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Practices for Avoiding Common ACH Origination Weaknesses
A speech by Phillip Hinkle on Oct 25, 2006 at the
SWACHA Conference (Brave New Frontiers in Electronic Payments).
Foundation: One or more individuals should be trained
and familiar with the NACHA Rules. And, if activity volume warrants,
at least one person should be NACHA certified.
- Establish a “credit approval” process that includes “specific” credit
limits for origination customers. That is, establish a maximum
transmission amount and maximum frequency of transmission. (A
$75,000 transmission once a month creates a lower credit exposure
than $50,000 transmitted every day.) NACHA Operating Guidelines
require tracking exposure limits of customers across multiple
settlement dates.
- Establish procedures to document that the ACH staff has confirmed
that each transmission is within the limit established for that
customer and that the file has been received from an authorized
person. The staff should also document that they have verified
that pre-funding or adequate credit limits exist for each file
prior to transmission.
- Establish an annual renewal / credit review process. The
lending staff should perform the annual credit review. Consider
sending the customer a renewal package or having them sign a
letter agreement that reminds them of the limits of the contract
they have already signed.
- Include the ACH approved limit when internally reporting
the borrower’s total credit exposure. (This might have to just
be a “best estimate” when trying to quantify the bank’s
exposure on debit origination, since those can be returned up to
approximately two months.)
- Review cash management (ACH Origination) contracts and ensure
that they address all of the provisions in the NACHA sample contract,
or that provisions that were left out were done so for a specific
reason. (Often several different contract forms are in files, and
they do not contain many of the protective clauses in the sample
ACH contract developed by the trade association to protect banks.)
- Contracts should include (by addendum, appendix, or annual
letter agreement) the transmission limit that has been approved
for the customer. This is so the customer will know in advance
that a file will (can) be rejected if it is over their approved/established
transmission limit or if they have exceeded their transmission
frequency.
- Require all ACH contracts to be approved and signed by the
client at the same company level required for opening the deposit
account, e.g. company president or board resolution.
- Contracts should address the issue of who is authorized to
send a file to the bank and how the bank can rely on the file as
being authorized by the company. (Does the clerk that creates and
delivers the file to the bank sign on the depository agreement?
If not, why does the bank accept disbursement instructions from
them? If the depository agreement requires checks to bear two signatures,
what will be acceptable payment instructions for ACH disbursements?)
- Daily processing schedules and calendars should be developed
as recommended by NACHA Operating Guidelines.
- Contracts with all customers need to require compliance
with NACHA rules. And, ensure that a contract is on file before
originating any transmissions for a customer.
- NACHA rules should be distributed to all origination customers – or
given information for obtaining them.
- Perform the Annual ACH Self Audit as required by NACHA rules.
NACHA has a low cost ACH Self Audit workbook available.
Questions and comments can be directed to our Information Technology Specialist.
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