Must ACH Debits Be Authorized?

The Federal Reserve accused an Idaho bank of improperly using the automated clearing house last month to process payments after checks were destroyed in a plane crash.

The bank acknowledged that it had gone against a Fed recommendation and the rules of the National Automated Clearing House Association.

However, the incident may push the association to adopt regulations - long overdue, according to some bankers - allowing this type of action.

|We Thought It Was Prudent'

The bank, First Security Bank of Idaho, used the automated clearing house system to speed the clearing of checks that had been destroyed Nov. 16 when a courier airplane carrying tens of thousands of checks from Boise banks crashed on takeoff.

First Security bypassed some association rules that would have made the process less accurate as well as more time-consuming, a bank officer said.

"We thought it was prudent to get the items out so they could be presented and returned if there was any problem," said Joe F. DeNiro, senior vice president and manager of operations centers at First Security Service Co., the automation arm of $6.5 billion-asset First Security Corp., Salt Lake City.

Checks that had been deposited at other banks were also destroyed in the accident - one bank had to borrow $50 million at the Fed's discount window to cover the missing checks.

But only First Security used the automated clearing house to speed recovery.

According to the rules, financial institutions can initiate clearing house transactions only if authorized by customers. But First Security originated some 19,000 unauthorized transactions across the country.

Bankers were divided over the Idaho bank's actions, although many were sympathetic. But the Federal Reserve Bank office in Salt Lake City sent out a memo to regional clearing house executives which read:

"First Security Bank of Idaho NA has attempted to avoid reconstruction and float costs [from the crash] by collecting these items through the ACH system in violation of ACH and check collection rules. We understand many of these items are rejecting and being returned."

|This Is Completely Bizarre'

Others said the unauthorized payments could disrupt the operations of receiving banks.

"This is completely bizarre; it's an ACH payment out of the ordinary course," said John F. Lee, president of the New York Clearing House Association, which runs the New York automated clearing house. "A bank is of course free to reject these payments, but it's a big chore to reject all these items."

Others took a more sanguine view. "I don't see this as a major problem," said James J. Hopes, president of Chase ACH, an clearing house run by Chase Manhattan Bank.

Chase does not require preauthorization on transactions, because it assigns liability to the originating financial institution.

Rules of the national association define liability less clearly. But the association plans to discuss the feasibility of assigning liability, which would allow actions like First Security's.

"If there's a good business case to make a rules change, maybe we could create special formats so that the paying bank would not take on any risk" in this type of situation, said William B. Nelson, senior director, network services, for the National Automated Clearing House Association.

The authorization rules were designed to protect consumers, who might be reluctant otherwise to give corporations or banks authority to withdraw directly from their checking accounts.

But as consumers have grown more familiar with preauthorized payments, the rules have become less useful, Mr. Hopes said.

Errors and Delay

"There are too many cases where the 10-day prenotification period gets in the way of business," he said.

First Security Bank could have reconstructed the lost checks by manually copying the transactions from microfilms of the checks.

But this would have taken the bank at least a month, Mr. DeNiro said, and clerical errors would have made balancing nearly impossible.

Instead of physically reconstructing items, the bank sifted through about 21,000 check data base entries to find items suitable for conversion to electronic payment.

When transmitting the ACH items, the bank included the words "check destroyed." Customers statements will show that notation with the transactions.

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