What Underwriting Practices Do You Have in Place For ACH Originators?

What Underwriting Practices Do You Have in Place For ACH Originators? 

Due to advances in technology and demand from commercial customers, all banks now offer some form of online cash management products through their technology providers.  The most common product banks of all sizes offer is direct deposit payroll services through internet banking.  Regulators and auditors require that a strong risk management program for ACH origination be in place if these services are being offered even on a small scale.  The threat of credit, cyber, and reputational risk are considered to be inherently high regardless of the size of the bank or the scale of customers being served.

Many times banks view ACH origination services much like a retail deposit product, which is a dangerous mistake.  ACH origination is more closely aligned with the risks associated with unsecured commercial lending.   Not understanding the funding and settlement risks associated with the various types of ACH originations can lead to operating losses that can happen quickly.  This is why effective policies and underwriting techniques are so important, and why all ACH origination customers should be subject to formalized due diligence and underwriting processes before they are allowed ACH origination privileges.

The goal of well devised ACH policies and underwriting guidelines is to provide an effective assessment of customer risk factors that need to be identified and monitored for as long as ACH origination services are provided.   Adequate policy and underwriting guidelines, much like credit or loan underwriting, must identify customer risks and provide risk mitigation strategies for the bank to safely transact business within strictly defined customer limits. Properly structured ACH policies and underwriting guidelines should clearly define the following:

  1.  Who is eligible for these services
  2.  Risk tolerance criteria levels for all origination customers
  • Low risk customers
  • High risk customers
  • Prohibited customers
  1.  Allowable ACH transaction types; and
  2.  Authorization responsibilities and limits for bank staff
  • Customer origination limits approval
  • Over limit approval

Elements of an effective ACH origination underwriting program should include:

  1.  General Customer Information
  • How long in business
  • Business type
  • Management structure
  • Geography of the business
  1. Business Information
  • Credit reports
  • Dunn & Bradstreet
  • Business website
  • Social media
  • Better Business Bureau
  1. Necessary Banking Information
  • Banking statements
  • Account analysis statements
  • Type and size of originations files (e.g. Credit vs. Debit Files)
  • NSF activity
  • Do balances support cash flow of operations
  • ACH returns
  • Do transaction volumes seem consistent with business activities 
  • Will prefunding or escrowing be required to cover potential losses and/or returns
  1. NACHA Originator Watch List & Third Party Sender Review
  • Terminated originators
  • Check before on-boarding customers to ACH services

ACH origination underwriting is a blend of credit and deposit behavior evaluation.  Allowing customers ACH origination privileges is much more than just an operational function.   It deserves in depth due diligence of customers conducting ACH activities.  Additionally ongoing monitoring of customer activities against initial underwriting results is necessary.  Here again, this is much like how you monitor your bank’s loan portfolio.  Ongoing monitoring, reviewing, and re-risking ACH originators is vital to protecting your institution from undue losses and other inherent risks in offering ACH origination services.

OCC Bulletin 2006-39, although 12 years old, still provides fundamental industry guidance for structuring the necessary risk management components of ACH origination.   If your management team has not reviewed ACH policies and underwriting guidelines lately, OCC Bulletin 2006-39 is a good place to start. The FFIEC IT Examination Handbook booklets for Wholesale and Retail Payment Systems as well as the NACHA guidelines also provide a good source for information to evaluate your policies and underwriting practices.

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