Customer Authorization For ACH Drafts

by Mary Beth Guard, BOL Guru

Question: We were told by another banker that we need authorization from the customer for ACH drafts that come from companies such as the local utility company. In the past, we've taken the word of these type of businesses or government entities that the monthly draft is authorized by the customer. Do we have to get an authorization from every customer for every draft (by every I don't mean every month just one authorization to show that the draft will come out every month or week).

Answer: This is covered by Regulation E. It provides, in Section 205.10(b):

"Preauthorized electronic fund transfers from a consumer's account may be authorized only by a writing signed or similarly authenticated by the consumer. The person that obtains the authorization shall provide a copy to the consumer."

You can't allow your customer's account to be debited for a preauthorized electronic fund transfer unless it is authorized. Whether you want to depend on the ACH return rules to protect you, or merely trust the payee to have obtained proper authorization, or instead adopt a policy of requiring payees to furnish a copy of the authorization to you is something you will need to decide upon as a matter of bank policy.

It then goes on to say, in paragraph (d) of Section 205.10:

"(1) Notice. When a preauthorized electronic fund transfer from the consumer's account will vary in amount from the previous transfer under the same authorization or from the preauthorized amount, the designated payee or the financial institution shall send the consumer written notice of the amount and date of the transfer at least 10 days before the scheduled date of transfer.
(2) Range. The designated payee or the institution shall inform the consumer of the right to receive notice of all varying transfers, but may give the consumer the option of receiving notice only when a transfer falls outside a specified range of amounts or only when a transfer differs from the most recent transfer by more than an agreed- upon amount."

If the amount of the transfer out of the customer's account is the same each month, no notification appears necessary. If it varies, however, either the payee or you will need to comply with 205.10(d)(1) and (2).

The original version appeared in the January/February 2002 edition of the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 6/24/02