Federal Government Participation in the Automated Clearing House

SUMMARY: The Department of the Treasury, Financial Management Service

(Service), is revising its regulation, 31 CFR Part 210 (Part 210),

governing the use of the Automated Clearing House (ACH) system by

Federal agencies (agencies). The ACH system is the primary electronic

funds transfer (EFT) system used by agencies to make payments, and the

Service anticipates that agencies increasingly will use the ACH system

to collect funds. Part 210 provides the regulatory foundation for use

of the ACH system by agencies. It defines the rights and liabilities of

agencies, Federal Reserve Banks, financial institutions, and the

public, in connection with ACH credit entries, debit entries, and entry

data originated or received by an agency through the ACH system.

DATES: This rule is effective May 10, 1999. The incorporation by

reference of the publication listed in the rule is approved by the

Director of the Federal Register as of May 10, 1999.

ADDRESSES: This rule is available on the Financial Management Service's

ACH web site at the following address: http://www.fms.treas.gov/ach/.

FOR FURTHER INFORMATION CONTACT: Walt Henderson, Senior Financial

Program Specialist, at (202) 874-6705; Mary Bailey, Financial Program

Specialist, at (202) 874-6749; Natalie H. Diana at (202) 874-6590;

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

Division, at (202) 874-6590; or Margaret Marquette, Senior Attorney, at

(202) 874-6681.

SUPPLEMENTARY INFORMATION:

I. Background

A. Introduction

The ACH system is a nationwide 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 (Government) is the largest single user of the ACH

system, originating and receiving millions of transactions each month.

As the Government's financial manager, the Service collects and

disburses funds for most agencies. In fiscal year 1998, approximately

63% of payments made by the Department of the Treasury (Treasury) were

made through the ACH system. In addition, a growing number of

transactions involving the collection of funds by agencies are being

made through the ACH system. In fiscal year 1998, over $1.1 trillion in

corporate tax payments was collected electronically.

Two laws are responsible for the substantial increase in the use of

the ACH system by 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)) mandate the use of EFT for the

collection of certain Federal taxes. Provisions in the Debt Collection

Improvement Act of 1996 (DCIA), Pub. L. No. 104-134, require that most

Federal payments (other than payments under the Internal Revenue Code

of 1986) be made by EFT.

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. 31 CFR Part 203 (Payment of Federal Taxes

and the Treasury Tax and Loan Program) addresses the rights and

responsibilities of taxpayers, financial institutions, and Federal

Reserve Banks in connection with EFTPS. 63 FR 5644.

On September 25, 1998, Treasury published a final rule, 31 CFR Part

208 (Part 208), implementing the requirement of the DCIA that agencies

convert from check to EFT payments, subject to the waiver authority of

the Secretary of the Treasury. 63 FR 51490.

The Service anticipates that the ACH system will be the dominant,

though not exclusive, EFT system used by agencies to make payments and

to collect funds. Part 210 provides the regulatory foundation for use

of the ACH system by agencies.

B. Proposed Rulemakings

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

Rulemaking with respect to Part 210. 59 FR 50112. After considering the

comments received on the 1994 proposed rule, and taking into account

developments since that proposal was issued, the Service issued a new

Notice of Proposed Rulemaking on February 2, 1998 (NPRM). 63 FR 5426.

The NPRM proposed to adopt the ACH rules developed by the National

Automated Clearing House Association (NACHA) (ACH Rules) as the rules

governing all Government ACH transactions, with twelve exceptions for

which the Service proposed to establish special rules as a matter of

Federal law.

The Service received 26 comment letters on the NPRM. Commenters

generally supported the adoption of the ACH Rules as the rules

governing Government ACH transactions, but had differing views

regarding the twelve proposed exceptions. Some financial institutions

commented that Federal payments should be subject to the ACH Rules

without variation or exception, commenting that imposing liability on

financial institutions for losses resulting from Government errors and

omissions will damage efforts to expand the use of the ACH as a vehicle

for making Federal payments, and may have pricing implications for

recipients of Federal payments. Other financial institutions and

agencies commented that certain of the twelve proposed exceptions were

not appropriate. Specific comments are discussed in the section-by-

section analysis below.

C. Final Rule

Part 210, which implements Treasury's statutory responsibility to

collect and disburse public funds, establishes the rights and duties of

parties to transactions originated or received by 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

(RDFIs), and performs the settlement function for the affected

financial institutions; (4) the RDFI, which is the institution that

receives ACH entries from the ACH Operator and posts them to the

accounts

[[Page 17473]]

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, 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 Government payments and

collections and that distinguish 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 agencies, the

Service, and the Federal Reserve Banks with respect to the origination

or receipt of an ACH entry. Due to the bifurcation of function between

certifying and disbursing agencies, Government operations do not

conform to the definitions in the ACH Rules. From a functional

perspective, the 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, an

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 agencies originating

and receiving ACH entries. Accordingly, although it is the Service's

view that 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 agencies that originate or

receive ACH entries the obligations and liabilities imposed on ODFIs

and RDFIs, respectively, for purposes of the ACH Rules. Part 210

therefore is structured on the premise that 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.

After reviewing the comments and further considering the issues

raised, the Service has determined to preempt 11 provisions of the ACH

Rules.2 In view of the special nature of Government entries,

and the importance of protecting public funds, the Service believes

that it is in the best interest of the public to preempt the 11

provisions of the ACH Rules described briefly below, for reasons

discussed in more detail in the section-by-section analysis.

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\2\ The NPRM proposed to preempt 12 provisions of the ACH Rules.

As discussed in the section-by-section analysis, the final rule

deletes from the listing of provisions to be preempted the provision

related to arbitration and replaces it with a provision related to

rules enforcement. In addition, the provision related to

prenotifications has been deleted, leaving a total of 11 provisions

to be preempted.

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The following five ACH Rules are preempted entirely and are

excluded specifically from Part 210's definition of ``applicable ACH

Rules'' (see Sec. 210.2(d)):

1. ACH members. Part 210 preempts the limitation on the

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

2. Compensation. Part 210 preempts the compensation rules set forth

in the ACH Rules.

3. Rules Enforcement. Part 210 preempts the requirement under the

ACH Rules that participants agree to be subject to a national system of

fines to ensure compliance with 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. 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

Part 210 entirely preempts through the definition of ``applicable ACH

Rules,'' six other provisions of the ACH Rules are preempted in part by

operation of specific sections of Part 210. Those provisions are:

1. Verification of identity of recipient (see Secs. 210.4(a) and

210.8(b)(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.

Part 210 imposes a different rule for Government entries. Specifically,

under 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 Government for

all entries made in reliance on a forged authorization that the

institution has accepted. Thus, 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 agencies (see

Secs. 210.4(a)(2) and 210.8(b)(1)). Part 210 preempts the ACH Rules

with respect to the form of authorization required to initiate debit

entries to an 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

Sec. 210.4(a), no person or entity (including any financial

institution) may initiate or transmit a debit entry to an agency, other

than a reversal of a credit entry, 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 Sec. 210.8(b)(1).

3. Liability of the Government

(a) Amount of damages (see 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 ACH Association as a result of the RDFI's or ODFI's breach

of any warranty. Thus, under the ACH Rules, an 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, an agency

that receives payments would be liable for all losses resulting from

any breach by it of an applicable warranty under the ACH Rules.

Section 210.6 limits an agency's liability to the amount of the

entry whether it is originating or receiving

[[Page 17474]]

ACH entries. Therefore, an agency would not be liable to a DFI, ACH

Operator, or ACH Association for interest, attorneys' fees, or other

consequential damages. In addition, in certain circumstances, an

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 Sec. 210.7(a)). Part

210 preempts section 11.5 of the ACH Rules, which provides that a

Federal Reserve Bank is not the agent of an RDFI or ODFI. Part 210

provides that Federal Reserve Banks are Fiscal Agents of the Treasury

in carrying out their duties as the Government's ACH Operator and are

not liable to any party other than the Treasury for their actions under

Part 210.

4. Liability of financial institutions (see Sec. 210.8(b)). Part

210 preempts the provisions of the ACH Rules that would operate to make

a financial institution liable to the Government for any loss,

liability or claim relating to an entry in an amount exceeding the

entry. The ACH Rules impose liability on an RDFI or ODFI for all

losses, liabilities, or claims incurred by another DFI, ACH Operator,

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

warranty. Under Part 210, a financial institution would not be liable

to the Government for interest, attorneys' fees, or other consequential

damages, except in the case of an unauthorized debit to an agency, as

discussed above.

5. Reversals (see Sec. 210.6(f)). Part 210 requires 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, Part 210 applies the ACH Rules relating to

indemnification to the Government, but limits the extent of the

indemnification to the amount of the individual entry(ies) being

reversed.

6. Account requirements for Federal payments (see Sec. 210.5). Part

210 imposes a requirement with respect to ACH credit entries

representing Federal payments other than vendor 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 three exceptions discussed in the section-by-section analysis. The

term ``account'' for purposes of 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 September 2000, to permit the crediting

of ACH credits to a financial institution general ledger account or to

a loan account. Because of the consumer protections associated with the

crediting of Federal payments to a deposit account, including those

available under Regulation E (12 CFR Part 205) and Regulation DD (12

CFR Part 230), as well as the availability of Federal deposit or share

insurance, the Service does not intend to accept this ACH Rule with

respect to payments other than vendor 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 establishing some of these rights in Part 210 with

respect to agencies vis-a-vis originators or receivers of Government

entries. For example, Part 210 provides that an agency will be liable

to a 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 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. Part 210 establishes certain circumstances in

which an entry shall be deemed to be unauthorized.

D. Future Changes to Subpart B

The NPRM solicited preliminary comment on the reorganization of

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. In addition, the

Service requested comment on ways in which the reclamation process

might be restructured in the future to operate more efficiently as a

fully automated process.

In order to begin formulating a preliminary approach to

implementing an automated reclamation process, the Service solicited

comment on whether the protection afforded to financial institutions by

the limited liability provisions of Subpart B is outweighed by the

processing costs of handling reclamations. In particular, the Service

requested 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.

Although commenters generally expressed conceptual support for

increased automation of reclamation processing, most commenters did not

favor moving toward an automated reclamation process at this time. One

agency questioned the business case for replacing the current paper

reclamation process with a form of automated reclamation. That agency

indicated that the use of death notification entries (DNEs) has

significantly reduced the number of reclamation requests produced and

that, at the same time, payment cycling is causing a significant

reduction in reclamations because the agency has additional time to

receive and act on reports of recipients' deaths. The agency commented

that these enhancements reduce the need for a future electronic

reclamation process.

Some financial institutions commented that the approach outlined in

the NPRM would substantially increase financial institutions' losses

from reclamations without a corresponding reduction in expenses. One

financial institution pointed out that it would expect to perform much

of the same research under the Service's suggested approach as it

currently does in order to pursue reimbursement from the surviving

depositor(s) or the estate of the decedent. Another financial

institution expressed support for assuming liability for any payments

received within a one-year period of the recipient's death, but

recommended that the Service continue the existing limitations on

financial institution liability for payments received more than one

year after the death of the recipient.

[[Page 17475]]

II. Section-by-Section Analysis of Part 210

The title of Part 210 has been changed to ``Federal Government

Participation in the Automated Clearing House'' to reflect the

broadened scope of the regulation to cover all types of transactions

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

system.

As revised, Part 210 is comprised of two subparts. Subpart A sets

forth rules applicable to all ACH credit and debit entries and entry

data originated or received by an agency, which are defined in the

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

for the reclamation of benefit payments. Subpart C, which dealt with

discretionary salary allotments, has been deleted as unnecessary

because it is 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.

Section 210.1--Scope; Relation to Other Regulations

Part 210 formerly covered only ACH payments made by the Government.

In the NPRM, the Service proposed to broaden the scope of Part 210 to

cover all entries and entry data originated or received by an agency

through the ACH system. Section 210.1 is revised as proposed in the

NPRM. Thus, Part 210 as amended applies to collections and the

information entries that are handled through the ACH system, as well as

to Federal payments made through the ACH system.

Part 210 establishes the general legal and operational framework

applicable to all ``Government entries'' as defined in the rule.

Federal tax payments made by ACH debit or credit are governed by 31 CFR

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 the 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 Part 210. Federal tax payments received by the

Government through the ACH system that are governed by Part 203 and ACH

entries for the purchase of, or payment of principal and interest on,

United States securities that are governed by Part 370 are not subject

to any provision of Part 210 that is inconsistent with Part 203 or Part

370, respectively.

Section 210.2--Definitions

The Service is revising this section, as proposed, to provide 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 is adding, removing, or redesignating certain other terms, as

indicated below.

The Service is deleting certain definitions from Part 210 because

Part 210, as revised, uses these terms in the same way as the ACH

Rules. Thus, the definitions of the terms ``banking day,'' ``business

day,'' and ``prenotification,'' have been deleted. In addition, the

term ``payment'' is not defined in revised Part 210 because Part 210

uses instead the ACH terms ``entry'' and ``credit.'' Similarly, the

term ``payment date'' is not defined because Part 210 uses instead the

ACH term ``settlement date.''

Other terms previously defined in Part 210, such as ``allotment,''

``allotter,'' ``discretionary allotment,'' ``employee,'' and

``nonbenefit payment'' have been deleted because they are not used in

revised Part 210. The terms ``account,'' ``payment instruction,'' and

``Federal Reserve Bank'' have been deleted as unnecessary.

The Service has added a definition of ``ACH Rules'' at

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

the NACHA Operating Rules and the NACHA Operating Guidelines.

The Service also has added a definition of ``actual or constructive

knowledge'' at 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 when it has received, by whatever means, any

information of the death or incapacity and has had a reasonable

opportunity to act upon the information. 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 incapacity. For example, an

RDFI would have actual knowledge of a death or legal incapacity through

a communication of that fact by an executor of the deceased recipient's

or beneficiary's estate, a family member, another third party, or the

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.

Although Part 210 previously did not contain a definition of

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

Subpart B of Part 210 provided 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 is not changing that standard, but is adding

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.

Financial institutions questioned whether the addition of a

definition of ``actual or constructive knowledge'' might be viewed to

broaden the circumstances under which a financial institution can be

liable in reclamation cases. Several commenters asked whether financial

institutions would have an obligation to check obituaries, noting that

Part 210 previously provided expressly that there is no such

obligation. One commenter stated that banks should not be responsible

for acting on the basis of unconfirmed information, regardless of its

source, and therefore suggested that the definition of actual or

constructive knowledge include the concept that the information should

come from an official source such as a death certificate, written

communication from a decedent's personal representative, or a copy of a

court order adjudicating a recipient's incapacity. The same commenter

pointed out that under the proposed standard, a bank might be deemed to

have knowledge of death prior to the time when the information is, or

should have been, brought to the attention of an employee who handles

benefit payments. The commenter urged that banks be permitted an

opportunity to communicate the information to the responsible

individual or department.

The deletion of the language formerly in Part 210 stating that

financial institutions are not required to check obituaries does not

mean that financial

[[Page 17476]]

institutions must check obituaries. The standard of constructive

knowledge set forth in the final rule, i.e., whether commercially

reasonable business practices would have resulted in discovery of the

recipient's death or incapacity, is a flexible concept. For example,

what is a commercially reasonable practice for a large money center

bank may not be commercially reasonable for a small rural bank.

Similarly, business practices that are not today technologically

feasible or cost-effective may become standard industry practices at

some future time. Thus, with regard to whether financial institutions

should be responsible for acting on the basis of unconfirmed

information, the Service declines to adopt a rule under which a

financial institution has knowledge of the death of a recipient only if

the information comes from an ``official source.'' Rather, whether a

financial institution would be deemed to have knowledge of a

recipient's death would depend on whether, given all the facts and

circumstances, a similarly situated financial institution would

reasonably conclude that the information was reliable.

The Service agrees that financial institutions need a reasonable

period of time to act on information of death or incapacity and, as

indicated above, has incorporated a provision to this effect in the

final definition. Some commenters indicated that banks utilizing batch

processing systems cannot activate a hold on an account following

receipt of notice until evening or the following day, depending on the

processing schedule. Accordingly, the Service believes that a

reasonable period of time will not exceed one business day, i.e.,

twenty four hours, excluding weekends or holidays.

The Service has added a definition of ``agency'' at Sec. 210.2(c)

to mean any department, agency, or instrumentality of the United States

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

the United States. Part 210 formerly used the term ``program agency.''

The change is not intended to alter the scope of Part 210. The

definition is identical to the definition of agency in Part 208, which

sets forth rules governing the mandatory use of EFT by Federal

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

expressly excludes Federal Reserve Banks.

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

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

Section 210.2(d) defines the term ``applicable ACH Rules'' to mean

the ACH Rules with an effective date on or before September 17, 1999,

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

Sec. 210.3. Part 210 completely preempts those ACH Rules that: govern

claims for compensation or reclamation of benefit payments; provide for

rules enforcement procedures; 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, Part

210 also preempts certain other provisions of the ACH Rules through

operation of particular sections of Part 210.

In the NPRM, the Service proposed to preempt the requirement under

the ACH Rules that disputes among participants be settled by

arbitration procedures set forth in the ACH Rules. Since the ACH Rules

have been amended, effective March 19, 1999, to make arbitration

voluntary rather than mandatory, the Service no longer believes it is

necessary to preempt the arbitration provisions of the ACH Rules.

However, since publication of the NPRM, NACHA has adopted a rule that

became effective on December 18, 1998, establishing a national system

of fines applicable to both financial institutions and access

participants for violation of the provisions of the ACH Rules. The

Service does not believe it is in the public interest to subject the

Treasury General Account (TGA) to an unquantified liability based on an

untested system of fines; therefore, at this time the Service is not

incorporating in Part 210 those provisions of the ACH Rules dealing

with enforcement for noncompliance. However, the Service intends to

work with agencies to achieve Government-wide compliance with all ACH

Rule requirements, including applicable time frames.

Other than the requirement that credit entries be originated no

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

technical or timing requirements imposed on 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 reversals and returns.

Many commenters objected to permitting agencies to originate an

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

entry. Some financial institutions pointed out that production and

storage costs are incurred by an RDFI to warehouse ACH entries and that

expanding the origination window increases the risk to which the RDFI

is exposed. For example, several financial institutions pointed out

that a DNE is ineffective to cause the automated return of a benefit

payment that has already been received but is being held or warehoused

pending settlement. Some agencies also indicated that there is no

reason that the Government cannot adhere to the two-day origination

deadline eventually, and that it would benefit the Government to do so

by allowing agencies more time to process reports that affect

continuing payment entitlement. The Service anticipates that in the

future agencies will be able to adhere to the two-day window and

expects to revise Part 210 accordingly at that time. However, because

there is not uniform operational capability to meet the two-day window

at this time, the Service has retained this preemption of the ACH Rules

in the final rule.

The Service is adding a definition of ``authorized payment agent''

at Sec. 210.2(e) in connection with the account requirements set forth

at Sec. 210.5. The definition has been reworded slightly from the

proposed definition in order to correspond 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, Sec. 210.5 would permit an

authorized payment agent to receive the payments on behalf of the

beneficiary. The Social Security Act, the 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.3 The Social Security Administration (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 former

Sec. 210.2 refers to representative payees and fiduciaries. SSA, the

Railroad Retirement Board, and the Department of Veterans Affairs have

issued detailed regulations addressing the qualifications

[[Page 17477]]

and duties of representative payees and fiduciaries.4 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 42 U.S.C. 1383(a)(2)(A)(ii)(i); 38 U.S.C. 5502(a)(1); 45

U.S.C. 231k, respectively.

\4\ See 20 CFR Parts 404, 410, 416, 266, and 348; and 38 CFR

Part 13, respectively.

---------------------------------------------------------------------------

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 definition is intended to refer to

such agencies.

The Service has added 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 EFT system that has adopted the ACH Rules.

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

reworded slightly from the definition previously set forth in Part 210

to reflect the addition of a definition of benefit payment, but

substantively is unchanged from the previous definition.

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

to the definition previously set forth in Part 210. The regulation

lists 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 Sec. 210.2(h).

The Service has added to Part 210 a definition of ``Federal

payment.'' The 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

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 or a taxpayer elects to make

using the ACH system are subject to Part 210 and thus are included

within the definition of Federal payment at Sec. 210.2(i).

The definition of ``financial institution'' in Sec. 210.2(j) is

identical to the definition contained in Part 208 except that the

Service has added a sentence noting that, in 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 definition of ``financial institution'' makes specific

reference to banks, savings banks, credit unions, savings associations,

and United States-based foreign bank branches. The 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, Part 210 previously applied only to credit

entries originated by an agency for the purpose of making payments. As

amended, Part 210 has a broader scope; it applies to all entries

originated or received by an agency, whether made for the purpose of

payments or collections or for information purposes.

The Service has added 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

published by the Service in the Green Book, as provided at

Sec. 210.3(c).

The term ``notice of reclamation'' at Sec. 210.2(m) means a notice

issued by the Government in a paper, electronic, or other form in order

to initiate a reclamation. This definition clarifies that the

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 Part

210 from Sec. 210.13(a), where it was previously located.

The Service has preserved the definition of ``outstanding total''

in Part 210 without substantive change.

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

similar to the corresponding definition in Part 208. The term includes

an authorized payment agent that receives a payment on behalf of a

beneficiary.

The term ``Service'' has been added at Sec. 210.2(p) to mean the

Financial Management Service, Department of the Treasury.

The term ``Treasury'' has been added at Sec. 210.2(q) to mean the

United States Department of the Treasury.

The Service has added a definition of the term ``Treasury Financial

Manual'' at Sec. 210.2(r) 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 Government-wide fiscal

responsibilities of the Treasury.

Section 210.3--Governing Law

Section 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. This approach is consistent with Clearfield

Trust Co. v. United States, 318 U.S. 363 (1943), and its progeny, which

support the principle that the Government can establish the rules that

govern 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

this function.

One commenter requested clarification regarding the extent to which

Article 4A of the Uniform Commercial Code (UCC Article 4A) is

applicable to Government entries. Treasury consistently has taken the

position that under Clearfield Trust, state law, including the Uniform

Commercial Code, is inapplicable to Federal payments and collections,

except to the extent that the state law is incorporated in Federal law.

However, UCC Article 4A is incorporated in the ACH Rules, which the

Service is adopting, and, therefore, will apply to Government entries

except as preempted in Part 210.

Section 210.3(b)(1) provides that Part 210 incorporates by

reference the applicable ACH Rules published in Parts I, II, and IV of

the 1999 NACHA Rule Book (including any rule changes in effect on or

before September 17, 1999), as modified by Part 210. NACHA has approved

an amendment to the ACH Rules that, effective September 2000, will

permit the crediting of entries to non-deposit accounts. The Service

does not intend to accept this amendment for payments subject to

Sec. 210.5.

Section 210.3(b)(2) describes how subsequent amendments to the ACH

Rules will be handled. The proposed rule provided 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. Many commenters urged

the Service to change this position. Several financial institutions and

agencies recommended that the Service provide that amendments to the

ACH Rules are deemed accepted unless

[[Page 17478]]

the Service expressly rejects the amendment by publishing notice to

that effect in the Federal Register.

Federal regulations require that any changes to a publication

incorporated by reference in a Federal regulation be published in the

Federal Register.5 Accordingly, the Service may not adopt an

approach whereby amendments to the ACH Rules are deemed accepted unless

expressly rejected. In order to mitigate the uncertainty and

inconvenience to financial institutions that would result from a lag in

addressing ACH Rule amendments, the Service intends to work closely

with NACHA to track proposed ACH Rule changes and to respond to such

changes in a timely manner. The Service anticipates that it will

publish a Federal Register notice addressing ACH Rule changes within 90

days of NACHA's publication of its rule book, which is published

annually.

---------------------------------------------------------------------------

\5\ See 1 CFR 51.11.

---------------------------------------------------------------------------

For the above reasons, Part 210 states that amendments effective

after September 17, 1999, will not apply to Government entries unless

the Service expressly accepts such amendments by publishing notice of

acceptance in the Federal Register. In addition, 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 notice that expressly

accepts the amendment.

Section 210.3(c) provides 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 above, the Service has moved

certain requirements that previously were set forth in the regulation

itself to the Green Book and the Treasury Financial Manual. 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.

The requirements set forth in the Green Book and the Treasury

Financial Manual, including those provisions that the Service is

relocating 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.

Section 210.4--Authorizations and Revocations of Authorizations

Section 210.4(a) provides that each debit and credit entry subject

to 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 Sec. 210.8(b)(2).

Section 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 recent years, in

order to encourage recipients to use Direct Deposit, 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. Part 210

acknowledges that the enrollment process may be completed by the

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

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

requirement that the financial institution sign the authorization form.

Section 210.4(a) recognizes that signature verification may not be

possible or practical in an automated enrollment process.

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 leaves to the

discretion of the financial institution or agency accepting an

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

identity.

Some commenters requested that the Service clarify that a financial

institution that accepts an authorization is not required to verify

that the recipient, in fact, is entitled to receive the payment(s) in

question. Financial institutions, in particular, commented that the

RDFI is not in a position to determine who is entitled to the payment

being authorized. The Service agrees that the financial institution is

not in a position to know whether the customer, in fact, is entitled to

the payment(s) being authorized. Section 210.4(a) requires only that

the identity of the recipient be verified; the financial institution is

not liable for determining whether the customer is entitled to the

payment.

Agencies and other commenters supported the requirement that the

RDFI verify the identity of the recipient as a means of reducing fraud.

Financial institutions and ACH associations generally objected to the

imposition of liability on financial institutions that accept and

process enrollments, rather than on the ODFI, as provided for in the

ACH Rules. Financial institutions further commented that if the ACH

Rules are preempted in this respect, financial institutions should not

be held to a strict liability standard. These institutions urged the

Service to adopt a ``commercially reasonable business practices''

standard of care, or an ``actual or constructive knowledge'' of a fraud

standard. Financial institutions argued that they cannot be an insurer

against all fraud and that a strict liability standard creates a

disincentive for financial institutions to participate in the

enrollment process.

The Service continues to believe that the authorization process

represents an opportunity to reduce fraud which could otherwise result

in significant losses to the Government. Because a financial

institution that accepts an authorization from a customer has an

obligation to know the customer and is in a position to verify a

written signature, the Service believes it is appropriate to hold the

financial institution strictly liable for verifying the identity of the

customer.

Under Sec. 210.4(a)(2), an originator and an ODFI are prohibited

from initiating a debit entry to an agency, other than a reversal of a

credit entry, 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 Government. These pilots

indicate that the use of debit entries to the Government is a cost-

efficient payment mechanism that benefits both the Government and the

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

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 is

required to give an authorization only once, prior to the first entry.

[[Page 17479]]

As proposed, Sec. 210.4(a)(2) did not provide an exception from the

authorization requirements for a reversal of a credit entry previously

sent to an agency. Since a reversal of a credit entry is a debit entry,

some commenters questioned whether proposed Sec. 210.4(a)(2) would

limit or restrict a financial institution's right to reverse a credit

entry. It was not the Service's intention to require a prior written

authorization before the initiation of a reversal, and the final rule

has been revised to clarify this point.

Section 210.4(b) 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.

Section 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.

Section 210.4(b)(4) provides that a new authorization supersedes

any existing authorization that is inconsistent with the new

authorization.

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

may reverse any duplicate or erroneous entry as provided in

Sec. 210.6(f).

Section 210.4(c)(1) provides that, in the case of a recipient of

benefit payments, a change in the recipient's ownership of the account

results in the termination of the authorization. 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.

Some commenters questioned whether an authorization is revoked as a

result of any change in the ownership of an account, even if that

change does not affect the recipient's ownership interest in the

account. These commenters questioned whether, for example, the addition

of a co-signatory on the account would cause the authorization to be

revoked. It is not the Service's intent that an authorization be

revoked as a result of a change in ownership of an account where the

recipient's interest is not adversely affected. The wording of

210.4(c)(1) has been changed accordingly.

Under Sec. 210.4(c)(2), the death or legal incapacity of a

recipient of benefit payments or the death of a beneficiary results in

the termination of the authorization.

Section 210.4(c)(3) 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 to which benefit

payments currently are being sent, except in cases of fraud.

Final Sec. 210.4(c)(3) is unchanged from the NPRM except that the

30-day notice requirement is limited in the final rule to accounts to

which benefit payments currently are being sent. Most financial

institutions commented that the 30-day notice requirement was an

improper interference with their customer relationships. Financial

institutions pointed out that banks routinely close accounts in cases

of excessive overdrafts or in instances of fraud, and noted that the

30-day period would require banks to establish a separate account

closing process for accounts receiving Federal ACH transactions. Some

agencies also questioned whether it was appropriate for the Service to

regulate account closing in this fashion, indicating that they had not

had a problem with closed accounts. 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. Because the Service is concerned

that a recipient of benefit payments may suffer hardship if the account

to which his or her benefit payments are being sent is closed, the

final rule has been limited to address this class of recipients.

One agency commenting on the proposed rule requested clarification

regarding situations in which payments are sent to an account that has

been kept open by a financial institution notwithstanding the

recipient's request that the account be closed. The agency stated that,

in its view, ``the only criterion that should apply in such a situation

is whether the recipient has closed the account at the financial

institution. . . . When a recipient can provide proof that an account

has been closed, all Federal payments subsequently received by the

financial institution must be returned.''

The effect of 210.4(c) is that payments sent to an account that has

been closed must be returned by the financial institution. However,

Part 210 does not establish the circumstances in which a financial

institution can or must close an account. A financial institution's

right or obligation to close a customer's account is established by the

terms of the account agreement between the financial institution and

the customer and applicable state or Federal laws. Thus, a recipient's

assertion that an account has been closed is not necessarily sufficient

to require the financial institution to return funds sent to the

account. There may be situations in which a recipient wishes to close

an account but does not have a legal right to do so. This could occur,

for example, when the account has been overdrawn and language in the

deposit contract provides that the financial institution may keep the

account open until the overdraft is settled. In such a case, a

financial institution's obligation to return a payment depends on

whether the closing of the account, in fact, has been accomplished, not

upon the recipient's desire to close the account or belief that the

account has been closed. The Service emphasizes that it is the actual

closing of the account as a legal matter, and not the recipient's

desire or attempts to close the account, that imposes an obligation on

the financial institution to return payments under Sec. 210.4(c).

In order to eliminate any unnecessary interruptions in ACH services

to recipients when any of the events described in Sec. 210.4(c)(4)

occurs, Sec. 210.4(c)(4) 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

Government may transfer temporarily the authorization to a consenting

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

The Service has deleted the provision formerly contained in

Sec. 210.4(e) that stated 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.

Section 210.5--Account Requirements for Federal Payments

Section 210.5 imposes restrictions on the type of account to which

Federal payments may be deposited. Section 210.5(a) reiterates the

general rule set forth in Part 208 that Federal payments other than

vendor payments must be deposited to an account at a financial

institution in the name of the recipient. The phrase ``notwithstanding

ACH Rule 2.1.2'' indicates that 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 certain exceptions discussed below.

This section is designed to ensure that payments reach

[[Page 17480]]

the intended recipient by requiring that such payments be deposited

into an account in which the recipient has an ownership interest.

Vendor payments are excluded under Sec. 210.5(a) 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.

Proposed Sec. 210.5 would have imposed these restrictions only on

benefit payments, which by definition excluded Federal retirement

payments. Upon further consideration, the Service has determined that

Federal retirement payments need not be excluded from the account

restrictions. In the situation most often cited, that in which a

surviving spouse is entitled to a deceased recipient's retirement

payment, the surviving spouse is considered to be the recipient and,

therefore, the payment would be deposited into the surviving spouse's

account. The final rule parallels Part 208, which requires that all

Federal payments other than vendor payments be deposited to an account

in the name of the recipient, with two exceptions.

The first exception, related to authorized payment agents, is

unchanged from the proposed rule. The second exception, related to

investment accounts, contains two changes from the proposed rule.

First, the exception has been expanded to cover investment accounts

established through an investment company registered under the

Investment Company Act of 1940, in addition to investment accounts

established through a securities broker or dealer registered under the

Securities Exchange Act of 1934. Second, the requirement contained in

the proposed rule that the investment account and all associated

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

under applicable Federal or State deposit insurance regulations has

been deleted. The reasons for these changes are discussed in detail in

the final rulemaking for Part 208. 63 FR 51490, 51500. Additionally, in

order to ensure consistency with Part 208, Sec. 210.5(b)(3) has been

added. Section 210.5(b)(3) provides that the Secretary of the Treasury

may waive the requirements of Sec. 210.5(a) in any case or class of

cases.

A number of commenters requested additional guidance on various

aspects of Sec. 210.5. Some commenters questioned whether the account

must be solely in the name of the recipient, which would preclude the

use of joint accounts, and whether master-subaccounts can be

established with limited access by the beneficiary. One agency

commented that it has no way of knowing the account title at the

financial institution and cannot be expected to monitor industry

practices in this regard.

The part 208 final rulemaking release contains an extensive

discussion of the restrictions on accounts to which Federal payments

can be sent, and addresses the issues raised by commenters on proposed

Sec. 210.5. See 63 FR 51490, 51499. The Service does not believe it is

necessary to duplicate that discussion here, and refers readers to the

Part 208 rulemaking release. However, in response to the question

raised by commenters as to whether Sec. 210.5 would prohibit the use of

a joint account between the recipient and a spouse or other member of

the recipient's family, the Service emphasizes that Sec. 210.5 does not

require that the recipient's name be the only name on the account, and

thus would not prohibit the use of such a joint account. In addition,

as discussed in the Part 208 rulemaking release, Sec. 210.5 does not

prevent recipients of Federal salary payments from making discretionary

allotments, as such allotments are made prior to the time the

recipient's payment is deposited into an account at a financial

institution.

The Service is aware that NACHA has approved an amendment to the

ACH Rules (effective September 2000), which permits the crediting of

entries to general ledger accounts and loan accounts. The Service does

not intend to accept that amendment with respect to Federal payments

other than vendor payments.

Section 210.6--Agencies

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

Government'' to ``Agencies.'' Section 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 and reversal requirements of Secs. 210.6(a) and (f)

constitute additional obligations. The liability provisions of

Secs. 210.6(b), (c), (d), and (f) expand as well as 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.

Section 210.6 is largely unchanged from the NPRM except that

Sec. 210.6(b) of the NPRM, relating to prenotifications, has been

deleted and the subsections of Sec. 210.6 have been renumbered

accordingly. 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). Under the ACH Rules, prenotifications are

optional for all entries. The Service had proposed at Sec. 210.6(b) of

the NPRM to modify the ACH Rules by requiring prenotifications for

debit entries initiated by an agency. The purpose of the proposed

requirement was to ensure that a debit initiated by an agency would be

applied against the correct account at the intended financial

institution.

In light of comments received, the Service has deleted this

requirement from the final rule. 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.

However, a prenotification does not provide notice to the owner of the

account to be debited, and thus does not serve as a protection against

a debit to an incorrect account. Moreover, requiring prenotifications

for debit entries may impede the implementation and operation of

programs such as point-of-sale check payment capture, in which ACH

debits are initiated against a consumer account at the time a purchase

of goods or services takes place. Requiring prenotification also would

effectively preclude agencies from effecting reversals of credit

entries, as a number of commenters pointed out. For these reasons, the

Service has deleted from the final rule the requirement that agencies

utilize prenotifications before initiating debit entries.

Section 210.6(a) 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.

Section 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;

[[Page 17481]]

rather, it is an operational requirement imposed by the Service on

agencies.

Sections 210.6(b)-(d) set forth an agency's liability to various

parties in connection with Government entries. Section 210.6(b)

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.

Several financial institutions urged the Service to reconsider this

limitation on liability, pointing out that losses resulting from agency

errors may be shifted unfairly to the RDFI. One commenter gave an

example of an agency's initiation of a duplicate debit entry to a

receiver's account, in which case the account might become overdrawn,

resulting in returned checks and related charges for which the receiver

would attempt to recover compensation. If the receiver's right of

recovery from the Government were limited to the amount of the entry,

the receiver might seek compensation from the RDFI for a refund of

charges and other damages resulting from the return of checks, loss of

use of funds, etc.

To address this concern, Sec. 210.8(b) of the final rule provides

that a financial institution will not be liable to any party for any

loss resulting from an agency's error or omission in originating an

entry. This provision does not affect a financial institution's

responsibilities to its customer to resolve errors under the Electronic

Fund Transfer Act or Regulation E. Rather, this provision establishes

that a financial institution is not liable for consequential damages

resulting from an agency's error.

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. Section

210.6(b) 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.

Section 210.6(c) 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, ACH Association, and ODFI, and

may be liable to one of those parties for any 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 on state law.

Section 210.6(c) preempts 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, Sec. 210.6(c) 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).

Section 210.6(d) 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

requirements. While Part 210 previously addressed processing errors by

an agency, the final rule refers to duplicate and erroneous entries, as

defined in the ACH Rules, in order to describe specifically the type of

errors or the nature of the losses for which an agency is liable.

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

origination of duplicate or erroneous entries. Part 210 subjects

agencies to the liability imposed on ODFIs under the ACH Rules for

originating erroneous and duplicate entries, but preempts the ACH Rules

in three respects. First, an agency is not liable for all costs

incurred by the RDFI, such as attorneys' fees, but is liable only up to

the amount of the entry. Second, Sec. 210.6(d) 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, Sec. 210.6(d)

excludes credit entries received by an RDFI after the death or legal

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

beneficiary. It should be noted that liability in connection with any

benefit payment to a deceased recipient is not covered under

Sec. 210.6(d), but is governed solely by Subpart B.

Several commenters questioned how the comparative negligence

standard would be administered and what negligence would consist of in

this context. One commenter questioned whether the costs of

apportioning negligence might exceed the benefit to the Government of

limiting its liability in this fashion.

What will constitute negligence on the part of a financial

institution in a particular context depends on the relevant facts and

circumstances. Although the Service recognizes that there may be costs

associated with investigating and determining the causes of a

particular loss, the Service believes it is important to retain this

provision in order to apportion liability appropriately in cases where

an agency and a financial institution share responsibility for a loss.

For example, if an agency erroneously originated a credit entry to an

incorrect account, and the person who received the misdirected funds

brought the mistake to the attention of the financial institution, the

financial institution could incur liability if it failed to take

appropriate action and the agency subsequently was unable to recover

the erroneously transmitted funds.

Section 210.6(e) is unchanged from Sec. 210.6(f) of the proposed

rule, except that the word ``final'' has been added in recognition that

a Federal Reserve Bank's crediting of an account can be reversed if

actual and final funds are not collected in settlement of a credit item

at or before 8:30 a.m. Eastern Time on the banking day following the

settlement date.

Section 210.6(f) addresses the Government's initiation of

reversals. As discussed in the analysis of Sec. 210.4(b) above, a

recipient who executes an authorization agrees, among other things,

that the Government may reverse duplicate or erroneous entries or

files, as provided in Sec. 210.6(f).

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 than 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

[[Page 17482]]

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 ability to effect reversals is an important way for the

Government to 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 Government.

With respect to certain types of payments, however, the

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 Government may

recover overpayments. For example, in the context of Federal benefit

payments, the Government may be required to provide notice and a

hearing prior to taking action to recover payments, or may be limited

in the amount, timing, or manner in which an overpayment is recovered.

Part 210 does not address the operation of these requirements because

the applicable requirements may vary depending on the type of payment.

It is the agency's responsibility to determine before certifying a

reversal that the reversal will not violate any applicable laws or

regulations.

One commenter requested that the Service clarify how the

certification requirement of Sec. 210.6(f) affects the indemnification

of the RDFI and other parties to a transaction as provided under ACH

Rule 2.4.5. The certification requirement represents an additional

obligation of any agency that originates a reversal. The certification

requirement is intended to function as an intra-Governmental warranty

and is not intended to affect the indemnification of the RDFI or other

parties to a transaction under ACH Rule 2.4.5. and Part 210.

Several commenters requested clarification as to whether the

Government, when initiating reversals, would be bound by any ACH Rule

requirements that generally apply with respect to reversals, such as

the five-day reversal deadline. It is the intention of the Service that

all ACH Rule requirements apply to Government-initiated reversals

except that the extent of the Government's indemnification would be

limited to the amount of the entry(ies). Therefore, an agency that

reverses a Government entry must do so within the five-day deadline.

Section 210.7--Federal Reserve Banks

Section 210.7 sets forth the role and responsibilities of the

Federal Reserve Banks.

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 has deleted as unnecessary the provisions previously in

Part 210 relating to funds availability since those requirements are

addressed under Federal Reserve Bank Operating Circular No. 4 on ACH

Items.

Some commenters were concerned that a change in the timing of

payments would result from the deletion from Sec. 210.7 of language

stating that Federal Reserve Banks are to make available to the

financial institution the amount specified in a payment instruction,

and debit the TGA, on the payment date. Part 210 previously defined 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, and

provided 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.'' The

Service is not changing the foregoing timing requirements, which are

consistent with the Federal Reserve Bank Operating Circular on ACH

items.

Some agencies indicated that the time frame of settlement under the

ACH system may conflict with statutory requirements regarding when

certain payments must be made. For example, the Office of Personnel

Management (OPM) commented that the Civil Service annuity benefit is

payable ``on the first business day of the month after the month or

period for which it has accrued.'' Therefore, OPM indicated that it

cannot legally request another payment date when the first day of the

month is on a Saturday, which is a business day for purposes of the

relevant statute, but which is not a settlement date under the ACH

Rules. The Railroad Retirement Board commented that the Railroad

Retirement Act prohibits issuing payments before the first day of the

next calendar month.

The Service recognizes that agencies subject to statutory

constraints on payment dates will need to address the interaction of

those constraints with the timing of ACH payments. Because different

statutes present different issues and limitations, the Service believes

that these issues must be addressed on a case-by-case basis. Where

statutory payment requirements potentially conflict with the use of the

ACH system, the Service urges the paying agency to work with the

Service in order to resolve those issues. For example, a statute that

requires that payment be made no later than the first business day of

the month may allow for the initiation of payments one or two days

early in order to ensure that the recipient receives the funds no later

than the statutorily prescribed payment date. On the other hand, this

approach would not be a viable solution in the context of a statute

that requires that payment be made no earlier than the first business

day of the month. Because statutes differ, the Service is not in a

position to adopt a uniform approach to these issues.

Section 210.7(a), which is unchanged from the proposed rule,

specifies that each Federal Reserve Bank, as the Fiscal Agent of the

Treasury, serves as the Government's ACH Operator for Government

entries. The phrase ``notwithstanding Section 11.5 and Article 8 of the

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.

Section 210.7(b), also unchanged from the proposed rule, has been

added to Part 210 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. Agencies desiring a routing number

should obtain approval from the Service prior to requesting a routing

number from a Federal Reserve Bank.

Section 210.8--Financial Institutions

Section 210.8 addresses the obligations of financial institutions

with respect to Government entries, which were previously set forth at

Sec. 210.7. The Service has removed as unnecessary many of the

provisions of previous Sec. 210.7 because they are addressed in the ACH

Rules. For example, former 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, former Secs. 210.7(f)(1), (f)(2),

and (f)(4) have been deleted since the ACH Rules address these

provisions.

The Service had proposed at Sec. 210.8(a) of the NPRM to require

RDFIs to verify that the account number and one other item of

information in a prenotification entry both relate to the

[[Page 17483]]

same account. 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 ACH Rules

do not require that RDFIs verify prenotifications in this manner; thus,

the proposed requirement and the corresponding liability to which a

financial institution would have been subject for failing to verify a

prenotification would have superseded the ACH Rules with respect to

agency-initiated prenotifications.

Several agencies commenting on the proposed rule supported the

verification requirement because, in the words of one commenter,

``[t]his will ensure that subsequent Federal direct deposit payments

are credited to the intended party, not just into an account that

happens to coincide with a valid account number at the RDFI.'' Other

agencies indicated that they did not intend to use prenotifications and

did not believe the proposed verification requirement was necessary.

All of the financial institutions commenting on the NPRM objected

to the proposed requirement. Financial institutions commented that they

rely on account numbers alone in processing entries, as permitted by

the ACH Rules and UCC Article 4A, and that they presently cannot

perform the proposed verification in an automated processing

environment. Therefore, in order to comply with the requirement,

financial institutions would be required either to manually process

Government entries or to develop and implement new processing systems.

Many banks commented that they cannot invest in new processing systems

at this time, especially in view of Year 2000 requirements and related

systems testing. Some financial institutions indicated that if the

verification requirement were imposed, the costs of processing

Government entries would increase and they might shift these costs to

payment recipients. Some commenters also noted that, in the case of

payments made to representative payees, beneficiary information

relating to the payment may not be listed on the account in any manner

since financial institutions typically have information only on persons

who are authorized to sign on the account.

Financial institutions also argued that shifting losses to banks is

inconsistent with basic principles of electronic payment law, pointing

out that both UCC Article 4A and the ACH Rules provide that the RDFI

may make payment on the basis of account number alone.

After considering the comments received, the Service has decided

not to include in Part 210 a requirement that upon receipt of a

prenotification an RDFI verify one other identifying data element in

addition to the recipient's account number. The Service does not

believe it is in the best interest of the public to implement a

requirement that would make it more expensive for financial

institutions to receive and process electronic Government payments or

that would require manual processing of Government entries. The Service

acknowledges the rationale for allowing RDFIs to rely on account number

alone, as set forth in the commentary to UCC Article 4A-207(b)(1): ``If

the [RDFI] has both the account number and the name of the beneficiary

supplied by the originator of the funds transfer, it is possible for

the [RDFI] to determine whether the name and number refer to the same

person, but if a duty to make that determination is imposed on the

[RDFI] the benefits of an automated payment are lost. Manual handling

of payment orders is both expensive and subject to human error.''

Moreover, the Service believes that more data is needed regarding

the causes of misdirected Government entries. Without information as to

the types of Government entries that are misdirected and the reasons

for such mistakes, the Service is concerned that the verification

requirement would eliminate any incentive for agencies to follow

commercially reasonable standards in initiating payments. The Service

does not believe it is appropriate to impose on financial institutions

liability for losses resulting from agency errors.

Although data regarding misdirected entries is not available, the

Service has anecdotal information that suggests that many misdirected

entries are a result of human error by agency personnel who key in

account numbers. The Service is particularly concerned with agency

practices in which account information is processed through a single

manual key entry, and urges agencies to review their enrollment

practices and to consider adopting more stringent key entry procedures

such as scanning a voided check or performing a double-key entry, or

instituting some other verification procedure to avoid key entry

mistakes. The Service encourages agencies to review their enrollment

practices and intends to work with agencies to develop data regarding

the extent and causes of misdirected ACH entries and to formulate ways

of reducing such errors.

The Service also understands that, in some cases, misdirected

entries occur as a result of financial institutions' errors in

enrolling recipients or in transmitting notifications of change (NOCs).

The Service believes that it is appropriate to hold financial

institutions responsible for losses caused by their errors in enrolling

recipients and has revised Sec. 210.8(b)(2) accordingly, as discussed

below.

The Service has redesignated former Sec. 210.7(g) of Part 210 as

Sec. 210.8(a) without making any substantive change.

Section 210.8(b) provides 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

Secs. 210.8(b)(1) and (2). The phrase ``[n]otwithstanding ACH Rules

2.2.3, 2.4.5, 2.5.2, 4.2, and 7.7.2'' indicates that 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, Sec. 210.8(b) 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 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 UCC Article 4A, which would apply to

credit entries to non-consumer accounts, the liability of financial

institutions that fail to handle entries properly generally does not

extend to all resulting losses, but does include imputed interest in

certain circumstances. Because Part 210, as a general matter, limits

the Government's liability 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, Sec. 210.8(b)

preempts the extent of the liability to which financial institutions

are subject under both the ACH Rules and UCC 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

[[Page 17484]]

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

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

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

imputed interest for the period of the delay. Section 210.8(b) does not

affect a financial institution's liability under Subpart B.

Although financial institutions generally objected to changing the

liability provisions of the ACH Rules for Government entries, most

financial institutions indicated that if the final rule limited the

liability of the Government to the amount of an entry, the liability of

financial institutions should be correspondingly limited under

Sec. 210.8(b).

Section 210.8(b) of the final rule also provides that a financial

institution will not be liable to any third party for any loss

resulting from an agency's error or omission in originating an entry.

The Service has added this provision to the final rule to address

comments by several financial institutions that limiting an agency's

liability to the amount of an entry, as set forth at Sec. 210.6, may

have the effect of shifting losses resulting from an agency error to

the RDFI. As discussed above, one commenter gave an example of an

agency's initiation of a duplicate debit entry to a receiver's account,

in which case the account might become overdrawn, resulting in returned

checks and related charges for which the receiver would attempt to

recover compensation. If the receiver's right of recovery from the

Government were limited to the amount of the entry, the receiver might

seek compensation from the RDFI for a refund of charges and other

damages resulting from the return of checks, loss of use of funds, etc.

Section 210.8(b) addresses this situation by providing that the

receiver cannot recover against the RDFI for these damages.

Section 210.8(b)(1) is unchanged from the proposed rule except that

the reference to ``reserve account'' has been changed to ``account'' in

response to comments that Federal Reserve Banks also maintain clearing

accounts for financial institutions in some cases. Section 210.8(b)(1)

clarifies that a financial institution may not originate or transmit a

debit entry to an agency without the prior written authorization of the

agency. As previously discussed, debit entries to the TGA represent a

significant security concern for the Service. By expanding the use of

the ACH system to allow for Government payments by a debit to the TGA,

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

out its fiscal responsibility, the Service believes it is necessary to

take precautions to ensure that such debits do not occur. Therefore

Part 210 requires 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. Section 210.8(b)(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 Part 210 as amended, a financial institution is liable for

any unauthorized debit entries initiated to an agency in violation of

this requirement. In connection with this, the 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

includes imputed interest under Sec. 210.8(b)(1). This provision is an

exception to the general limitation of a financial institution's

liability to the amount of an entry. The Service believes it is

necessary to impose this additional liability in order to avoid any

potential loss of public funds resulting from an unauthorized debit to

the TGA.

Section 210.8(b)(2) restates the third and fourth sentences of

former Sec. 210.11(b) and addresses the RDFI's liability in situations

where the financial institution accepts a forged authorization. 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 UCC 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. Section 210.8(b)(2) operates to preempt these ACH and UCC

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 financial institution accepts a forged authorization,

the financial institution rather than the Government will be liable for

the entries effected in reliance on the forged authorization.

The Service has revised Sec. 210.8(b)(2) of the final rule to

provide that an RDFI that transmits to an agency an authorization

containing an incorrect account number shall be liable for any

resulting loss, up to the amount of the payment(s) made on the basis of

the incorrect number. With respect to NOCs that contain incorrect

account information, the Service believes that the treatment of

erroneous NOCs are appropriately addressed under the ACH Rules. The ACH

Rules provide that an RDFI that transmits an NOC warrants that the

information contained within the NOC is correct, and that the RDFI is

liable for any loss or liability resulting from a breach of this

warranty. (See ACH Rules, Article Five, Section 5.3) Accordingly, a

financial institution that transmits to an agency an NOC containing

erroneous information will be liable to the agency for the amount of

any resulting misdirected entry.

In the case of a misdirected entry that an agency believes was the

result of an incorrect account number in an authorization or NOC

transmitted by an RDFI, the agency shall carry out an investigation to

determine the cause of the error. If the agency determines that the

loss in fact resulted from an RDFI's transmission of an incorrect

account number, the agency may instruct the Service to direct the

appropriate Federal Reserve Bank to debit the RDFI's account for the

amount of the misdirected payment(s). The agency may not issue such an

instruction until it has notified the RDFI of the results of its

investigation and provided the RDFI a reasonable opportunity to

respond.

Section 210.8(c) sets forth the conditions under which the

obligation for the amount of an entry is acquitted. The word ``final''

has been added to the wording in the proposed rule in recognition that

a credit entry may be reversed after crediting by a Federal Reserve

Bank if the Reserve Bank does not receive actually and finally

collected funds in settlement of the item at or before 8:30 a.m.

Eastern Time on the banking day following the settlement date. Section

210.8(c) also has been revised from the proposed rule to clarify that

the originator's obligation, in addition to any obligation of the ODFI,

is discharged upon final crediting. The final rule also provides that,

in the case of a debit entry originated by an agency against an

account, full acquittance does not occur until the underlying payment

is final.

Subpart B--Reclamation of Benefit Payments

The Service has restructured Subpart B of Part 210 by adding a new

Sec. 210.9--Parties to the reclamation. The other five sections

comprising Subpart B (Secs. 210.10 through 210.14) are a

[[Page 17485]]

reorganization of the four previous sections on reclamations in 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 Sec. 210.2. The

Service has not changed significantly the obligations and liabilities

of agencies and financial institutions in effect under former Part 210.

In order to simplify the regulation and enhance its flexibility

with respect to automating reclamations, the Service has moved certain

procedures and guidelines from Subpart B to the Service's Green Book or

Treasury Financial Manual. As discussed above with respect to Subpart

A, the Green Book and the Treasury Financial Manual do not introduce

new rights and obligations that are not contained in Part 210. Instead,

they provide specific operational directions and procedures which put

the regulatory requirements into practice. 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 has added this new section to delineate the differing

roles of the financial institution, the Service, and the agency that

certified the benefit payments in question.

Section 210.9(a) restates provisions of former Secs. 210.7(a) and

210.14(d) of Part 210, which provided 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.

Section 210.9(b) clarifies 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

This section defines the liability of RDFIs for benefit payments

received after the death or legal incapacity of a recipient or death of

a beneficiary, and limits the extent of that liability.

Section 210.10(a) restates the rule set forth at Sec. 210.12(a) of

previous 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 a

recipient or death of a 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 a recipient or

death of a beneficiary and has had a reasonable opportunity to act on

that knowledge. Accordingly, the RDFI is required to return all benefit

payments received after it learns of the death or legal incapacity of a

recipient or death of a beneficiary. This obligation applies whether

the RDFI has received a notice of reclamation or learned of the death

or legal incapacity on its own.

In addition, Sec. 210.10(a) requires that the RDFI immediately

notify a paying agency if the RDFI learns of the death or legal

incapacity of a recipient or death of a beneficiary from a source other

than notice from the agency. Some financial institutions, while

recognizing that it may be in the institution's best interest to

provide agencies with such notice, commented that financial

institutions should not incur further liability by failing to provide

the notice.

Under Sec. 210.11(d) as proposed, an RDFI that failed to notify an

agency as required by Sec. 210.10(a) would have forfeited its right to

limit its liability. The Service agrees that proposed Sec. 210.11(d)

could potentially impose a harsh result in some circumstances,

particularly where no loss is caused by the RDFI's failure to comply

with the notice requirement. Accordingly, the Service has amended

Sec. 210.11(d) to provide that an RDFI that fails to comply with any

provision of Subpart B in a timely and accurate manner, including the

notice requirements at Sec. 210.13, will be liable to the Government

for any loss resulting from its act or omission.

Section 210.10(d) provides that an RDFI's liability for post-death

and post-incapacity payments is limited to the most recent six years of

payments. Previously, RDFIs were subject under Part 210 to 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. Financial institutions that commented on the proposed rule

supported shortening the time frame for initiating reclamations,

although several financial institutions urged the Service to adopt a

shorter period than six years. Some agencies supported the proposed

time limit, while other agencies objected to it.

Section 210.10(d) also provides an exception to the six-year

limitation where the amount in the account when the RDFI receives the

notice of reclamation and has had a reasonable opportunity to act on

the notice 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.

In addition, Sec. 210.10(d) requires that an agency that initiates

a reclamation must do so within 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 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. Some

agencies commented that the 120-day period was an adequate and

appropriate period deadline, whereas other agencies commented that 120

days is too short a period in view of exception processing delays on

the part of the Service that occur with respect to certain non-

recurring entries. Financial institutions commenting on this provision

supported a shortened deadline for initiating reclamations and

generally felt that 120 days was appropriate.

Section 210.10(e) is unchanged from the proposed rule except that

the reference to ``reserve account'' has been changed to ``account'' to

reflect the fact that a Federal Reserve Bank may also maintain clearing

accounts for financial institutions in some cases. Section 210.10(e)

restates a rule of reclamations previously set forth at Secs. 210.13(c)

and (d): the Government has the right to debit the RDFI's 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,

[[Page 17486]]

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 was

previously set forth at Sec. 210.13(c), is a procedural item that may

change with the automation of reclamations. Therefore, the Service has

relocated this requirement to the Green Book.

Section 210.11--Limited Liability

The Service has not changed the criteria that an RDFI must meet in

order to limit its liability under Subpart B, but has reworded the

provisions setting forth the criteria for greater clarity.

Section 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

previous Sec. 210.12(b) and, although reworded, does not change

significantly the substantive operation of the previous formula.

Former Sec. 210.12(d) of Part 210 contained 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,

believing that the description of due diligence may be confusing or

difficult to apply in this context, proposed to utilize a definition of

``actual or constructive knowledge'' set forth at proposed Sec. 210.2.

Formerly under Part 210, one of the factors relevant to determining

the extent of an RDFI's limited liability was the amount in the

account. Former Sec. 210.13(b)(2)(i) defined 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 Government.

Part 210 previously provided that a reasonable time to take action was

not later than the close of business on the day following the receipt

of the notice of reclamation.

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

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

teller machine (ATM) withdrawals and the RDFI cannot provide

information regarding the identity of the withdrawer. The Service

therefore proposed in the NPRM to define the ``amount in the account''

as the account balance at the time the RDFI receives the notice of

reclamation and to eliminate the ``reasonable time to take action''

language formerly at Sec. 210.13(b)(2)(i).

A number of financial institutions commenting on the proposed rule

objected to the calculation of the amount in the account on the basis

that they cannot take immediate action to prevent withdrawals upon

receipt of a notice of death. One commenter noted that approximately

one-half of community banks utilize batch processing systems, in which

a hold placed on an account cannot be activated until evening or the

following day, depending on the processing schedule. As discussed above

with respect to the definition of ``actual and constructive

knowledge,'' the Service has revised the definition to provide

financial institutions with a reasonable opportunity to take action

after receiving notice of death or incapacity. The Service believes

that one business day will normally constitute a reasonable opportunity

to take action.

Section 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 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.

Section 210.11(b)(2) incorporates the last sentence of former

Sec. 210.13(b)(1), and adds the requirement that the RDFI certify the

date the RDFI first had actual or constructive knowledge of the death

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

if such knowledge was obtained first through notice received from the

agency. As proposed, Sec. 210.11(b)(2) stated that the RDFI must

certify the date the RDFI first had ``information'' of the death or

incapacity. Some commenters questioned the meaning of the word

``information,'' as opposed to the phrase ``actual or constructive

knowledge.'' Because ``information'' was intended to refer to actual or

constructive knowledge, Sec. 210.11(b)(2) has been revised to eliminate

any apparent inconsistency.

Requiring these certifications, in combination with the authority

of the Government to debit the RDFI's account as provided in

Sec. 210.10(e), underscores that the burden is on the RDFI to

demonstrate its qualification for limited liability.

Former Sec. 210.13(b)(2)(ii) has been relocated to

Sec. 210.11(b)(3) of the final rule.

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 Sec. 210.11(a)(1), if the agency is

unable to collect the remaining amount of the outstanding total, the

Government will debit the RDFI's account at its Federal Reserve Bank

(or the correspondent account utilized by the RDFI) for the amount

specified in Sec. 210.11(a)(2), which is the lesser of: (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. It should be noted that

in no instance will the RDFI be liable for more than the outstanding

total because the amount potentially recoverable under

Sec. 210.11(a)(2) cannot exceed the balance of the unrecovered

outstanding total.

As proposed in the NPRM, Sec. 210.11(d) would have provided that an

RDFI would forfeit its right to limit its liability if the RDFI failed

to comply with any provision of Subpart B. One financial institution

commented that the proposed expanded liability in Sec. 210.11(d) was

inappropriate and unfair, and that only a violation of those provisions

that relate directly to the qualifications for limited liability stated

in Sec. 210.11(a) and (b) should cause a financial institution to lose

its right to limit its liability. The Service has revised

Sec. 210.11(d) to provide that a financial institution that violates

any provision of Subpart B shall be liable to the Government for any

loss resulting from its act or omission, in addition to any amount(s)

for which the RDFI is liable under Sec. 210.10 or Sec. 210.11(a).

Section 210.12--RDFI's Rights of Recovery

Section 210.12(a) restates the principle set forth in former

Sec. 210.14(c) that in reclaiming funds from an RDFI, the 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.

Section 210.12(b) restates without substantive change former

Sec. 210.14(d) of Part 210.

Section 210.13--Notice to Account Owners

Section 210.13 is based on former Sec. 210.14(a) of Part 210, but

has been changed slightly to provide for the possibility of an

automated reclamation process by the addition of the phrase

[[Page 17487]]

``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.

Part 210 formerly required 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 may intrude unnecessarily into the relationship between the

RDFI and its customer and conflicts with the principle that

reclamations are actions between the Government and the RDFI, and not

between the 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 section is based upon former Sec. 210.15 of Part 210, with

certain additions and deletions. Much of former Sec. 210.15 was

procedural information which the Service has moved to the Green Book,

where it is more appropriately located. In particular, the Service has

relocated to the Green Book the procedures that RDFIs are to follow in

correcting erroneous death information (previously codified in

Sec. 210.15(a)(1) and (2) and Sec. 210.15(c)). The Service also has

moved to the Green Book the 60-day time limit for the RDFI to return

the completed notice of reclamation to the 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.

Any automated reclamation procedures developed or used by the

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 Sec. 210.14(b) 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 agencies and does not make decisions as to the underlying

obligations.

Subpart C--Discretionary Salary Allotments

The Service has removed Subpart C from Part 210. Subpart C provided

that discretionary allotments from Federal employees' wage and salary

payments permitted by the issuing agency could be made through the ACH

system and were subject to Part 210. The Service determined that

Subpart C was redundant since the substance of Subpart C was 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. 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.

III. Rulemaking Analysis

Treasury has determined that this 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 entities. Accordingly,

a Regulatory Flexibility Act analysis is not required.

There is no collection of information contained in this rule and,

therefore, the Paperwork Reduction Act does not apply.

List of Subjects in 31 CFR Part 210

Automated Clearing House, Electronic funds transfers, Fraud,

Incorporation by reference.

Authority and Issuance

For the reasons set out in the preamble, 31 CFR Part 210 is 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 Federal 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 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 and has had a reasonable

opportunity to act on such information or that the RDFI would have

learned of the death or incapacity if it had followed commercially

reasonable business practices.

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

United States Government, or a corporation owned or controlled by the

Government of the United States. The term agency does not include a

Federal Reserve Bank.

(d) Applicable ACH Rules means the ACH Rules with an effective date

on or

[[Page 17488]]

before September 17, 1999, as published in Parts I, II, and IV of the

``1999 ACH Rules: A Complete Guide to Rules & Regulations Governing the

ACH Network,'' 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 1.2.4 and Appendix Eleven (governing the enforcement

of the ACH Rules);

(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 individual or entity that is

appointed or otherwise selected as a representative payee or fiduciary,

under regulations of the Social Security Administration, the Department

of Veterans Affairs, the Railroad Retirement Board, or other agency

making Federal payments, to act on behalf of an individual entitled to

a Federal payment.

(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 annuity and Railroad Unemployment and

Sickness benefits, Department of Veterans Affairs Compensation and

Pension, and Worker's Compensation.

(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) 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);

(ii) 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);

(iii) 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);

(iv) 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);

(v) 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

(vi) 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.

(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 a recipient or death of a

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 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 means the United States Department of the Treasury.

(r) Treasury Financial Manual 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 Treasury.

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,

including rule changes with an effective date on or before September

17, 1999, as published in Parts I, II, and IV of the ``1999 ACH Rules:

A Complete Guide to Rules & Regulations Governing the ACH Network.''

The Director of the Federal Register approves this incorporation by

reference in accordance with 5 U.S.C. 552(a) and 1 CFR Part 51. Copies

of the ``1999 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 17, 1999, 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

[[Page 17489]]

Register notice 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.

The Treasury Financial Manual 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. The Green Book is available for

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

fmsnews.html 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.

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, or similarly authenticated, by an

agency, no person or entity shall initiate or transmit a debit entry to

that agency, other than a reversal of a credit entry previously sent to

the 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(f) 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 recipient's ownership of the deposit account as reflected in the

deposit account records, including the removal of the name of the

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. With respect to a recipient of benefit

payments, if an RDFI closes an account to which benefit payments

currently are being sent, 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 Federal payments.

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

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

financial institution. For all payments other than vendor payments, the

account at the financial institution shall be in the name of the

recipient, except as provided in paragraph (b) of this section.

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

Federal payment shall be deposited into an account titled in accordance

with the regulations governing the authorized payment agent.

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

account established through a securities broker or dealer registered

with the Securities and Exchange Commission under the Securities

Exchange Act of 1934, or an investment account established through an

investment company registered under the Investment Company Act of 1940

or its transfer agent, such payment may be deposited into an account

designated by such broker or dealer, investment company, or transfer

agent.

(3) The Secretary of the Treasury may waive the requirements of

paragraph (a) of this section in any case or class of cases.

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) 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).

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

originator or an ODFI for any loss sustained by the 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).

(d) 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 of this part. An agency

shall not be liable to any ACH association.

(e) Acquittance of the agency. The final crediting of the amount of

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

the Federal Government.

(f) 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

[[Page 17490]]

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

an entry subject to this part does not render a financial institution a

Treasury depositary. A financial institution shall not advertise itself

as a Treasury depositary on such basis.

(b) 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. A financial institution shall not

be liable to any third party for any loss or damage resulting directly

or indirectly from an agency's error or omission in originating an

entry. Nothing in this section shall affect any obligation or liability

of a financial institution under Regulation E, 12 CFR part 205, or the

Electronic Funds Transfer Act, 12 U.S.C. 1693 et seq.

(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 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. An RDFI that transmits

to an agency an authorization containing an incorrect account number

shall be liable to the Federal Government for any resulting loss, up to

the amount of the payment(s) made on the basis of the incorrect number.

If an agency determines, after appropriate investigation, that a loss

has occurred because an RDFI transmitted an authorization or

notification of change containing an incorrect account number, the

agency may instruct the Service to direct a Federal Reserve Bank to

debit the RDFI's account for the amount of the payment(s) made on the

basis of the incorrect number. The agency shall notify the RDFI of the

results of its investigation and provide the RDFI with a reasonable

opportunity to respond before initiating such a debit.

(c) Acquittance of the financial institution. The final 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 and the originator for the amount of the entry. Full

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

incomplete, are incorrect, or are incapable of being processed. In the

case of funds collected by an agency through origination of a debit

entry, full acquittance shall not occur until the underlying payment

becomes final.

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 a 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 from

a source other than notice 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 that initiates a reclamation must do so

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 account balance at the time the RDFI receives the

notice of reclamation exceeds the total amount of all post-death or

post-incapacity 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 and has

had a reasonable opportunity (not to exceed one business day) to act on

the notice.

(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

[[Page 17491]]

debit the 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 and has had a reasonable

opportunity (not to exceed one business day) to act on the notice, 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 actual or constructive

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

the beneficiary, regardless of how and where such information was

obtained;

(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 and accurately 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 account utilized by the RDFI at that Federal

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

(d) Violation of Subpart B. 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 liable to the Federal

Government for any loss resulting from its act or omission. Any such

liability shall be in addition to the amount(s) for which the RDFI is

liable under Sec. 210.10 or Sec. 210.11, as applicable.

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 direct the Service to reclaim

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 account utilized by the

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

reclaimed funds.

Dated: April 6, 1999.

Richard L. Gregg,

Commissioner.

[FR Doc. 99-8873 Filed 4-8-99; 8:45 am]

BILLING CODE 4810-35-P