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Financial Fraud Law

In Battle Over Payday Lending, New York Says NACHA’s Proposals Are ‘Not Adequate’

 In August 2013, Benjamin M. Lawsky, the Superintendent of the New York Department of Financial Services (DFS), called on NACHA, which manages the development, administration, and governance of the Automated Clearing House (ACH) network for payment processing among banks, to work with the DFS to cut off access to New York customer accounts for illegal, online payday lenders. In November 2013, NACHA proposed several amendments to existing NACHA Rules and invited public comment. 

Now, Lawsky has written to NACHA and its board of directors that the reforms that the organization has proposed,

“Do not adequately address the current abuses of the ACH network by ... payday lenders who make usurious loans in and to New York.”

Lawsky continued in the letter,

“Unfortunately, NACHA’s reforms do not go far enough and continue to leave New Yorkers vulnerable to predatory payday lending over the internet. Unless NACHA and its board of directors take bolder action, banks will continue to serve as a pipeline for the illegal activity by payday lenders who prey on consumers and brazenly violate New York law.”

In the letter, Lawsky acknowledged that many of NACHA’s proposed reforms represent a “positive step” toward preventing illegal activity, but argued that they could be further strengthened by the following additional measures:

      • NACHA should issue a policy statement clarifying that ACH debit authorizations to repay illegal loans that are unenforceable under applicable state law are not valid.
      • NACHA should mandate that Originating Depository Financial Institutions (ODFIs) – which are the banks that the illegal online lenders use to initiate a transaction – review the Originator Watch List and Terminated Originator Database,  as part of their due diligence obligations. These ODFIs should also supplement their due diligence review to include regulatory or enforcement actions by state or federal agencies; and
      • NACHA should require that consumers’ banks – Receiving Depository Financial Institutions (RDFIs) – properly effectuate stop-payment requests. In many cases, RDFIs do not stop transactions when consumers invoke their stop payment rights, in violation of NACHA rules and federal law.

Lawsky said that payday lending is illegal in New York under both civil and criminal usury statutes, but added that, in some cases, “lenders have skirted New York’s prohibition on payday lending by offering loans over the internet, hoping to avoid prosecution.” Lawsky said that illegal payday loans made over the internet and into New York must pass through the ACH network that NACHA administers.  

In August 2013, Lawsky also demanded that 35 companies cease and desist offering illegal payday loans online in violation of New York law. Lawsky now says that the majority of these companies (at least 23) already have ceased providing payday loans in and to New York after receiving the letters from DFS.  Additionally, he said, in December 2013, DFS announced that it was expanding its investigation into payday lending by sending subpoenas to 16 online ‘lead generation’ firms suspected of deceptive or misleading marketing of illegal, online payday loans in New York.

The text of the letter that Lawsky sent to NACHA is available below.


The Electronic Payments Association
Maribel Bondoc, Manager, ACH Network Rules
13450 Sunrise Valley Drive
Herndon, VA 20171

Re:     Request for Comment on Proposed NACHA Rules to Improve ACH Network Quality

Dear Ms. Bondoc:

The New York State Department of Financial Services (the “Department”) respectfully submits its comments to NACHA, The Electronic Payments Association, in response to NACHA’s Request for Comment on Proposed Rules to Improve ACH Network Quality, published on November 11, 2013. The Proposed Rules seek to (1) establish a system of economic incentives for Originating Depository Financial Institutions (“ODFIs”) to improve the quality of their originations; and (2) strengthen existing risk management and NACHA rules enforcement provisions. 

Adopting NACHA’s proposals would be a positive step toward further protecting the integrity of the Automated Clearing House (“ACH”) network. However, the Department believes these proposals do not adequately address the current abuses of the ACH network by Originators such as payday lenders who make usurious loans in and to New York. NACHA can and should adopt stronger measures to prevent online payday lenders and others from using the ACH network to violate state and federal laws. The Department proposes additional steps that NACHA could take that are in the interest of all network participants, including:

        • Issue a policy statement clarifying that ACH debit authorizations to repay illegal loans that are unenforceable under applicable state law do not constitute valid authorizations under 2013 NACHA Operating Rules & Guidelines (“NACHA Rules”);
        • Mandate that all ODFIs review the Originator Watch List and the Terminated Originator Database in connection with due diligence processes, and supplement these databases with information provided by state and federal regulators and prosecutors; and
        • Require consumers’ banks or Receiving Depository Financial Institutions (“RDFIs”) to properly effectuate stop-payment requests.

Although many ODFIs and payment processors effect legitimate payment transactions through the ACH network, an increasing number have been initiating payments for high-risk Originators who may engage in illegal transactions, such as payday lenders, debt collectors, and credit repair companies. Of particular concern to the Department are transactions involving high-interest online payday lending, which are illegal under New York usury and other laws. In February 2013, the Department launched an investigation into the online payday lending industry and uncovered dozens of out-of-state lenders that used the Internet to solicit and provide illegal payday loans to consumers in New York. These lenders process illegal credits and debits in and to New York via the ACH network. The Department sent cease and desist letters to the lenders and took other actions to end online payday lending in New York. 

While the Department’s efforts have had a significant impact, the current ACH network lacks sufficient mechanisms to prevent payday loans from entering states like New York, where payday lending is illegal. Although NACHA rules require ODFIs to conduct due diligence sufficient to limit improper transactions, illegal payday loans continue to enter New York through the ACH network. To effectively address this serious problem, NACHA should implement the Rule changes currently under consideration and the additional steps that the Department proposes.

Proposed Rule Changes 

1. NACHA Enforcement Authority (Section 10.4.1)

Under the current rules, NACHA has limited authority to initiate enforcement proceedings sua sponte or without the complaint of an ACH network participant who is party to the transaction. NACHA is proposing to extend its authority to initiate enforcement proceedings against ODFIs and Third-Party Senders who transmit ACH entries without proper authorization. As NACHA has noted in a letter to certain ODFIs dated August 9, 2013, “purported authorizations to pay illegal loans that are unenforceable under applicable state law do not constitute valid authorizations under the NACHA Rules.”

NACHA must have the tools necessary to carry out its core mission of ensuring the integrity of the ACH network. Accordingly, the Department supports this proposed rule change because it will enable NACHA to initiate enforcement against financial institutions and payment processors that allow illegal activity, such as unlawful payday lending, to be conducted via the ACH system.

The Department further notes that under existing NACHA Rules, enforcement proceedings can be initiated based upon complaints of participating financial institutions. The Department believes that it is important that NACHA communicate to all financial institutions participating in the ACH network, through issuance of a policy statement, that initiation of transactions to repay loans that are void under state law violates current NACHA Rules. This will encourage ODFIs and RDFIs to file complaints with NACHA when they learn that the ACH network has been used to effectuate illegal payday loans.

2. Establishing Incentives for ODFI Compliance – Quality Fees (Section 1.11.1 I)

This proposal establishes fees that ODFIs must pay RDFIs when RDFIs return debit entries to ODFIs based on mistake, revocation of ACH authorization by the consumer, or stop-payment request. The proposed fees to be assessed against ODFIs depend on the reason for the debit returns. The purpose of the proposed change is to shift the costs associated with returned originations to ODFIs, who are ultimately responsible for monitoring Originators that transmit debit entries through the ACH system.

The Department views this proposed change as a positive measure insofar as it is intended to incentivize ODFIs to limit the number of unauthorized entries transmitted by Originators who abuse the ACH network. Although NACHA requires ODFIs to “know their customers,” predatory online payday lenders still collect payment on usurious loans from New York consumers, even after they revoke ACH authorizations or submit stop-payment requests to their banks. This activity reflects a failure on the part of many ODFIs to adequately monitor their customers. The Department encourages NACHA to set the fees at levels sufficient to have an impact on ODFIs’ due diligence failures to date.

3. Return Rate Thresholds – (Sections 2.17.2, 8.89 and Appendix Ten)

A consumer’s bank is permitted to return a debit entry to an ODFI when that entry does not have a valid consumer authorization. NACHA relies on the rate of unauthorized returned debit entries to flag high-risk Originators and Third-Party Senders for investigation. NACHA’s proposed rule change will reduce the acceptable return rate threshold for unauthorized debit transactions from 1 percent to 0.5 percent of debit entries. When an Originator exceeds the acceptable return rate, the ODFI is required to bring the Originator’s return rate threshold within acceptable limits or face possible sanctions pursuant to the NACHA enforcement process.

Because a high return rate is indicative of improper activity, lowering the acceptable return rate threshold should allow NACHA to more quickly identify an increased number of problem Originators and Third-Party Senders. This is a positive step toward stopping Originators who abuse the ACH network. However, the Department has learned through its investigation that even under the current rule, payday lenders with unauthorized return rates far exceeding 1 percent have used the ACH network to collect illegal fees from New York residents. That illegal payday lenders continue to use the ACH system to effectuate illegal transactions demonstrates that there are insufficient consequences for exceeding the return rate threshold. More effective enforcement of NACHA rules is necessary to prevent Originators from engaging in illegal conduct through the ACH network.  

4. Clarification Practices for Reinitiation of Returned Entries – Topic 2 (Subsection

Under current NACHA Rules, Originators must obtain authorization from a consumer before reinitiating a debit after the consumer stopped payment on that transaction. The NACHA Rules currently permit resubmission of debit transactions only under limited circumstances. This protects consumers from having their bank accounts subjected to repeated abusive debit attempts. NACHA’s proposal explains impermissible practices involving the resubmission of returned debit transactions. In particular, the proposal clarifies that an ODFI cannot resubmit a debit transaction that is returned for stopped payment unless the resubmission has been authorized by the consumer.

While the proposed change may add some clarity to the existing rule, the rule itself does not stop bad actors from resubmitting debits after consumers exercise their stop-payment rights. Under the current rule and the proposed clarification, these bad actors may continue to repeatedly debit accounts even after a stop-payment has been requested resulting in overdraft and other fees. The burden of identifying and stopping prohibited reinitations remains with the consumer.
To effectively address abuses of the ACH payment system, more fundamental reforms are needed.

Mandatory Use of NACHA Databases

NACHA maintains two databases that are meant to assist ODFIs in conducting their NACHA-required due diligence for Originators and Third-Party Senders: the Originator Watch List (“OWL”) and the Terminated Originator Database (“TOD”). OWL identifies Originators and Third-Party Senders that meet several objective risk criteria that are generally indicative of unsound business practices. TOD includes Originators and third-party payment processors that ODFIs have terminated for cause. TOD and OWL are provided only for informational, risk-management purposes; NACHA does not prohibit ODFIs from doing business with entities identified in its databases.

While NACHA believes that these databases are helpful tools in protecting the integrity of the ACH network, the vast majority of ODFIs do not consult them. NACHA should require ODFIs to consult both OWL and TOD as part of their due diligence efforts through a policy statement and a subsequent rule change. This proposal would result in a minimal burden to ODFIs, while widespread use of these databases would better prevent unscrupulous Originators from accessing and abusing the ACH network.

Further, NACHA should strengthen OWL by supplementing the database with information from state and federal regulatory and enforcement authorities. This change would provide ODFIs access to regularly updated information that would assist them in identifying Originators and Third-Party Senders that may abuse the ACH network, including through illegal lending.

Responsibility of RDFIs   

A significant omission in the proposed rule changes is NACHA’s failure to address the role of RDFIs in the processing of illegal transactions through the ACH system. While NACHA is correct to raise the bar on ODFIs to prevent the initiation of transactions that violate NACHA rules, RDFIs also have responsibility in preventing illegal transactions. RDFIs have an important role in the ACH network since they directly interface with their customers who are the victims of abusive Originators. Currently, under NACHA Rule § 3.7, when consumers direct their banks to stop payment on ACH transactions, the banks must honor those requests. This is a crucial protection against unauthorized debits by illegal payday lenders. These stop-payment requests must remain in effect until the customer withdraws the request. However, the Department has found that many RDFIs do not adequately inform consumers of this right. In many cases, RDFIs do not stop transactions when consumers invoke their stop-payment rights, in violation of NACHA rules and federal law. These practices undermine important consumer protections. Further, NACHA depends on accurate data, such as the number of stop-payment requests, in order to flag problematic Originators. Thus, the failure to process stop-payments undermines NACHA’s ability to protect the integrity of the ACH network. These deficiencies could be addressed by requiring all RDFIs, as a condition to participation in the ACH network, to adopt enhanced employee training and compliance protocols on stop-payment rights. NACHA should also adopt a rule change that would allow NACHA to initiate enforcement against RDFIs that do not comply with these enhanced training and compliance obligations. Such training and protocols would better ensure that RDFI employees inform consumers of their rights to stop payment when the consumers complain to their banks about abusive or unauthorized debits and will properly effectuate these stop-payment requests.


The changes NACHA has proposed represent a positive step. Unfortunately, NACHA’s reforms do not go far enough and continue to leave New Yorkers vulnerable to predatory payday lending over the internet. Unless NACHA and its board of directors take bolder action, banks will continue to serve as a pipeline for the illegal activity by payday lenders who prey on consumers and brazenly violate New York law.
The Department appreciates the opportunity to comment on NACHA’s proposed rules, and would welcome further discussion on these suggestions. If you have any questions about these comments, please contact Executive Deputy Superintendent Joy Feigenbaum at (212) 480-6092 to discuss this further.

Benjamin M. Lawsky

Superintendent of Financial Services

cc:     Members of NACHA’s Board of Directors

Elliot H. Berman, Senior Vice President, General Counsel, Chief Risk Manager & Secretary, Johnson Financial Group

Janet Boyst, Executive Vice President, Operations & Technology, Atlantic Capital Bank

Mary Burchette, Senior Vice President, Global Treasury Management, U.S. Bank

Robert D. Edwards, Executive Vice President, PNC Bank

Chet Kimmell, President & CEO, Neighborhood Credit Union

Judy D. Long, Executive Vice President & COO, First Citizens National Bank

John E. Lucas, CCM, Managing Director, Treasury Services, BNY Mellon

Cynthia Murray, Head, Global Payment & Channel Solutions, Bank of America Merrill Lynch

Rick Rhoads, Senior Vice President, State Employees’ Credit Union

William J. Schoch, President & CEO, Western Payments Alliance

Dennis Simmons, AAP, President & CEO, SWACHA – The Electronic Payments Resource

Amy Smith, AAP, CAE, President & CEO, The Payments Authority, Inc.

David Willis, Senior Vice President, Debit Cards & Funds Services, Navy Federal Credit Union

Sayantan Chakraborty, Managing Director, North America Head of Payments, Citibank, N.A.

Craig Vaream, Managing Director, Product Executive, J.P. Morgan

Richard Burke, Jr., Executive Vice President, Corporate Products & Services, TD Bank, N.A.

Pat Thelen, Executive Vice President, Treasury Management, Capital Markets & International Banking, UMB Bank, N.A., NACHA Chairperson

Colleen J. Taylor, Executive Vice President, Treasury Management, Capital One, NACHA Vice Chairperson

Russell K. Oatman, Senior Vice President, Corporate Treasury Services Group, First National Bank of Omaha, NACHA Secretary/Treasurer

Learn more: New York Expands Investigation into Online Payday Lending; New York Demands that 35 Online Payday Lenders ‘Cease and Desist’; Should Congress Block State Regulation of Payday Lenders?; One of Nation’s Largest Payday Lenders Settles Charges with CFPB; Payday Loan Complaints Now Being Accepted by Consumer Financial Protection Bureau

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