Legal and Regulatory Track

1
Legal and Regulatory Track Payments Getting
and Maintaining a Bank Relationship
Moderator Jennifer Galloway, Jennifer
Galloway, PA Panelists Kirk Chewning,
Strategic Link Consulting Mark Murphy, Sandberg
Phoenix von Gontard PC Rick Eckman, Pepper
Hamilton Blake Sims, Hudson Cook
2
Outline

• OLA Payments best practices
• ACH processing in the current environment
• Payments compliance and alternatives

3
OLA Payment Best Practices Reporting
Presented By Kirk Chewning
4
OLA Best Practices

• Lenders, processors and their agents shall
  develop and maintain timely postings of returns
  information
• Lenders shall provide consumers an alternative to
  ACH debiting. These alternatives shall be
  provided both when the customer is current and in
  collection stages.  Such alternatives may include
  paper check, debit card, money order, or other
  means. 
• 3. All customers must have the right to rescind
  the loan and the ACH authorization within one (1)
  business day of the loan approval so long as the
  customer returns the funds within 24 hours of the
  rescission
• 4. Lenders will follow all NACHA presentment
  rules one original presentment plus only two
  re-presentments on each original payment.

5
OLA Best Practices (Continued)

• Lenders will not process multiple ACH debit
  attempts to an individual loan on the same
  effective date (No ACH Split Payments) unless
  expressly authorized by (expressly requested by)
  the customer
• Lenders shall charge only one NSF fee per
  original loan payment
• 7. All authorizations for recurring debits
  shall be secured in accordance with NACHA rules,
  the Electronic Funds Transfer Act and Regulation
  E. This shall include securing authorization for
  recurring debits in writing and signed or
  similarly authenticated by the consumer
• 1. Authorization can be electronic
• 2. Authorization must be retained and a copy
  provided to borrower
• 3. Must include the five essential elements
  defined by NACHA rules
• 8. Lenders shall transfer PII data using TPS and
  TPP security protocols to ensure no inappropriate
  passing of data. 

6
OLA Best Practices (Continued)

• 9. All parties will comply with the new NACHA
  Rule 2.3.4 which requires the ODFI to ensure that
  originators and third-party senders do not share
  account/routing numbers for the purpose of
  initiating debit entries that are not covered by
  the original authorization
• 10.Lenders shall not ACH debit a consumer unless
  they have a valid authorization with the proper
  ABA and account information.  Lenders shall not
  use new bank account information that the
  merchant sourced from the marketplace on the
  consumer, or in other words, Lenders shall only
  debit consumers for the account listed on the
  valid authorization.
• Lenders shall not use RCCs and RCPOs in their
  normal course of business unless formally
  requested and proper consumer authorization has
  been secured.
• 12. Lenders shall provide their payment
  processors and the sponsoring ODFI signed payment
  authorizations for all R10s and R29s returns
  within 24 hours of the request for such
  documentation.

7
OLA Best Practices (Continued)

1. Lenders shall provide Proof of Authorizations to
   be delivered to TPP within 24 business hours of
   the request
2. Lenders shall maintain all Proof of
   Authorization for all unauthorized transactions
   in a segregated manner and shall be be delivered
   to TPP within 4 business hours, upon request

8
RETURNS TESTS
9
General GuidanceAny merchants (lenders) third
party processor has the ultimate responsibility
and authority to establish, monitor and
adjudicate the rate of returns of all types and
codes. The processor is the gateway to the ODFI
bank partner and obligated to comply not only
with federal regulatory standards but those
established by NACHA. Notwithstanding this
ultimate authority, both merchants (lenders) and
processors are well advised to closely jointly
monitor return rates of all types on a constant
and continual basis. In the event a merchants
processor or bank does not frequently,
proactively provide return code analysis by ABA,
merchants (lenders) should ask their processor to
do so on a monthly basis, and to review those
data with recommendations to control return rates
under levels acceptable to NACHA.
TestingLenders/Merchants shall at a minimum
test their portfolios monthly to generate the
results of the previous month using the following
tests on the next few pages. In the event that
any merchant is out of the best practice realm
they should work closely with their processor(s)
and internal staff to correct lack of compliance
swiftly. Regulators, Processors and other
payment experts recommend daily and weekly review
of these thresholds. They feel that not only
will it make the relationship better with
processors and ODFI but also make the product
better for consumers and in some cases reduce
default and fraud.
OLA Best Practices Return Testing
10
OLA Best Practices Return Testing
Return Test Rules
Test 1 Best Practice 15 - The total count of
all returns (all codes) shall not be greater than
30 of total debits processed as computed by the
effective dates of the corresponding
debits. Test 2 Best Practice 16 The total
count of all NSF Returns (R01 R09) shall not be
greater than 25 of total debits processed as
computed by the effective dates of the
corresponding debits. Test 3 Best Practices 17
Lenders shall have an administration return
code less than or equal to 4.0 of total debits
processed as computed by the effective dates of
the corresponding debits. Admin lt 4 (R02, R03,
R04) Test 4 Best Practice 18 - All R05, R07,
R10, R29, and R51s (negative chargeback returns)
shall not to be greater than 0.5 of total debits
processed as computed by the effective dates of
the corresponding debits. (It is understood that
NACHAs current requirement is 1.0 or less
than) Test 5 Best Practices 19 Lenders shall
have a corrections (C Codes) of less than or
equal to 0.40 of total debits processed as
computed by the effective dates of the
corresponding debits. Corrections lt 0.40 (any
C code).
11
Test 6 Best Practice 20 - The total of all
R01 and R09 (insufficient fund returns) shall be
greater than 75 of the total returns for the
merchant as computed by the effective dates of
the corresponding debits.Test 7 Best Practice
21 - Lenders shall review individual ABA
numbers which have an extremely high return
percentage of the total transactions processed
during any given thirty day period. For any ABA
numbers that represent greater than 1.5X the
merchants average return (ABA returns vs. ABA
debits) and if the merchant submitted more than
15 returns per month with the said ABA then
Lenders will take the following measures  a)
Closely evaluate the applicant pre-approval, risk
management and underwriting means and methods
being used in comparison the industry best
practices and the state of the art methods
available from third party providers of consumer
data, and promptly institute such improved
measures. b) Discuss with the processor
recommendations for controlling returns. c) In
the event return rates do not fall into line with
industry practices and NACHA guidelines, the
lender is advised to cease funding loans from
any such ABA Test 8 Best Practice 22 -
Lenders shall review and promptly modify their
approval and risk management practices for any
individual ABA numbers for which more than 15
returns have been processed during the prior
calendar month in order to ensure no single ABA
number represents negative chargeback returns
greater than 1.5 of total debits for said ABA as
computed by the effective dates of the
corresponding debits.
OLA Best Practices Return Testing
12
Merchant Reporting Example - Return Testing
ACH Portfolio Test Report ACH Portfolio Test Report ACH Portfolio Test Report
September 1, 2013 - September 30, 2013 September 1, 2013 - September 30, 2013 September 1, 2013 - September 30, 2013          
               
Test 1 Best Practice 15 Test 1 Best Practice 15            
The total count of all returns (all codes) shall not be greater than 30 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all returns (all codes) shall not be greater than 30 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all returns (all codes) shall not be greater than 30 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all returns (all codes) shall not be greater than 30 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all returns (all codes) shall not be greater than 30 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all returns (all codes) shall not be greater than 30 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all returns (all codes) shall not be greater than 30 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all returns (all codes) shall not be greater than 30 of total debits processed as computed by the effective dates of the corresponding debits.
 
Test Results
MERCHANT DEBITS RETURNS RETURNS_VS_DEBITS
ABC Company 75,056 9,728 13.0
XYZ Company 76,808 10,644 13.9
TOTAL 151,863 20,372 13.4        
               
Test 2 Best Practice 16 Test 2 Best Practice 16            
The total count of all NSF Returns (R01 R09) shall not be greater than 25 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all NSF Returns (R01 R09) shall not be greater than 25 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all NSF Returns (R01 R09) shall not be greater than 25 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all NSF Returns (R01 R09) shall not be greater than 25 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all NSF Returns (R01 R09) shall not be greater than 25 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all NSF Returns (R01 R09) shall not be greater than 25 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all NSF Returns (R01 R09) shall not be greater than 25 of total debits processed as computed by the effective dates of the corresponding debits. The total count of all NSF Returns (R01 R09) shall not be greater than 25 of total debits processed as computed by the effective dates of the corresponding debits.
 
Test Results
MERCHANT DEBITS RETURNS RETURNS_VS_DEBITS
ABC Company 75,056 8,085 10.8
XYZ Company 76,808 8,683 11.3
TOTAL 151,863 16,767 11.0        
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Merchant Reporting Example - Return Testing
ACH Portfolio Test Report ACH Portfolio Test Report ACH Portfolio Test Report
September 1, 2013 - September 30, 2013 September 1, 2013 - September 30, 2013 September 1, 2013 - September 30, 2013          
               
Test 3 Best Practice 17 Test 3 Best Practice 17            
Lenders shall have an administration return code less than or equal to 4.0 of total debits processed as computed by the effective dates of the corresponding debits. Admin lt 4 (R02, R03, R04) Lenders shall have an administration return code less than or equal to 4.0 of total debits processed as computed by the effective dates of the corresponding debits. Admin lt 4 (R02, R03, R04) Lenders shall have an administration return code less than or equal to 4.0 of total debits processed as computed by the effective dates of the corresponding debits. Admin lt 4 (R02, R03, R04) Lenders shall have an administration return code less than or equal to 4.0 of total debits processed as computed by the effective dates of the corresponding debits. Admin lt 4 (R02, R03, R04) Lenders shall have an administration return code less than or equal to 4.0 of total debits processed as computed by the effective dates of the corresponding debits. Admin lt 4 (R02, R03, R04) Lenders shall have an administration return code less than or equal to 4.0 of total debits processed as computed by the effective dates of the corresponding debits. Admin lt 4 (R02, R03, R04) Lenders shall have an administration return code less than or equal to 4.0 of total debits processed as computed by the effective dates of the corresponding debits. Admin lt 4 (R02, R03, R04) Lenders shall have an administration return code less than or equal to 4.0 of total debits processed as computed by the effective dates of the corresponding debits. Admin lt 4 (R02, R03, R04)
 
Test Results
MERCHANT DEBITS ADMIN R02 R03 R04 ADMIN_VS_DEBITS
ABC Company 75,056 777 703 64 10 1.04
XYZ Company 76,808 997 887 96 14 1.30
TOTAL 151,863 1,775 1,590 160 25 1.17  
               
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Merchant Reporting Example - Return Testing
Test 4 Best Practice 18 Test 4 Best Practice 18              
All R05, R07, R10, R29, and R51s (negative chargeback returns) shall not to be greater than 0.5 of total All R05, R07, R10, R29, and R51s (negative chargeback returns) shall not to be greater than 0.5 of total All R05, R07, R10, R29, and R51s (negative chargeback returns) shall not to be greater than 0.5 of total All R05, R07, R10, R29, and R51s (negative chargeback returns) shall not to be greater than 0.5 of total All R05, R07, R10, R29, and R51s (negative chargeback returns) shall not to be greater than 0.5 of total All R05, R07, R10, R29, and R51s (negative chargeback returns) shall not to be greater than 0.5 of total  
debits processed as computed by the effective dates of the corresponding debits. debits processed as computed by the effective dates of the corresponding debits. debits processed as computed by the effective dates of the corresponding debits. debits processed as computed by the effective dates of the corresponding debits. debits processed as computed by the effective dates of the corresponding debits.  
(It is understood that NACHAs current requirement is 1.0 or less than) (It is understood that NACHAs current requirement is 1.0 or less than) (It is understood that NACHAs current requirement is 1.0 or less than) (It is understood that NACHAs current requirement is 1.0 or less than) (It is understood that NACHAs current requirement is 1.0 or less than)  
   
Test Results  
MERCHANT DEBITS NCB R05 R07 R10 R29 R51 NCB_VS_DEBITS
ABC Company 75,056 85 0 39 45.5 0 0 0.113
XYZ Company 76,808 75 0 31.2 44.2 0 0 0.098
TOTAL 151,863 160 0 70.2 89.7 0 0 0.105
                 
Test 5 Best Practice 19 Test 5 Best Practice 19              
Lenders shall have a corrections (C Codes) of less than or equal to 0.40 of total debits processed as computed by the effective dates of the corresponding debits. Lenders shall have a corrections (C Codes) of less than or equal to 0.40 of total debits processed as computed by the effective dates of the corresponding debits. Lenders shall have a corrections (C Codes) of less than or equal to 0.40 of total debits processed as computed by the effective dates of the corresponding debits. Lenders shall have a corrections (C Codes) of less than or equal to 0.40 of total debits processed as computed by the effective dates of the corresponding debits. Lenders shall have a corrections (C Codes) of less than or equal to 0.40 of total debits processed as computed by the effective dates of the corresponding debits. Lenders shall have a corrections (C Codes) of less than or equal to 0.40 of total debits processed as computed by the effective dates of the corresponding debits. Lenders shall have a corrections (C Codes) of less than or equal to 0.40 of total debits processed as computed by the effective dates of the corresponding debits. Lenders shall have a corrections (C Codes) of less than or equal to 0.40 of total debits processed as computed by the effective dates of the corresponding debits. Lenders shall have a corrections (C Codes) of less than or equal to 0.40 of total debits processed as computed by the effective dates of the corresponding debits.
Corrections lt 0.40 (any C code). Corrections lt 0.40 (any C code).  
Results  
No Correction codes found No Correction codes found      
                 


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Merchant Reporting Example - Return Testing

Test 6 Best Practice 20 Test 6 Best Practice 20              
The total of all R01 and R09 (insufficient fund returns) shall be greater than 75 of the total returns for the merchant as computed by the effective dates of the corresponding debits. The total of all R01 and R09 (insufficient fund returns) shall be greater than 75 of the total returns for the merchant as computed by the effective dates of the corresponding debits. The total of all R01 and R09 (insufficient fund returns) shall be greater than 75 of the total returns for the merchant as computed by the effective dates of the corresponding debits. The total of all R01 and R09 (insufficient fund returns) shall be greater than 75 of the total returns for the merchant as computed by the effective dates of the corresponding debits. The total of all R01 and R09 (insufficient fund returns) shall be greater than 75 of the total returns for the merchant as computed by the effective dates of the corresponding debits. The total of all R01 and R09 (insufficient fund returns) shall be greater than 75 of the total returns for the merchant as computed by the effective dates of the corresponding debits. The total of all R01 and R09 (insufficient fund returns) shall be greater than 75 of the total returns for the merchant as computed by the effective dates of the corresponding debits. The total of all R01 and R09 (insufficient fund returns) shall be greater than 75 of the total returns for the merchant as computed by the effective dates of the corresponding debits. The total of all R01 and R09 (insufficient fund returns) shall be greater than 75 of the total returns for the merchant as computed by the effective dates of the corresponding debits.
   
Test Results  
MERCHANT RETURNS NSF NSF_VS_RETURNS  
ABC Company 9,728 8,085 83.1  
XYZ Company 10,644 8,683 81.6  
TOTAL 20,372 16,767 82.3          
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Merchant Reporting Example - Return Testing
Test 7 Best Practice 21 Test 7 Best Practice 21        
Lenders shall review individual ABA numbers which have an extremely high return percentage of the total transactions processed during any given thirty day period. For any ABA numbers that represent Lenders shall review individual ABA numbers which have an extremely high return percentage of the total transactions processed during any given thirty day period. For any ABA numbers that represent Lenders shall review individual ABA numbers which have an extremely high return percentage of the total transactions processed during any given thirty day period. For any ABA numbers that represent Lenders shall review individual ABA numbers which have an extremely high return percentage of the total transactions processed during any given thirty day period. For any ABA numbers that represent Lenders shall review individual ABA numbers which have an extremely high return percentage of the total transactions processed during any given thirty day period. For any ABA numbers that represent Lenders shall review individual ABA numbers which have an extremely high return percentage of the total transactions processed during any given thirty day period. For any ABA numbers that represent
greater than 1.5X the merchants average return (ABA returns vs. ABA debits) and if the merchant submitted more than 15 returns per month with the said ABA then Lenders will take the following measures  greater than 1.5X the merchants average return (ABA returns vs. ABA debits) and if the merchant submitted more than 15 returns per month with the said ABA then Lenders will take the following measures  greater than 1.5X the merchants average return (ABA returns vs. ABA debits) and if the merchant submitted more than 15 returns per month with the said ABA then Lenders will take the following measures  greater than 1.5X the merchants average return (ABA returns vs. ABA debits) and if the merchant submitted more than 15 returns per month with the said ABA then Lenders will take the following measures  greater than 1.5X the merchants average return (ABA returns vs. ABA debits) and if the merchant submitted more than 15 returns per month with the said ABA then Lenders will take the following measures  greater than 1.5X the merchants average return (ABA returns vs. ABA debits) and if the merchant submitted more than 15 returns per month with the said ABA then Lenders will take the following measures 
Closely evaluate the applicant pre-approval, risk management and underwriting means and methods being used in comparison the industry best practices and the state of the art methods available from third Closely evaluate the applicant pre-approval, risk management and underwriting means and methods being used in comparison the industry best practices and the state of the art methods available from third Closely evaluate the applicant pre-approval, risk management and underwriting means and methods being used in comparison the industry best practices and the state of the art methods available from third Closely evaluate the applicant pre-approval, risk management and underwriting means and methods being used in comparison the industry best practices and the state of the art methods available from third Closely evaluate the applicant pre-approval, risk management and underwriting means and methods being used in comparison the industry best practices and the state of the art methods available from third Closely evaluate the applicant pre-approval, risk management and underwriting means and methods being used in comparison the industry best practices and the state of the art methods available from third
party providers of consumer data, and promptly institute such improved measures. party providers of consumer data, and promptly institute such improved measures. party providers of consumer data, and promptly institute such improved measures. party providers of consumer data, and promptly institute such improved measures. party providers of consumer data, and promptly institute such improved measures.
Discuss with the processor recommendations for controlling returns. Discuss with the processor recommendations for controlling returns. Discuss with the processor recommendations for controlling returns. Discuss with the processor recommendations for controlling returns.
In the event return rates do not fall into line with industry practices and NACHA guidelines, the lender is advised to cease funding loans from any such ABA In the event return rates do not fall into line with industry practices and NACHA guidelines, the lender is advised to cease funding loans from any such ABA In the event return rates do not fall into line with industry practices and NACHA guidelines, the lender is advised to cease funding loans from any such ABA In the event return rates do not fall into line with industry practices and NACHA guidelines, the lender is advised to cease funding loans from any such ABA In the event return rates do not fall into line with industry practices and NACHA guidelines, the lender is advised to cease funding loans from any such ABA In the event return rates do not fall into line with industry practices and NACHA guidelines, the lender is advised to cease funding loans from any such ABA
Test Results
MERCHANT ABA DEBITS RETURNS RETURNS_VS_DEBITS MERCH_AVE_X_150
ABC Company 75,056 9,728 13.0 19.4
XYZ Company 76,808 10,644 13.9 20.8
TOTAL   151,863 20,372 13.4 20.1
           
ABA with 15 or more Returns for Test 7 ABA with 15 or more Returns for Test 7 ABA with 15 or more Returns for Test 7      
MERCHANT ABA DEBITS RETURNS RETURNS_VS_DEBITS MERCH_AVE_X_150
ABC Company 314074269 796 205 25.8 22.4
ABC Company 226078036 613 178 29.0 22.4
ABC Company 256074974 412 93 22.6 22.4

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Merchant Reporting Example - Return Testing

Test 8 Best Practice 22 Test 8 Best Practice 22        
Lenders shall review and promptly modify their approval and risk management practices for any individual ABA numbers for which more than 15 returns have been processed during the prior calendar Lenders shall review and promptly modify their approval and risk management practices for any individual ABA numbers for which more than 15 returns have been processed during the prior calendar Lenders shall review and promptly modify their approval and risk management practices for any individual ABA numbers for which more than 15 returns have been processed during the prior calendar Lenders shall review and promptly modify their approval and risk management practices for any individual ABA numbers for which more than 15 returns have been processed during the prior calendar Lenders shall review and promptly modify their approval and risk management practices for any individual ABA numbers for which more than 15 returns have been processed during the prior calendar Lenders shall review and promptly modify their approval and risk management practices for any individual ABA numbers for which more than 15 returns have been processed during the prior calendar
month in order to ensure no single ABA number represents negative chargeback returns greater than 1.5 of total debits for said ABA as computed by the effective dates of the corresponding debits. month in order to ensure no single ABA number represents negative chargeback returns greater than 1.5 of total debits for said ABA as computed by the effective dates of the corresponding debits. month in order to ensure no single ABA number represents negative chargeback returns greater than 1.5 of total debits for said ABA as computed by the effective dates of the corresponding debits. month in order to ensure no single ABA number represents negative chargeback returns greater than 1.5 of total debits for said ABA as computed by the effective dates of the corresponding debits. month in order to ensure no single ABA number represents negative chargeback returns greater than 1.5 of total debits for said ABA as computed by the effective dates of the corresponding debits. month in order to ensure no single ABA number represents negative chargeback returns greater than 1.5 of total debits for said ABA as computed by the effective dates of the corresponding debits.
 
MERCHANT ABA DEBITS RETURNS NCB NCB_VS_DEBITS
ABC Company 123556667 498 107 11 2.2
XYZ Company 344445556 256 46 4 1.6
Total   754 153 15 1.99


ABA with 15 or more Returns for Test 8 ABA with 15 or more Returns for Test 8 ABA with 15 or more Returns for Test 8      
- Lenders shall review and promptly modify their approval and risk management practices for any individual ABA numbers for which more than 15 returns have been processed during the prior calendar month in order - Lenders shall review and promptly modify their approval and risk management practices for any individual ABA numbers for which more than 15 returns have been processed during the prior calendar month in order - Lenders shall review and promptly modify their approval and risk management practices for any individual ABA numbers for which more than 15 returns have been processed during the prior calendar month in order - Lenders shall review and promptly modify their approval and risk management practices for any individual ABA numbers for which more than 15 returns have been processed during the prior calendar month in order - Lenders shall review and promptly modify their approval and risk management practices for any individual ABA numbers for which more than 15 returns have been processed during the prior calendar month in order - Lenders shall review and promptly modify their approval and risk management practices for any individual ABA numbers for which more than 15 returns have been processed during the prior calendar month in order
order to ensure no single ABA number represents negative chargeback returns greater than 1.5 of total debits for said ABA as computed by the effective dates of the corresponding debits. order to ensure no single ABA number represents negative chargeback returns greater than 1.5 of total debits for said ABA as computed by the effective dates of the corresponding debits. order to ensure no single ABA number represents negative chargeback returns greater than 1.5 of total debits for said ABA as computed by the effective dates of the corresponding debits. order to ensure no single ABA number represents negative chargeback returns greater than 1.5 of total debits for said ABA as computed by the effective dates of the corresponding debits. order to ensure no single ABA number represents negative chargeback returns greater than 1.5 of total debits for said ABA as computed by the effective dates of the corresponding debits. order to ensure no single ABA number represents negative chargeback returns greater than 1.5 of total debits for said ABA as computed by the effective dates of the corresponding debits.
MERCHANT ABA Debits Return NCB NCB_VS_DEBITS
ABC Company 253177049 304 62 7 2.3
ABC Company 063104668 149 26 3 2.0
ABC Company 021001088 107 20 2 1.9

18
Questions?Thank you
19
OLA Best Practices
Payments A Closer Look Presented by Mark Murphy
20
Timely Postings
Payments must be posted upon receipt.
Policies must prevent delay and/or incorrect
application of payments.
21
Payment Options
Lenders must provide an alternative to ACH
debiting.
The alternative must be provided when customer
is current or in collection.
Alternatives may include paper check, debit
card, money order or other means.
22
Electronic Payment Authorization
One Time Debits Notice of amount and date
required. Notice in loan agreement is sufficient.
Recurring Debits Written authorization
required, containing amount or range of amounts,
and dates. Paper or electronic form acceptable.
Retain copy and give copy to consumer.
Unauthorized Debits Lenders and processors must
ensure any unauthorized debit is quickly
identified and reversed.
23
Reporting
Our best fraud prevention tool Reporting of
current and prior loan activity that is Timely,
Accurate and Complete.
Report within 30 days after furnishing the
negative information to the CRA.
Furnisher has a duty to correct the information
and thereafter furnish only complete and accurate
information.
Furnisher must reinvestigate, and must complete
the investigation within 30 days.
Furnisher must notify any CRA to which it
furnished inaccurate information and provide any
information necessary to correct
24
Repayment Options
The Consumer must be made aware of repayment
options at the time they enter into the Loan.
When a Lender learns that a Consumer is unable
to repay at original terms, Members should offer
repayment plans that provide flexibility based on
Consumers circumstances.
25
Returns
Returns occur when a Consumer believes a debit
is unauthorized and asks for the debit to be
reversed.
High rate of returns indicates failures in
processes for obtaining proper authorizations, or
may indicate incidents of fraud.
Depository institutions may take action to close
a Lenders account due to high rate of returns,
harming the Lenders relationship with the
depository institution and ability to process
payments.
26
Identifying and Dealing with Returns
Block any ABA number/bank with an extremely high
return percentage, which in general is 30 or
more of total debits. Only exception Consumer
proves that ABA or DDA at the ABA is a valid
account, allow debits for only that situation.
Stop processing any debits or credits for
accounts when ACH Negative Return Codes appear.
ACH Negative Return Code processing R2, R3, R4,
R5, R7, R8, R10, R16, R20, R29.

• For all R10 and R29 (Chargeback where customer
  flags as unauthorized)
• Show ACH processor authentication and
  authorization documents, and
• Ensure no additional transactions are completed
  on the account.

27
Third-Party Payment Processors Compliance
Richard P. Eckman Partner, Pepper Hamilton LLP
28
Third-Party Payment Processors

• TPPPs What are they?
• A deposit customer that uses its banking
  relationship to process payments for merchant
  clients
• Merchant Clients
• Legitimate?
• High Risk
• Illegal

29
Warning Signs/Red Flags

• Consumer complaints (i.e., unauthorized,
  misrepresented, merchant strong-armed consumer
  into providing account information
• High rates of unauthorized returns/charge backs
• TPPPs have been targeting problem institutions
  with the promise of income and capital
• TPPP likely to use more than one financial
  institution to process payments, and activity may
  periodically move among institutions

30
Enhanced Due Diligence

• Policies and procedures
• Know your TPPPs customers
• Develop a processor approval program that extends
  beyond credit risk management
• Perform background checks on TPPPs and merchant
  clients
• Authenticate the TPPPs business operations and
  assess the risk level

31
Enhanced Due Diligence (cont.)

• Review promotional materials, including websites,
  to determine target clientele
• Identify processors major customers
• Review corporate documentation
• Visit business operations center
• Review information of merchant clients the
  principle business activity geographic location
  and sales techniques

32
Ongoing Monitoring Systems

• Monitoring high rates of return
• Setting return rate thresholds
• Setting transaction volume limits
• Auditing third-party processors programs
• Monitoring reserve adequacy
• Monitoring consumer complaints about merchant
  clients on internet blogs and industry databases
• Developing contract language addressing access to
  records, conditions requiring account closing,
  and reserve adequacy

33
Potential Supervisory Responses

• May require the bank to terminate the
  relationship with the high-risk TPP
• Informal enforcement actions
• Formal enforcement actions
• Civil money penalties
• Section 5 of the FTC Act

34
Unfair or Deceptive Practices?

• A bank may be viewed as facilitating a TPPPs or
  a merchants fraudulent or unlawful activity
• Section 5(a) of the FTC Act prohibits unfair or
  deceptive acts or practices affecting commerce
  and applies to all persons engaged in commerce,
  including banks
• Authority under Section 8 of the FDI Act to take
  appropriate action when unfair or deceptive acts
  or practices are uncovered

35
Examining Guidance

• Verify the banks due diligence and underwriting
• Review the banks controls, policies and
  procedures for high-risk accounts
• If you find suspicious activity
• Gather information to support your findings
• Escalate findings to your superiors
• Communicate to the bank the seriousness of
  potentially facilitating consumer fraud
• Encourage the bank to file a SAR and to contact
  law enforcement

36
Red Flags

• High return rates
• Merchants selling questionable products and
  services
• 100 refund policy
• Prior civil, criminal and regulatory actions
  against processor or its principals
• Consumer and other bank complaints
• Inquiries from law enforcement

37
A Simple Proposition

• Mass-market scammers need access to payment
  systems (RCCs, ACH, CC) to take consumers money.
  Without bank access there are no unauthorized
  withdrawals.
• Banks are stationary (no whack-a-mole),
  regulated and are concerned about reputational
  risk.
• Banks already are required to have systems in
  place to prevent criminals from accessing the
  banking system.
• Cutting off the scammers access to the payment
  systems is relatively efficient and fast, and
  protects consumers prospectively as we
  investigate.

38
Important Steps Forward

• Guidance to banks from FDIC, OCC and FinCEN
• United States v. First Bank of Delaware
• Financial Fraud Enforcement Task Force/Consumer
  Protection Branch efforts to choke off
  fraudsters access to payment systems (DOJ, FTC,
  FDIC-OIG, USPIS, FBI and others)
• May 21, 2013 FTIC Notice of Proposed Rulemaking
  would ban the use of RCCs in connection with
  telemarketing

39
Operation Choke Point, So Far

• More than 50 subpoenas issued to banks and TPPPs
• Several active and criminal investigations
• Banks are self-disclosing problematic TPPP
  relationships
• Banks are terminating TPPP relationships and
  scrutinizing scammer relationships
• Internet payday lending collateral benefits
• Investigative support from USPIS, FBI, SIGTARP,
  USSS

40
Regulatory Loophole

• Treasury Department regulation amended in 2011
  arguably excludes TPPPs from the definition of
  money transmitter and thus is not a Money
  Services Business (MSB)
• A payment processor that originates tens of
  millions of dollars of debit transactions against
  consumer bank accounts on behalf of Internet and
  telemarketing merchants may not be an MSB and may
  not be required to register with FinCEN or comply
  with the BSA

41
Payment Alternatives H. Blake Sims Hudson Cook,
LLP
42
Payment Alternatives

• Cards (debit, credit, prepaid)
• Check
• Remotely-created check (RCC)
• Electronic Payment Order (EPO)
• Revocable Wage Assignment
• Others Direct Carrier Billing, Mobile Wallets

43
Payment Alternatives - Cards

• Credit/debit/prepaid cards
• Card company rules and PCI compliance
• Truncation (no more than the last 5 digits of a
  card number)
• Debit card payments are covered by Reg. E (cannot
  condition the extension of credit)
• Must run as a credit transaction for recurring
  payment because cannot hold PIN

44
Payment Alternatives Debit Cards

• Single-initiated TEL entries 
• Either record explicit oral authorization or
  provide, in advance of debit, written notice that
  confirms the oral authorization.
• Recurring TEL entries
• Must record explicit oral authorization and
  provide a written copy of the authorization.

45
Payment Alternatives Debit Cards

• Both Single/Recurring entries
• The authorization must be readily identifiable as
  an authorization and must have clear and readily
  understandable terms.
• Certain required minimum information must be
  included as part of the authorization (recommend
  scripts). 
• Written notice confirming oral authorization must
  include, at a minimum, the pieces of information
  required to be included during the telephone
  call. Should disclose the method by which written
  notice will be provided if this option is used .
• You must clearly state during the telephone
  conversation that the consumer is authorizing a
  debit entry to his account. The customer must
  explicitly express consent. Silence is not
  express consent.

46
Payment Alternatives Debit Cards

• EFTA penalties
• Actual Damages
• Statutory damages
• Individual action up to 1,000
• Class action up to 1,000 for each plaintiff, and
  500,000 or 1 of net worth, whichever is less
• Attorney fees
• Court costs
• Class actions
• Possibly punitive damages under state law

47
Payment Alternatives - Checks

• Articles 3 4 of the UCC and Reg. CC
• Electronic Check Clearing House Organization
  (ECCHO) www.eccho.org
• Personal Checks (manual deposit, Check 21, BOC)
• Remotely-Created Checks (RCC)
• Telemarketing Sales Rule
• Requires authorization and printing of check
• Cannot BOC
• Reg. CC shifted bank warranties to depositors
  bank

48
Payment Alternatives - Checks

• Electronic Payment Order (EPO)
• aka remotely-created electronic payment, e-check,
  or remotely-created payment order
• Requires authorization but no check printed
• Legal framework uncertain do we apply check
  laws or EFTA?
• Reg. CC not addressed
• Federal Reserve Operating Circular 3 requires
  paper check not eligible for check imaging, and
  Fed has no liability
• ECCHO Rules not an item under rules
• May be deemed an EFT CFPB interprets Reg. E
• Federal Reserve has created a working group to
  study

49
Payment Alternatives Wage Assignment

• FTC Credit Practices Rule - 16 CFR part 444. 
• Allowed if revocable at will
• Wage assignment should be clearly and
  conspicuously disclosed
• Wage assignment should NOT insinuate it is a
  garnishment
• Likely to draw close scrutiny from regulators
• OLA Best Practices
• State laws vary

50
Payment Alternatives Others

• Direct Carrier Billing consumers make a
  purchase and have the charge appear on a monthly
  wireless phone bill or deducted from their
  prepaid balance.
• Ex. BillToMobile, etc.
• FTC rules on cramming
• Mobile Wallets singular payment application
  that allows consumers to save and manage a
  variety of payment methods in one place.
• Consumer payment credentials stored in a
  cloud-based vault
• Ex. GoogleWallet, etc.

51
Contact Information

• H. Blake Sims
• Hudson Cook, LLP
• 6005 Century Oaks Drive, Suite 500
• Chattanooga, TN 37416
• 423.490.7563 (direct)
• bsims_at_hudco.com

52
Legal Disclaimer

• These presentation is provided with the
  understanding that the presenters are not
  rendering legal advice or services.
• Laws are constantly changing, and each federal
  law, state law, and regulation should be checked
  by legal counsel for the most current version.
• We make no claims, promises, or guarantees about
  the accuracy, completeness, or adequacy of the
  information contained in this presentation.
• Do not act upon this information without seeking
  the advice of an attorney.
• This outline is intended to be informational. It
  does not provide legal advice.
• Neither your attendance nor the presenters
  answering a specific audience member question
  creates an attorney-client relationship