IBA Compliance Connection

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We are considering offering an interest-bearing checking account that allows for transfers only to and from a business’s operating account. Check writing, ACH credits and debits, and bill pay will be prohibited. Is R20 the most appropriate ACH return code for outside transactions on this account, even though we would not place a limit on the number of internal transactions between the customer’s accounts? What FRB check return code should we use if external paper checks or remotely created checks are presented for payment?

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Yes, we believe the ACH return code R20 is the most appropriate for an external transfer to or from an account that prohibits external transfers. R20 is the designated ACH return code for payments sent to non-transaction accounts as defined in Regulation D, which includes “an account against which transactions are prohibited or limited.” Even though this interest-bearing checking account is a transaction account under Regulation D (since it allows unlimited internal transfers — unlike non-transaction accounts which permit no more than six internal or external transfers), we believe that return code R20 “most closely approximates the reason for [r]eturn,” since the return is being made due to transaction limitations on the account.

Regarding external paper checks and remotely created checks (RCCs) processed through the check collection system, we recommend reviewing return code Q in the Specifications for Electronic Exchange of Check and Image Data adopted by the Federal Reserve (DSTU X9.37-2003). We believe that return code Q may be used for unauthorized items.

For resources related to our guidance, please see:

  • NACHA Rules, Appendix Four – Return Entries (“R20 – Non-Transaction Account ACH – ACH Entry to a non-Transaction Account. . . . A non-Transaction Account, as defined in Regulation D, would include an account against which transactions are prohibited or limited.”)
  • NACHA Rules, Appendix Four – Return Entries (“If no appropriate Return Reason Code is defined within this Appendix Four, the RDFI must use the code that most closely approximates the reason for Return.”)
  • Regulation D, 12 CFR 204.2(d)(2) (“The term ‘savings deposit’ also means: A deposit or account, such as an account commonly known as a passbook savings account, a statement savings account, or as a money market deposit account (MMDA), that otherwise meets the requirements of § 204.2(d)(1) and from which, under the terms of the deposit contract or by practice of the depository institution, the depositor is permitted or authorized to make no more than six transfers and withdrawals, or a combination of such transfers and withdrawals, per calendar month or statement cycle (or similar period) of at least four weeks, to another account (including a transaction account) of the depositor at the same institution or to a third party by means of a preauthorized or automatic transfer, or telephonic (including data transmission) agreement, order or instruction, or by check, draft, debit card, or similar order made by the depositor and payable to third parties. . . .”)
  • Regulation D, 12 CFR 204.2(e) (“Transaction account includes: (1) Demand deposits; . . . (6) All deposits other than time and savings accounts . . . .”)
  • DSTU X9.37-2004, Specifications for Electronic Exchange of Check and Image Data, Page 6 (April 26, 2019) (“This document describes how the DSTU X9.37-2003 standard is used when a depository institution sends an image cash letter file as a deposit to the Federal Reserve Bank, or when the Federal Reserve Bank transfers, presents, or returns an image cash letter file to a depository institution. This document is not a standard of American National Standards Institute. In general, Reserve Bank check processing services are subject to Regulation J, 12 CFR Part 210, and to the terms and conditions set forth in Federal Reserve Bank Operating Circular 3.”)
  • DSTU X9.37-2004, Specifications for Electronic Exchange of Check and Image Data, Page 38 (April 26, 2019) (Return Reasons for non-payment: . . . ‘Q’ Not Authorized.”)