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RMAG Best Practices for Risk & Exposure Management: Part 4

Earlier this year the Nacha Risk Management Advisory Group (RMAG) conducted a survey of the methodologies used by Originating Depository Financial Institutions (ODFIs) to manage ACH risk in their client portfolios.  The intent of the survey was to use the results to develop educational materials and best practices for ODFIs to consider as they manage their client portfolios.  This is the fourth in a series of five articles, one for each of the five parts of the survey.
The following are the recommended best practices for Underwriting Debit Origination:
  1. Require credit underwriting for all debit origination clients:  This should be a requirement for all ACH debit origination customers, and the survey results indicated that 96% of the respondents required underwriting for debit origination clients.
  2. Establish criteria based on your financial institution’s Risk and Credit Policies:  For the vast majority of respondents to the survey the criteria for underwriting debit origination clients are similar to those of credit origination clients. These include:
    1. Credit worthiness (as defined by your institution)
    2. New client vs. existing client
    3. Length of time as a client
    4. Recent change in the client’s financial condition
    5. Business segment of the client
  3. Establish criteria that your financial institution will monitor for debit origination clients:  The criteria should be consistent with your internal policies, be easily obtainable from systemic reporting, and be consistent with the Nacha Rules.  The following were the most frequently mentioned monitoring criteria among survey respondents and RMAG members:
    1. Return level (Overall)
    2. Return rate (Unauthorized)
    3. Return level (Invalid)
    4. Over-limit suspends (number of times)
    5. Dormancy or inactive status

      The monitoring of return rates and levels is a requirement under the Nacha Rules to determine if your client is in violation of the Rules.  Monitoring of return rates and levels as part of credit worthiness is not required but is overwhelmingly considered a best practice.

      Higher than “normal” return rates are often seen by financial institutions and the Nacha Risk Management staff as leading indicators of other potential issues that may be happening within the client’s organization.
  4. Determine if deferred settlement/debit hold is a risk mitigation technique that your financial institution could use:   to manage risk4
Please continue to follow Newslink for additional articles from the Nacha Risk Management Advisory Group on the best practices in risk and exposure management.