In instances in which an automatic payment (ACH) is set up on an installment loan and is returned (due to NSF, Account Closed, etc.), once bank is made aware of this return, is bank required to notify the customer their payment was returned and that a returned item fee (allowed by state law) has been assessed? If such notification is required, it is a requirement under Regulation Z or NACHA rules? Thanks.

None of which I am aware. They will likely get an overdraft notice from the other bank in the case of a NSF and I am sure your collection staff will be giving them a call shortly, or if you send 10-15 day past due notices on your loans, they will get one of those.