A Common Scenario – Trouble with ACH Drafts
Imagine: A few years ago, you got a loan or bought something on credit. Rather than worry about having to remember to write and mail a check each month and risking late fees and repossessions if you forgot, you decided to let the payments come directly out of your bank account. And the creditor, of course, was happy with that arrangement. So sure enough, month after month, the creditor drafted $80 from your account, keeping you current. But then one day, you realize that you can’t make the payment – you lost a job or had a tire blow out and the money simply isn’t there in the account. There’s 5 days left before the draft is scheduled to occur. What do you do?
You cancel the draft. Isn’t that going to make the creditor mad? Yes, if you cancel the draft, you may be breaching your contract with the dealer/creditor. But if the money isn’t there, the breach is going to happen anyway, and on top of that, the draft will bounce and the bank and creditor will hit you with NSF fees. So you cut your losses as quickly as possible. Don’t allow a draft that you can’t cover.
Preauthorized ACH Transfers and the Electronic Funds Transfer Act
Now, if things go the way they’re supposed to, you call your bank, tell them that you withdraw authorization to draft a payment to the creditor, and the bank says “OK.” And the money doesn’t draft and life goes on.
But what if the bank says you can’t? Or if the creditor says you can’t? It turns out, you have rights you may not know about. ACH payments and most electronic payments are governed by the Electronic Funds Transfer Act (EFTA). This includes debit card payments and ATM transactions as well. It does NOT include online bill-pay where your bank writes a paper check for you and it is sent to the creditor. Those are treated just like paper checks you’ve written yourself and are governed by the old fashioned UCC.
Preauthorized Transfers are electronic payment arrangements where you give a creditor preliminary authorization to take specified amounts of money out of your bank account at specified times. Money in your bank account belongs to you, and the law gives you some pretty strong protections against other people taking it from you without judicial process.
1. Preauthorized transfers must be authorized in writing. You cannot call a credit card company or car dealer up and give them your account number and tell them “go ahead and draft.” The authorization must be signed and must be written. Note that an E-SIGN is good enough, but they still have to provide you with a downloadable copy of the draft authorization before they take a payment.
2. They cannot require an ACH authorization as a condition for giving you a loan or selling you something on credit. You have the right to send payments the old fashioned way if you want to. If a creditor or car dealers says that they’ll only sell to or give you a certain interest rate you if you authorize an ACH, then they’re breaking the law.
3. You have the right to cancel any preauthorized draft at any point up to 3 business days before the scheduled draft. This is the most important right you have under the EFTA. If you foresee that a draft will overdraw your account, then you have the right to cancel it at any time before 3 business days before the draft. Here’s an example: You have an ACH payment scheduled to debit $150 from your account on Friday the 13th. If you cancel the draft at 4:59 pm on Monday the 9th, then the draft CANNOT take place. This right CANNOT be waived, so even if your contract says “You waive all rights to cancel this preauthorized transfer,” the bank MUST honor your request to cancel the transaction. The creditor can kick and scream and throw a fit all they like, and that won’t change the fact that they simply cannot get the money. Note that the authorization revocation must be sent to your checking account bank – NOT the creditor.
The best thing about this aspect of the EFTA is that your cancellation notice can be oral or in writing. As always, writing is better, but if you call your bank or go there in person and tell them not to allow a certain draft to take place, then they must comply with your instructions. However, they CAN require you to confirm an oral cancellation in writing within 14 days. So if you call and cancel a draft by telephone, and they tell you that you must fill out a cancellation form and send it to them within 2 weeks, you do have to send it in. If you don’t, they can allow the draft to proceed because you didn’t confirm the oral cancellation request in writing.
What if they Draft Anyway?
If they draft the money against your instructions anyway, then you have to write YOUR BANK (NOT the creditor or seller) a letter telling them “You allowed $150 to come out of my account without authorization. Refund me the money immediately.”
You should send the letter as soon as you learn of the draft. If you wait more than a couple of days after you’ve learned of their screwup, then you can be deemed to have waived your rights. So send the letter immediately.
If they still refuse to fix it, then you can sue them for 3 times what you lost as a result. 15 U.S.C. 1693f(e). And you can make them pay your attorney’s fees if you have to take them to court.
If you don’t learn of a draft until you see it on a billing statement, you have 60 days after the billing statement was sent to dispute it. It must be in writing.
If you lose a debit card or PIN, then you must report the theft or loss to your bank within 2 days of learning of the loss. Otherwise, you’ll be liable for the money stolen from your account as a result.