Requiring ACH Debits is Against the Law

At a recent conference (National Alliance of BHPH Dealers), I spoke to a number of dealers who credited taking ACH payments as their primary and very effective collection method. These dealers used technology to electronically debit buyers’ weekly, bi-weekly, semi-monthly or monthly payments from the buyers’ bank accounts through an automated clearing house (ACH). Payments are often scheduled or tied to buyers’ paydays so the dealer can ensure that there are sufficient funds in a buyer’s bank account to cover the car payment.

As electronic payment technology becomes more available in the buy here pay here industry, BHPH dealers are finding a new way to collect payments on time, with little or no direct personal involvement from the dealer’s collection or customer service departments. ACH payments save a dealer time, money and headaches.

Several dealers approached the CounselorLibrary booth at the conference happily touting the effectiveness of ACH payments, and in the same breath telling us that they required all of their buyers to sign up for automatic debits in order to finance the purchase of a car. Unfortunately, as lawyers often do, we had to burst their happy bubble.

We explained to those dealers that there is this Federal Reserve Board regulation called Regulation E. Regulation E implements a federal law called the Electronic Funds Transfer Act which, among other things, regulates electronic funds transfers from deposit accounts. Regulation E prohibits a creditor from requiring a buyer to agree to automatic debits.

Note that federal law also prohibits dealers from requiring electronic ACH debits as a condition of reinstatement. And, if state law gives the customer an unqualified right to reinstate, such a policy would also violate state law.

All is not lost, however. Although a dealer may not require buyers to agree to ACH debits, we also explained that a dealer may offer a customer an incentive to make payments by electronic debit. For example, a dealer may offer a customer a quarter- or half-percent reduction in the finance charge rate if the customer agrees to electronic payment debits. In this case, the dealer would want the deal to contain language stating that if the customer terminated the ACH during the term of the transaction, the dealer could raise the rate by that quarter- or half-percent. 

The dealer could also offer customers other types of incentives, such as free oil changes or down payment discounts, which would not cause the rate to vary.

When taking electronic debits, dealers must also keep in mind that the debits have to be authorized. Dealers may obtain debit authorizations in a number of ways, and the requirements differ depending on whether the debit is a one-time debit (a single debit entry) or a recurring debit (one scheduled to recur at specified times and in specified amounts).

In addition to Regulation E, the National Automated Clearing House Association (NACHA) Rules provide guidance on the manner in which a person can take an authorization to make a single debit or recurring debit entry. NACHA is a private, non-profit organization representing financial institutions, and it develops Operating Rules for consumer and commercial ACH transactions.

Different NACHA rules govern recurring and non-recurring single debit entries. With respect to recurring ACH debits to a consumer account, the NACHA Operating Rules provide that an authorization must be in writing, signed or similarly authenticated by the consumer. Non-recurring debit authorizations may be taken by phone, but then require the dealer to record the transaction or provide notice of the transaction to the consumer prior to the debit entry.

Because their financial institutions require it, dealers must comply with NACHA Rules.

It’s possible that some states might have laws or regulations that bear on ACH payments, so as with anything you read on these pages, you should consult your own lawyer and rely only upon his or her advice.

As buy here pay here dealers make the jump into the digital age and begin taking electronic payments, they should note the preauthorization requirements for accepting those electronic payments. And remember, no dealer may require a buyer to make payments via an electronic debit.