Stop Payment or Revocation of Authorization?

When a customer requests that a financial institution "stop payment" on a recurring ACH debit entry, the institution must determine whether the customer indeed wants to "stop payment" or in fact wishes to revoke authorization for all debit entries initiated by the same Originator.

NACHA Operating Guidelines states that "just as a stop payment on a check is for one check only, a stop payment in the ACH Network is for one ACH payment only." Staff Interpretation of Regulation E, however, states that whenever a consumer stops payment on an electronic transaction (which includes an ACH debit entry), the financial institution must suspend "all subsequent payments to the payee-originator until the consumer notifies the institution that payments should resume."

The key, then, to compliance with both the NACHA Rules and Regulation E is a determination by the institution of the customer's true intention. If the customer requests a "stop payment" on a recurring ACH debit entry, ask the customer if the customer wishes to stop all future ACH debit entries from the same Originator (not just the next expected single debit entry). If the answer is yes, inform the customer that the customer is not in fact requesting a stop payment, but should revoke authorization as to the Originator. The Operating Guidelines and Regulation E are consistent with respect to a revocation of authorization. Once authorization is properly revoked, the institution may appropriately return all debit entries initiated by the Originator whose authorization has been revoked. If the customer expects a debit entry to be initiated within a period of time that does not give the customer enough time to properly revoke authorization, it would be appropriate to stop payment on the single forthcoming debit entry while the customer completes the process for revocation of authorization for future and subsequent debit entries.

ALACHA General Counsel Al Watkins can be contacted at (205)244-3834 or awatkins@bakerdonelson.com.

This contribution from the General Counsel is for informational purposes only, and is not intended to be legal advice to any party. Engage counsel separately for direct legal advice.