New ACH Rules

Cliff Cook of Compliance Services, Inc., forwarded this to me in an email. It was put together by Cliff and Michael Raskasy, Esq. of Harlowe & Falk LLP.

Here is the email. I think it’s worth sharing.


Last week, the National Automated Clearing House Association (“NACHA”) announced an amendment to the ACH rules that enhances the requirements for consumer debit authorizations.

Under the current rules, before using an ACH entry to debit a consumer bank account, an originator (e.g., a lender) must generally obtain the written authorization of the consumer. Each authorization must comply with several requirements, including a general requirement that the authorization must “clearly and conspicuously” state its terms. If an authorization does not comply with these requirements, a debit is considered to be “unauthorized” and subject to return.

The revised rule expands the requirements of the current rule. Now, each ACH authorization must be “clear and readily understandable,” instead of “clear and conspicuous” as to its terms. This suggests that a “plain English” standard now applies to authorizations.

Moreover, the authorization must also address the amount and timing of debits. According to the new rule, “[a]ny purported authorization that is not clear and readily understandable as to its terms (including the amount or timing of debits), or that is otherwise invalid under applicable law, does not satisfy the requirements of this subsection 2.1.2.” This change represents an expansion of the existing rule, which requires only that the “terms” of the debit be stated.

Finally, the new rule expands the definition of “unauthorized entry.” Now, an ACH debit will be “unauthorized” (and subject to return by the consumer) if (i) the consumer’s authorization does not include all of the information required by the revised rule, above, or (ii) the debit amount is either higher or lower than the amount authorized by the consumer. This represents a change from the prior definition, which prohibited only debits in an amount greater than the amount authorized. In explaining the change, NACHA stated that “[a] transaction in any amount other than that authorized by the Receiver is unauthorized. As a result, this amendment revises the definition of an unauthorized entry to refer, instead, to an amount “different than” the amount authorized by the Receiver.” Undoubtedly, this expanded definition will have the effect of increasing the potential number of debits that are considered “unauthorized.”


The new rules take effect on March 19, 2010.


If you use ACH debits to collect loan payments, these debits will be considered “unauthorized” if your authorization language or collection procedures do not comply with the new requirements. This may result in a substantial increase in returned debit entries. We also expect enhanced regulatory scrutiny of ACH procedures, including authorization documentation, and an increase in litigation exposure.


1. Have legal counsel review your existing ACH authorization language for compliance with the new rules. Work with legal counsel to tailor a solution appropriate for your situation to maximize collections and minimize risks.
2. Review your ACH procedures to ensure that they are consistent with the rules and your authorization language.

We ( worked with Cliff on some TILA and APR issues. I don’t like throwing around the word “expert” too much, but I will here. I highly recommend him.

You can find his contact information here.

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