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Nacha Decision on Rule Enforcement in Aftermath of Hurricane Katrina

ACTION TAKEN: The ACH Rules Enforcement Panel has decided that it will not impose penalties on financial institutions that originate XCK entries to collect checks currently defined as ineligible under Subsection 2.7.2 of the Nacha Operating Rules.

EFFECTIVE DATES: This policy is effective for XCK entries originated from September 1 through October 31, 2005 in the area impacted by Hurricane Katrina.

BACKGROUND: As financial institutions in the areas impacted by Hurricane Katrina continue to restore their operations, it is becoming apparent that large numbers of paper checks will not be able to be collected because they are damaged, destroyed or contaminated. Typically, these are checks that were deposited with a financial institution, but were not transported to the Federal Reserve or other clearing facility prior to the hurricane and the resulting floods.

Nacha has been contacted by a financial institution and the Federal Reserve System about using the ACH Network to collect those damaged or destroyed checks for which an electronic record of the MICR line has been captured. The Nacha Operating Rules allow such destroyed checks to be collected via the ACH Network using the Destroyed Check Entry (XCK).

An item may be collected as an XCK entry if it is in the possession of a financial institution and an electronic record has been retained of the MICR line and dollar amount of the check. The item must be eligible for presentation within a cash letter, even if the cash letter transmittal has not yet been prepared by the financial institution. For purposes of XCK entries, a cash letter is composed of two or more checks in the possession of a financial institution or its agent that have not yet been collected. Items not yet deposited with the financial institution may not be collected as XCK entries.

The rules covering XCK entries, however, contain a number of restrictions on which checks are eligible to be collected this way. Among other restrictions, U.S. Treasury checks, Postal money orders, and checks over $2,500 are not eligible to be collected using XCK. The complete eligibility restrictions are contained in the Nacha Operating Rules, Subsection 2.7.2. As with all Nacha rules, these provisions are enforced through the National System of Fines.

To respond to this temporary but urgent need of financial institutions under these extraordinary circumstances, the ACH Rules Enforcement Panel has decided that it will not impose penalties on financial institutions that originate XCK entries to collect checks that are ineligible under Subsection 2.7.2 of the Nacha Operating Rules. This relief is retroactive to XCK entries originated on or after September 1, 2005 by affected financial institutions, and will remain in effect through October 31, 2005.

Acceptance of XCK entries is optional by Receiving Depository Financial Institutions (RDFIs), and transactions can be returned within 60 days of the settlement date. Nacha believes that collection of as many of these checks, U.S. Treasury checks, and Postal money orders as possible is in the best interests of the country, financial institutions, and their customers. Nacha encourages RDFIs to be accommodative in their approach to accepting these XCK transactions. RDFIs may need to verify whether their systems are set to automatically reject XCK entries, or programmed to identify and automatically reject XCK entries originated from ineligible items (e.g., those over $2,500).


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