Federal Register, Volume 83 Issue 180 (Monday, September 17, 2018)

[Federal Register Volume 83, Number 180 (Monday, September 17, 2018)]
[Rules and Regulations]
[Pages 46849-46853]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20029]

========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents.

========================================================================

Federal Register / Vol. 83, No. 180 / Monday, September 17, 2018 /
Rules and Regulations

[[Page 46849]]

FEDERAL RESERVE SYSTEM

12 CFR Part 229

[Regulation CC; Docket No. R-1620; RIN 7100 AF-14]

Availability of Funds and Collection of Checks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Board is publishing a final rule that amends Subpart C of
Regulation CC to address situations where there is a dispute as to
whether a check has been altered or was issued with an unauthorized
signature, and the original paper check is not available for
inspection. This rule adopts a presumption of alteration for disputes
between banks over whether a substitute check or electronic check
contains an alteration or is derived from an original check that was
issued with an unauthorized signature of the drawer.

DATES: Effective January 1, 2019.

FOR FURTHER INFORMATION CONTACT: Clinton N. Chen, Senior Attorney (202-
452-3952), Legal Division; or Ian C.B. Spear, Manager (202-452-3959),
Division of Reserve Bank Operations and Payment Systems; for users of
Telecommunication Devices for the Deaf (TDD) only, contact 202-263-
4869; Board of Governors of the Federal Reserve System, 20th and C
Streets NW, Washington, DC 20551.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Background

Congress enacted the Expedited Funds Availability Act of 1987 (EFA
Act) to provide prompt funds availability for deposits in transaction
accounts and to foster improvements in the check collection and return
processes. Section 609(c) authorizes the Board to regulate any aspect
of the payment system and any related function of the payment system
with respect to checks in order to carry out the provisions of the EFA
Act.\1\
---------------------------------------------------------------------------

\1\ EFA Act section 609(c)(1) states that in order to carry out
the provisions of this chapter, the Board of Governors of the
Federal Reserve System shall have the responsibility to regulate--
(A) any aspect of the payment system, including the receipt,
payment, collection, or clearing of checks; and (B) any related
function of the payment system with respect to checks. See, 12
U.S.C. 4008(c)(1).
---------------------------------------------------------------------------

Regulation CC implements the EFA Act. Subpart C of Regulation CC
implements the EFA Act's provisions regarding forward collection and
return of checks.

II. Summary of UCC and Current Regulation CC

Under the Uniform Commercial Code (UCC), an alteration is a change
to the terms of a check that is made after the check is issued that
modifies an obligation of a party by, for example, changing the payee's
name or the amount of the check.\2\ By contrast, a forgery is a check
on which the signature of the drawer (i.e., the account-holder at the
paying bank) was made without authorization at the time of the check's
issuance.\3\ In general, under UCC 4-401, the paying bank may charge
the drawer's account only for checks that are properly payable.\4\
Neither altered checks nor forged checks are properly payable. In the
case of an altered check under the UCC, the banks that received the
check during forward collection, including the paying bank, have
warranty claims against the banks that transferred the check (e.g., a
collecting bank or the depositary bank). In the case of a forged check,
however, the UCC places the responsibility on the paying bank for
identifying the forgery.\5\ Therefore, the depositary bank typically
bears the loss related to an altered check, whereas the paying bank
bears the loss related to a forged check.
---------------------------------------------------------------------------

\2\ UCC 3-407. The UCC is a body of laws approved by the
American Law Institute and the Uniform Law Commission, which has
been enacted by state legislatures on a generally uniform basis.
Article 3 addresses negotiable instruments, while Article 4
addresses bank deposits and collections.
\3\ The term ``forgery'' is not defined in the UCC. However, the
term ``unauthorized signature'' is defined as ``a signature made
without actual, implied, or apparent authority'' and ``includes a
forgery.'' UCC 1-201(41).
\4\ The term ``bank'' as used in this notice and in Regulation
CC (12 CFR 229.2(e)) includes a commercial bank, savings bank,
savings and loan association, credit union, and a U.S. agency or
branch of a foreign bank.
\5\ The presenting bank warrants to the paying bank only that it
has no knowledge of an unauthorized drawer's signature. See UCC 3-
417(a)(3) and 4-208(a)(3).
---------------------------------------------------------------------------

These provisions of the UCC reflect the long-standing rule set
forth in Price v. Neal that the paying bank must bear the loss when a
check it pays is not properly payable by virtue of the fact that the
drawer did not authorize the item.\6\ The Price v. Neal rule reflects
the assumption that the paying bank, rather than the depositary bank,
is in the best position to judge whether the drawer's signature on a
check is the authorized signature of the account-holder. By contrast,
the depositary bank is arguably in a better position than the paying
bank to inspect the check at the time of deposit and detect an
alteration to the face of the check, to determine that the amount of
the check is unusual for the depositary bank's customer, or to
otherwise take responsibility for the items it accepts for deposit.
---------------------------------------------------------------------------

\6\ Price v. Neal, 97 Eng. Rep. 871 (K.B. 1762).
---------------------------------------------------------------------------

Regulation CC does not currently address whether a check should be
presumed to be altered or forged in cases of doubt. For example, an
unauthorized payee name could result from an alteration of the original
check that the drawer issued, or from the creation of a forged check
bearing the unauthorized payee name and an unauthorized/forged drawer's
signature. Courts have reached opposite conclusions as to whether a
paid, but fraudulent, check should be presumed to be altered or forged
in the absence of evidence (such as the original check).\7\ Since the
time of these decisions, the check collection system has become
virtually all-electronic, and the number of instances in which the
original paper check is available for inspection in such cases will be
quite low.\8\ Unlike the 2006 court cases, where the paying bank
received and destroyed the original check, in today's check environment
the original check is typically truncated by

[[Page 46850]]

the depositary bank or a collecting bank before it reaches the paying
bank.
---------------------------------------------------------------------------

\7\ See, e.g., Chevy Chase Bank v. Wachovia Bank, N.A., 208 Fed.
App'x. 232, 235 (4th Cir. 2006) and Wachovia Bank, N.A. v. Foster
Bancshares, Inc., 457 F.3d 619 (7th Cir. 2006).
\8\ For example, by the beginning of 2017 the Federal Reserve
Banks received over 99.99 percent of checks electronically from
99.06 percent of routing numbers and presented over 99.99 percent of
checks electronically to over 99.76 percent of routing numbers. As
of the same time, the Federal Reserve Banks received 99.63 percent
of returned checks electronically from over 99.37 percent of routing
numbers and delivered 99.41 percent of returned checks
electronically to 92.84 percent of routing numbers.
---------------------------------------------------------------------------

III. Summary of Proposal and Comments

A. Summary of Proposal

On June 2, 2017, the Board published a notice of proposed
rulemaking intended to clarify the burden of proof in situations where
there is a dispute as to whether the check has been altered or is a
forgery, and the original paper check is not available for
inspection.\9\ The Board proposed to adopt a presumption of alteration
with respect to any dispute arising under Federal or State law as to
whether the dollar amount or the payee on a substitute check or
electronic check has been altered or whether the substitute check or
electronic check is derived from an original check that is a forgery.
Under the proposed rule, the presumption of alteration may be overcome
by a preponderance of evidence that the substitute check or electronic
check accurately represents the dollar amount and payee as authorized
by the drawer, or that the substitute check or electronic check is
derived from an original check that is a forgery. In the proposed rule,
the presumption of alteration shall cease to apply if the original
check is made available for examination by all parties involved in the
dispute. The Board requested comment on whether the presumption should
apply to a claim that the date was altered. The Board also requested
comment on whether the presumption should apply if the bank claiming
the presumption received and destroyed the original check.
---------------------------------------------------------------------------

\9\ In response to a 2011 proposed rulemaking, two commenters
requested that the Board address the uncertainty caused by the
divergent appellate court decisions, even though the Board did not
raise the issue. 76 FR 16862 (March 25, 2011). The Board described
these comments in greater detail as part of its 2014 Regulation CC
proposal and requested comment on whether it should adopt a
presumption of alteration. 79 FR 6673, 6703 (Feb. 4, 2014). Based on
its analysis of the comments received in the 2014, the Board
requested comment on proposed regulatory text and commentary on June
2, 2017. 82 FR 25539 (June 2, 2017).
---------------------------------------------------------------------------

B. Summary of General Comments

The Board received eleven responses to its proposal from a variety
of commenters, including financial institutions, trade associations,
and clearinghouses. Ten commenters, including a comment letter
submitted by a group of institutions and trade associations (``group
letter''), generally supported the Board's proposal to adopt a
presumption of alteration. Commenters supported the presumption of
alteration because it aligned Regulation CC with current practices and
created a uniform rule. One commenter stated that the proposed
presumption was not necessary because the difference between alteration
and forgery are well-known in the industry and the use of an
evidentiary presumption may require institutions to unnecessarily
increase the expense to store documents. Detailed comments are
discussed in the description of the final rule below.

C. Consultation With Other Agencies

As directed by section 609(e) of the EFA Act, the Board consulted
with the Comptroller of the Currency, the Board of Directors of the
Federal Deposit Insurance Corporation, and the National Credit Union
Administration Board during the rulemaking process.\10\
---------------------------------------------------------------------------

\10\ 12 U.S.C. 4008(e).
---------------------------------------------------------------------------

IV. Summary of Final Rule

The Board has considered all comments received and has adopted a
presumption of alteration. The Board has made certain modifications to
the proposed presumption in light of comments received, as discussed
below.
Altered Date. The Board's proposed presumption covered alterations
to the dollar amount and payee. The Board requested comment on whether
the presumption of alteration should apply to a claim that the date was
altered. Six commenters, including the group letter, supported applying
the presumption to claims that the date was altered and one commenter
requested the Board investigate whether applying the presumption to
such claims would promote greater certainty in the check collection
process. Two commenters, including the group letter, noted that a claim
that the date was altered may be alleged (1) where the date of a post-
dated check is altered to make the check currently payable, and as a
result, the paying bank pays the check when presented and incurs a loss
to its customer which would not have resulted had the paying bank paid
the check upon or following the date on the check was issued by the
customer; and (2) where the date is altered to a more recent date in
order to convey holder-in-due-course status on the depositor or to
otherwise avoid a ``stale-date'' rejection by the paying bank. Three
commenters suggested that the Board align the definition of
``alteration'' with the definition in the UCC, which would include
alteration of the date field.\11\ One Federal Reserve Bank commenter
stated that fraud could be committed by altering a number of fields,
including name of payee, amount, date, check number, routing number,
payee's indorsement, etc., and that the Board should address the entire
scope of the legal uncertainty by using the UCC definition of
alteration.
---------------------------------------------------------------------------

\11\ Under the UCC, alteration means (i) an unauthorized change
in an instrument that purports to modify in any respect the
obligation of a party, or (ii) an unauthorized addition of words or
numbers or other change to an incomplete instrument relating to the
obligation of a party. UCC section 3-407.
---------------------------------------------------------------------------

Based on the comments received, the Board has modified the
presumption in the final rule so that the term ``alteration'' is used
as defined in the UCC. The Board believes that aligning the presumption
with the UCC's definition of ``alteration'' appropriately expands the
scope of the presumption to cover instances of fraud beyond changes to
the dollar amount or payee. The Board notes in the commentary that
terms that are not defined in section 229.2, such as ``alteration,''
have the meanings set forth in the UCC and provides examples of
alterations.
Bank that received and destroyed the original check. The
presumption in the proposed rule would apply to disputes involving a
substitute check or an electronic check, and thus the presumption could
not be asserted by a bank that received the original check. The Board
requested comment on whether the presumption should apply if the bank
claiming the presumption received and destroyed the original check.
Six commenters, including the group letter, stated that the
presumption should not apply to paying banks that received and
destroyed the original check. These commenters noted that it is rare
for a paying bank to receive an original check. A paying bank may
receive the original check from the depositary bank via direct
presentment if it is a very high dollar check or if the depositary bank
has concerns with certain aspects of the check, such as unclear terms
or a smudged signature. A paying bank may also request and receive the
original check after receiving presentment of an electronic check due
to a dispute about the check image. These commenters stated that
receipt of an original check by a paying bank puts the paying bank on
notice about the possible importance of the original check, and the
paying bank should not have the benefit of the presumption of
alteration if it receives the original check.
Commenters were split on whether the presumption should apply to a
bank, other than the paying bank, if it received and destroyed the
original check. The group letter stated that the presumption

[[Page 46851]]

should apply in these cases because it would promote check truncation
by not creating a legal disincentive to the destruction of checks by
such banks. Three commenters stated that the presumption should not
apply to any bank that received and destroyed the original check
because a bank should not benefit from a presumption against another
party when it had in its possession potential evidence to resolve a
dispute regarding alteration or forgery.
In the final rule, the presumption of alteration applies to a
dispute between banks where an electronic check or a substitute check
was transferred between those banks. The presumption applies in such a
dispute regardless of where in the chain, or by whom, the original
check was truncated. However, as noted in the commentary, the
presumption does not apply to a dispute between banks where the
original check was transferred between those banks, even if that check
is subsequently truncated and destroyed. The Board believes that the
final rule addresses the concerns raised by the commenters who argued
that the presumption of alteration should not apply if the paying bank
received the original check. As a presumption of alteration generally
favors the paying bank (the depositary bank is generally liable for
alterations), the commenters' concern was that the application of the
presumption should not incentivize a paying bank to destroy the
original check after being put on notice of potentially high-risk items
by receiving the original check. When a paying bank receives
presentment of the original check, the presumption of alteration would
not apply, as the presumption applies only to disputes concerning
substitute checks or electronic checks. In another example noted by
commenters, a paying bank may request and receive the original check
after receiving presentment of an electronic check due to a dispute
about the check image. In that scenario, the presumption of alteration
would not apply pursuant to Sec. 229.38(i)(3), which states that the
presumption no longer applies if the original check is made available
for examination by all parties involved in the dispute.
The Board does not believe that limiting the application of the
presumption to the transfer of electronic checks or substitute checks
will create a material incentive for depositary banks or collecting
banks to bypass the check imaging process and send forward a
substantial number of original checks merely to preserve the
presumption of alteration. As the commenters noted, the expense of
handling checks physically would likely be merited only in rare cases
where a bank had substantial concerns about certain aspects of the
check.
Rebutting the presumption and effect of producing the original
check. One Federal Reserve Bank commenter suggested that the Board
allow the presumption to be overcome only by the production of the
original check, and not by proving by a preponderance of the evidence
that the check was not altered or was forged. The commenter stated that
a stronger evidentiary presumption in favor of alteration would be more
efficient, as parties may continue to expend resources litigating the
issue of whether an item is an alteration or forgery. Two commenters
requested that the Board specify who would have the authority to
determine whether evidence satisfied a preponderance of evidence
burden. One commenter requested that the Board provide additional
clarity as to what type of evidence would be adequate to overcome the
presumption of alteration. Two commenters suggested that the Board set
a time limitation in which a financial institution could request the
original check in cases of doubt, such as ten business days.
Additionally, one commenter requested that the Board allow a scanned
image of the original check in lieu of the original to avoid the
presumption of alteration.
In proposing the presumption of alteration, the Board did not
intend to eliminate the opportunity for banks to provide additional
evidence and engage in further litigation. The presumption was intended
to create a uniform starting point that recognized the operational
realities of check fraud in the absence of evidence. The comments
requesting that the Board specify who can make the determination, what
types of evidence would be adequate for overcoming the presumption of
alteration, and the time limitation within which the original check
must be provided would be matters for the court or other dispute
resolution process and are outside of the scope of this final rule. A
scanned image of the original check would generally provide no better
evidentiary value than a substitute check or an electronic check, and
thus the final rule does not permit such an image to overcome the
presumption of alteration. Accordingly, the Board has adopted
provisions on the rebuttal of the presumption in Sec. 229.38(i)(2)
substantially as proposed.
Use of term ``forgery.'' One Federal Reserve Bank commenter
suggested that the Board use the phrase ``issued without the account
holder's authorization'' instead of the term ``forgery.'' The Federal
Reserve Bank commenter stated that under the UCC, the payor bank is
generally liable for paying a check if the issuance of the check was
not authorized by the accountholder, whether there is a forged drawer's
signature on the check or not.
In the Board's final rule, the Board has adopted this suggestion.
The presumption will apply to disputes as to whether a substitute check
or electronic check contains an alteration or is derived from an
original check that was issued with an unauthorized signature of the
drawer. The Board believes that adopting the phrase ``issued with an
unauthorized signature of the drawer'' appropriately covers the entire
scope of the payer bank's liability for paying an item that is not
properly payable because the accountholder has not authorized the
issuance of the item. As stated in relation to ``alteration,'' the
Board notes in the commentary that terms that are not defined in Sec.
229.2, such as ``unauthorized signature,'' have the meanings set forth
in the UCC and provides examples of unauthorized signatures.
Other topics. The Board also received comments on a variety of
other topics. Two commenters, including the group letter, suggested
that the Board clarify that the presumption also applies to alteration
of the electronic image and not just the original check. The group
letter also requested that the Board clarify that the parties should
have the ability to vary the presumption to the maximum extent
permitted under Sec. 229.37. In the final rule, the Board has
clarified in the commentary that the alteration claim may be related to
the original check or the electronic or substitute check. The Board
also included in the commentary a sentence stating that the presumption
of alteration may be varied by agreement to the extent permitted under
Sec. 229.37.
One commenter requested that the Board ensure that the presumption
can be applied only in disputes between banks, and not disputes between
banks and customers. In the final rule, the Board has specified in
Sec. 229.38(i)(1) that the presumption applies to disputes between
banks.
The group letter requested that the Board clarify that the
presumption applies to disputes where the loss allocation rules for
bank and non-bank parties are established under private contract or by
laws other than Regulation CC and the UCC, such as private presentment
arrangements or Federal regulations that apply to Treasury checks. As
stated earlier, the intent behind the presumption of alteration is to
create a uniform starting point in the absence of evidence under

[[Page 46852]]

Federal and State laws. As stated above, the final rule does not
prevent banks from varying the presumption of alteration by agreement
to the extent permitted under Sec. 229.37. However, the Board did not
intend to override any other Federal statute or regulation, such as
U.S. Treasury rules governing Treasury checks, to the extent that they
already address the issue that the presumption is intended to address.
In the final rule, the Board has indicated that the presumption applies
in the absence of any Federal statute or regulation to the contrary.
One commenter requested that the Board require banks that receive
original checks to preserve them for a set period of time. A retention
requirement for physical checks would impose a record-keeping and
storage burden for banks. The Board believes a more appropriate
approach is for the rule to establish responsibilities with respect to
the handling of checks and for banks to determine their own physical
check retention policies based on their assessment of risk.

IV. Competitive Impact Analysis

The Board conducts a competitive impact analysis when it considers
an operational or legal change, if that change would have a direct and
material adverse effect on the ability of other service providers to
compete with the Federal Reserve in providing similar services due to
legal differences or due to the Federal Reserve's dominant market
position deriving from such legal differences. All operational or legal
changes having a substantial effect on payments-system participants
will be subject to a competitive-impact analysis, even if competitive
effects are not apparent on the face of the proposal. If such legal
differences exist, the Board will assess whether the same objectives
could be achieved by a modified proposal with lesser competitive impact
or, if not, whether the benefits of the proposal (such as contributing
to payments-system efficiency or integrity or other Board objectives)
outweigh the materially adverse effect on competition.\12\
---------------------------------------------------------------------------

\12\ Federal Reserve Regulatory Service, 7-145.2. See, https://www.federalreserve.gov/publications/reginfo.htm.
---------------------------------------------------------------------------

The Board does not believe that the amendments to Regulation CC
will have a direct and material adverse effect on the ability of other
service providers to compete effectively with the Reserve Banks in
providing similar services due to legal differences. The amendments
would apply to the Reserve Banks and private-sector service providers
alike and would not affect the competitive position of private-sector
banks vis-[agrave]-vis the Reserve Banks.

V. Paperwork Reduction Act

In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board may not conduct
or sponsor, and a respondent is not required to respond to, an
information collection unless it displays a valid Office of Management
and Budget (OMB) control number. The Board reviewed the final rule
under the authority delegated to the Board by the OMB and determined
that it contains no collections of information under the PRA.\13\
Accordingly, there is no paperwork burden associated with the rule.
---------------------------------------------------------------------------

\13\ See 44 U.S.C. 3502(3).
---------------------------------------------------------------------------

VI. Regulatory Flexibility Act

An initial regulatory flexibility analysis (IRFA) was included in
the proposal in accordance with section 3(a) of the Regulatory
Flexibility Act (RFA), 5 U.S.C. 601 et seq. (RFA). In the IRFA, the
Board requested comment on the effect of the proposed rule on small
entities and on any significant alternatives that would reduce the
regulatory burden on small entities. The Board did not receive any
comments. The RFA requires an agency to prepare a final regulatory
flexibility analysis (FRFA) unless the agency certifies that the rule
will not, if promulgated, have a significant economic impact on a
substantial number of small entities. In accordance with section 3(a)
of the RFA, the Board has reviewed the final regulation. Based on its
analysis, and for the reasons stated below, the Board certifies that
the rule will not have a significant economic impact on a substantial
number of small entities.
The final rule will apply to all depository institutions regardless
of their size.\14\ Pursuant to regulations issued by the Small Business
Administration (13 CFR 121.201), a ``small banking organization''
includes a depository institution with $550 million or less in total
assets. Based on 2017 call report data, there are 9,631 depository
institutions that have total domestic assets of $550 million or less
and thus are considered small entities for purposes of the RFA. The
presumption of alteration shifts the burden to the bank that warrants
that a check has not been altered, which could be a depositary bank or
collecting bank. In order to overcome the presumption of alteration, a
depositary bank or collecting bank must prove by a preponderance of
evidence either the substitute check or electronic check does not
contain an alteration, or that the substitute check or electronic check
is derived from an original check that was issued with an unauthorized
signature of the drawer. Under the final rule, the presumption of
alteration shall cease to apply if the original check is made available
for examination by all parties involved in the dispute. Furthermore,
the presumption of alteration will not apply if the paying bank
received the original check from which the substitute check or
electronic check was derived.
---------------------------------------------------------------------------

\14\ The rule would not impose costs on any small entities other
than depository institutions.
---------------------------------------------------------------------------

A depositary bank or collecting bank that destroys all original
checks after truncation may incur additional risk, as it may not be
able to overcome the presumption of alteration. The Board expects the
additional risk to be minimal. According to Federal Reserve data, only
0.015% of forward items collected through the Reserve Banks were
returned due to a claim of alteration or forgery in March 2018. The
Board expects depositary banks and collecting banks to weigh the costs
and benefits of destroying or retaining original checks, such as for
large dollar amounts, so that the presumption of alteration will not
apply. In their roles as paying banks, however, those same banks could
benefit from the presumption. Additionally, a depositary bank that
permits remote deposit capture may also incur additional risk, as it
may not be able to obtain the original check to overcome the
presumption of alteration. The Board expects depositary banks to
examine their protocols for remote deposit capture, such as limiting
the amount of money that may be deposited remotely. The Board expects
that depository institutions will benefit from a uniform rule when
there is an absence of evidence over whether a check has been altered
or forged and may have reduced litigation and dispute resolution costs.
The Board does not expect the rule to have a significant economic
impact on a substantial number of small entities.

List of Subjects in 12 CFR Part 229

Banks, Banking, Federal Reserve System, Reporting and recordkeeping
requirements.

Authority and Issuance

For the reasons set forth in the preamble, the Board to amends 12
CFR part 229 as follows:

[[Page 46853]]

PART 229--AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS
(REGULATION CC)

0
1. The authority citation for part 229 continues to read as follows:

Authority: 12 U.S.C. 4001-4010, 12 U.S.C. 5001-5018.

Subpart C--Collection of Checks

0
2. In Sec. 229.38, paragraph (i) is added to read as follows:

Sec. 229.38 Liability.

* * * * *
(i) Presumption of Alteration--(1) Presumption. Subject to
paragraphs (i)(2) and (3) of this section and in the absence of a
Federal statute or regulation to the contrary, the presumption in this
paragraph applies with respect to any dispute between banks arising
under Federal or State law as to whether a substitute check or
electronic check transferred between those banks contains an alteration
or is derived from an original check that was issued with an
unauthorized signature of the drawer. When such a dispute arises, there
is a rebuttable presumption that the substitute check or electronic
check contains an alteration.
(2) Rebuttal of presumption. The presumption of alteration may be
overcome by proving by a preponderance of evidence that either the
substitute check or electronic check does not contain an alteration, or
that the substitute check or electronic check is derived from an
original check that was issued with an unauthorized signature of the
drawer.
(3) Effect of producing original check. If the original check is
made available for examination by all banks involved in the dispute,
the presumption in paragraph (i)(1) of this section shall no longer
apply.

0
3. In appendix E, section XXIV, add reserved paragraphs E through H and
paragraph I to read as follows:

Appendix E to Part 229--Commentary

* * * * *

XXIV. Section 229.38 Liability

* * * * *

E through H [Reserved]

I. 229.38(i) Presumption of Alteration

1. This paragraph applies to disputes between banks where one
bank has sent an electronic check or a substitute check for
collection to the other bank. The presumption of alteration does not
apply to a dispute between banks where one bank sent the original
check to the other bank, even if that check is subsequently
truncated and destroyed. The presumption of alteration applies with
respect to claims that the original check or to the electronic check
or substitute check was altered or contained an unauthorized
signature.
2. The presumption of alteration applies when the original check
is unavailable for review by the banks in context of the dispute. If
the original check is produced, through discovery or other means,
and is made available for examination by all the parties, the
presumption no longer applies.
3. This paragraph does not alter the transfer and presentment
warranties under the UCC that allocate liability among the parties
to a check transaction with respect to an item that has been altered
or that was issued with an unauthorized signature of the drawer. The
UCC or other applicable check law continues to apply with respect to
other rights, duties, and obligations related to altered or
unauthorized checks. In addition, the presumption does not apply if
it is contrary to another Federal statute or regulation, such as the
U.S. Treasury's rules regarding U.S. Treasury checks. The
presumption of alteration may be varied by agreement to the extent
permitted under Sec. 229.37.
4. As stated in Sec. 229.2, terms that are not defined in that
section have the meanings set forth in the Uniform Commercial Code.
``Alteration'' is defined in UCC 3-407 and includes both (i) an
unauthorized change in a check that purports to modify in any
respect the obligation of a party, and (ii) an unauthorized addition
of words or numbers or other change to an incomplete check relating
to the obligation of a party. Alterations could include, for
example, an unauthorized change to a payee name or a change to the
date on a post-dated check that purports to make the check currently
payable. ``Unauthorized signature'' is defined in UCC 1-201 and
further discussed in UCC 3-403. An unauthorized signature could
include a forgery as well as a signature made without actual or
apparent authority.
* * * * *

By order of the Board of Governors of the Federal Reserve
System, September 11, 2018.
Ann Misback,
Secretary of the Board.
[FR Doc. 2018-20029 Filed 9-14-18; 8:45 am]
BILLING CODE 6210-01-P