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Risks of Automated Clearing House Payments
ODFI Exposure Limits for Business Originators. Rule 2.1.9 requires the ODFI to maintain exposure limits for all Originators that are not natural persons. If the Originator is a corporation or other nonnatural business entity, the ODFI is obliged to establish the limit, to implement procedures to review the limit periodically, and to implement procedures to monitor entries initiated by the Originator relative to the exposure limit. Additional exposure limit requirements are imposed on initiators of web entries, who are required to use commercially reasonable security procedures to establish the identity of the Originator.
Warranties and Liabilities of the ODFI
What Is a Warranty? A warranty is a representation that a statement of fact is true or that circumstances are what they ought to be. There are two kinds of warranties: contractual warranties and statutory warranties.
A contractual warranty is provided voluntarily by a party to a contract. The kind of warranty that is commonly termed a manufacturer’s warranty is contractual. Thus, when a consumer buys a refrigerator, the manufacturer may warrant in a warranty card to the consumer that the refrigerator will not require any service or repair for a period of two years. If the refrigerator breaks down within the two-year period, the manufacturer is in breach of warranty and may be sued for that breach unless the refrigerator is repaired according to the terms of the warranty.
A statutory warranty is imposed on a party by statute. For example, a grantor of real estate pursuant to a warranty deed is deemed under state real property law to warrant that good title is transferred to the grantee.
ODFI’s Contractual Warranties under ACH Rules. The ACH Rules are funds-transfer system rules and do not have the force of statutory law. The warranties that are deemed given by the parties under the ACH Rules are contractual because the parties voluntarily agree by contract to be bound by the ACH Rules.
Origination of ACH Entries
The ODFI is deemed to give the warranties to the RDFI, the ACH Operator, and the member associations of NACHA. As a general proposition, the warranties assure the RDFI, the ACH Operator, and the member associations that the ODFI will be responsible for claims asserted by either the Originator or the Receiver arising out of alleged improprieties in the underlying transaction.
ODFI Warrants Authorization By Originator and Receiver. The ODFI warrants to the RDFI, the ACH Operator, and the member associations of NACHA that each entry transmitted by the ODFI to the ACH Operator is in accordance with proper authorization provided by the Originator and the Receiver.17 Stated differently, the ODFI agrees that if the transfer has not been properly authorized and a loss results—as between the beneficiaries of the warranty, that is, the RDFI, the ACH Operator, and the member associations of NACHA, and the warrantor, the ODFI—the ODFI will be liable to the party asserting a claim to recover the loss.
The result is that the ODFI indemnifies the RDFI, the ACH Operator, and the member associations for losses resulting from claims by the Originator or the Receiver that a transfer was not authorized.
Note: The ODFI is not agreeing with the Originator or the Receiver to pay for losses that they may sustain when a transfer is not properly authorized. Rather, the ODFI is agreeing—with the RDFI, the ACH Operator, and the member associations—to shoulder any claims arising out of allegedly unauthorized transfers asserted against them by the Originator or the Receiver.
ODFI Warranty about Timeliness and Propriety of Entries. The ODFI warrants to the RDFI, the ACH Operator, and the member associations that each entry is authorized and18:
(i) each credit entry is timely, and
(ii) each debit entry is
(a) for an amount that will be owing to the Originator from the Receiver on the settlement date, and
Risks of Automated Clearing House Payments
(b) for a sum specified by the Receiver to be paid to the Originator (or to correct a previously transmitted erroneous credit entry).
In these warranties, the ODFI is indemnifying the RDFI, the ACH Operator, and the member associations from claims asserted by the Originator and the Receiver in the underlying transaction. As in the preceding warranty, the ODFI is not agreeing with the Originator or the Receiver to pay for losses that they may sustain when a payment is not timely or not properly payable. Rather, the ODFI is agreeing—with the RDFI, the ACH Operator, and the member associations—to shoulder any claims arising out of an allegedly improper payment asserted against them by the Originator or the Receiver.
ODFI Warranty about Compliance with Other Requirements. The ODFI warrants to the RDFI, the ACH Operator, and the member associations that19:
(i) all of the prerequisites under ACH Rule 2.1 concerning authorization and entry have been satisfied,