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A client of our’s likes to anticipate things going awry. When she signed an auto lease agreement three years ago, she authorized the leasing company to pull its monthly payments directly from her checking account. But once the final payment had gone out, she gave tried to cancel the automatic payment authorization with her bank. She was concerned that the payments would continue.
A world-class worrier!
Her premonitions came to pass, however. The week after she mailed her check to buy the car at the end of its lease and she thought that all was settled, she got a surprise: an extra, 37th monthly payment went to the leasing company. How was this even possible logistically? She put in a preventative stop-payment request just in case with her bank, Citibank.
In an e-mailed response, Citibank attributed the failure to stop payment to a mistake made by an employee, “an isolated incident due to human error.” (It later restored the funds, but by that point the bank knew that its customer was a reporter; asked whether it was bank policy to always make customers whole when payment isn’t properly stopped, a Citibank spokeswoman declined to answer this or any other questions.) At least Citibank owned up to having made a mistake. The leasing company, U.S. Bank, said that no mistake was made: it asserts a right to withdraw payments indefinitely until it declares a lessee’s account closed, absolutely astounduing!
When our client called U.S. Bank after discovering the surprise debit, she learned that her check to buy the car had been deposited two days earlier but that a refund for the 37th payment had not yet been set in motion. The refund eventually came in an old - fashioned paper check, which didn’t show up until 22 days after U.S. Bank had processed the purchase check.
When funds transfer automatically as all parties wish and expect, we are well served. Automatic direct payments like those lease payments are but one small part of the vast electronic payments system in the United States, known as the Automated Clearing House network.
Direct deposits are another part of the system and a wonderful invention indeed. A system that brings money automatically into an individual’s account is efficient, and a vast improvement over the time when banks would lock up the funds for three to five days. But when the money moves in the other direction and goes out as a direct payment again, automatically the door is opened to potential problems.
A.C.H. also handles online bill payments, which require that customers initiate the process. For that reason, they are not as convenient as direct payments that a vendor pulls in automatically. But online bill pay has the virtue of remaining wholly within the customer’s control. There’s no chance of a lessor helping itself to an extra monthly payment.
Michael Herd, a managing director at Nacha the Electronic Payments Association, the nonprofit organization that operates the A.C.H. system said automated direct payments, which began in the mid-1970s, surged in the ’90s with the encouragement of mortgage servicers and credit card companies, but have grown more slowly in recent years. The most growth of late has been in online bill pay, which climbed to 2 billion payments in 2008, though still less than the 2.8 billion direct payments made that year.
Mr. Herd said that until he heard of her situation, he had not been aware of any merchant “asserting a right to collect payments after the underlying debt is paid off.”
Businesses with which we generally have a permanent relationship like electric or water utilities seem well suited for direct payments. But perhaps authorizations should be extended more cautiously to those with whom our relationship may not be so long-lived.
If the number of automatic payments is finite, the payment authorization should be limited to the stipulated number. Our client a lawyer, it happens assumed that the open-ended payment authorization she signed over to U.S. Bank would be governed by the lease agreement’s set number of 36 payments. The bank held a different view; a customer service representative later explained to our client and to me, listening in via speakerphone that the authorization “does not specify a time frame” and would continue until the account was deemed closed.
The bank had not processed her check for buying the car on the day after the lease ended, so “we will draw one extra payment,” she said.
One would expect merchants who collect direct payments to use software that stops collections when the outstanding balance is zero. A spokeswoman with the American Bankers Association said banks could use software that debits a customer’s account “for a set number of months or weeks or they can set it up so that the last withdrawal is made on a certain date.”
U.S. Bank does not use such software, however. Lucille Conley, a senior vice president at U.S. Bank, says that direct collections are switched on or off manually at her bank. She also placed responsibility for discontinuing direct payment authorization on our client, the customer(s). She failed to cancel the authorization, so caveat lessee.
Ms. Conley also tried to characterize the 37th payment as a form of customer service. “Had you been a customer needing to extend your lease obligation for a short time after the maturity date,” she said, “you may have appreciated our ability to continue your automatic payments.”
We weren’t that customer, as the bank should have known from previous phone conversations. But the bank did not have to take great care because we had handed over the electronic keys to our checking account and failed to get them back. The bank could help itself to the money.
It’s an unbeatable strategy: Collect first electronically, then refund at leisure weeks later, by paper check, which must then clear. On the float alone, the house (bank) wins every time.
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