10/23/07

Art Doten Attorney, Wolters Kluwer Financial Services

An interesting issue in deposit law today is whether, when an account owner submits electronic images of checks to a depository institution for credit to its account, the institution, as opposed to the account owner, can decide whether to process them as checks (remote deposit capture) or as ACH entries (ARC or BOC).

Clearly, the electronic images can be processed as checks if the account owner so requests and there is an appropriate remote deposit capture agreement in place. Just as clearly, the electronic images can be processed as ACH entries if the account owner so requests and there is an appropriate ACH origination agreement in place. What is not clear, however, is whether the decision to process the electronic images as checks or as ACH entries can be left to the institution.

One view is that this decision can be left to the institution if there is an agreement so providing, especially if it establishes a clear-cut basis upon which the decision is to be made, such as the least fee cost to the account holder.

Another view, however, is that this decision cannot be left to the institution, even if such an agreement is in place, because it would be contrary to the ACH Rules.

The ACH Rules separate the role of Originator from the role of Originating Depository Financial Institution (ODFI), and any agreement leaving it to the institution to decide whether the electronic images are processed as checks or as ACH entries would merge these roles and appear to be contrary to the letter and spirit of the ACH Rules. ACH Operating Rule 14.1.42 defines “Originator” as an entity “that has authorized an ODFI to send or transmit” ACH entries. This language separates the role of Originator (in this case the account owner submitting the electronic images) and the role of ODFI (in this case the institution receiving the electronic images), with the role of Originator being to authorize the ACH entries, and the role of ODFI being simply to carry out this authorization. This language also appears to require the ACH entries to have been “authorized” by the Originator before the ODFI becomes involved, and a prerequisite to such authorization would seem to be a decision by the Originator that the electronic images will be processed as ACH entries.                                                          

The intention to separate the role of Originator and the role of ODFI also appears from the many other provisions of the ACH Rules which provide separate and distinct rights and obligations for Originators and for ODFIs. See, ACH Operating Rule 2.2, et seq., which describes the rights and obligations of ODFIs, and Operating Rule 3.1, et seq., which describes the rights and obligations of Originators. The role of the Originator, as opposed to the ODFI, to decide whether items are processed as ACH entries also appears from ACH Operating Rules 14.1.7 and 14.1.15, which define ARC and BOC as specific kinds of ACH entries “originated by the Originator.” The words “originated by the Originator” strongly suggest that the decision is to be made by the Originator.        

Supporters of the view, that the decision to process the electronic images as checks or as ACH entries can be left to the institution if an appropriate agreement is in place, argue that the account owner is still the Originator, and the institution is simply acting as its agent in making this decision. 

This argument, however, appears to be contrary to the ACH Rules, because the institution’s making the decision as agent for the account owner would (a) eliminate the separation roles of Originator and ODFI clearly contemplated by the ACH Rules, and (b) usurp the decision-making role that, as indicated above, appears to have been reserved for the Originator by the ACH Rules. 

Thus it appears that any agreement to leave to the institution the decision of whether electronic images of checks are processed as checks or as ACH entries risks violates the ACH Rules.