Tuesday, July 23, 2019

Regulation E and NACHA Rules: When you Want to Stop Payment on a Recurring Debit

Posted by Sharon July 22, 2013 4:00pm

Photo Credit: Stuart Miles

A majority of our banking transactions are now handled electronically.  In banking, this can cause an unwanted customer service issue when a customer wants to "stop payment" on an electronic item, especially on a recurring debit.

One example I would like to explore is when you sign up for a gym with automatic debits from your checking account each month.  You have good intentions, but realize that you do not want to go to the gym anymore.  You go to bank and put a stop payment on the monthly payment amount (let’s say for example, $50).  For that first month, the $50 payment comes through and the bank returns it.  The following month, the bank receives an electronic debit for $100 (the first month’s balance, and the second month’s balance).  The Bank pays it.  The stop was for a $50 debit, not a $100 debit.

When a customer has authorized a third party to make a series of debits to the customer's account, the stop payment rules in Regulation E will only affect the first debit in the series but not the others. Even though the customer may use stop payment terminology with a bank's customer service representative because that is the only term that the customer knows, that is not what the customer really wants. What the customer wants to do is stop payment on any debit initiated by the third party, including recurring debits.

The stop payment rules in Regulation E will not accomplish what the customer wants. To do that you must look at the requirements in the NACHA rules for revoking an authorization.  They require that the customer first deliver to the third party a written statement that the customer is revoking the authorization that the customer previously gave the third party to electronically debit the customer's account. Once received by the Bank, the bank may then return any item debiting the customer's account from the third party "authorization revoked."   Each Bank must follow the requirements outlined in the Deposit Agreement between the Bank and the customer.  The Bank does have the right to require three day’s notice for a stop payment request on a recurring payment.

In addition, while stop payments for ACH debits used to expire at 6 months, under NACHA rules, systems may require changes to support the placement of a stop payment on multiple transactions for a specific authorization and originator for longer than six months.  If the Bank’s system only allows it to stop pay based on a specific dollar amount and/or vendor spelling, then, the Bank needs to explore other options to stop transactions where they have been provided notification to revoke authorization for a particular vendor.  In light of the UDAP penalties issued by the OCC and the FDIC, failure of the Bank’s third party software is not an excuse to comply with the order to stop pay under Regulation E or revoke authorization under NACHA.

To reduce reputation risk and assist to prevent customer frustration, financial institutions should have proper operational procedures in place for these types of stop payments.  Banks should then train the operations department and customer service representatives about the authorization revocation rules.  Make sure that the Bank’s employees ask enough questions to ensure that they know the true nature of the customer’s request.


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Sharon Geiger

Senior Quality Control and Review Specialist

Sharon Geiger has 27 years banking experience, 21 of which have been involved in internal audit. She has extensive knowledge of all aspects of the banking industry, with a particular emphasis on regulatory compliance and identifying risks and controls. As QCR Specialist, she performs Quality Control Reviews to ensure all workpapers and reports are completed in compliance with the firm's standards.

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