Ask Mary: New ACH Rules Regarding Reversals

Dear Mary: How will the new ACH Rules regarding reversals impact my organization?

There are two ACH Rules with 2021 implementation dates that address the risk of improper use of reversals in the ACH Network.

Before we get to the rules and how they might impact your organization, I think it will help to understand what prompted them. Why are we talking about improper reversals now? How much harm can one reversing entry or file bring?

You probably remember last year’s payroll fiasco when a major Third-Party Sender payroll company was unable to settle payroll entries it had sent via ACH credit through the network. The CEO of the payroll company had fraudulently diverted the Originator’s funds meant to cover the employee payroll files and tax withholdings to his own bank account. The situation was compounded when the company decided to send reversal entries to reclaim funds from the direct deposit entries. These improper reversal entries caused substantial financial harm to the employees and their financial institutions and dampened the reputation of Direct Deposit via ACH and the ACH Network.

Article Two of the ACH Rules already lists a limited number of permissible reasons to send reversals (see Section 2.8 & 2.9), however this scenario taught the industry that a little extra clarification and enforcement might help to divert future catastrophes. As a result, the following ACH Rules changes will be implemented next year:

Enforcement (Egregious Violation): January 1, 2021

  • Addition of a new Egregious Rules Violation category which is defined as a willful or reckless action that involves at least 500 Entries OR involves multiple Entries in the aggregate amount of at least $500,000 or more.
  • The ACH Rules Enforcement Panel will determine whether a violation is Egregious and classify and Egregious Violation as a Class 2 or 3 rules violation.
  • Authorize Nacha to report Class 3 rules violations to the ACH Operators and industry regulators.

Please note: While the new enforcement rules are a result of improper reversals being sent, Egregious Violations can apply to any Rules Violation that causes significant harm to the ACH Network.

Reversal Rule Language Clarifications: June 30, 2021

  • The initiation of Reversing Entries or Files for any reason other than those explicitly permissible under the ACH Rules is prohibited.
  • Addition of non-exclusive examples of circumstances in which the origination of reversals is improper.
  • The initiation of a Reversing Entry of File beyond the time period permitted by the ACH Rules is prohibited.
  • Establish formatting requirements for Reversals beyond the current standardized use of the Company Entry Description field.
  • Explicitly permit an RDFI to return an improper Reversal.
  • Expand the permissible reasons for a Reversal to include a “wrong date” error.

So, what does that mean for your organization? If you are an Originating Depository Financial Institution (ODFI) or Third-Party Sender, you should educate your Originators on the consequences of improper reversals and review practices, policies and controls regarding reversals to prevent improper reversals from being sent in the future. If you are an Originator, you should review your reversal practices, policies and controls as well.

To learn more about these and other important payments industry changes be sure to subscribe to Payment Systems Update that will be streaming via a series of three, two-hour webinars in 2021. Watch News You Can Use and epcor.org for more information coming soon.

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