Federal Government Participation in the Automated Clearing House

SUMMARY: The Department of the Treasury, Financial Management Service,

proposes to revise its regulation governing the use of the Automated

Clearing House (ACH) system by Federal agencies. Part 210 defines the

rights and liabilities of Federal agencies, Federal Reserve Banks,

financial institutions, and the public, in connection with ACH credit

entries, debit entries, and entry data originated or received by a

Federal agency through the ACH system. As a result of the enactment of

recent legislation, the Service expects to introduce up to 600 million

new transactions into the ACH system by January 1, 1999. The Service

anticipates that the ACH system will provide the dominant, though not

exclusive, EFT system used by Federal agencies. Part 210 will provide

the regulatory foundation for use of the ACH system by Federal

agencies.

DATES: Comments must be received no later than May 4, 1998.

ADDRESSES: Comments should be addressed to Cynthia L. Johnson,

Director, Cash Management Policy and Planning Division, Financial

Management Service, U.S. Department of the Treasury, Room 420, 401 14th

Street, S.W., Washington, DC 20227. A copy of the proposed rule is

available at the Service's web site at: http://www.fms.treas.gov/ach.

Comments on the proposed rule will be available for public inspection

and downloading on the Internet and for public inspection and copying

at the Department of the Treasury Library, Room 5030, 1500 Pennsylvania

Avenue, N.W., Washington, D.C. To make an appointment to inspect

comments and transcripts, please call (202) 622-0990.

FOR FURTHER INFORMATION CONTACT: Diana Shevlin, Financial Program

Specialist, at (202) 874-7032; Donna Wilson, Financial Program

Specialist, at (202) 874-6799; Christine Ricci, Senior Analyst, or

Cynthia L. Johnson, Director, Cash Management Policy and Planning

Division, at (202) 874-6590; or Natalie H. Diana, Attorney-Advisor, at

(202) 874-6827.

SUPPLEMENTARY INFORMATION:

I. Background

As the Federal Government's financial manager, the Financial

Management Service (the Service) provides leadership and assistance to

Federal agencies in cash management, payment policy, debt collection,

and financial systems. The Service also collects and disburses funds

for most Federal agencies. In fiscal year 1997, the Service issued over

856 million payments, totaling in excess of $1.1 trillion, and

collected over $1 trillion on behalf of Federal agencies, representing

a variety of taxes, duties, fees, and fines.

In fiscal year 1997, approximately 58% percent of Treasury payments

were made through the Automated Clearing House (ACH) system. In

addition, a growing number of transactions involving the collection of

funds by Federal agencies are being made through the ACH system. The

ACH system is a nationwide electronic funds transfer (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 is the largest single user of the

ACH system, originating and receiving millions of transactions each

month. In fiscal year 1997, the Service made 489 million payments

through the ACH system. In addition, in fiscal year 1997, the Service

collected over $711 billion in taxes and more than $28 billion in non-

tax collections using the ACH system.

Federal agencies primarily use the ACH system to make recurring

payments, such as salary payments. Federal agencies also use the ACH

system to make non-recurring payments, such as travel reimbursements

and tax refunds, as well as payments to vendors and to grant and

program recipients. The ACH system also is used for non-tax

collections, international funds settlement and for cash concentration

from Treasury's more than 3,500 depositaries. The Service adopted a

policy of accepting ACH credits to Treasury's General Account (TGA) in

order to enable Federal agencies to collect payments such as fines,

fees, and loan payments from the public by EFT.

In addition to transactions that are used by the Federal Government

as well as the private sector, Federal agencies have worked with

financial institutions and the National Automated Clearing House

Association (NACHA), the rulemaking body for the ACH system, to develop

two new ACH entries and formats specifically designed to meet the needs

of Federal agencies: The Automated Enrollment Entry (ENR) replaces the

paper form used for enrollment in the Direct Deposit program. The Death

Notification Entry (DNE) allows a Federal agency, such as the Social

Security Administration (SSA), to notify a financial institution

promptly of the death of a Social Security recipient. The DNE has

reduced significantly the total dollar amount of post-death payments

that SSA seeks to recover annually from financial institutions.

Two recently enacted laws are increasing substantially the use of

the ACH system by Federal 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)), and provisions in the Debt

Collection Improvement Act of 1996 (DCIA), Chapter 10 of the Omnibus

Consolidated Rescission and Appropriations Act of 1996, Pub. L. 104-

134, mandate the use of EFT for the collection of certain Federal taxes

and for Federal payments other than payments under the Internal Revenue

Code of 1986. The DCIA defines EFT as ``any movement of funds, other

than a transaction originated by cash, check, or similar paper

instrument, that is initiated through an electronic terminal,

telephone, computer, or magnetic tape, for the purpose of ordering,

instructing, or authorizing a financial institution to debit or credit

an account.'' DCIA, section 31001(x). EFT includes ACH, Fedwire, and

transfers made at automated teller machines (ATMs) and point-of-sale

(POS) terminals.

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. The Service will soon issue final

amendments to 31 CFR part 203--Treasury Tax and Loan Depositaries. Part

203 addresses the rights and responsibilities of taxpayers, financial

institutions, and Federal Reserve Banks in connection with EFTPS.

Section 31001(x) of the DCIA amends 31 U.S.C. 3332 to require

Federal agencies to convert from checks to EFT in two phases. During

phase one, which began on July 26, 1996, all recipients of Federal

payments (other than payments under the Internal Revenue Code of 1986)

who become eligible to receive those payments on or after July 26,

1996, must receive them electronically unless the recipient certifies

that the recipient does not have an account at a

[[Page 5427]]

financial institution or an authorized payment agent.

Phase two covers the conversion from checks to EFT for all Federal

payments, except payments under the Internal Revenue Code of 1986. The

DCIA provides that, subject to the Secretary of the Treasury's

authority to grant waivers, all such payments made after January 1,

1999, must be made by EFT.

On July 26, 1996, the Service promulgated an interim rule, 31 CFR

part 208, to implement those provisions of the DCIA that took effect on

that date. 61 FR 39254. On September 16, 1997, the Service published

for comment a proposed rule implementing the phase two requirements of

the DCIA. 62 FR 48714.

As a result of the enactment of the DCIA and NAFTA, the Service

expects to introduce up to 600 million new transactions into the ACH

system by January 1, 1999. The Service anticipates that the ACH system

will provide the dominant, though not exclusive, EFT system used by

Federal agencies. Part 210 will provide the regulatory foundation for

use of the ACH system by Federal agencies.

II. The 1994 Notice of Proposed Rulemaking

On September 30, 1994, the Service published a Notice of Proposed

Rulemaking (NPRM) with respect to Part 210; that document is referred

to herein as the 1994 NPRM. The purpose of the 1994 NPRM was ``to

provide a regulatory basis for the broader use of the ACH system to

meet the future payment, collection and information flow needs of the

Government.'' 59 FR 50112.

The Service received fifty-one comments from Federal agencies,

financial institutions, NACHA and its regional affiliates, and private

sector organizations. All commenters expressed strong support of the

Service's efforts to provide a regulatory basis for broader use of the

ACH system and to make the regulations more consistent with financial

industry rules. Specific comments on the NPRM are discussed in the

section-by-section analysis below.

III. This Notice of Proposed Rulemaking

A. Introduction

After considering the comments received on the 1994 NPRM, and

taking into account developments since the 1994 NPRM was issued, in

particular the enactment of the DCIA and NAFTA, the Service believes it

is appropriate to issue a new NPRM. While the organization and wording

of this proposed rule is significantly different from the 1994 NPRM,

the Service has not deviated from its determination, expressed in the

1994 NPRM, that the ACH Rules, which apply to private entries made

through the ACH system, also should apply to credit and debit entries

and entry data originated or received by Federal agencies (Government

entries), subject to certain exceptions necessary to protect the

interests of the Treasury, other Federal agencies, and the public. The

use of private industry rules reduces the regulatory burden on

financial institutions which otherwise might have to comply with

conflicting or duplicative requirements.

Several commenters indicated that the 1994 NPRM did not explain

clearly the relationship between the ACH Rules and Federal law or

identify with sufficient clarity the ACH Rules which the Service was

preempting with respect to Government entries. This NPRM clarifies that

the Service proposes to adopt the ACH Rules as the rules governing all

Government entries, with twelve exceptions discussed below, for which

the Service proposes to establish special rules as a matter of Federal

law.

Under Federal law, Treasury has the authority and the duty to

disburse and collect funds on behalf of executive Federal agencies. See

31 U.S.C. Secs. 321(b)(1), 3301, 3321, 3327 and 3335. Treasury

consistently has taken the position that state law, such as the Uniform

Commercial Code, is inapplicable to 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 the function. The Supreme Court affirmed this

position in Clearfield Trust Co. v. United States, 318 U.S. 363, 366

(1943). In Clearfield Trust, the Supreme Court found that the rights

and duties of the United States with respect to commercial paper that

it issues are governed by Federal law, not state law. Treasury has

defended successfully the Clearfield Trust doctrine in a number of

cases. See, e.g., Alnor Check Cashing Co. v. Katz, 821 F. Supp. 307,

311 (E.D. Pa. 1993), aff'd 11 F.3d 27 (3rd Cir. 1993); Alaska National

Bank of the North v. Federal Reserve Bank of San Francisco, No. A87-

156, slip op. at 10 (D. Alaska, Aug. 10, 1987).

In 1942, when the Clearfield case was decided, the Federal

Government disbursed funds primarily in the form of Treasury checks.

However, the use of an electronic funds transfer system, such as the

ACH system, instead of paper checks, does not change the legal

principle that the rights and duties of the United States are governed

by Federal law.

Part 210, which relies upon and implements Treasury's statutory

responsibility to collect and disburse public funds, regulates the

rights and duties of parties to transactions originated or received by

Federal 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 and

performs the settlement function for the affected financial

institutions; (4) the receiving depository financial institution

(RDFI), which is the institution that receives ACH entries from the ACH

Operator and posts them to the accounts 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, Federal 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 Federal

Government payments and collections and that distinguish Federal

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 Federal agencies, the

Service and the Federal Reserve Banks with respect to

[[Page 5428]]

the origination or receipt of an ACH entry. Due to the bifurcation of

function between certifying and disbursing Federal agencies, Federal

Government operations do not conform to the definitions in the ACH

Rules. From a functional perspective, the Federal 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, a Federal 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 Federal agencies

originating and receiving ACH entries. Accordingly, although it is the

Service's view that Federal 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 Federal agencies that originate or receive ACH entries the

obligations and liabilities imposed on ODFIs and RDFIs, respectively,

for purposes of the ACH Rules. Proposed part 210 therefore is

structured on the premise that Federal 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.

The Service has reviewed the ACH Rules and determined that, given

the special nature of Government entries, and the importance of

protecting public funds, it is in the best interest of the public for

the Service to preempt in part or in whole twelve provisions of the ACH

Rules. The twelve provisions that the Service proposes to preempt in

part or in whole are described briefly below, and are discussed in more

detail in the section-by-section analysis. There are five provisions of

the ACH Rules that the Service proposes to preempt completely. The

following five ACH Rules are preempted entirely and are excluded

specifically from part 210's definition of ``applicable ACH Rules''

(see proposed Sec. 210.2(d)):

1. ACH members. Proposed part 210 preempts the limitation on the

applicability of the ACH Rules to members of an ACH association.

2. Compensation. Proposed part 210 preempts the compensation rules

set forth in the ACH Rules.

3. Arbitration. Proposed part 210 preempts the requirement under

the ACH Rules that disputes among participants be settled by

arbitration procedures set forth in 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. Proposed 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

proposed part 210 entirely preempts through the definition of

``applicable ACH Rules,'' seven other provisions of the ACH Rules are

preempted in part by operation of specific sections of proposed part

210. Those provisions are:

1. Verification of identity of recipient (see proposed

Secs. 210.4(a), 210.8(c)(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. Proposed part 210 imposes a different rule for

Government entries. Specifically, under proposed 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 Federal Government for all entries made in reliance on a

forged authorization that the institution has accepted. Thus, proposed

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 Federal agencies (see

proposed Secs. 210.4(a)(2), 210.8(c)(1)). Proposed part 210 preempts

the ACH Rules with respect to the form of authorization required to

initiate debit entries to a Federal 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 proposed Sec. 210.4(a), no person or entity (including

any financial institution) may initiate or transmit a debit entry to a

Federal agency 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 proposed Sec. 210.8(c)(1).

3. Prenotifications (see proposed Secs. 210.6(b), 210.8(a)). The

Service is proposing to preempt the ACH Rules in two respects in

connection with prenotifications. In order to reduce the potential for

misdirected entries, proposed Sec. 210.8(a) requires a financial

institution that receives a prenotification relating to Government

entries to verify the account number and at least one other identifying

data element in the prenotification. This requirement supersedes the

ACH Rules which specifically permit financial institutions to rely on

the account number alone in posting payment to an account.

Second, the origination of a prenotification is optional for all

entries under the ACH Rules. Proposed Sec. 210.6(b) preempts the ACH

Rules by requiring that a Federal agency originate a prenotification

before initiating a debit entry to a recipient's account.

Prenotification is optional for all credit entries.

4. Liability of the Federal Government. (a) Amount of damages (see

proposed 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 Association as

a result of the RDFI's or ODFI's breach of any warranty. Thus, under

the ACH Rules, a Federal 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, a Federal agency that receives

payments, would be liable for all losses resulting from any breach by

it of an applicable warranty under the ACH Rules.

Proposed Sec. 210.6 limits a Federal agency's liability to the

amount of the

[[Page 5429]]

entry whether it is originating or receiving ACH entries. Therefore, a

Federal agency would not be liable to a DFI, ACH Operator or an ACH

association for interest, attorneys' fees, or other consequential

damages. In addition, in certain circumstances, a Federal 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 proposed

Sec. 210.7(a)). Proposed part 210 preempts article 11.5 of the ACH

Rules, which provides that a Federal Reserve Bank is not the agent of

an RDFI or ODFI. Proposed part 210 provides that Federal Reserve Banks

are Fiscal Agents of the Treasury and are not liable to any party other

than the Treasury for their actions under part 210.

5. Liability of financial institutions (see proposed

Sec. 210.8(c)). Proposed part 210 preempts the provisions of the ACH

Rules that would operate to make a financial institution liable to the

Federal Government for any loss, liability or claim relating to an

entry in an amount exceeding the entry. As previously indicated, the

ACH Rules impose liability on an RDFI or ODFI for all losses,

liabilities or claims incurred by another DFI, ACH Operator or

Association as a result of the RDFI's or ODFI's breach of any warranty.

Under proposed part 210, a financial institution would not be liable to

the Federal Government for interest, attorneys' fees, or other

consequential damages, except in the case of an unauthorized debit to a

Federal agency, as discussed above.

6. Reversals (see proposed Sec. 210.6(g). Proposed part 210

requires Federal 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, proposed

part 210 applies to the Federal Government the ACH Rules relating to

indemnification, but limits the extent of the indemnification to the

amount of the individual entry(ies) being reversed.

7. Account requirements for benefit payments (see proposed

Sec. 210.5). Proposed part 210 imposes a requirement with respect to

ACH credit entries representing benefit 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 two exceptions discussed in the section-by-section analysis. The

term ``account'' for purposes of proposed 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 March 1999, to permit the

crediting of ACH credits to a financial institution general ledger

account or to a loan account. The Service does not intend to accept

this ACH Rule with respect to certain benefit 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 proposing to establish some of these rights in part

210 with respect to Federal agencies vis-a-vis originators or receivers

of Government entries. For example, proposed Part 210 provides that a

Federal agency will be liable to a recipient for any loss sustained by

the recipient as a result of the Federal 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. Proposed part

210 establishes certain circumstances in which an entry shall be deemed

to be unauthorized.

B. Vendor Payments, Enrollment, and Relationship to Other Regulations

In this NPRM, the Service is soliciting comment on two issues of

general interest: vendor payments and enrollment.

Although the Service has encouraged companies doing business with

Federal agencies to receive payment through the ACH system,

participation by vendors has been low. Of the 16 million vendor

payments disbursed by Treasury in fiscal year 1997, only 27% were made

by EFT.

The Service understands that the primary reason vendors do not use

EFT is the non-receipt of remittance data with their payments, i.e.,

payments are credited to the vendor's deposit account without

information indicating the purpose of the payment. Absent identifying

information, it is difficult for vendors to reconcile their accounts

receivable. The Service seeks public comment on this matter and on what

actions could be taken, in particular by the financial industry, to

make improvements. Specifically, the Service seeks comment on the

following:

What factors contribute to the non-receipt of remittance

data (e.g., customer demand, costs)?

What are the key reasons why electronic data interchange

(EDI) has not been adopted widely by the financial industry?

Does the approved amendment to the NACHA ACH Rules

(effective September 18, 1998), which requires the RDFI to provide

remittance information upon request, adequately address vendors'

concerns?

What alternative approaches/solutions are there to remedy

this problem?

With respect to enrollments, the Federal Government actively is

promoting the use of automated enrollment for all payments. The Service

has received many comments on how to improve the current process for

enrolling vendors in EFT. The Service seeks public comment on how to

expand the use of automated enrollment and what steps the Federal

Government could take to improve the process.

C. Future Changes to Subpart B

As discussed in greater detail in the section-by-section analysis

below, the Service proposes in this NPRM to reorganize and rewrite

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. The Service also

is seeking to clarify in this NPRM the obligations and liabilities

imposed on financial institutions under current subpart B. The Service

is not proposing to change significantly those obligations and

liabilities at this time. However, the Service is actively considering

ways in which the reclamation process might be restructured in the

future to operate more efficiently as a fully automated process.

Because the Service recognizes

[[Page 5430]]

that many Federal agencies are not in a position to move to an

automated reclamation process at this time, proposed Subpart B

preserves the basic structure of the current paper-oriented process.

The current reclamation process is a cumbersome and labor-intensive

manual process involving a complicated formula for the allocation of

liability. As the volume of Federal benefit payments made through the

ACH system increases, the number of reclamations also will increase,

significantly increasing the processing burden on both the Federal

Government and financial institutions. The Service believes it would be

in the best interests of the Federal Government and financial

institutions to develop a more cost-effective and efficient reclamation

process by simplifying the formula for allocating liability and

eliminating the manual processing requirements upon which the current

reclamation process is based.

In order to begin formulating a preliminary approach to

implementing an automated reclamation process, the Service is

soliciting comment on the considerations which financial institutions

and Federal agencies believe are important with respect to

reclamations. For example, because the average number of payments

involved in a reclamation is 1.5, the Service questions whether the

protection afforded to financial institutions by the limited liability

provisions of Subpart B is outweighed by the processing costs of

handling reclamations. The Service thus is interested in 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. This liability structure would

make it possible to streamline the reclamation process by eliminating

the certification and informational requirements, thereby eliminating

the need for the Federal Government and financial institutions to

research and verify the circumstances of each reclamation. In addition,

the Service welcomes comments on other possible ways in which the

current reclamation process could be simplified.

D. Section-by-Section Analysis

The Service proposes to change the title of this Part to ``Federal

Government Participation in the Automated Clearing House'' to reflect

the broadened scope of the regulation to cover all types of activities

that are handled, or may in the future be handled, over the ACH system.

This proposal contains two subparts. Subpart A sets forth rules

applicable to all ACH credit and debit entries and entry data

originated or received by a Federal agency which are defined in the

proposed rule as ``Government entries.'' Subpart B contains the rules

for the reclamation of benefit payments. Current part 210 contains an

additional subpart, subpart C, dealing with discretionary salary

allotments. In addition, the 1994 NPRM proposed to add a new subpart D

dealing with savings allotments. The Service has determined that

subparts C and D are unnecessary because they are 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. Under 31 CFR

part 208, Federal agencies are required to make all Federal payments,

including allotments, by EFT. Subpart A of Part 210 sets forth the

rules governing all ACH credit entries made by a Federal agency,

including savings and salary allotment payments. Therefore, subparts C

and D are deleted from proposed part 210.

Section 210.1--Scope; Relation to Other Regulations

Current part 210 covers only ACH payments made by the Federal

Government. In the 1994 NPRM, the Service proposed to broaden the scope

of part 210 to cover all entries and entry data originated or received

by a Federal agency through the ACH system. Entry data includes

prenotifications, returned entries, adjustment entries, notifications

of change and other notices or data transmitted through the ACH system.

Thus, part 210 would apply to collections and the information entries

which can now be handled through the ACH system, as well as to Federal

payments made through the ACH system.

Proposed part 210 establishes the general legal and operational

framework applicable to all ``Government entries'' as defined in the

proposed rule. Federal tax payments made by ACH debit or credit are

governed by 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 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 proposed part 210. For example, under proposed part

210 a Federal agency is required to originate a prenotification before

originating an ACH debit entry to an account; in contrast, under part

370, a prenotification need not be originated before originating an ACH

debit entry to an account. In this example, as a result of the

operation of proposed Sec. 210.1, a prenotification would not be

required before the Federal Government originates an ACH debit entry to

an account for the purpose of collecting payment for the purchase of a

United States security.

Section 210.1 of the 1994 NPRM referenced the relationship of part

210 to the savings allotment provisions of 31 CFR part 209. Effective

January 27, 1997, the Service deleted part 209 because it was obsolete.

61 FR 68155. Therefore, the reference to part 209 has been deleted from

proposed part 210.

Section 210.2--Definitions

The Service proposes to revise this section to explain 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 proposes to add, remove, or redesignate certain other terms, as

indicated below.

The Service proposes to delete certain definitions that appear in

current part 210 and in the 1994 NPRM because proposed part 210 uses

these terms in the same way as the ACH Rules. Thus, the definitions of

the terms ``banking day,'' ``business day,'' ``erroneous payment,''

``prenotification'' and ``receiver'' have been deleted.

Other terms defined in current part 210 have been deleted because

they are not used in proposed part 210. The terms ``allotment'' and

``allotter,'' which are defined both in current part 210 and the 1994

NPRM, and the terms ``discretionary allotment'' and ``employee'' in

current part 210, have been removed because the terms are used only in

Subparts C or D. The terms ``payment'' and ``payment date'' in current

part 210 have been replaced by the ACH terms ``entry'' or ``credit''

(rather than ``payment'') and ``settlement date'' (rather than

``payment date''). The term ``payment instruction'' has been deleted as

unnecessary in proposed part 210.

The definition of ``Federal Reserve Bank'' in current part 210 and

the definition of ``Government'' in the 1994 NPRM also are deleted as

unnecessary.

The Service proposes to add a definition of ``ACH Rules'' in

proposed Sec. 210.2(a). This definition explains that the ACH Rules

consist of the NACHA

[[Page 5431]]

Operating Rules and the NACHA Operating Guidelines.

The Service also proposes to add a definition of ``actual or

constructive knowledge'' at proposed 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 upon the receipt by whatever means of any

information of the death or legal incapacity. 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 legal incapacity. For

example, an RDFI would have actual knowledge of a death or legal

incapacity through a communication with an executor of the deceased

recipient's or beneficiary's estate, a family member, another third

party, or the Federal 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.

Neither current part 210 nor the 1994 NPRM contain a definition of

``actual or constructive knowledge,'' but the reclamation provisions of

subpart B of current part 210 provide 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 does not intend to change that standard in

this NPRM, but proposes to add 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.

The Service proposes to add a definition of ``agency'' in

Sec. 210.2(c) to mean any department, agency, or instrumentality of the

Federal Government, or a corporation owned or controlled by the Federal

Government. Current part 210 uses the term ``program agency.'' The

proposed change is not intended to alter the scope of current part 210.

The proposed definition is identical to the definition of agency in

part 208, which sets forth rules governing the mandatory use of EFT by

agencies, except that the definition of agency for purposes of part 210

does not include a Federal Reserve Bank.

For purposes of subpart B, which governs reclamations, ``agency''

means the agency that certified the benefit payment(s) being reclaimed.

Section 210.2(d) of proposed part 210 defines the term ``applicable

ACH Rules'' to mean the ``1997 ACH Rules,'' including all rule changes

published therein with an effective date on or before September 19,

1997, which are made applicable to ``Government entries'' pursuant to

proposed Sec. 210.3. Proposed part 210 completely preempts those ACH

Rules that: govern claims for compensation, arbitration, or reclamation

of benefit payments; 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 to

this NPRM, proposed part 210 also preempts certain other provisions of

the ACH Rules through operation of particular sections of part 210.

It should be noted that any technical or timing requirements

imposed upon 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 notifications of change and returns. Agencies would

not be subject to the requirement that credit entries be originated no

more than two banking days before the settlement date of the entry,

since this requirement is excluded from the definition of applicable

ACH Rules.

The Service proposes to add a definition of ``authorized payment

agent'' at Sec. 210.2(e) in connection with the account requirements

for benefit payments set forth at proposed Sec. 210.5. The definition

is identical 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, proposed Sec. 210.5

would permit an authorized payment agent to receive the payments on

behalf of the beneficiary.

The Social Security Act, 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.2 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 current

Sec. 210.2 refers to representative payees and fiduciaries.

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\2\ See 42 U.S.C. 1383(a)(2)(A)(ii)(I); 38 U.S.C. 5502(a)(1); 45

U.S.C. 231k, 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 proposed definition is intended to

refer to such agencies.

In fiscal year 1997, approximately 10 percent of Social Security

benefit payments (61 million payments) were made to approximately five

million representative payees. SSA, the Railroad Retirement Board, and

the Department of Veterans Affairs have issued detailed regulations

addressing the qualifications and duties of representative payees and

fiduciaries.3 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 20 CFR Parts 404, 410, 416, 266, and 348; and 38 CFR

Part 13, respectively.

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The Service proposes to add 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 electronic fund transfer system that has adopted

the ACH Rules.

The proposed definition of ``beneficiary'' in Sec. 210.2(g) has

been reworded slightly from the definition in current part 210 to

reflect the addition of a definition of benefit payment, but

substantively is unchanged from the definition in current part 210.

Although the 1994 NPRM did not define specifically a beneficiary as a

person other than a recipient, the term beneficiary was used in the

1994 NPRM as meaning a party other than a recipient.

The definition of ``benefit payment'' in proposed Sec. 210.2(h) is

similar to the definition in current part 210. In the

[[Page 5432]]

1994 NPRM, the Service had proposed to move the specific classes of

benefit payments enumerated in the definition to the Green Book.

Several commenters objected to this proposed change and requested that

the specific classes of benefit payments continue to be enumerated in

the regulation itself. In light of these comments, the Service proposes

to retain in the regulation a listing of 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 proposed Sec. 210.2(h).

The Service proposes to add to part 210 a definition of ``Federal

payment.'' The proposed 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 proposed

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 elects to make using the ACH

system would be subject to part 210 and thus are included within the

definition of Federal payment at proposed Sec. 210.2(i).

The proposed definition of ``financial institution'' in

Sec. 210.2(j) is identical to the definition contained in Part 208

except that the Service proposes to add a sentence noting that, in

proposed 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 proposed rule defines ``financial institution'' to mean a

depository institution as defined in 12 U.S.C. 461(b)(1)(A), excluding

subparagraphs (v) and (vii), and an agency or branch of a foreign bank

as defined in 12 U.S.C. 3101. Under this definition, banks, savings

banks, credit unions, savings associations, and United States-based

foreign bank branches would be considered ``financial institutions.''

This 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, current Part 210 applies only to credit entries

originated by an agency for the purpose of making payments. Proposed

Part 210 has a broader scope; it applies to all entries originated or

received by an agency, whether made for the purpose of payments,

collections or for information purposes.

The Service proposes to add 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

which are published in the Green Book, as provided at proposed

Sec. 210.3(c).

The Service proposes to define the term ``notice of reclamation''

at proposed Sec. 210.2(m) to mean a notice issued by the Federal

Government in a paper, electronic, or other form in order to initiate a

reclamation. This definition clarifies that the Federal 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 proposed part 210

from Sec. 210.13(a) of current Part 210.

The Service proposes to preserve the definition of ``outstanding

total'' in current Part 210 without substantive change.

The proposed definition of ``recipient'' in Sec. 210.2(o) is

substantially similar to the corresponding definition in Part 208. The

term would include an authorized payment agent that receives a payment

on behalf of a beneficiary.

The Service proposes to add the term ``Service'' to mean the

Financial Management Service, Department of the Treasury.

The Service proposes to add a definition of the Treasury Financial

Manual in Sec. 210.2(q) 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 Federal Government-wide

fiscal responsibilities of the Treasury. The proposed definition is

substantially unchanged from the definition set forth in the 1994 NPRM.

Section 210.3--Governing Law

Proposed Sec. 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. As discussed above, this approach is consistent

with cases such as Clearfield Trust Co. v. United States, 318 U.S. 363

(1943), and its progeny.

Proposed Sec. 210.3(b) provides that Part 210 incorporates by

reference the applicable ACH Rules in effect on September 19, 1997, as

modified by this part. Since the publication of the 1994 NPRM, a number

of amendments to the ACH Rules have been adopted. The Service will be

bound by all amendments adopted since the publication of the 1994 NPRM

up to and including those which took effect on September 19, 1997,

except the rule that makes prenotifications optional for all payment

types, which the Service is proposing to modify. In addition, as noted

above, NACHA has approved an amendment to the ACH Rules that, effective

March 19, 1999, will permit the crediting of entries to non-deposit

accounts. The Service does not intend to accept this amendment for

benefit payments subject to proposed Sec. 210.5.

Proposed Sec. 210.3(b)(2) describes how subsequent amendments to

the ACH Rules will be handled. The 1994 NPRM stated 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. Twenty-six members of

one ACH association were among the thirty-six commenters who urged the

Service to change this position. Several financial institutions also

recommended that the Service provide that amendments to the ACH Rules

are deemed accepted unless the Service expressly rejects the amendment

by publishing notice to that effect in the Federal Register. In

contrast, one agency commented that ``* * * Federal agencies should be

prohibited from implementing NACHA proposed amendments until

specifically sanctioned by the Treasury Department for agency use.''

Although the Service recognizes that its proposed policy may impose

some additional burden on financial institutions that must track the

status of ACH Rule amendments, the Service believes that the interests

of the Federal Government outweigh these concerns. Amendments to the

ACH Rules could have a significant effect on individual agencies and on

the Federal Government as a whole. The Service believes that in order

to assess the impact of an amendment on agencies, the Federal

Government, and the public, the Service must review the amendments and

consult with other agencies. Moreover, Federal regulations require that

any changes to a

[[Page 5433]]

publication incorporated by reference in a Federal

Register.4

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\4\ See 1 CFR Sec. 51.11.

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For the above reasons, proposed part 210 states that amendments

effective after September 19, 1997, will not apply to Government

entries unless the Service expressly accepts such amendments by

publishing notice of acceptance in the Federal Register. In addition,

proposed 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 document that expressly accepts the amendment.

The Service proposes to clarify at Sec. 210.3(c) of proposed part

210 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 in various places in this NPRM, the Service is proposing to

remove to the Green Book and the Treasury Financial Manual certain

requirements that currently are set forth in the regulation itself.

Particularly 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.

Some commenters on the 1994 NPRM were concerned that the Service

would alter the substantive rights of parties to a Government entry

through amendments to the Treasury Financial Manual, the Green Book and

other operating guidelines. The commenters requested that such changes

be made through amendments to part 210 and be published for public

comment. The Treasury Financial Manual and the Green Book, as well as

other operating guidelines published by the Service, provide specific

operational directions and procedures that implement the regulatory

requirements of part 210. The requirements set forth in the Green Book

and the Treasury Financial Manual, including those provisions that the

Service is proposing to relocate 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.

However, as discussed above, agencies and financial institutions should

be aware that the Service has the authority to issue binding procedures

and guidance to implement part 210 and that the Service will enforce

the requirements set forth in the Treasury Financial Manual and the

Green Book in the same manner that it enforces regulations.

Section 210.4--Authorizations and Revocations of Authorizations

Proposed Sec. 210.4(a) provides that each debit and credit entry

subject to proposed 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 proposed

Sec. 210.8(c)(2).

Proposed Sec. 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 order to encourage

recipients to use Direct Deposit, in recent years, 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. Proposed part

210 acknowledges that the enrollment process may be completed by the

recipient's financial institution or by the agency. In addition,

proposed Sec. 210.4(a) encourages automated enrollments by removing the

requirement that the financial institution sign the authorization form.

Proposed Sec. 210.4(a) recognizes that signature verification may not

be possible or practical in an automated enrollment.

The 1994 NPRM required that financial institutions exercise due

diligence in verifying the identity of recipients. Commenters requested

clarification of this standard. The Service proposes to delete the

requirement that financial institutions exercise due diligence to

verify the recipient's identity. Instead, proposed 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 proposes to leave to the

discretion of the financial institution or agency accepting an

authorization the steps it will take to verify the recipient's

identity. The Service continues to believe that the authorization

process represents an opportunity to reduce fraud which could otherwise

result in significant losses to the Federal Government. Because the

party that accepts the authorization is in the best position to detect

potential fraud, the Service believes it is appropriate to hold that

party strictly liable for the identity of the recipient.

Under proposed Sec. 210.4(a)(2), which is substantially similar to

Sec. 210.3(a)(6) of the 1994 NPRM, an originator and an ODFI would be

prohibited from initiating a debit entry to an agency 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 Federal Government. These pilots indicate that

the use of debit entries to the Federal Government is a cost-efficient

payment mechanism that benefits both the Federal Government and the

payee-recipient. However, in order to protect the interests of the

Federal 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 would give authorization only once, prior to the first entry.

Proposed Sec. 210.4(b), which is based on Sec. 210.3(b) of the 1994

NPRM and Sec. 210.4(b) of current part 210, 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.

Proposed Sec. 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.

Proposed Sec. 210.4(b)(4) provides that a new authorization

supersedes any already existing authorization that is inconsistent with

the new authorization. This provision is reworded, but substantively

unchanged, from Sec. 210.3(b)(4) of the 1994 NPRM.

[[Page 5434]]

Under proposed Sec. 210.4(b)(5), the recipient agrees that the

Federal Government may reverse any duplicate or erroneous entry as

provided in Sec. 210.6(g).

The 1994 NPRM proposed that an authorization would be revoked in

the event the RDFI was unable to process an item properly because of

incorrect transaction instructions. The Service proposes to delete this

provision in light of comments received indicating that the common

practice by RDFIs that receive an item that cannot be processed is to

return the item. This affords the ODFI an opportunity to correct

erroneous information and resubmit the item. The Service agrees that

the return and resubmission process is an appropriate mechanism to deal

with such items.

The Service also proposes to eliminate the provision contained in

the 1994 NPRM that an authorization was revoked upon a determination by

the Federal Government that the conditions of authorization have

changed. Several commenters questioned the breadth and vagueness of

this provision. The Service agrees that this provision is not

necessary.

In addition, the Service proposes to delete the provision in

Sec. 210.4(e) of current part 210 and Sec. 210.3(d) of the 1994 NPRM

that states 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.

The Service also proposes to delete the provision in the 1994 NPRM

that an authorization would terminate upon a failure by the recipient

to meet any of the conditions specified in the terms of the

authorization. This provision was intended to address circumstances in

which a recipient failed to comply with a duty imposed on the recipient

in the authorization under any applicable agency regulation, guideline,

or agreement. Upon further consideration, the Service does not believe

that this issue needs to be addressed in part 210, because the

circumstances in which a recipient's right to receive benefit payments

terminates as a result of violation of agency requirements are

appropriately addressed by the agency regulations governing benefit

payments.

Proposed Sec. 210.4(c)(1) corresponds to Sec. 210.4(c)(2) of

current part 210. This section provides that, in the case of benefit

payments, a change in the ownership of the account results in the

termination of the authorization. This provision is an extension to the

authorization requirements relating to account ownership for recipients

of benefit payments. 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.

Under proposed Sec. 210.4(c)(2), as under current part 210, the

death or legal incapacity of a recipient of benefit payments or the

death of a beneficiary results in the termination of the authorization.

Proposed Sec. 210.4(c)(3), which corresponds to Secs. 210.4(c)(4)

and 210.7(c) of current part 210, 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

except in cases of fraud. Some financial institutions commented that

the thirty day notice requirement was an improper interference with

their customer relationships. 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.

In order to eliminate any unnecessary interruptions in ACH services

to recipients when any of the events described in proposed

Sec. 210.4(c)(4) occurs, the Service proposes to add a provision that

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 Federal Government may

transfer temporarily the authorization to a consenting financial

institution for a period of no longer than 120 days. Proposed

Sec. 210.4(c)(4) is largely identical to Sec. 210.3(c)(9) of the 1994

NPRM except that the Service proposes to add the term ``consenting'' to

clarify that it will transfer authorizations only to an RDFI that

consents to the transfer.

Section 210.5--Account requirements for Benefit Payments

Proposed Sec. 210.5 imposes restrictions on the type of account to

which benefit payments may be deposited. Proposed Sec. 210.5(a) sets

forth a general rule that benefit payments must be deposited to an

account at a financial institution in the name of the recipient. As

explained above in connection with the definition of ``benefit

payment,'' Federal retirement payments would not constitute benefit

payments for purposes of the requirements of proposed Sec. 210.5. The

reason for excluding Federal retirement payments from the requirement

of proposed Sec. 210.5(a) is that in some circumstances these types of

payments are made to accounts owned by someone other than the person

authorized to receive the Federal retirement payment, such as a spouse.

For purposes of proposed Sec. 210.5, the phrase ``account at a

financial institution'' is intended to mean a deposit account. Proposed

Sec. 210.5 would not prohibit the use of a joint account between the

recipient and a spouse or other member of the recipient's family.

Proposed Sec. 210.5(b) provides two exceptions from the general

rule set forth at proposed Sec. 210.5(a) for situations that involve an

authorized payment agent or an investment account established through a

registered securities broker or dealer. Proposed Sec. 210.5(b)(1)

addresses cases in which an authorized payment agent has been selected

or designated. The term ``authorized payment agent'' is narrowly

defined for purposes of this NPRM to mean a person or entity selected

under certain agency regulations to act on behalf of a beneficiary. In

such cases, the account may be titled in any manner that satisfies the

regulations of the appropriate agency.

Proposed Sec. 210.5(b)(2) permits an ACH credit entry representing

a benefit payment to be deposited into an investment account in the

name of a broker or dealer registered under the Securities Act of 1934,

provided that the account and related records are structured so that

the beneficiary's interest is protected under Federal or state deposit

insurance regulations. The deposit of a benefit payment into an account

owned by a third party raises concerns about the protection of the

beneficiary's interests. The requirement that the account and related

records be structured so that the beneficiary's interest is protected

under Federal or state deposit insurance regulation is intended to

address this concern.

The phrase ``notwithstanding the applicable ACH Rules'' indicates

that proposed 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 the two exceptions noted above. This requirement is

based on Sec. 210.4(a) of current part 210 and Sec. 210.3(a) of the

1994 NPRM. Like those provisions, this proposed section is designed to

ensure that benefit payments reach the intended recipient by requiring

that

[[Page 5435]]

such payments be deposited into an account in which the recipient has

an ownership interest. Proposed Sec. 210.5(a) is limited to benefit

payments, however, 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. In light of these business

practices, the Service does not believe that it is appropriate to

require that non-benefit payments be deposited into an account in which

the recipient has an ownership interest.

The ACH system in the past has not supported the transmission of

ACH credit entries to a non-deposit account. The Service is aware that

NACHA has approved an amendment to the ACH Rules (effective March 19,

1999), which permits the crediting of entries to general ledger

accounts and loan accounts. The Service does not intend to accept the

amendment with respect to certain benefit payments.

Current part 210 provides that the title of the account designated

by the recipient must include the recipient's name. However, in

response to inquiries, the Service has interpreted current Part 210 as

permitting a master/subaccount arrangement in which the benefit

payments are deposited into a master account established, for example,

by a nursing home that is providing care for a number of Social

Security recipients. Proposed Sec. 210.5 is consistent with this

approach, but also allows benefit payments to be deposited into an

investment account established by a registered securities broker or

dealer, provided the recipient's name and ownership interest are

indicated on the deposit account records.

Section 210.6--Agencies

The title of this section has been changed from ``Federal

Government'' to ``Agencies.'' Proposed Sec. 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, prenotification, and reversal

requirements of proposed Sec. 210.6(a), (b), and (g) constitute

additional obligations. The liability provisions of Sec. 210.6(c), (d),

(e), and (g) both expand and 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.

Proposed Sec. 210.6(a) is based on Sec. 210.6(e)(2) and

Sec. 210.4(b) of the 1994 NPRM and 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. The Service proposes to delete the language from the 1994

NPRM directing the Federal Reserve Bank to take ``appropriate action''

because this language refers to operational matters between the Service

and the Federal Reserve Bank, and is not needed in the regulation.

Proposed Sec. 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; rather, it is an operational requirement imposed by

the Service on agencies.

Proposed Sec. 210.6(b) addresses prenotifications. 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). 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.

Proposed Sec. 210.6(b) is based on current Sec. 210.8(b) and deals

with an agency's responsibilities for prenotifications in the context

of both debits and credits. The duties of a financial institution with

respect to prenotifications are addressed in Sec. 210.8(a).

Under the ACH Rules, prenotifications are optional for all entries.

Both the 1994 NPRM and proposed part 210 make prenotification optional

for credit entries, but modify the ACH Rules by requiring

prenotification for debit entries initiated by an agency. The Service

believes that, in the case of debits initiated by the Federal

Government, added precautions need to be taken to ensure that the debit

is applied against the correct account at the intended financial

institution.

In response to questions raised by commenters, it should be noted

that an agency must follow all operational requirements relating to

prenotifications required under the ACH Rules when the agency initiates

or receives a prenotification.

Proposed Sec. 210.6(c)-(e) set forth an agency's liability to

various parties in connection with Government entries. The 1994 NPRM

proposed to limit generally the extent of an agency's liability to the

amount of the entry(ies) at issue, but to permit an agency to agree to

be bound by the compensation and arbitration procedures found in the

ACH Rules, subject to the requirement that the agency fund any

additional amount of liability and any arbitration costs. The Service

has determined that it is not in the interest of the Federal Government

to permit agencies to vary the liability of the Federal Government on a

case-by-case basis. In order to preserve a uniform set of rules and

liabilities for all Government entries, the Service has deleted from

proposed part 210 the provision permitting agencies to opt into the ACH

compensation and arbitration rules.

Proposed Sec. 210.6(c) is based on current Sec. 210.10(a) and

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.

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. Proposed

Sec. 210.6(c) 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.

Proposed Sec. 210.6(d) is new. It 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, Association, and

ODFI, and may be liable to one of those parties for any

[[Page 5436]]

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

state law.

Proposed Sec. 210.6(d) would preempt 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, proposed

Sec. 210.6(d) 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).

Proposed Sec. 210.6(e) 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 and

prenotification verification requirements. Under current part 210 and

the 1994 NPRM, an agency bears responsibility for processing errors;

however, the Service believes that neither current part 210 nor the

1994 NPRM are clear in describing the type of errors or the nature of

the losses for which an agency would be liable. For this reason, this

proposal refers specifically to duplicate and erroneous entries, which

are defined in the ACH Rules.

Under the ACH Rules, an ODFI is liable for losses caused by its

origination of duplicate or erroneous entries. This proposed rule would

subject agencies to the liability for originating erroneous and

duplicate entries imposed on ODFIs under the ACH Rules, but would

preempt the ACH Rules in three respects. First, under the proposal, an

agency would not be liable for all costs incurred by the RDFI, such as

attorneys fees, but would be liable only up to the amount of the entry.

Second, the proposal 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, proposed Sec. 210.6(e) excludes credit

entries received by an RDFI after the death of a recipient of benefit

payments or the death or legal incapacity of a beneficiary. It should

be noted that liability in connection with any benefit payment to a

deceased recipient would not be covered under proposed Sec. 210.6(e),

but would be governed solely by subpart B.

Proposed Sec. 210.6(f) is substantially unchanged from

Sec. 210.10(c) of current part 210 and Sec. 210.4(i) the 1994 NPRM.

The Service proposes to add a new Sec. 210.6(g) to address the

Federal Government's initiation of reversals. As discussed in the

analysis of proposed Sec. 210.4(b) above, a recipient who executes an

authorization agrees, among other things, that the Federal Government

may reverse duplicate or erroneous entries or files, as provided in

proposed Sec. 210.6(g).

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 that 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 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 Social Security Administration (SSA) suffers annual losses of

between one and two million dollars due to misdirected payments. SSA

has expressed concern that, as the number of Direct Deposit payments

dramatically increases, additional millions could be misdirected as a

result of data entry errors. The ability to effect reversals is an

important way in which the Federal Government can 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 Federal Government.

With respect to certain types of payments, however, the Federal

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 Federal

Government may recover overpayments. For example, in the context of

Federal benefit payments, the Federal Government may be required to

provide a notice and hearing prior to taking action to recover

payments, or may be limited in the amount, timing or manner in which an

overpayment is recovered. The Service is not proposing to address the

operation of these requirements in Part 210 because the applicable

requirements may vary depending on the type of the payment. It is the

agency's responsibility to determine before certifying a reversal that

the reversal will not violate any applicable laws or regulations.

The 1994 NPRM addressed reversals in the context of recipient

authorizations: By executing an authorization, a recipient agreed that

the Federal Government reserved the right to use reversal entries in

the event that it originated duplicate files or entries in error.

Several commenters on the 1994 NPRM requested clarification as to

whether the Federal Government, when initiating reversals, would be

bound by any ACH Rule requirements that generally apply with respect to

reversals, such as the five (5) day reversal deadline. It is the

intention of the Service that all ACH Rule requirements would apply to

Federal Government-initiated reversals except that the extent of the

Federal Government's indemnification would be limited to the amount of

the entry(ies). The proposed rule has been amended to clarify this

point.

Section 210.7--Federal Reserve Banks

The Service proposes to reorganize and expand Sec. 210.6 of current

part 210 as Sec. 210.7 of proposed part 210 to more clearly present the

role and responsibilities of the Federal Reserve Banks. As discussed

below, most of proposed Sec. 210.7 either was previously proposed at

Sec. 210.5 of the 1994 NPRM or is unchanged from current Sec. 210.6.

However, one change from both the 1994 NPRM and current part 210

relates to the timing of settlement and funds availability. In the 1994

NPRM, the Service had proposed to combine subsections 210.6(c) and

210.6(e) of current part 210 and to substitute the ACH term

``settlement date'' for ``payment date,'' to reflect that for credit

entries initiated by an agency, entry information and funds were to be

made available by the Federal Reserve Bank no later than the opening of

business on the settlement date.

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 now proposes to delete as unnecessary the

[[Page 5437]]

provisions from both part 210 and the 1994 NPRM relating to funds

availability since those requirements are addressed under the Federal

Reserve Bank Uniform Operating Circular on ACH items.

It should be noted that some commenters on the 1994 NPRM were

concerned about the substitution of the term ``settlement date'' for

the term ``payment date'' in current part 210. These commenters argued

that the substitution of the term ``settlement date'' for ``payment

date'' could result in delaying some payments beyond the statutorily

required day on which payment must be made. The commenters further

argued that payees who receive payments electronically would be

disadvantaged as compared with check recipients. For example, Federal

statutes require that certain annuity payments made by the Railroad

Retirement Board or the Office of Personnel Management must be made on

the first day of the month. These agencies pointed out that when the

first day of the month falls on a Saturday, checks are dated for the

first date of the month and delivered on Saturday. The commenters did

not indicate what happens when the first of the month falls on a

Sunday. The commenters pointed out that recipients who receive their

payments by EFT will be at a disadvantage as compared with check

recipients because check recipients will receive their payment on

Saturday whereas other recipients will not receive payment until the

``settlement date'', which would be Monday.

Because the mandatory EFT provisions of the DCIA require all

payments made by an agency, except tax refunds, to be made

electronically, the equity issues raised by commenters in 1994 should

be largely moot. Moreover, the substitution of the term ``settlement

date'' for ``payment date'' will not change the date on which payment

will be available under current part 210. Current part 210 defines 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.

Current Part 210 provides 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.'' Thus, under the example cited above, where the first of the

months falls on a Saturday, payment currently would not be made until

Monday. Therefore, this issue is not related to the use of the term

``settlement date'' as opposed to ``payment date;'' rather, this issue

is related to the nature of electronic payments and the banking

industry generally.

The Service recognizes that this issue will need to be addressed by

those agencies subject to such constraints, and solicits comment on

ways in which this issue could be addressed. For example, the Service

solicits comment on the feasibility of initiating certain payments one

or two days early in order to ensure that the recipient receives the

funds on the day preceding the statutorily prescribed payment date,

rather than one or two days later.

The Service proposes to move current Sec. 210.6(a) and

Sec. 210.6(f) to proposed Sec. 210.7(a). In addition, the Service

proposes to specify in proposed Sec. 210.7(a) that each Federal Reserve

Bank, as the Fiscal Agent of the Service, serves as the Federal

Government's ACH Operator for Government entries. This language was

previously proposed at Sec. 210.5(a) of the 1994 NPRM. Proposed

Sec. 210.7(a) also incorporates the exclusion from liability set forth

at Sec. 210.5(e) of the 1994 NPRM. The phrase ``notwithstanding the

applicable 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.

The Service proposes to add Sec. 210.7(b) 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.

This provision was previously proposed by the Service at Sec. 210.5(b)

of the 1994 NPRM.

Section 210.8--Financial Institutions

Proposed Sec. 210.8 addresses the obligations of financial

institutions with respect to Government entries, which are set forth at

current Sec. 210.7. The Service proposes to remove as unnecessary many

of the provisions of Sec. 210.7 of current part 210 because they are

addressed in the ACH Rules. For example, current 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, Sec. 210.7(f),

(f)(1), (f)(2), and (f)(4) of current Part 210 have been deleted since

the ACH Rules address these provisions.

Proposed Sec. 210.8(a) addresses an RDFI's obligations with respect

to prenotifications. 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

purpose of a prenotification is to verify the accuracy of the account

data. Proposed Sec. 210.8(a) specifies that if an agency initiates a

prenotification entry, the RDFI has certain obligations associated with

that entry; specifically, the RDFI must verify that the account number

and one other item of information in a prenotification entry both

relate to the same account. This requirement is not imposed on RDFIs

under the ACH Rules, as reflected by the phrase ``[n]otwithstanding the

applicable ACH Rules.'' Therefore, the obligation imposed in this

section, and the corresponding liability to which a financial

institution would be subject under Sec. 210.8(c) if it failed to verify

a prenotification, would supersede the ACH Rules with respect to

agency-initiated prenotifications.

The Service proposed to add this requirement to part 210 in the

1994 NPRM. The 1994 NPRM proposed to require RDFIs to verify, in the

prenotification, the recipient's account number and at least one other

identifying data element. The 1994 NPRM gave the authorizing

recipient's name as an example of an identifying data element. A number

of financial institutions objected to this requirement on the basis

that automated systems now in place at many large financial

institutions cannot perform this verification and that financial

institutions rely on account numbers only. Five commenters expressed

specific concern over the recipient's name being used as an example of

another identifying data element. Financial institution commenters

pointed out that manual processing would be required to verify the

recipient's name. Conversely, the Social Security Administration (SSA)

suffers annual losses of between one and two million dollars due to

misdirected payments. SSA has expressed concern that, as the number of

Direct Deposit payments dramatically increases, additional millions

could be misdirected as a result of data entry errors.

The Service recognizes that the automated payments processing

systems currently utilized by some financial institutions may not have

the operational capability to verify recipients' names. However, the

Service understands that some financial institutions are working toward

implementing systems changes that will permit verification of

recipients' names. The Service believes that the reduction

[[Page 5438]]

in misdirected entries that could be achieved by requiring verification

of prenotifications is significant enough to warrant the requirement.

Therefore, this proposal retains the additional ``identifying data

element'' requirement.

The Service proposes to redesignate Sec. 210.7(g) of current part

210 as proposed Sec. 210.8(b) without making any substantive change.

The Service proposes to add a new Sec. 210.8(c) to provide 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 subsections 210.8(c)(1) and (2). The

phrase ``[n]otwithstanding the applicable ACH Rules'' indicates 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, proposed Sec. 210.8(c) 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 under the applicable ACH Rules 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 Article 4A of the Uniform Commercial

Code, which would apply to credit entries to non-consumer accounts, the

liability of financial institutions which fail to handle entries

properly generally does not extend to all resulting losses, but does

include imputed interest in certain circumstances. Because the Service,

as a general matter, is proposing to limit the Federal Government's

liability under part 210 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, proposed

Sec. 210.8(c) would preempt the extent of the liability to which

financial institutions are subject under both the ACH Rules and 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 in a

timely manner, Sec. 210.8(c) would limit the RDFI's liability to the

Federal Government to the amount of the entry, thereby preempting the

Article 4A rule that imposes liability on the financial institution for

imputed interest for the period of the delay. Proposed Sec. 210.8(c) is

not intended to affect a financial institution's liability under

subpart B.

Proposed Sec. 210.8(c) represents a change from the 1994 NPRM,

which provided that a financial institution would be liable for losses

sustained by the Federal Government ``if the Government has correctly

handled the entry(ies).'' Several commenters pointed out that the

language proposed in the 1994 NPRM could have the effect of imposing

liability on a financial institution even where the financial

institution had complied with its obligations under part 210. It is not

the intention of the Service to impose liability on a financial

institution under this section unless the financial institution has

failed to meet an obligation to which it is subject. Rather, for any

obligation imposed on financial institutions under part 210, proposed

Sec. 210.8(c) would impose liability on a financial institution for a

loss to the Federal Government resulting from the financial

institution's failure to meet that obligation. For example,

Sec. 210.6(f) of this NPRM provides that an agency generally will be

liable to an RDFI for erroneous or duplicate entries originated by the

agency. However, Sec. 210.8(a) of this NPRM requires that if the

Federal Government initiates a prenotification, the RDFI must verify an

entry item in addition to the account number. Thus, if the Federal

Government initiated an erroneous entry and the RDFI failed to verify

the prenotification, the RDFI would be liable for any loss to the

Federal Government, up to the amount of the entry(ies), if the error

would have been detected by verifying the prenotification.

The Service proposes to add a new Sec. 210.8(c)(1) to make it

absolutely clear that a financial institution may not originate or

transmit a debit entry to an agency without the prior written

authorization of the Service. As previously discussed, debit entries to

the Treasury General Account (TGA) represent a significant security

concern for the Service. By expanding the use of the ACH system to

allow for Federal Government payments by a debit to the TGA, the

possibility of unauthorized debits to the TGA arises. In carrying out

its responsibility of protecting the public trust, the Service believes

it is necessary to take precautions to ensure that such debits do not

occur. Therefore the Service proposes to require 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. Proposed Sec. 210.8(c)(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 the general rule that the Service is proposing, a financial

institution would be liable for any unauthorized debit entries

initiated to an agency in violation of this requirement. However, the

Federal 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 would include imputed interest

under proposed Sec. 210.8(c)(1). This provision is an exception to the

general limitation of a financial institution's liability to the amount

of an entry.

Commenters on the 1994 NPRM objected to the proposal to permit the

Service, in the case of unauthorized debits, to instruct the Federal

Reserve Bank to debit the account used by the financial institution.

Such action, if necessary, represents a last step in recovering funds

that have not otherwise been recovered. Nevertheless, the right to

debit through the Federal Reserve Bank is a right that needs to be

retained by Treasury. This NPRM retains this provision because it is in

the best interest of the Federal Government and it is protective of

public funds.

Section 210.8(c)(2) of this NPRM restates the third and fourth

sentences of current Sec. 210.11(b). The Service proposes to expand

this section to address fraud for authorizations of both debits and

credits. 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 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. Proposed Sec. 210.8(c)(2)

operates to preempt these ACH and 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

[[Page 5439]]

financial institution accepts a forged authorization, the financial

institution rather than the Federal Government will be liable for the

entries effected in reliance on the forged authorization.

Proposed Sec. 210.8(d) sets forth the conditions under which a

financial institution's obligation for the amount of an entry is

acquitted, and is unchanged from Sec. 210.4(i) of the 1994 NPRM.

Subpart B--Reclamation of Benefit Payments

The Service proposes to restructure Subpart B of current Part 210

by adding a new Sec. 210.9--Parties to the reclamation. The other five

sections comprising proposed Subpart B (Secs. 210.10 through 210.14)

are a reorganization of the four existing sections on reclamations in

current 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 proposed

Sec. 210.2.

In the 1994 NPRM, the Service proposed to revise Subpart B in order

to provide a framework for paperless processing of reclamations. This

NPRM is intended to make Subpart B more flexible by deleting references

that would tend to limit the reclamation process to paper reclamations,

as the Service intends to move toward a more automated environment for

reclamations. In addition, however, in this NPRM the Service has

reorganized and rewritten current Subpart B in an attempt to clarify

the obligations and liabilities imposed on financial institutions under

current Subpart B. The Service is not proposing to change significantly

these obligations and liabilities at this time.

In order to simplify the regulation and enhance its flexibility

with respect to automating reclamations, the Service proposes to move

procedure-oriented provisions from Subpart B to the Service's Green

Book. Commenters on the 1994 NPRM requested that any reclamation

procedures differing from ACH Rules be implemented through amendments

to Part 210 itself rather than by amending the Green Book. As discussed

above with respect to Subpart A, the Green Book does not introduce new

rights and obligations that are not contained in the Code of Federal

Regulations. Instead, the Green Book provides specific operational

directions and procedures which put the regulatory requirements into

practice. Therefore, the Service proposes in this NPRM to remove

certain procedures and guidelines currently set forth in Part 210 to

the Green Book or Treasury Financial Manual, as proposed in the 1994

NPRM. All regulatory amendments would be promulgated for public comment

in the Federal Register. It should be noted that 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 proposes to add this new section to delineate the

differing roles of the financial institution, the Service, and the

agency that certified the benefit payments in question.

Proposed Sec. 210.9(a) restates provisions of Sec. 210.7(a) and

Sec. 210.14(d) of current Part 210, which provide 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.

The Service proposes to add a new Sec. 210.9(b) to clarify 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

In this section the Service proposes to define more clearly the

liability of RDFIs for benefit payments received after the death or

legal incapacity of the recipient or death of the beneficiary, and to

limit the extent of that liability.

Proposed Sec. 210.10(a) restates the rule set forth at

Sec. 210.12(a) of current 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 the recipient or death of the 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 the recipient or death of the beneficiary. Accordingly, the RDFI is

instructed to return all benefit payments received after it learns of

the death or legal incapacity of the recipient or death of the

beneficiary. This obligation applies whether the RDFI has received a

notice of reclamation or learned of the death or legal incapacity on

its own.

The Service proposes to restate the provisions of Sec. 210.13(c) of

current part 210 at proposed Secs. 210.10(b) and 210.10(c). Current

Sec. 210.13(c) contains provisions governing both an RDFI's

responsibilities upon its discovery, or imputed knowledge of, the death

or legal incapacity of a recipient or death of a beneficiary and an

RDFI's responsibilities upon receipt of a notice of reclamation.

Dividing these provisions into two separate subsections provides a

clearer delineation of an RDFI's responsibilities.

In the 1994 NPRM, the Service proposed a six-year limitation on an

RDFI's liability for post-death and post-incapacity payments in order

to provide RDFIs with relief from otherwise 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. Cases

in which such payments continue for more than six years are infrequent

and therefore the proposed six-year limitation, while providing

protection to RDFIs in these relatively rare circumstances, likely will

have a minimal impact on the overall recovery of funds by the Federal

Government. Financial institutions that commented on the 1994 NPRM

generally supported the six-year limitation also supported requiring

financial institutions to cooperate with the Federal Government's

reclamation efforts after the expiration of any applicable time

limitation.

The six-year limitation has been reworded in proposed

Sec. 210.10(d) of this NPRM to clarify that it is the most recent six

years of payments (rather than the six years of payments immediately

following the death or incapacity) that is relevant to determining the

amount that an agency can reclaim. In addition, the Service is

proposing to provide an exception to the six-year limitation where the

amount in the account at the time the RDFI receives the notice of

[[Page 5440]]

reclamation 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. For example, if payments had been made for twenty years

following the death of a recipient, and the amount in the account was

equal to or exceeded the total amount of the payments made during the

twenty years, the RDFI would be liable for the full amount of all

payments made over the twenty-year period. In the foregoing example, if

the amount in the account when the RDFI received the notice of

reclamation was equal to the most recent ten years of payments (less

than the full twenty years of payments but more than the six-year

amount), the RDFI would be liable for an amount equal to the amount in

the account, i.e., the most recent ten years of payments.

Proposed Sec. 210.10(d) also incorporates a requirement proposed in

the 1994 NPRM that an agency must initiate a reclamation within a

certain period of time after learning of the death or incapacity of the

recipient or death of the beneficiary. Section 210.10(g) of the 1994

NPRM proposed a 12-month period following knowledge of the death or

incapcity for initiation of the reclamation. The Service proposes in

this NPRM to shorten that period to 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

Federal 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.

Proposed Sec. 210.10(e) restates a rule of reclamations set forth

at Sec. 210.13 (c) and (d) of current part 210: the Federal Government

has the right to debit the RDFI's reserve 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, 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 is set

forth at current Sec. 210.13(c), is a procedural item that may change

with the automation of reclamations. Therefore, the Service proposes to

relocate this requirement to the Green Book.

Section 210.11--Limited Liability

The Service does not propose to change the criteria which an RDFI

must meet in order to limit its liability under Subpart b. The Service

does propose to reword the provisions setting forth the criteria to

achieve greater clarity.

Proposed Sec. 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 Sec. 210.12(b) of current part 210 and, although reworded,

does not change significantly the substantive operation of the current

formula.

Section 210.12(d) of current part 210 sets forth 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 believes that the description of due diligence is confusing and

difficult to apply. Therefore, the Service proposes to utilize the

definition of ``actual or constructive knowledge'' set forth at

proposed Sec. 210.2.

Under current part 210, one of the factors relevant to determining

the extent of an RDFI's limited liability is the amount in the account.

Current Sec. 210.13(b)(2)(i) defines 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 Federal Government.

Current part 210 provides that a reasonable time to take action is not

later than the close of business on the day following the receipt of

the notice of reclamation. In Sec. 210.10(i)(2)(ii) of the 1994 NPRM,

the Service proposed to add that the amount in the account would not be

reduced for debit card withdrawals, automated withdrawals, pre-

authorized debits, non-Federal Government reclamations, and forged

checks or other comparable instruments made after the RDFI had

knowledge of the death or incapacity of the recipient or death of the

beneficiary. Some commenters on the 1994 NPRM objected to the proposed

change on the basis that it would shift the risk of liability to the

RDFI for all debits, both legitimate and fraudulent, made during this

period.

The Service has experienced many instances in which the ``amount in

the account'' for reclamation purposes has been reduced by ATM

withdrawals and the RDFI cannot provide information regarding the

identity of the withdrawer. Without this information, the Service

cannot pursue recovery from the withdrawer(s). The Service therefore

believes that the funds recovered through the reclamation process can

be increased if the Service does not allow ATM withdrawals and other

debits to reduce the calculation of the amount in the account. Under

proposed Subpart B, the amount in the account is the account balance at

the time the RDFI receives the notice of reclamation. The ``reasonable

time to take action'' language in current Sec. 210.13(b)(2)(i) has been

eliminated; therefore, any withdrawals subsequent to the RDFI's receipt

of the notice of reclamation will not reduce the ``amount in the

account.'' RDFIs can take whatever steps may be permitted under their

account agreements and applicable law to reduce their exposure, such as

blocking debits to an account upon receipt of a notice of reclamation.

Proposed Sec. 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 proposed 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.

Proposed Sec. 210.11(b)(1) is taken from Sec. 210.13(b)(2) of

current part 210. Proposed Sec. 210.11(b)(2) incorporates the last

sentence of current Sec. 210.13(b)(1), and adds the requirement that

the RDFI certify the date the RDFI first had information of the death

or legal incapacity of the recipient or death of the beneficiary even

if such information was obtained first through notice received from the

agency. Requiring these certifications, in combination with the

authority of the Federal Government to debit the RDFI's reserve account

as provided in proposed Sec. 210.10(e), underscores that the burden is

on the RDFI to demonstrate its qualification for limited liability.

Section 210.13(b)(2)(ii) of current Part 210 has been relocated to

proposed Sec. 210.11(b)(3).

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 proposed Sec. 210.11(a)(1), if the

agency is unable to collect the remaining amount of the outstanding

total, the Federal Government will debit the RDFI's reserve account at

its Federal Reserve Bank (or the correspondent account utilized by the

RDFI) for the amount specified in proposed Sec. 210.11(a)(2).

Proposed Sec. 210.11(d) incorporates the current Sec. 210.12(e) and

broadens the scope of an RDFI's forfeiture of its rights to limit its

liability if the RDFI fails to

[[Page 5441]]

comply with any provision of Subpart B. 210.12--RDFI's rights of

recovery

Proposed Sec. 210.12(a) restates the principle set forth in current

Sec. 210.14(c) and in Sec. 210.10(d) of the 1994 NPRM that in

reclaiming funds from an RDFI, the Federal 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.

Proposed Sec. 210.12(b) restates without substantive change

Sec. 210.14(d) of current Part 210, which was set forth at

Sec. 210.10(h) of the 1994 NPRM.

Section 210.13--Notice to Account Owners

Proposed Sec. 210.13 is based on Sec. 210.14(a) of current Part

210, but has been changed slightly to provide for the possibility of an

automated reclamation process by the addition of the phrase ``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. The Service proposed in the 1994 NPRM to

add language to the regulation indicating that the Federal Government

might require proof that the RDFI had mailed written notice and that

such proof might include (but would not be limited to) a file copy of

the notice, a certified mail receipt, or documentation pertaining to

the standard operating procedure of the RDFI that such a notice is sent

routinely. The reference to a mailed written notice and the types of

proof that might be appropriate in connection with such a notice have

been deleted in this NPRM in keeping with the Service's effort to

eliminate paper-oriented requirements from Subpart B.

Section 210.14(b) of current Part 210 requires 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 intrudes unnecessarily into the

relationship between the RDFI and its customer and conflicts with the

principle that reclamations are actions between the Federal Government

and the RDFI, and not between the Federal 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 proposed section is based upon Sec. 210.15 of current part

210, with certain additions and deletions. Much of current Sec. 210.15

is procedural information which the Service proposes to move to the

Green Book, where it is more appropriately located. In particular, the

Service proposes to relocate to the Green Book the procedures that

RDFIs are to follow in correcting erroneous death information (codified

in current Sec. 210.15(a)(1) and (2) and Sec. 210.15(c)). The Service

proposes to eliminate from the regulation and move to the Green Book

the 60-day time limit for the RDFI to return the completed notice of

reclamation to the Federal 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. The Service is

not eliminating this requirement as part of the paper reclamation

process, but rather is placing it with other procedures and operational

guidelines in the Green Book. Any automated reclamation procedures

developed or used by the Federal 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 proposed Sec. 210.14(b) that the Service proposes

to add to this section seek to 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 Federal agencies and does not make decisions as to the

underlying obligations.

Subpart C--Discretionary Salary Allotments

The Service proposes in this NPRM to remove subpart C from part

210. Subpart C of current part 210 provides that discretionary

allotments from Federal employees' wage and salary payments permitted

by the issuing agency may be made through the ACH system and shall be

subject to Part 210. The Service determined that subpart C is redundant

since the substance of Subpart C is 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. Under Part 208, Federal agencies are required

to make all Federal payments, including allotments, by EFT. 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.

Rulemaking Analysis

Treasury has determined that this proposed 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 business entities. The proposed

rule does not require any actions on the part of small entities.

Accordingly, a Regulatory Flexibility Act analysis is not required.

List of Subjects in 31 CFR Part 210

Automated Clearing House, Electronic funds transfer, Financial

institutions, Fraud, Incorporation by reference

Authority and Issuance

For the reasons set out in the preamble, 31 CFR part 210 is

proposed to be 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 benefit 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

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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 or that the RDFI would have

discovered the death or incapacity if it had followed commercially

reasonable business practices.

(c) Agency means any department, agency, or instrumentality of the

Federal Government, or a corporation owned or controlled by the Federal

Government. The term agency does not include a Federal Reserve Bank.

(d) Applicable ACH Rules means the ACH Rules published in the

``1997 ACH Rules,'' including all rule changes published therein with

an effective date on or before September 19, 1997, 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 1.2.3 (governing the arbitration of disputes);

(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 natural person or entity

that is appointed or otherwise selected as a representative payee or

fiduciary, under regulations of the Railroad Retirement Board, the

Social Security Administration, the Department of Veterans Affairs, or

other agency making benefit payments, to act on behalf of a

beneficiary.

(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 Board Retirement and Annuity,

Department of Veterans Affairs Compensation and Pension, and Worker's

Compensation. For purposes of Sec. 210.5 of this part, the term

``benefit payment'' shall not include a Federal retirement payment.

(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) An entity described in section 19(b)(1)(A), excluding

subparagraphs (v) and (vii), of the Federal Reserve Act (12 U.S.C.

461(b)(1)(A)). Under section 19(b)(1)(A) of the Federal Reserve Act and

for purposes of this part only, the term ``depository institution''

means:

(A) 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);

(B) 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);

(C) 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);

(D) 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); or

(E) 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

(ii) 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. The Green Book is available for

downloading at the Service's web site at http://www.fms.treas.gov/ 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.

(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 the recipient or death of the

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

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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 Financial Manual (TFM) 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 Department of the Treasury. The TFM 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.

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 published in the

``1997 ACH Rules,'' including all rule changes published therein with

an effective date on or before September 19, 1997. Copies of the ``1997

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 19, 1997, 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 Register document 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.

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 by an agency or similarly

authenticated, no person or entity shall initiate or transmit a debit

entry to that 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(g) 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 ownership of a deposit account as reflected in the deposit account

records, including the removal or addition of the name of a 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. If an RDFI closes an account, 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 benefit payments.

(a) Notwithstanding ACH Rule 2.1.2, an ACH credit entry

representing a benefit payment shall be deposited into an account at a

financial institution and, except as provided in paragraph (b) of this

section, such account shall be in the name of the recipient.

(b)(1) Where an authorized payment agent has been selected, the

benefit payment shall be deposited into an account titled in accordance

with the regulations governing the authorized payment agent.

(2) Where a benefit payment is to be deposited into an investment

account established through a securities broker or dealer registered

under the Securities Act of 1934, such payment may be deposited into an

account in the name of the broker or dealer, provided the account and

all associated records are structured so that the beneficiary's

interest is protected under applicable Federal or state deposit

insurance regulations.

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) Prenotifications. An agency, at its discretion, may send a

prenotification prior to origination of the first credit entry to a

recipient. An agency shall send a prenotification prior to origination

of the first debit entry to an account.

(c) 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).

(d) Liability to an originator. An agency will be liable to an

originator or an ODFI for any loss sustained by the

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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).

(e) 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. An agency shall not be

liable to any ACH association.

(f) Acquittance of the agency. The crediting of the amount of an

entry to a recipient's account shall constitute full acquittance of the

Federal Government.

(g) 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 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 ACH Rule 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) Prenotifications. Notwithstanding ACH Rules 2.3 and 4.1.4, upon

receipt of a prenotification originated by an agency, an RDFI shall

verify the recipient's account number and at least one other

identifying data element contained in the entry.

(b) Status as a Treasury depositary. The origination or receipt of

an entry subject to this part does not render an RDFI a Treasury

depositary. An RDFI shall not advertise itself as a Treasury depositary

on such basis.

(c) 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.

(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 reserve 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.

(d) Acquittance of the financial institution. The 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 for the amount of the entry. Full acquittance of the ODFI

shall not occur if the entries do not balance, are incomplete, are

clearly incorrect, or are incapable of being processed.

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 the 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

other than 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 may initiate a reclamation 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

amount in the account at the

[[Page 5445]]

time the RDFI receives the notice of reclamation exceeds the total

amount of all 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.

(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 debit the reserve 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, 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 information of the death or

legal incapacity of the recipient or death of the beneficiary, even if

such information was obtained first through notice received from the

agency;

(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 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 reserve account utilized by the RDFI at that

Federal Reserve Bank for the amount specified in Sec. 210.11(a)(2).

(d) Forfeiture of rights. 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 deemed to have

forfeited its right to limit its liability under this subpart and shall

be liable to the agency for the amount of the benefit payments at

issue.

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 directed the Service to reclaim

of 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 reserve account utilized

by the RDFI at the Federal Reserve Bank in the amount of the improperly

reclaimed funds.

Dated: January 23, 1998.

Richard L. Gregg,

Acting Commissioner.

[FR Doc. 98-2042 Filed 1-30-98; 8:45 am]

BILLING CODE 4810-35-P