In the realm of ACH payments, there are occasions when an RDFI must return a debit entry to an ODFI. An entry can be returned for various reasons, including insufficient funds, stop payment, account closed, unauthorized debit and unable to locate account, among others. 

According to Article Three, Section 3.8, RDFI’s Right to Transmit Return Entries, an RDFI may return an entry for any reason; however, they must adhere to specific Rules, such as the timing of returns. The different return reason codes used for returning ACH entries and their associated requirements are detailed in Appendix Four (Table of Return Reason Codes) of the Rules. For instance, an RDFI may use the R02 – Account Closed return reason code to return an entry, but it must process the return entry in time for it to reach the ODFI by the start of business on the second banking day after the settlement date of the original entry. Appendix Four also outlines whether a Written Statement of Unauthorized Debit (WSUD) is necessary, any SEC code restrictions, the party responsible for initiating the return and any pertinent Rules references linked to a specific return reason code. 

Dishonored returns 

Additional provisions within Article Two allow the ODFI the option to dishonor a return if it meets certain conditions. While this allows the ODFI to respond to an incorrectly processed return, the ODFI must also follow the requirements of Appendix Four and Subsection 2.13.6.1. An ODFI might dishonor a return for reasons such as a misrouted return, a return of an erroneous or reversing debit, a duplicate return, an untimely return, field errors, or if the return entry was not requested or accepted by the ODFI. This dishonor mechanism enables the ODFI to reject a return that doesn’t meet the Rules requirements, provided it falls into one of the aforementioned categories, and to communicate the specific error to the RDFI using the appropriate dishonored return reason code. This process is beneficial for the ODFI when used correctly. 

Contested dishonored returns 

If an ODFI dishonors a return that should have been accepted, the Rules permit the RDFI to challenge the dishonored return, meaning they can reject it and send it back to the ODFI. 

The first thing the RDFI should do upon receiving a dishonored return is determine why the return has been dishonored. The RDFI should then research the original received entry and the original outgoing return entry to determine next steps. As mentioned previously, circumstances may warrant the RDFI refusing the dishonored return by processing a contested dishonored return. For example, if the RDFI receives a dishonored return that is coded as R69 – Field Errors, and the ODFI has indicated within the addenda record of the dishonored return that the original return entry contains the incorrect dollar amount, the RDFI should review the original return to confirm the error. If the error is confirmed, the RDFI can process a contested dishonored return using the code R74 – Corrected Return, which must contain the correct dollar amount and meet specific deadlines. Conversely, if the RDFI finds no errors in the original return, they can contest the dishonored return using the code R76 – No Errors Found. 

Once the ODFI receives the contested dishonored return, it is obligated to accept it, as there is no recourse within the ACH Network for the ODFI to refuse it. This grants significant authority to the RDFI, echoing the adage that “with great power comes great responsibility.” All return reason codes, including those for dishonored and contested dishonored returns, must adhere to specific timing and SEC code requirements, and the involved DFI must process these transactions in accordance with the established Rules. This is the responsibility mentioned previously. While the ODFI has no right to refuse a contested dishonored return, if it is found that the RDFI contested inappropriately, the ODFI can file a Rules violation, potentially leading to enforcement actions and fines. 

What our auditors are seeing 

During the 2023 ACH Compliance Audit season, there was a noted increase in exceptions concerning handling dishonored and contested dishonored returns. Instances of RDFIs processing untimely returns were common, which is a compliance issue in and of itself. If the ODFI dishonors the return as untimely, and the RDFI incorrectly contests the dishonored return as a timely original return, the ODFI must accept the contested dishonored return and either pass the chargeback to their client or absorb the loss themselves. Other compliance issues included processing the dishonored or contested dishonored return with the incorrect code. For example, the dishonored code used may indicate that the original return was untimely; however, the contested dishonored code will indicate No Errors Found, which, as noted previously, is to be used when contesting an entry dishonored as R69 – Field Errors. 

It’s always best to operate within the ACH Network in good faith and strive to uphold its integrity. Processing returns that violate the Rules can tarnish the reputation of the DFI and result in Rules violations, Nacha fines, and increased legal risks if any parties involved in the ACH Entry seek compensation through legal means. 

Ensuring that staff handling Returns are well-versed in the ACH Rules and receive proper training is crucial. Employing an Accredited ACH Professional (AAP) is often a wise decision to benefit the organization. Additionally, staying engaged with EPCOR through trainings and webinars is an effective way to stay informed about the latest ACH Rules and best practices. Have a tricky return situation you want to talk through?  Reach out to our team of experts at 800.500.0100 or memserve@epcor.org. 

Republished with permission by EPCOR.