the ODFI must warrant that the authorization is
valid. The ODFI or the originator thus bears the ultimate liability for
any loss resulting from a forged or invalid authorization. Similarly,
under UCC Article 4A, the ODFI or originator generally bears the risk
of loss if an entry is originated to a receiver not entitled to the
payment. Section 210.8(b)(2) operates to preempt these ACH and UCC
Article 4A rules in situations where a financial institution accepts
the recipient's authorization and fails to verify the identity of the
recipient. If the financial institution accepts a forged authorization,
the financial institution rather than the Government will be liable for
the entries effected in reliance on the forged authorization.
The Service has revised Sec. 210.8(b)(2) of the final rule to
provide that an RDFI that transmits to an agency an authorization
containing an incorrect account number shall be liable for any
resulting loss, up to the amount of the payment(s) made on the basis of
the incorrect number. With respect to NOCs that contain incorrect
account information, the Service believes that the treatment of
erroneous NOCs are appropriately addressed under the ACH Rules. The ACH
Rules provide that an RDFI that transmits an NOC warrants that the
information contained within the NOC is correct, and that the RDFI is
liable for any loss or liability resulting from a breach of this
warranty. (See ACH Rules, Article Five, Section 5.3) Accordingly, a
financial institution that transmits to an agency an NOC containing
erroneous information will be liable to the agency for the amount of
any resulting misdirected entry.
In the case of a misdirected entry that an agency believes was the
result of an incorrect account number in an authorization or NOC
transmitted by an RDFI, the agency shall carry out an investigation to
determine the cause of the error. If the agency determines that the
loss in fact resulted from an RDFI's transmission of an incorrect
account number, the agency may instruct the Service to direct the
appropriate Federal Reserve Bank to debit the RDFI's account for the
amount of the misdirected payment(s). The agency may not issue such an
instruction until it has notified the RDFI of the results of its
investigation and provided the RDFI a reasonable opportunity to
respond.
Section 210.8(c) sets forth the conditions under which the
obligation for the amount of an entry is acquitted. The word ``final''
has been added to the wording in the proposed rule in recognition that
a credit entry may be reversed after crediting by a Federal Reserve
Bank if the Reserve Bank does not receive actually and finally
collected funds in settlement of the item at or before 8:30 a.m.
Eastern Time on the banking day following the settlement date. Section
210.8(c) also has been revised from the proposed rule to clarify that
the originator's obligation, in addition to any obligation of the ODFI,
is discharged upon final crediting. The final rule also provides that,
in the case of a debit entry originated by an agency against an
account, full acquittance does not occur until the underlying payment
is final.
Subpart B--Reclamation of Benefit Payments
The Service has restructured Subpart B of Part 210 by adding a new
Sec. 210.9--Parties to the reclamation. The other five sections
comprising Subpart B (Secs. 210.10 through 210.14) are a
[[Page 17485]]
reorganization of the four previous sections on reclamations in Part
210. As discussed above, the reclamation provisions of Subpart B
completely preempt the reclamation provisions of the ACH Rules with
respect to benefit payments received by an RDFI after the death or
legal incapacity of a recipient or the death of a beneficiary. Any
provisions of the ACH Rules dealing with reclamation of benefit
payments are not applicable ACH Rules as defined in Sec. 210.2. The
Service has not changed significantly the obligations and liabilities
of agencies and financial institutions in effect under former Part 210.
In order to simplify the regulation and enhance its flexibility
with respect to automating reclamations, the Service has moved certain
procedures and guidelines from Subpart B to the Service's Green Book or
Treasury Financial Manual. As discussed above with respect to Subpart
A, the Green Book and the Treasury Financial Manual do not introduce
new rights and obligations that are not contained in Part 210. Instead,
they provide specific operational directions and procedures which put
the regulatory requirements into practice. The Service has the
authority to enforce the requirements set forth in the Green Book and
the Treasury Financial Manual in the same manner that it enforces
regulations.
Section 210.9--Parties to the Reclamation
The Service has added this new section to delineate the differing
roles of the financial institution, the Service, and the agency that
certified the benefit payments in question.
Section 210.9(a) restates provisions of former Secs. 210.7(a) and
210.14(d) of Part 210, which provided that by accepting and handling
benefit payments, a financial institution agrees to the provisions of
Subpart B, including the reclamation actions and the debiting of the
financial institution's Federal Reserve Bank account for any
reclamation amount for which it is liable.
Section 210.9(b) clarifies that the Service performs only
disbursing and collection functions on behalf of agencies and does not
make decisions as to the underlying obligations themselves. For
example, if a financial institution or recipient has a question about
the amount of a reclamation, the Service will respond that the amount
was determined by the appropriate agency. In addition, if a financial
institution or recipient disputes the facts underlying a death or date
of death, that party should discuss the dispute with the appropriate
agency. After resolution, the Service will carry out the reclamation in
accordance with the direction of the agency that certified the payment
or directed the Service to reclaim the funds in question.
Section 210.10--RDFI Liability
This section defines the liability of RDFIs for benefit payments
received after the death or legal incapacity of a recipient or death of
a beneficiary, and limits the extent of that liability.
Section 210.10(a) restates the rule set forth at Sec. 210.12(a) of
previous Part 210, but moves the limited liability provisions to the
next section to make it clear that an RDFI is presumed liable for all
benefit payments received after the death or legal incapacity of a
recipient or death of a beneficiary unless the RDFI meets the
qualifications for limited liability set forth in Sec. 210.11. An RDFI
has no right to limit its liability with respect to benefit payments
received after it knows of the death or incapacity of a recipient or
death of a beneficiary and has had a reasonable opportunity to act on
that knowledge. Accordingly, the RDFI is required to return all benefit
payments received after it learns of the death or legal incapacity of a
recipient or death of a beneficiary. This obligation applies whether
the RDFI has received a notice of reclamation or learned of the death
or legal incapacity on its own.
In addition, Sec. 210.10(a) requires that the RDFI immediately
notify a paying agency if the RDFI learns of the death or legal
incapacity of a recipient or death of a beneficiary from a source other
than notice from the agency. Some financial institutions, while
recognizing that it may be in the institution's best interest to
provide agencies with such notice, commented that financial
institutions should not incur further liability by failing to provide
the notice.
Under Sec. 210.11(d) as proposed, an RDFI that failed to notify an
agency as required by Sec. 210.10(a) would have forfeited its right to
limit its liability. The Service agrees that proposed Sec. 210.11(d)
could potentially impose a harsh result in some circumstances,
particularly where no loss is caused by the RDFI's failure to comply
with the notice requirement. Accordingly, the Service has amended
Sec. 210.11(d) to provide that an RDFI that fails to comply with any
provision of Subpart B in a timely and accurate manner, including the
notice requirements at Sec. 210.13, will be liable to the Government
for any loss resulting from its act or omission.
Section 210.10(d) provides that an RDFI's liability for post-death
and post-incapacity payments is limited to the most recent six years of
payments. Previously, RDFIs were subject under Part 210 to potentially
unlimited liability in situations where an agency is unaware of the
death or legal incapacity of the recipient or the death of a
beneficiary and continues to make payments to the account for a number
of years. Financial institutions that commented on the proposed rule
supported shortening the time frame for initiating reclamations,
although several financial institutions urged the Service to adopt a
shorter period than six years. Some agencies supported the proposed
time limit, while other agencies objected to it.
Section 210.10(d) also provides an exception to the six-year
limitation where the amount in the account when the RDFI receives the
notice of reclamation and has had a reasonable opportunity to act on
the notice exceeds the six-year amount for which the RDFI otherwise
would be liable. In such a case, the RDFI would be liable for the total
amount of all post-death or post-incapacity payments, up to the amount
in the account.
In addition, Sec. 210.10(d) requires that an agency that initiates
a reclamation must do so within 120 days after the date that the agency
receives notice of the death or incapacity of the recipient or death of
the beneficiary. This provision is intended to encourage agencies to
act in a timely manner in initiating reclamations, and to protect RDFIs
from liability in the event an agency does not act expeditiously. Some
agencies commented that the 120-day period was an adequate and
appropriate period deadline, whereas other agencies commented that 120
days is too short a period in view of exception processing delays on
the part of the Service that occur with respect to certain non-
recurring entries. Financial institutions commenting on this provision
supported a shortened deadline for initiating reclamations and
generally felt that 120 days was appropriate.
Section 210.10(e) is unchanged from the proposed rule except that
the reference to ``reserve account'' has been changed to ``account'' to
reflect the fact that a Federal Reserve Bank may also maintain clearing
accounts for financial institutions in some cases. Section 210.10(e)
restates a rule of reclamations previously set forth at Secs. 210.13(c)
and (d): the Government has the right to debit the RDFI's account at
its Federal Reserve Bank for the full amount of all post-death or post-
incapacity benefit payments owed to an agency or for a lesser amount as
a result of the RDFI's ability to limit its liability. Such action,
[[Page 17486]]
if necessary, represents a last step in reclaiming funds that have not
otherwise been recovered.
The 60-day time period for an RDFI to return funds, which was
previously set forth at Sec. 210.13(c), is a procedural item that may
change with the automation of reclamations. Therefore, the Service has
relocated this requirement to the Green Book.
Section 210.11--Limited Liability
The Service has not changed the criteria that an RDFI must meet in
order to limit its liability under Subpart B, but has reworded the
provisions setting forth the criteria for greater clarity.
Section 210.11(a) provides the basis for calculating an RDFI's
liability if it is eligible to limit its liability because it did not
have actual or constructive knowledge of the death or incapacity of a
recipient or the death of a beneficiary. The formula is taken from
previous Sec. 210.12(b) and, although reworded, does not change
significantly the substantive operation of the previous formula.
Former Sec. 210.12(d) of Part 210 contained rules addressing the
circumstances in which an RDFI is ``deemed to have knowledge'' of the
death or incapacity using a standard of ``due diligence.'' The Service,
believing that the description of due diligence may be confusing or
difficult to apply in this context, proposed to utilize a definition of
``actual or constructive knowledge'' set forth at proposed Sec. 210.2.
Formerly under Part 210, one of the factors relevant to determining
the extent of an RDFI's limited liability was the amount in the
account. Former Sec. 210.13(b)(2)(i) defined the ``amount in the
account'' to mean the balance in the account when the RDFI has received
a notice of reclamation and has had a reasonable time to take action
based on its receipts, plus any additions to the account balance made
before the RDFI returns the notice of reclamation to the Government.
Part 210 previously provided that a reasonable time to take action was
not later than the close of business on the day following the receipt
of the notice of reclamation.
The Service has experienced many instances in which the ``amount in
the account'' for reclamation purposes has been reduced by automated
teller machine (ATM) withdrawals and the RDFI cannot provide
information regarding the identity of the withdrawer. The Service
therefore proposed in the NPRM to define the ``amount in the account''
as the account balance at the time the RDFI receives the notice of
reclamation and to eliminate the ``reasonable time to take action''
language formerly at Sec. 210.13(b)(2)(i).
A number of financial institutions commenting on the proposed rule
objected to the calculation of the amount in the account on the basis
that they cannot take immediate action to prevent withdrawals upon
receipt of a notice of death. One commenter noted that approximately
one-half of community banks utilize batch processing systems, in which
a hold placed on an account cannot be activated until evening or the
following day, depending on the processing schedule. As discussed above
with respect to the definition of ``actual and constructive
knowledge,'' the Service has revised the definition to provide
financial institutions with a reasonable opportunity to take action
after receiving notice of death or incapacity. The Service believes
that one business day will normally constitute a reasonable opportunity
to take action.
Section 210.11(b) sets forth the steps an RDFI must take in order
to qualify for limited liability. By requiring an RDFI to certify the
information required in Sec. 210.11(b)(1) and (2), the burden of
demonstrating qualification for limited liability is placed on the
RDFI. Failure to meet this burden results in the full liability of the
RDFI under proposed Sec. 210.10.
Section 210.11(b)(2) incorporates the last sentence of former
Sec. 210.13(b)(1), and adds the requirement that the RDFI certify the
date the RDFI first had actual or constructive knowledge of the death
or legal incapacity of the recipient or death of the beneficiary even
if such knowledge was obtained first through notice received from the
agency. As proposed, Sec. 210.11(b)(2) stated that the RDFI must
certify the date the RDFI first had ``information'' of the death or
incapacity. Some commenters questioned the meaning of the word
``information,'' as opposed to the phrase ``actual or constructive
knowledge.'' Because ``information'' was intended to refer to actual or
constructive knowledge, Sec. 210.11(b)(2) has been revised to eliminate
any apparent inconsistency.
Requiring these certifications, in combination with the authority
of the Government to debit the RDFI's account as provided in
Sec. 210.10(e), underscores that the burden is on the RDFI to
demonstrate its qualification for limited liability.
Former Sec. 210.13(b)(2)(ii) has been relocated to
Sec. 210.11(b)(3) of the final rule.
Section 210.11(c) provides the payment and collection procedures
which apply if an RDFI qualifies for limited liability. After an RDFI
returns the amount specified in Sec. 210.11(a)(1), if the agency is
unable to collect the remaining amount of the outstanding total, the
Government will debit the RDFI's account at its Federal Reserve Bank
(or the correspondent account utilized by the RDFI) for the amount
specified in Sec. 210.11(a)(2), which is the lesser of: (i) the benefit
payments received by the RDFI from the agency within 45 days after the
death or legal incapacity of the recipient or death of the beneficiary,
or (ii) the balance of the outstanding total. It should be noted that
in no instance will the RDFI be liable for more than the outstanding
total because the amount potentially recoverable under
Sec. 210.11(a)(2) cannot exceed the balance of the unrecovered
outstanding total.
As proposed in the NPRM, Sec. 210.11(d) would have provided that an
RDFI would forfeit its right to limit its liability if the RDFI failed
to comply with any provision of Subpart B. One financial institution
commented that the proposed expanded liability in Sec. 210.11(d) was
inappropriate and unfair, and that only a violation of those provisions
that relate directly to the qualifications for limited liability stated
in Sec. 210.11(a) and (b) should cause a financial institution to lose
its right to limit its liability. The Service has revised
Sec. 210.11(d) to provide that a financial institution that violates
any provision of Subpart B shall be liable to the Government for any
loss resulting from its act or omission, in addition to any amount(s)
for which the RDFI is liable under Sec. 210.10 or Sec. 210.11(a).
Section 210.12--RDFI's Rights of Recovery
Section 210.12(a) restates the principle set forth in former
Sec. 210.14(c) that in reclaiming funds from an RDFI, the Government is
not directing or authorizing the RDFI to debit the recipient's account.
Any rights that an RDFI may have to recover the amount of reclaimed
funds from a recipient are a matter of applicable state law and the
contract between the RDFI and the recipient. Subpart B neither limits
nor expands those rights.
Section 210.12(b) restates without substantive change former
Sec. 210.14(d) of Part 210.
Section 210.13--Notice to Account Owners
Section 210.13 is based on former Sec. 210.14(a) of Part 210, but
has been changed slightly to provide for the possibility of an
automated reclamation process by the addition of the phrase
[[Page 17487]]
``or otherwise provide to the account owner(s)'' to the existing
requirement that notice be mailed. In addition, the phrase ``any notice
required by the Service to be provided to account owners as specified
in the Green Book'' has been substituted for the specific reference to
the ``Notice to Account Owners'' to allow for more flexibility in
changing the format of the required notice.
Part 210 formerly required that RDFIs notify account owners of any
actions to be taken by the RDFI with respect to the account in
connection with a reclamation action. The Service believes that this
requirement may intrude unnecessarily into the relationship between the
RDFI and its customer and conflicts with the principle that
reclamations are actions between the Government and the RDFI, and not
between the Government and the recipient. Actions taken by an RDFI with
respect to a customer account, and any notice to the customer in
connection with those actions, are a matter of State law or contract,
not Federal law.
Section 210.14--Erroneous Death Information
This section is based upon former Sec. 210.15 of Part 210, with
certain additions and deletions. Much of former Sec. 210.15 was
procedural information which the Service has moved to the Green Book,
where it is more appropriately located. In particular, the Service has
relocated to the Green Book the procedures that RDFIs are to follow in
correcting erroneous death information (previously codified in
Sec. 210.15(a)(1) and (2) and Sec. 210.15(c)). The Service also has
moved to the Green Book the 60-day time limit for the RDFI to return
the completed notice of reclamation to the Government in order for the
RDFI to limit its liability for the payments made after the death or
legal incapacity of the recipient or death of the beneficiary. This 60-
day limit is a requirement for the paper-based reclamation procedure.
Any automated reclamation procedures developed or used by the
Government would not be bound by the same time limit as the paper
process since an automated procedure theoretically could be completed
in less time.
The provisions at Sec. 210.14(b) direct questions and disputes to
the agency issuing directions on reclamations. These provisions clarify
that the Service only performs disbursing and collection functions on
behalf of the agencies and does not make decisions as to the underlying
obligations.
Subpart C--Discretionary Salary Allotments
The Service has removed Subpart C from Part 210. Subpart C provided
that discretionary allotments from Federal employees' wage and salary
payments permitted by the issuing agency could be made through the ACH
system and were subject to Part 210. The Service determined that
Subpart C was redundant since the substance of Subpart C was covered in
other regulations. For example, regulations issued by the Office of
Personnel Management, at 5 CFR Part 550, address the circumstances
under which discretionary allotments may be made. Subpart A of Part 210
sets forth the rules governing all ACH credit entries made by an
agency, including any savings and salary allotment payments. For these
reasons, specific provisions for the use of the ACH system to allow for
discretionary allotments in Part 210 are unnecessary.
III. Rulemaking Analysis
Treasury has determined that this regulation is not a significant
regulatory action as defined in Executive Order 12866.
It is hereby certified that this rule will not have a significant
economic impact on a substantial number of small entities. Accordingly,
a Regulatory Flexibility Act analysis is not required.
There is no collection of information contained in this rule and,
therefore, the Paperwork Reduction Act does not apply.
List of Subjects in 31 CFR Part 210
Automated Clearing House, Electronic funds transfers, Fraud,
Incorporation by reference.
Authority and Issuance
For the reasons set out in the preamble, 31 CFR Part 210 is revised
to read as follows:
PART 210--FEDERAL GOVERNMENT PARTICIPATION IN THE AUTOMATED
CLEARING HOUSE
Sec.
210.1 Scope; relation to other regulations.
210.2 Definitions.
210.3 Governing law.
Subpart A--General
210.4 Authorizations and revocations of authorizations.
210.5 Account requirements for Federal payments.
210.6 Agencies.
210.7 Federal Reserve Banks.
210.8 Financial institutions.
Subpart B--Reclamation of Benefit Payments
210.9 Parties to the reclamation.
210.10 RDFI liability.
210.11 Limited liability.
210.12 RDFI's rights of recovery.
210.13 Notice to account owners.
210.14 Erroneous death information.
Authority: 5 U.S.C. 5525; 12 U.S.C. 391; 31 U.S.C. 321, 3301,
3302, 3321, 3332, 3335, and 3720.
Sec. 210.1 Scope; relation to other regulations.
This part governs all entries and entry data originated or received
by an agency through the Automated Clearing House (ACH) network, except
as provided in paragraphs (a) and (b) of this section. This part also
governs reclamations of benefit payments.
(a) Federal tax payments received by the Federal Government through
the ACH system that are governed by part 203 of this title shall not be
subject to any provision of this part that is inconsistent with part
203.
(b) ACH credit or debit entries for the purchase of, or payment of
principal and interest on, United States securities that are governed
by part 370 of this title shall not be subject to any provision of this
part that is inconsistent with part 370.
Sec. 210.2 Definitions.
For purposes of this part, the following definitions apply. Any
term that is not defined in this part shall have the meaning set forth
in the ACH Rules.
(a) ACH Rules means the Operating Rules and the Operating
Guidelines published by the National Automated Clearing House
Association (NACHA), a national association of regional member clearing
house associations, ACH Operators and participating financial
institutions located in the United States.
(b) Actual or constructive knowledge, when used in reference to an
RDFI's knowledge of the death or legal incapacity of a recipient or
death of a beneficiary, means that the RDFI received information, by
whatever means, of the death or incapacity and has had a reasonable
opportunity to act on such information or that the RDFI would have
learned of the death or incapacity if it had followed commercially
reasonable business practices.
(c) Agency means any department, agency, or instrumentality of the
United States Government, or a corporation owned or controlled by the
Government of the United States. The term agency does not include a
Federal Reserve Bank.
(d) Applicable ACH Rules means the ACH Rules with an effective date
on or
[[Page 17488]]
before September 17, 1999, as published in Parts I, II, and IV of the
``1999 ACH Rules: A Complete Guide to Rules & Regulations Governing the
ACH Network,'' except:
(1) ACH Rule 1.1 (limiting the applicability of the ACH Rules to
members of an ACH association);
(2) ACH Rule 1.2.2 (governing claims for compensation);
(3) ACH Rule 1.2.4 and Appendix Eleven (governing the enforcement
of the ACH Rules);
(4) ACH Rules 2.2.1.8; 2.6; and 4.7 (governing the reclamation of
benefit payments);
(5) ACH Rule 8.3 and Appendix Two (requiring that a credit entry be
originated no more than two banking days before the settlement date of
the entry--see definition of ``Effective Entry Date'' in Appendix Two).
(e) Authorized payment agent means any individual or entity that is
appointed or otherwise selected as a representative payee or fiduciary,
under regulations of the Social Security Administration, the Department
of Veterans Affairs, the Railroad Retirement Board, or other agency
making Federal payments, to act on behalf of an individual entitled to
a Federal payment.
(f) Automated Clearing House or ACH means a funds transfer system
governed by the ACH Rules which provides for the interbank clearing of
electronic entries for participating financial institutions.
(g) Beneficiary means a natural person other than a recipient who
is entitled to receive the benefit of all or part of a benefit payment.
(h) Benefit payment is a payment for a Federal entitlement program
or for an annuity, including, but not limited to, payments for Social
Security, Supplemental Security Income, Black Lung, Civil Service
Retirement, Railroad Retirement annuity and Railroad Unemployment and
Sickness benefits, Department of Veterans Affairs Compensation and
Pension, and Worker's Compensation.
(i) Federal payment means any payment made by an agency. The term
includes, but is not limited to:
(1) Federal wage, salary, and retirement payments;
(2) Vendor and expense reimbursement payments;
(3) Benefit payments; and
(4) Miscellaneous payments including, but not limited to,
interagency payments; grants; loans; fees; principal, interest, and
other payments related to United States marketable and nonmarketable
securities; overpayment reimbursements; and payments under Federal
insurance or guarantee programs for loans.
(j)(1) Financial institution means:
(i) Any insured bank as defined in section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813) or any bank which is eligible to apply
to become an insured bank under section 5 of such Act (12 U.S.C. 1815);
(ii) Any mutual savings bank as defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813) or any bank which is eligible to
apply to become an insured bank under section 5 of such Act (12 U.S.C.
1815);
(iii) Any savings bank as defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813) or any bank which is eligible to
apply to become an insured bank under section 5 of such Act (12 U.S.C.
1815);
(iv) Any insured credit union as defined in section 101 of the
Federal Credit Union Act (12 U.S.C. 1752) or any credit union which is
eligible to apply to become an insured credit union pursuant to section
201 of such Act (12 U.S.C. 1781);
(v) Any savings association as defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813) which is an insured depository
institution as defined in such Act (12 U.S.C. 1811 et seq.) or is
eligible to apply to become an insured depository institution under the
Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.); and
(vi) Any agency or branch of a foreign bank as defined in section
1(b) of the International Banking Act, as amended (12 U.S.C. 3101).
(2) In this part, a financial institution may be referred to as an
Originating Depository Financial Institution (ODFI) if it transmits
entries to its ACH Operator for transmittal to a Receiving Depository
Financial Institution (RDFI), or it may be referred to as an RDFI if it
receives entries from its ACH Operator for debit or credit to the
accounts of its customers.
(k) Government entry means an ACH credit or debit entry or entry
data originated or received by an agency.
(l) Green Book means the manual issued by the Service which
provides financial institutions with procedures and guidelines for
processing Government entries.
(m) Notice of reclamation means notice sent by electronic, paper,
or other means by the Federal Government to an RDFI which identifies
the benefit payments that should have been returned by the RDFI because
of the death or legal incapacity of a recipient or death of a
beneficiary.
(n) Outstanding total means the sum of all benefit payments
received by an RDFI from an agency after the death or legal incapacity
of a recipient or the death of a beneficiary, minus any amount returned
to, or recovered by, the Federal Government.
(o) Recipient means a natural person, corporation, or other public
or private entity that is authorized to receive a Federal payment from
an agency.
(p) Service means the Financial Management Service, Department of
the Treasury.
(q) Treasury means the United States Department of the Treasury.
(r) Treasury Financial Manual means the manual issued by the
Service containing procedures to be observed by all agencies and
Federal Reserve Banks with respect to central accounting, financial
reporting, and other Federal Government-wide fiscal responsibilities of
the Treasury.
Sec. 210.3 Governing law.
(a) Federal Law. The rights and obligations of the United States
and the Federal Reserve Banks with respect to all Government entries,
and the rights of any person or recipient against the United States and
the Federal Reserve Banks in connection with any Government entry, are
governed by this part, which has the force and effect of Federal law.
(b) Incorporation by reference--applicable ACH Rules.
(1) This part incorporates by reference the applicable ACH Rules,
including rule changes with an effective date on or before September
17, 1999, as published in Parts I, II, and IV of the ``1999 ACH Rules:
A Complete Guide to Rules & Regulations Governing the ACH Network.''
The Director of the Federal Register approves this incorporation by
reference in accordance with 5 U.S.C. 552(a) and 1 CFR Part 51. Copies
of the ``1999 ACH Rules'' are available from the National Automated
Clearing House Association, 607 Herndon Parkway, Suite 200, Herndon,
Virginia 20170. Copies also are available for public inspection at the
Office of the Federal Register, 800 North Capitol Street, N.W., Suite
700, Washington, D.C. 20001.
(2) Any amendment to the applicable ACH Rules that takes effect
after September 17, 1999, shall not apply to Government entries unless
the Service expressly accepts such amendment by publishing notice of
acceptance of the amendment to this part in the Federal Register. An
amendment to the ACH Rules that is accepted by the Service shall apply
to Government entries on the effective date of the rulemaking specified
by the Service in the Federal
[[Page 17489]]
Register notice expressly accepting such amendment.
(c) Application of this part. Any person or entity that originates
or receives a Government entry agrees to be bound by this part and to
comply with all instructions and procedures issued by the Service under
this part, including the Treasury Financial Manual and the Green Book.
The Treasury Financial Manual is available for downloading at the
Service's web site at http://www.fms.treas.gov/ or by calling (202)
874-9940 or writing the Directives Management Branch, Financial
Management Service, Department of the Treasury, 3700 East West Highway,
Room 500C, Hyattsville, MD 20782. The Green Book is available for
downloading at the Service's web site at http://www.fms.treas.gov/
fmsnews.html or by calling (202) 874-6540 or writing the Product
Promotion Division, Financial Management Service, Department of the
Treasury, 401 14th Street, S.W., Room 309, Washington, D.C. 20227.
Subpart A--General
Sec. 210.4 Authorizations and revocations of authorizations.
(a) Requirements for authorization. Each debit and credit entry
subject to this part shall be authorized in accordance with the
applicable ACH Rules and the following additional requirements:
(1) The agency or the RDFI that accepts the recipient's
authorization shall verify the identity of the recipient and, in the
case of a written authorization requiring the recipient's signature,
the validity of the recipient's signature.
(2) Unless authorized in writing, or similarly authenticated, by an
agency, no person or entity shall initiate or transmit a debit entry to
that agency, other than a reversal of a credit entry previously sent to
the agency.
(b) Terms of authorizations. By executing an authorization for an
agency to initiate entries, a recipient agrees:
(1) To the provisions of this part;
(2) To provide accurate information;
(3) To verify the recipient's identity to the satisfaction of the
RDFI or agency, whichever has accepted the authorization;
(4) That any new authorization inconsistent with a previous
authorization shall supersede the previous authorization; and
(5) That the Federal Government may reverse any duplicate or
erroneous entry or file as provided in Sec. 210.6(f) of this part.
(c) Termination and revocation of authorizations. An authorization
shall remain valid until it is terminated or revoked by:
(1) With respect to a recipient of benefit payments, a change in
the recipient's ownership of the deposit account as reflected in the
deposit account records, including the removal of the name of the
recipient, the addition of a power of attorney, or any action which
alters the interest of the recipient;
(2) The death or legal incapacity of a recipient of benefit
payments or the death of a beneficiary;
(3) The closing of the recipient's account at the RDFI by the
recipient or by the RDFI. With respect to a recipient of benefit
payments, if an RDFI closes an account to which benefit payments
currently are being sent, it shall provide 30 calendar days written
notice to the recipient prior to closing the account, except in cases
of fraud; or
(4) The RDFI's insolvency, closure by any state or Federal
regulatory authority or by corporate action, or the appointment of a
receiver, conservator, or liquidator for the RDFI. In any such event,
the authorization shall remain valid if a successor is named. The
Federal Government may temporarily transfer authorizations to a
consenting RDFI. The transfer is valid until either a new authorization
is executed by the recipient, or 120 calendar days have elapsed since
the insolvency, closure, or appointment, whichever occurs first.
Sec. 210.5 Account requirements for Federal payments.
(a) Notwithstanding ACH Rule 2.1.2, an ACH credit entry
representing a Federal payment shall be deposited into an account at a
financial institution. For all payments other than vendor payments, the
account at the financial institution shall be in the name of the
recipient, except as provided in paragraph (b) of this section.
(b)(1) Where an authorized payment agent has been selected, the
Federal payment shall be deposited into an account titled in accordance
with the regulations governing the authorized payment agent.
(2) Where a Federal payment is to be deposited into an investment
account established through a securities broker or dealer registered
with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, or an investment account established through an
investment company registered under the Investment Company Act of 1940
or its transfer agent, such payment may be deposited into an account
designated by such broker or dealer, investment company, or transfer
agent.
(3) The Secretary of the Treasury may waive the requirements of
paragraph (a) of this section in any case or class of cases.
Sec. 210.6 Agencies.
Notwithstanding ACH Rules 2.2.3, 2.4.5, 2.5.2, 4.2, and 7.7.2,
agencies shall be subject to the obligations and liabilities set forth
in this section in connection with Government entries.
(a) Receiving entries. An agency may receive ACH debit or credit
entries only with the prior written authorization of the Service.
(b) Liability to a recipient. An agency will be liable to the
recipient for any loss sustained by the recipient as a result of the
agency's failure to originate a credit or debit entry in accordance
with this part. The agency's liability shall be limited to the amount
of the entry(ies).
(c) Liability to an originator. An agency will be liable to an
originator or an ODFI for any loss sustained by the originator or ODFI
as a result of the agency's failure to credit an ACH entry to the
agency's account in accordance with this part. The agency's liability
shall be limited to the amount of the entry(ies).
(d) Liability to an RDFI or ACH Association. Except as otherwise
provided in this part, an agency will be liable to an RDFI for losses
sustained in processing duplicate or erroneous credit and debit entries
originated by the agency. An agency's liability shall be limited to the
amount of the entry(ies), and shall be reduced by the amount of the
loss resulting from the failure of the RDFI to exercise due diligence
and follow standard commercial practices in processing the entry(ies).
This section does not apply to credits received by an RDFI after the
death or legal incapacity of a recipient of benefit payments or the
death of a beneficiary as governed by Subpart B of this part. An agency
shall not be liable to any ACH association.
(e) Acquittance of the agency. The final crediting of the amount of
an entry to a recipient's account shall constitute full acquittance of
the Federal Government.
(f) Reversals. An agency may reverse any duplicate or erroneous
entry, and the Federal Government may reverse any duplicate or
erroneous file. In initiating a reversal, an agency shall certify to
the Service that the reversal complies with applicable law related to
the recovery of the underlying payment. An agency that reverses an
entry shall indemnify the RDFI as provided in the applicable ACH Rules,
but the agency's liability shall be limited to the amount of the entry.
If the Federal Government
[[Page 17490]]
reverses a file, the Federal Government shall indemnify the RDFI as
provided in the applicable ACH Rules, but the extent of such liability
shall be limited to the amount of the entries comprising the duplicate
or erroneous file. Reversals under this section shall comply with the
time limitations set forth in the applicable ACH Rules.
Sec. 210.7 Federal Reserve Banks.
(a) Fiscal Agents. Each Federal Reserve Bank serves as Fiscal Agent
of the Treasury in carrying out its duties as the Federal Government's
ACH Operator under this part. As Fiscal Agent, each Federal Reserve
Bank shall be responsible only to the Treasury and not to any other
party for any loss resulting from the Federal Reserve Bank's action,
notwithstanding Section 11.5 and Article 8 of the ACH Rules. Each
Federal Reserve Bank may issue operating circulars not inconsistent
with this part which shall be binding on financial institutions.
(b) Routing Numbers. All routing numbers issued by a Federal
Reserve Bank to an agency require the prior approval of the Service.
Sec. 210.8 Financial institutions.
(a) Status as a Treasury depositary. The origination or receipt of
an entry subject to this part does not render a financial institution a
Treasury depositary. A financial institution shall not advertise itself
as a Treasury depositary on such basis.
(b) Liability. Notwithstanding ACH Rules 2.2.3, 2.4.5, 2.5.2, 4.2,
and 7.7.2, if the Federal Government sustains a loss as a result of a
financial institution's failure to handle an entry in accordance with
this part, the financial institution shall be liable to the Federal
Government for the loss, up to the amount of the entry, except as
otherwise provided in this section. A financial institution shall not
be liable to any third party for any loss or damage resulting directly
or indirectly from an agency's error or omission in originating an
entry. Nothing in this section shall affect any obligation or liability
of a financial institution under Regulation E, 12 CFR part 205, or the
Electronic Funds Transfer Act, 12 U.S.C. 1693 et seq.
(1) An ODFI that transmits a debit entry to an agency without the
prior written or similarly authenticated authorization of the agency,
shall be liable to the Federal Government for the amount of the
transaction, plus interest. The Service may collect such funds using
procedures established in the applicable ACH Rules or by instructing a
Federal Reserve Bank to debit the ODFI's account at the Federal Reserve
Bank or the account of its designated correspondent. The interest
charge shall be at a rate equal to the Federal funds rate plus two
percent, and shall be assessed for each calendar day, from the day the
Treasury General Account (TGA) was debited to the day the TGA is
recredited with the full amount due.
(2) An RDFI that accepts an authorization in violation of
Sec. 210.4(a) shall be liable to the Federal Government for all credits
or debits made in reliance on the authorization. An RDFI that transmits
to an agency an authorization containing an incorrect account number
shall be liable to the Federal Government for any resulting loss, up to
the amount of the payment(s) made on the basis of the incorrect number.
If an agency determines, after appropriate investigation, that a loss
has occurred because an RDFI transmitted an authorization or
notification of change containing an incorrect account number, the
agency may instruct the Service to direct a Federal Reserve Bank to
debit the RDFI's account for the amount of the payment(s) made on the
basis of the incorrect number. The agency shall notify the RDFI of the
results of its investigation and provide the RDFI with a reasonable
opportunity to respond before initiating such a debit.
(c) Acquittance of the financial institution. The final crediting
of the correct amount of an entry received and processed by the Federal
Reserve Bank and posted to the TGA shall constitute full acquittance of
the ODFI and the originator for the amount of the entry. Full
acquittance shall not occur if the entries do not balance, are
incomplete, are incorrect, or are incapable of being processed. In the
case of funds collected by an agency through origination of a debit
entry, full acquittance shall not occur until the underlying payment
becomes final.
Subpart B--Reclamation of Benefit Payments
Sec. 210.9 Parties to the reclamation.
(a) Agreement of RDFI. An RDFI's acceptance of a benefit payment
pursuant to this part shall constitute its agreement to this subpart.
By accepting a benefit payment subject to this part, the RDFI
authorizes the debiting of the Federal Reserve Bank account utilized by
the RDFI in accordance with the provisions of Sec. 210.10(e).
(b) The Federal Government. In processing reclamations pursuant to
this subpart, the Service shall act pursuant to the direction of the
agency that certified the benefit payment(s) being reclaimed.
Sec. 210.10 RDFI liability.
(a) Full liability. An RDFI shall be liable to the Federal
Government for the total amount of all benefit payments received after
the death or legal incapacity of a recipient or the death of a
beneficiary unless the RDFI has the right to limit its liability under
Sec. 210.11 of this part. An RDFI shall return any benefit payments
received after the RDFI learns of the death or legal incapacity of a
recipient or the death of a beneficiary, regardless of the manner in
which the RDFI discovers such information. If the RDFI learns of the
death or legal incapacity of a recipient or death of a beneficiary from
a source other than notice from the agency, the RDFI shall immediately
notify the agency of the death or incapacity.
(b) Notice of Reclamation. Upon receipt of a notice of reclamation,
an RDFI shall provide the information required by the notice of
reclamation and return the amount specified in the notice of
reclamation in a timely manner.
(c) Exception to liability rule. An RDFI shall not be liable for
post-death benefit payments sent to a recipient acting as a
representative payee or fiduciary on behalf of a beneficiary, if the
beneficiary was deceased at the time the authorization was executed and
the RDFI did not have actual or constructive knowledge of the death of
the beneficiary.
(d) Time limits. An agency that initiates a reclamation must do so
within 120 calendar days after the date that the agency receives notice
of the death or legal incapacity of a recipient or death of a
beneficiary. An agency shall not reclaim any post-death or post-
incapacity payment(s) made more than six years prior to the most recent
payment made by the agency to the recipient's account; provided,
however, that if the account balance at the time the RDFI receives the
notice of reclamation exceeds the total amount of all post-death or
post-incapacity payments made by the agency during such six-year
period, this limitation shall not apply and the RDFI shall be liable
for the total amount of all payments made, up to the amount in the
account at the time the RDFI receives the notice of reclamation and has
had a reasonable opportunity (not to exceed one business day) to act on
the notice.
(e) Debit of RDFI's account. If an RDFI does not return the full
amount of the outstanding total or any other amount for which the RDFI
is liable under this subpart in a timely manner, the Federal Government
will collect the amount outstanding by instructing the appropriate
Federal Reserve Bank to
[[Page 17491]]
debit the account utilized by the RDFI. The Federal Reserve Bank will
provide advice of the debit to the RDFI.
Sec. 210.11 Limited liability.
(a) Right to limit its liability. If an RDFI does not have actual
or constructive knowledge of the death or legal incapacity of a
recipient or the death of a beneficiary at the time it receives one or
more benefit payments on behalf of the recipient, the RDFI's liability
to the agency for those payments shall be limited to:
(1) An amount equal to: (i) The amount in the account at the time
the RDFI receives the notice of reclamation and has had a reasonable
opportunity (not to exceed one business day) to act on the notice, plus
any additional benefit payments made to the account by the agency
before the RDFI responds in full to the notice of reclamation, or
(ii) The outstanding total, whichever is less; plus
(2) If the agency is unable to collect the entire outstanding
total, an additional amount equal to:
(i) The benefit payments received by the RDFI from the agency
within 45 days after the death or legal incapacity of the recipient or
death of the beneficiary, or
(ii) The balance of the outstanding total, whichever is less.
(b) Qualification for limited liability. In order to limit its
liability as provided in this section, an RDFI shall:
(1) Certify that at the time the benefit payments were credited to
or withdrawn from the account, the RDFI had no actual or constructive
knowledge of the death or legal incapacity of the recipient or death of
the beneficiary;
(2) Certify the date the RDFI first had actual or constructive
knowledge of the death or legal incapacity of the recipient or death of
the beneficiary, regardless of how and where such information was
obtained;
(3)(i) Provide the name, address, and any other relevant
information of the following person(s):
(A) Co-owner(s) of the recipient's account;
(B) Other person(s) authorized to withdraw funds from the
recipient's account; and
(C) Person(s) who withdrew funds from the recipient's account after
the death or legal incapacity of the recipient or death of the
beneficiary.
(ii) If persons are not identified for any of these subcategories,
the RDFI must certify that no such information is available and why no
such information is available; and
(4) Fully and accurately complete all certifications on the notice
of reclamation and comply with the requirements of this part.
(c) Payment of limited liability amount. If the RDFI qualifies for
limited liability under this subpart, it shall immediately return to
the Federal Government the amount specified in Sec. 210.11(a)(1). The
agency will then attempt to collect the amount of the outstanding total
not returned by the RDFI. If the agency is unable to collect that
amount, the Federal Government will instruct the appropriate Federal
Reserve Bank to debit the account utilized by the RDFI at that Federal
Reserve Bank for the amount specified in Sec. 210.11(a)(2).
(d) Violation of Subpart B. An RDFI that fails to comply with any
provision of this subpart in a timely and accurate manner, including
but not limited to the certification requirements at Sec. 210.11(b) and
the notice requirements at Sec. 210.13, shall be liable to the Federal
Government for any loss resulting from its act or omission. Any such
liability shall be in addition to the amount(s) for which the RDFI is
liable under Sec. 210.10 or Sec. 210.11, as applicable.
Sec. 210.12 RDFI's rights of recovery.
(a) Matters between the RDFI and its customer. This subpart does
not authorize or direct an RDFI to debit or otherwise affect the
account of a recipient. Nothing in this subpart shall be construed to
affect the right an RDFI has under state law or the RDFI's contract
with a recipient to recover any amount from the recipient's account.
(b) Liability unaffected. The liability of the RDFI under this
subpart is not affected by actions taken by the RDFI to recover any
portion of the outstanding total from any party.
Sec. 210.13 Notice to account owners.
Provision of notice by RDFI. Upon receipt by an RDFI of a notice of
reclamation, the RDFI immediately shall mail to the last known address
of the account owner(s) or otherwise provide to the account owner(s) a
copy of any notice required by the Service to be provided to account
owners as specified in the Green Book. Proof that this notice was sent
may be required by the Service.
Sec. 210.14 Erroneous death information.
(a) Notification of error to the agency. If, after the RDFI
responds fully to the notice of reclamation, the RDFI learns that the
recipient or beneficiary is not dead or legally incapacitated or that
the date of death is incorrect, the RDFI shall inform the agency that
certified the underlying payment(s) and direct the Service to reclaim
the funds in dispute.
(b) Resolution of dispute. The agency that certified the underlying
payment(s) and directed the Service to reclaim the funds will attempt
to resolve the dispute with the RDFI in a timely manner. If the agency
determines that the reclamation was improper, in whole or in part, the
agency shall notify the RDFI and shall return the amount of the
improperly reclaimed funds to the RDFI. Upon certification by the
agency of an improper reclamation, the Service may instruct the
appropriate Federal Reserve Bank to credit the account utilized by the
RDFI at the Federal Reserve Bank in the amount of the improperly
reclaimed funds.
Dated: April 6, 1999.
Richard L. Gregg,
Commissioner.
[FR Doc. 99-8873 Filed 4-8-99; 8:45 am]
BILLING CODE 4810-35-P
