Nacha Calls for More Vigilance from Banks on Fraud

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Banks may soon bear more responsibility for raising red flags about the conduct of businesses that use the automated clearing house payments network.

The industry-owned group that establishes the rules for the network, Nacha, is proposing new requirements designed to prevent fraud and other transactions that get returned without payment or for refunds.

The proposal comes amid strong regulatory pressure on banks to apply more scrutiny to transactions involving online consumer lenders that charge high interest rates.

The rules, if approved by Nacha's bank membership, could also affect individual banks' relationships with a range of companies beyond online lenders. Other businesses that might raise red flags inside banks, because a high percentage of their transactions get returned, include firms that make debt relief offers to consumers.

Under the proposal, the thresholds for triggering scrutiny of a particular business would tighten. For example, if at least 0.5% of a company's debits of customer accounts came back as unauthorized — an indicator of potential fraud — that would trigger scrutiny by the bank. Under the current rules, the threshold is 1%.

Perhaps more importantly, the new rules would introduce an overall debit return rate threshold of 15%. That means that a particular business would face more scrutiny if at least 15% of its attempts to debit customer accounts were unsuccessful.

This threshold encompasses not only potentially fraudulent transactions, but also payments that get returned because customers have insufficient funds in their accounts, or because the customer provided an erroneous bank account number.

The Nacha proposal could be bad news for online lenders whose customers live paycheck to paycheck and frequently don't have enough funds in their accounts to pay all of their bills, says Mark Furletti, a lawyer with Ballard Spahr.

Much of the recent controversy involving online lenders has involved companies that make loans to customers who live in states where they don't hold licenses, but Furletti says the proposed new rules could affect even fully licensed firms.

"They're going to have to tighten their underwriting criteria and won't be able to offer credit to these consumers," he says.

Marsha Jones, director of the Third Party Payment Processors Association, which represents processing firms that serve as intermediaries between merchants and banks, also expressed concern about the proposed rules.

"There are going to be industries that have higher return rates, simply because the customers who use those products tend to have more insufficient funds," she said, arguing that Nacha’s rules should take into account those industry-by-industry differences.

In its proposal, Nacha acknowledges that certain industries have higher-than-average return rates. But the document states that even within those sectors there are some companies whose "confusing authorizations" result in high levels of returns for insufficient funds because the customers don't understand that they are authorizing a debit of their bank accounts.

Though some voices close to the online lending industry expressed concern about the Nacha proposal, the Online Lenders Alliance, a group that represents lenders, struck a much more positive note.

"We're encouraged by Nacha's proposed rules and believe the organization is in the best position to determine thresholds for reasonable return rates," said Lisa McGreevy, president of the Online Lenders Alliance, in an email.

Nacha's proposed debit return rate threshold of 15% is well above a 3% threshold that the Justice Department has reportedly been using as it investigates banks' relationship with online lenders. The 3% threshold has drawn howls of protest from online lenders and their payment processors.

In an interview Jan Estep, president of Nacha, sidestepped a question about whether the heightened regulatory scrutiny on online lenders was a factor in her group's decision to propose new rules.

The new proposal is an outgrowth of a risk-management strategy the organization adopted last year, Estep said.

The proposed rules also include financial incentives to cut down on the rate of returned payments for banks whose business customers are debiting consumers' accounts.

Estep noted that merchants can take steps to reduce the frequency of those transactions, such as requiring online customers to type in their bank account number twice. The new rules should encourage the spread of those practices, she says.

"If returns aren't incurred, there aren't any fees at all," Estep says, "and everyone's better off."

Nacha's proposal comes roughly three months after the New York Department of Financial Services sent the group a letter alleging that the ACH network lacks sufficient mechanisms to block certain transactions involving online lenders.

"We are reviewing the proposals and expect to provide comments," Matthew Anderson, a spokesman for the department, said Tuesday.

Nacha will accept comments on the proposal from banks, merchants, and others until Jan. 13.

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