Last fall, Nacha finalized its Meaningful Modernization rule which provides for significant changes to the Nacha Operating Rules. According to Nacha, the amendments are intended to facilitate adoption of new ACH payments technologies, increase consistency for authorizations, reduce administrative burdens related to authorizations and provide additional flexibility for ACH Originators. The amendments become effective on September 17, 2021.
The most substantial changes relate to authorizations for consumer debits. Currently, the Nacha Operating Rules set forth required authorization disclosures (such as the Receiver’s name or identity, payment amount and payment date) only for authorizations provided over the telephone. After the effective date, these disclosures must be included in the authorization for all consumer debits. For certain types of consumer debits, such as check conversions, authorization by notice will still be permitted in accordance with Regulation E.
The amendments also provide for oral authorizations that are not telephone payments and for a new type of authorization. Currently, only the rules for consumer debits authorized over the telephone contemplate an oral authorization. Nacha recognizes that new technologies allow consumers to provide oral payment instructions in other manners, such as via video connections or through personal assistant devices. To address these new technologies, the amendments permit oral authorizations that are not telephone payments and incorporate the risk management principles for telephone or online payments more broadly to all oral authorizations.
Further, a new Standing Authorization is created, which Originators can use in connection with the new Subsequent Entry type of consumer debit. A Standing Authorization is an advance authorization for future debits when the amounts and dates are not known at the time of the authorization. It is intended for situations where the Originator and consumer have an ongoing relationship so advance authorization is desirable but the terms of the payments between the parties are not set in advance or are irregular. Unlike an authorization for recurring debits, the consumer under a Standing Authorization must take further action to initiate each debit entry, which would be considered a Subsequent Entry. The amendments also add a definition for Recurring Entry to clarify the distinction between Recurring and Subsequent Entries.
In addition to the consumer-related authorization changes, the amendments also change the process for proofs of authorization. Upon the request of a Receiving Depository Financial Institution (RDFI), an Originating Depository Financial Institution (ODFI) must provide proof of authorization. If an ODFI is unable to provide the authorization, it is liable for the amount of the entries related to such authorization. The amendments clarify that ODFIs can agree to accept a return from the RDFI of any consumer entry in lieu of providing the requested proof of authorization. While an RDFI can still require the proof of authorization even after the ODFI accepts the return, Nacha expects this change to reduce the administrative burden for ODFIs because they will not have to provide the proof of authorization in every instance thereby reducing the time and cost to resolve issues.
The final key amendment is clarification of the Written Statement of Unauthorized Debit (WSUD) that an RDFI must obtain to initiate an Extended Return, such as in the case of unauthorized ACH debits. Currently, the rules do not explicitly authorize the WSUD to be provided electronically or orally which has created some industry confusion over the validity of electronic and oral WSUDs. The amendments add explicit authorization for electronic or oral WSUDs.
Given the scope of the changes to the Nacha Operating Rules, there are a number of implementation considerations, use cases, and risk management implications for Originators and ODFIs to consider when assessing these changes. For a more in depth discussion of the amendments, listen to our Consumer Finance Monitor podcast, Nacha’s Meaningful Modernization Rule: A close look at the changes for consumer debit authorizations and more, to be released on August 26. Nacha has also published some resources on the amendments.