In July, we shared some tips on addressing unemployment fraud, and calls to our Payments Hotline show that the situation continues to evolve. Now ODFIs have begun sending requests for the return of these payments, accompanied by Letters of Indemnification (LOIs). RDFIs are looking for clarity on how to handle these requests and what is required under the Nacha Operating Rules. I wanted to take a moment to break down this issue and share insights to help RDFIs make the best business decision for their institutions.
Under the Rules
Let’s start with the specifics of the Rule requirements. As we mentioned last month, the ODFI warrants this transaction for the Originator, and the Rules allow the RDFI to post based solely on account number. There is no specific Rules requirement that the RDFI must return the funds.
From a Rules standpoint, there is no obligation to return the funds—with one caveat. If the RDFI has manipulated the ACH Entry in any way to enable posting, there is the potential for the ODFI to argue that the RDFI breached warranty. Further, if the RDFI sent the ODFI a Notification of Change (NOC) related to the manipulation of the account, the RDFI is warrantying that it is the right account number and/or tran code, further complicating the liability issue. While the ODFI may never pull the trigger in these scenarios, the potential creates an element of risk that needs to be considered by the RDFI.
On a related note, many core systems have automatic scans in place that help to reduce exceptions. These automated systems help increase RDFI efficiency, but if the core system modifies an Entry, it does mean that the ODFI could again, argue breach of warranty. RDFIs should review the parameters they have in place to ensure that it is fully aware of any modifications being made.
ACH Network Integrity
Looking beyond the Rules, FIs need to consider the greater good of the ACH Network. While the Rules do not require the return of funds, all ACH participants maintain responsibility for the integrity of the Network. In cases of fraud, when possible, returning the funds—even partially—helps keep bad actors from exploiting payments systems. While it is a business decision unique to individual institutions, when a return is possible for these scenarios, the RDFI may want to consider returning the funds as a show of good will.
The Letters of Indemnification Component (LOI)
The latest development in the specific scenarios of state unemployment fraud comes as ODFIs have started sending requests for returns with LOIs to RDFIs. While the specifics of the LOI and request depend on the ODFI and the exact scenario, across the board, the LOIs indemnify RDFIs against claims, losses, attorney fees, etc., resulting from the RDFI acting on the request. Essentially, the LOI says that the ODFI takes responsibility for the return and provides the RDFI with a sense of protection. In straight ACH transactions, the R06 code with permission of the ODFI provides the same level of indemnification.
In these unemployment fraud scenarios, the LOI fully comes into play with partial returns. If the Receiver has already withdrawn a part of the requested return funds, the RDFI may choose to return only the portion that remains available. If that partial return happens, it cannot be returned via ACH, as the transaction amounts will differ. So, in many cases, the ODFI’s request may request a partial return of the funds, either via wire or check, which do not offer the same indemnity as a R06 in ACH. However, an LOI requesting the return of full or partial payments provides the RDFI with the same sense of comfort around returning these funds outside of the ACH Network. If the entire deposit posted without the RDFI manipulating the account, the RDFI has no liability for doing nothing, or returning the funds.
RDFI Course of Action
As RDFIs evaluate the request for return from the ODFI, provided they have not manipulated the Entry, there are three options for responding:
- Return the full transaction amount. If the Receiver has not withdrawn the funds, the RDFI may choose to return the full payment via ACH, using code R06. If the Receiver has withdrawn the funds, the bank may make a business decision on how they would like to handle the return request, recognizing that the Rules do not require them to return the payment.
- Return a partial transaction amount. If the Receiver has only withdrawn a portion of the funds, the RDFI may choose to return what is left in the account. The LOI provides a sense of protection around this type of return, and the RDFI can choose the payment channel (wire or check) that works best with its business model. Again, the Rules do not require the RDFI to return any portion of the payment; this is a business decision.
- Do not initiate a return. RDFIs are not required to return the payment under the Rules, nor are they required to respond to the ODFI’s LOI. When funds are available, many RDFIs choose to return the transaction, or part thereof, to support the greater integrity of the ACH Network. That being said, the Rules do not require any action on the part of the RDFI, as long as the ACH Entry posted without being manipulated by the RDFI.
I hope this provided a good overview of how to respond to these requests and what your responsibilities are under the Nacha Operating Rules. You also can refer to our July 29 primary contact alert, issued via email, for additional guidance. As always, please feel free to reach out to me with any questions or call the Payments Hotline at 855-NEACHQA. We are here to help you navigate emerging payments issues and are happy to be of assistance.