Preauthorized Transfers
The Compliance Team is often asked about preauthorized transfers and whether changes can be made to them. Today’s blog is going to cover what a preauthorized transfer is and what changes can be made once a preauthorized transfer has been authorized.
First, let’s talk about which rules and regulations govern preauthorized transfers. Regulations E has rules in place related to preauthorized ACH transfers. Regulation E provisions apply to all electronic funds transfers (“EFTs”), such as debit card and ACH transactions. ACH transactions are also governed by the NACHA Operating Rules , which are a set of private rules that credit unions are usually contractually bound to follow as part of participating in the ACH network. I should note that the NACHA rules can be quite complicated, and the specific rules which apply may change depending on the credit union’s specific role in the transaction (Originating Depository Financial Institution vs. Receiving Depository Financial Institution), as well as the return code used, and more. Thus, a credit union may want to consult its NACHA representative when considering questions relating to the application of the NACHA rules.
With that said, let’s define what a preauthorized transfer is. Section 1005.2(k) of Regulation E defines a preauthorized transfer as an electronic fund transfer authorized in advance to recur at substantially regular intervals. Common examples include your employer directly depositing your payment into your checking account or a utility company automatically deducting your monthly bill from your checking account.
The commentary to this section provides additional information:
“A preauthorized electronic fund transfer under Regulation E is one authorized by the consumer in advance of a transfer that will take place on a recurring basis, at substantially regular intervals, and will require no further action by the consumer to initiate the transfer. In a bill-payment system, for example, if the consumer authorizes a financial institution to make monthly payments to a payee by means of EFTs, and the payments take place without further action by the consumer, the payments are preauthorized EFTs. In contrast, if the consumer must take action each month to initiate a payment (such as by entering instructions on a touch-tone telephone or home computer), the payments are not preauthorized EFTs.”
This means that a recurring (happens on a regular basis) debit transfer that is authorized by the member in advance of the transfer would qualify as a preauthorized electronic funds transfer. Please note that these transfers are generally set up through your credit union either via a written authorization or a similarly authenticated system (i.e., third party).
But what happens when you set up a monthly bill and then need to cancel the payment? Section 1005.10(c)(1) of Regulation E states:
“A consumer may stop payment of a preauthorized electronic fund transfer from the consumer's account by notifying the financial institution orally or in writing at least three business days before the scheduled date of the transfer.”
A “ business day ” is any day the credit union is open to the public for “carrying on substantially all business functions.” The commentary explains both public functions and back-office operations must be open for a credit union to be carrying on substantially all business functions. In most cases, a credit union’s banking days will be the same as its business days; but it is important to understand that this may not always be true and to know whether this is the case for your credit union.
Section 1005.10(c)(2) also states:
“The financial institution may require the consumer to give written confirmation of a stop-payment order within 14 days of an oral notification. An institution that requires written confirmation shall inform the consumer of the requirement and provide the address where confirmation must be sent when the consumer gives the oral notification. An oral stop-payment order ceases to be binding after 14 days if the consumer fails to provide the required written confirmation.”
As you can see, all requests provided by a member at least three business days before the scheduled date of the transfer must be honored. Additionally, if a credit union requires a written confirmation, then verbal requests are effective for fourteen days. The rules require credit unions to inform members that written confirmation is required and where to send it when it receives a verbal request. If the written confirmation is not received within fourteen days, the verbal stop payment order expires. Credit unions may also want to note to their members that a cancellation of a preauthorized transfer does not change the relationship or obligations between the member and the third party making the preauthorized transfer. The credit union is not responsible or able to cancel a contractual relationship between a member and a third party.
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