UCC 4A and the ACH Network Presented by Wanda Downs, AAP

Director of Payments Education

2018

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UCC 4A AND THE ACH NETWORKWanda Downs, AAPDirector of Payments Education

DisclaimerThis presentation and applicable materials are intended

for general education purposes and nothing in this presentation should be considered to be legal, accounting or tax advice

You should contact your own attorney, accountant or tax professional with any specific questions you might have related to this presentation that are of a legal, accounting or tax nature

Image source: Thinkstock

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What is UCC Article 4A?Article 4A is state law first promulgated in 1989 by

National Conference of Commissioners on Uniform State Law and American Law Institute

A “uniform” or “model” law must be adopted by state legislatures to be effective

By 1996, all 50 states and the District of Columbia have adopted Article 4A

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When Does UCC 4A Apply?UCC 4A applies to funds transfers that credit the

receiving account• Wholesale wire transfers• ACH credit entries▪ Including Same Day ACH credits

• On-us transfers• Remittance transfers

UCC 4A does not apply to• Regulation E transactions• Debit transactions

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How is a Payment Order Issued?Orally

• In person• By phone

Electronically• On line• File transmission• Storage media• Fax

Writing• Letter• Signed funds transfer document

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UCC 4A Relationship to Other Law and RulesNACHA Rules

• Govern all funds transfers made over the ACH network, including those to which Article 4A does and does not apply

Federal Reserve Operating Circulars 4 & 6• Drafted to be consistent with Article 4A; circulars control in event of conflict• Apply only when the Federal Reserve Bank participates in the credit transfer

Electronic Fund Transfer Act (Regulation E)• Apply generally to consumer electronic fund transfers, which are not governed

by Article 4A

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UCC 4A Provision AlterationsAllowed alterations

• Rejection time limits for on-us Entries and interest liability • Right of RDFI to make credit provisional until final settlement▪ Prior notice to Originator and Receiver required▪ODFI, RDFI, and Receiver must be bound

to NACHA Operating Rules• Notice of Receipt to Receiver• Choice of Law

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UCC 4A Choice of LawBetween

• ODFI & Originator – governed by state law where ODFI is located• ODFI & RDFI – governed by state law where RDFI is located• RDFI & Receiver – governed by state law where RDFI is located• ODFI & Receiver (on-us Entry) – governed by state law where ODFI is located

• Originator & Receiver regarding the issue of when the payment is made –governed by state law where RDFI is located except in on-us Entries

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UCC 4A Provision AlterationsProhibited alterations

• Originator’s duty to pay ODFI if funds transfer is completed and not to pay if not completed

• Right of Originator for refund in event of ODFI error• Liability of ODFI for late or improper transmittal• Requirement to pay Receiver upon acceptance• Receiver’s right to receive payment and damages if RDFI refuses to make payment

• Allocation of liability for unauthorized Entries• Obligation of ODFI to refund unauthorized Entry with interest

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UCC Article 4A TerminologyArticle 4A NACHA Operating Rules

Acceptance (Section 4A-209) No counterpart

Beneficiary (Section 4A-103(s)(2)) Receiver

Beneficiary’s Bank (Section 4A-103(a)(3)) RDFI (which is the same as the ODFI in an on-us entry)

Execute (Section 4A-301) Transmit to an ACH Operator or sending point

Originator’s Bank (Section 4A-104(d)) Originator

Payment Date (Section 4A-401) Settlement Date (or, in the se of an on-us entry, the date on which payment to the Receiver is to be made)

Payment Order / Funds Transfer (Sections 4A-103(a)(1), 4A-104(a)) Credit Entry

Receiving Bank (Section 4A-103(a)(4)) ODFI, ACH Operator, or RDFI, as applicable

Rejection (Section 4A-210) Return of Entry by RDFI

Sender (Customer) (Sections 4A-103(a)(5), 4A-105(a)(3)) Originator, ODFI, or ACH Operator, as applicable

Payment date (Section 4A-401) Settlement Date

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Article 4A Credit Transfer in NACHA Rules Terminology

Originator = Originator

Originator’s Bank = ODFI

Beneficiary’s Bank = RDFI

Beneficiary = Receiver

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UCC Article 4A Definitions §4A-103"Funds transfer" means the series of transactions,

beginning with the originator's payment order, made for the purpose of making payment to the beneficiary of the order

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Funds Transfer: A Series of Payment OrdersOriginator Issues Payment Order

Receiving Bank

Intermediary Bank

Beneficiary’s Bank

Beneficiary

Each of the payment orders in a funds transfer must be either Accepted or Rejected.

The moment of acceptance is when liability for the funds transfer occurs.

Funds Transfer

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UCC Article 4A Definitions §4A-103 "Payment order" means an instruction of a sender to a

receiving bank, transmitted orally, electronically, or in writing, to pay, or to cause another bank to pay, a fixed or determinable amount of money to a beneficiary if:i. the instruction does not state a condition to payment to the beneficiary other

than time of payment,ii. the receiving bank is to be reimbursed by debiting an account of, or otherwise

receiving payment from, the sender, andiii. the instruction is transmitted by the sender directly to the receiving bank or to

an agent, funds-transfer system, or communication system for transmittal to the receiving bank.

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UCC Article 4A Definitions §4A-104"Sender" means the person giving the instruction to the

receiving bank"Receiving bank" means the bank to which the sender's

instruction is addressed“Intermediary bank” means a receiving bank other than

the originator's bank or the beneficiary's bank

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UCC Article 4A Definitions §4A-103 "Beneficiary" means the person to be paid by the beneficiary's bank "Beneficiary's bank" means the bank identified in a payment order in

which an account of the beneficiary is to be credited pursuant to the order or in which otherwise is to make payment to the beneficiary if the order does not provide for payment to an account

“Originator” means the sender of the first payment order in a funds transfer

“Originator’s bank” means (i) the receiving bank to which the payment order of the originator is issued if the originator is not a bank, or (ii) the originator if the originator is a bank

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UCC Article 4A Definitions §4A-401“Payment date” means the day on which the amount of

the order is payable to the beneficiary by the beneficiary’s bank. The payment date may be determined by the instruction of the sender but cannot be earlier than the day the order is received by the beneficiary’s bank and, unless otherwise determined, is the day the order is received by the beneficiary’s bank

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Acceptance of Payment Order §4A-209Receiving Bank (ODFI), other than a Beneficiary Bank

(RDFI), accepts a Payment Order when it executes it (i.e., issues a new Payment Order to carry out the received order)

Beneficiary’s Bank accepts at the earliest of:• When Beneficiary’s Bank pays the Beneficiary or notifies it of receipt of the Payment Order

• When Beneficiary’s Bank receives payment at final settlement (wire settlement time, or ACH: 8:30 a.m. 1:00 p.m. or 5:00 p.m. ET)

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When Acceptance Cannot Occur §4A-209Beneficiary does not have account with Receiving Bank,Account has been closed, orReceiving Bank is not permitted to receive credits for

Beneficiary’s account

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Rejection of Payment Order §4A-210Bank is not required to accept a payment orderHow can a bank reject a payment order?

• By sending rejection• Bank does not execute (i.e., send the payment order to the next Receiving Bank)

• Bank failsAcceptance precludes rejection

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Rejection “Fine Print” §4A-210 Rejection of Payment Ordera) A payment order is rejected by the receiving bank by a notice of

rejection transmitted to the sender orally, electronically, or in writing. A notice of rejection need not use any particular words and is sufficient if it indicates that the receiving bank is rejecting the order or will not execute or pay the order. Rejection is effective when the notice is given if transmission is by a means that is reasonable in the circumstances. If notice of rejection is given by a means that is not reasonable, rejection is effective when the notice is received. If an agreement of the sender and receiving bank establishes the means to be used to reject a payment order, (i) any means complying with the agreement is reasonable and (ii) any means not complying is not reasonable unless no significant delay in receipt of the notice resulted from the use of the noncomplying means.

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When Must Bank Refund Payment§§4A-204, 4A-304, 4A-505Bank (ODFI) must refund if:

• Transfer not authorized• Not enforceable• Erroneously executed

Customer must notify bank within a reasonable time (not exceeding 90 days) in order to be entitled to interest on refund (at Federal Funds Rate)

A “reasonable time” may be fixed by agreement—but must truly be reasonable

Customer must make claim within one year of notification

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Mis-Description of Beneficiary §4A-207Acceptance cannot occur if:

• Name, Account, or other Number refers to nonexistent or unidentifiable person

If Payment Order identifies Beneficiary by both name and account number and name and number identify different person:• If Bank does not know, Bank may rely on number• If Bank does know, Bank may pay person named or account number if person is entitled▪ Bank (RDFI) liable if wrong person is paid

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Cancellation and Amendment §4A-211Made orally, electronically, or in writingReceived before acceptance occurs

• Not effective after acceptanceUnaccepted payment order is cancelled after five

business daysCancelled payment order cannot be acceptedAgreement or Funds-transfer System Rule can affect

rights of cancellation and amendment

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From Issuance to PaymentReceiving Bank is not Beneficiary's Bank

Receiving Bank issues Payment Order to carry out order of Sender (Execution 4A-301) (Acceptance 4A-

209)

Receiving Bank is obligated to execute the Payment Order in accordance with instructions of the Sender (4A-

302)

Sender becomes obligated to pay Receiving Bank for the Payment Order (4A-402(c))

Upon acceptance by Intermediary or Beneficiary’s Bank, Receiving Bank is obligated to pay for Payment Order

(4A-402(c))

Receiving Bank is Beneficiary’s Bank

Acceptance occurs when bank pays or notifies Beneficiary (4A-209(b)(1)

When Beneficiary's Bank receives payment (4A-209(b)(2))

Opening of next funds transfer business day if Sender has withdrawable balance and order has not been

rejected (4A-209(b)(3))

Payment Order cannot be rejected, amended, or cancelled after acceptance occurs and creditor process

and setoff come too late (4A-502)

Upon acceptance, Beneficiary’s Bank becomes obligated to pay the Beneficiary’ (4A-404(a))

Sender issues a Payment Order

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Security

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Security Procedures §4A-201, §4A-202Procedures established by agreement that accomplishes

• Verification of authenticity of order or cancellation• Error detection

Commercially reasonable security procedure• Question of law▪ Circumstances known to bank▪ Security procedures in general use▪ Alternative security procedures offered

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Enforceability of Funds Transfer §4A-203Authorized transfers enforceableUnauthorized transfers enforceable if:

• Verified pursuant to security procedure• Security procedure is commercially reasonable• Bank accepted it in good faith and in compliance with security procedure

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Unenforceability Funds Transfer §4A-203Unauthorized transfers not enforceable if:

• Bank agrees not to enforce• No security procedure• Security procedure is not commercially reasonable• Not made by authorized person or person entrusted with security procedure

• Not made by person who obtained access to transmitting facility• Made by person that obtained security procedure from a source not controlled by customer

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Factors to ConsiderCustomer AgreementsList of authorized agentsSecurity procedures generally

in useTransaction monitoringCase law

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FFIEC Expectations in a Changing EnvironmentThe supplement guidance restates the need to

continually adapt as technology and risks change• Standing still is not acceptable• More is better, layered is better

The guidance provides an updated expectation in a hostile environment in the form of Risk • Customer authentication• Layered security (defense in depth) and other controls

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Commercially Reasonable Security Procedure ChecklistDocument current security procedures

• Online access• Wire transfer & ACH Origination• Customer selected security procedure

Document transaction monitoringCompare bank security procedures to FFIEC guidanceCompare bank security procedures to other bank’sReview customer agreements

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AgreementsOnline / Internet Banking AgreementsWire transfer agreementsACH Origination AgreementsSecurity procedureCustomer agrees is commercially reasonableCustomer will scan personal computer(s)Customer will give notification of unauthorized transfer

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ODFI Disclosures Required by Rulesa) The Entry may be Transmitted through the ACH Networkb) Choice of law state

• Default is state of New Yorkc) Credit given to Receiver by RDFI is provisional until the RDFI

has received final settlementd) RDFI is entitled to a refund from Receiver in event final

settlement does not occurMay be provided within Origination Agreement or otherwise

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RDFI Entitled to RefundCredit Entries governed by UCC-4A are provisional until

final settlement If settlement does not occur, RDFI is entitled to a refund

from the Receiver of the amount creditedOriginator is considered not to have paid the Receiver in

these casesNot applicable if Receiver has not agreed to be bound by

the Rules

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Continuing Education CreditsAAP Continuing Education CreditsSession title: UCC 4A & the ACH NetworkSession is worth: 1.2 AAP CE (continuing education) creditsTopic area: Rules & RegulationsDate conducted: 2/14/18Conducted by: ePayResourcesSome of our sessions may also be eligible for other industry

certification renewal creditsCheck with your certifying organization for eligibility

requirements

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Resources From ePayResourcesAgreementsNow!ProceduresNow!Originator Handbook series

• Seven handbooks written with the corporate Originator in mind: easy-to-read language, just what a non-banker needs to know, helpful examples

• CCD & CTX Edition speaks to wholesale commercial credit transactionsRevised Uniform Commercial Code Article 4A and the

ACH Network (publisher NACHA)

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Wanda Downs

Director of Payments Education

wdowns@epayresources.org (800) 681-4224

Upcoming ePayResources events with CBANC Education:

Reg CC Updates Fri 2/23 at 11am CT/12pm ET