Stop Payment or Revocation of Authorization
Blair Rugh, Chief Compliance Advisor, explains how the processes have changed from stopping physical paper check payments vs. the electronic payments most make today.
Many individuals grew up in a world where all payments were made by paper checks. Electronic payments were a thing of the future. Accordingly, those individuals may believe that the paper check rules apply to electronic payments. In the past, when an individual wanted to stop payment of a check that he or she had written, the individual could call the financial institution to ask that the check be stopped and, if it had not already been paid, the institution would stop payment of the check. For electronic payments, the rules are different because a great number of preauthorized payments contemplate multiple transactions.
The story I tell frequently involves advice I received from my doctor that I should lose weight and get more exercise. My grandkids agreed and talked me into going to a health club where they decided to be my personal trainers for the day and took me through all of the machines. They told me that if I would join they would personally supervise my exercise regime. I signed up for a year at $200 per month and authorized the health club to electronically debit my account each month for the dues. The next day I was so sore I could barely get out of bed. I went back to the health club, but my grandkids had more pressing matters and could not go with me. So I decided I no longer wanted my membership. I called my financial institution and asked it to stop payment on the charge. Sure enough, the $200 initial charge came in and was returned as a stop payment. The next month, however, a debit came in from the health club for $400, and it was paid. I called my financial institution and said, “Wait a minute; I told you to stop payment on the charges from the health club.” The financial institution replied, “No you didn’t. You told us to stop payment on a $200 charge, which we did. You did not say anything about any other charge.”
Under the Regulation E and NACHA rules, if an individual wants to stop payment on a continuing series of preauthorized transactions, the individual must follow a far different process than just notifying his or her financial institution. The process for stopping a single preauthorized payment is simple. The individual must notify the financial institution at least three business days before the effective date of the transaction and then confirm the order in writing within 14 days if the financial institution requests he or she do so.
If, however, the individual wants to prevent the payment of a series of preauthorized transactions, the individual must provide the originator a written statement that revokes the authorization that was previously given. The individual must then provide his or her financial institution a copy of the revocation of authority and request the institution deny the payment of any electronic transfers to the originator. The financial institution must then return any such transfer with the NACHA code for authorization revoked.
To provide the best service possible, financial institution representatives and operations personnel should be aware of the differences. Anytime an individual requests a stop payment be put on an electronic transfer, said individual should be questioned about whether it is a single payment or a series of payments, and if the latter, the difference in the procedure should be explained so the individual can accomplish what he or she is intending to do.