[Federal Register Volume 59, Number 85 (Wednesday, May 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10645]


[[Page Unknown]]

[Federal Register: May 4, 1994]


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FEDERAL RESERVE SYSTEM

12 CFR Part 210

[Regulation J; Docket No. R-0821]

 

Collection of Checks and Other Items by Federal Reserve Banks and 
Funds Transfers Through Fedwire

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board is adopting amendments to subpart A of its 
Regulation J, governing collection of checks and other items by Federal 
Reserve Banks. The amendments, in general, conform the warranties and 
various other provisions of Regulation J to recent amendments to 
Regulation CC or to the Uniform Commercial Code.

EFFECTIVE DATE: June 6, 1994.

FOR FURTHER INFORMATION CONTACT: Oliver I. Ireland, Associate General 
Counsel (202/452-3625), or Stephanie Martin, Senior Attorney (202/452-
3198), Legal Division; for the hearing impaired only: 
Telecommunications Device for the Deaf, Dorothea Thompson (202/452-
3544).

SUPPLEMENTARY INFORMATION: Subpart A of the Board's Regulation J (12 
CFR part 210) governs the collection of checks and other items by 
Federal Reserve Banks. Regulation J sets out the warranties made by 
institutions that send items for collection through the Federal Reserve 
System as well as warranties made by Reserve Banks.1 Regulation J 
also covers liability for breach of warranty, presentment of and 
settlement for cash items and returned checks, and other related 
issues.
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    \1\As used in this docket, sender means any institution that 
sends a check to a Reserve Bank for collection, and bank includes 
all depository institutions, such as commercial banks, savings 
institutions, and credit unions.
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    In October 1992, the Board published amendments to its Regulation 
CC (12 CFR part 229) that require paying banks to make same-day 
settlement for certain checks presented by private-sector banks, 
effective January 3, 1994 (57 FR 46956, October 14, 1992). As part of 
these amendments, the Board revised the Regulation CC warranties to 
require private-sector collecting, returning, and presenting banks to 
warrant the accuracy of cash letter totals and check encoding. In 
December 1993, the Board published proposed amendments to Regulation J 
to clarify that the Reserve Banks and institutions that send items to 
Reserve Banks also make the Regulation CC warranties, to conform 
certain Regulation J provisions to the 1990 version of the Uniform 
Commercial Code (U.C.C.), and to make other minor changes (58 FR 68566, 
December 28, 1993). The Board received 10 comments on the proposed 
amendments, which are discussed in the section-by-section analysis 
below.
    The Board has established procedures for assessing the competitive 
impact of changes that have a substantial effect on payments system 
participants.2 Under these procedures, the Board assesses whether 
the proposed regulatory changes would have a direct and material 
adverse effect on the ability of other service providers to compete 
effectively with the Federal Reserve Banks in providing similar 
services due to differing legal powers or constraints or due to a 
dominant market position of the Federal Reserve deriving from such 
legal differences. The Regulation J amendments are largely technical, 
clarifying, or conform Regulation J to the rules applicable to private-
sector banks under Regulation CC and the U.C.C. The Board believes that 
the amendments would not have a direct and material adverse effect on 
the ability of others to compete effectively with the Federal Reserve 
Banks.
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    \2\These procedures are described in the Board's policy 
statement ``The Federal Reserve in the Payments System'' (55 FR 
11648, March 29, 1990).
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Section-by-Section Analysis

Section 210.1

    This section sets forth the authority, purpose, and scope of 
subpart A of Regulation J. At the suggestion of one commenter, the 
Board is updating the authority citations in this section to conform 
with the authority citations in the CFR. Specifically, the Board has 
added a citation to section 11(j) of the Federal Reserve Act, which 
authorizes the Board to exercise general supervision over the Reserve 
Banks.

Section 210.2(g)

    The Board proposed to amend the definition of ``item'' in keeping 
with the definition of ``item'' in U.C.C. Sec. 4-104(a)(9). Under the 
amended language, ``item'' would expressly include promises or orders, 
such as certain bonds or other investment securities, that are handled 
through the bank collection system. The Board received no comments on 
this section and has adopted the amendment as proposed.

Section 210.2(p)

    The Board proposed to add a definition of ``Uniform Commercial 
Code'' that conforms to the definition in Regulation CC (12 CFR 
229.2(ii)). The Board received no comments on this section and has 
adopted the amendment as proposed.

Section 210.3(a)

    The Board proposed to amend this section to set forth more 
accurately the scope of the Federal Reserve Banks' operating circulars, 
which include provisions for service terms and adjustments. The 
amendment specifies that the operating circulars may include provisions 
for adjustments of amounts, waiver of expenses, and payment of interest 
by as-of adjustment.
    One commenter believed that the proposed change, at least as it 
relates to Reserve Bank adjustment practices, impedes the ability of 
correspondent banks to compete with the Reserve Banks. This commenter 
stated that the adjustment accounting practices of its local Reserve 
Bank require intercept processors and depository institutions to engage 
in a burdensome reconcilement process. The commenter stated that the 
Board should not incorporate the operating circulars into Regulation J.
    The proposed amendments, however, would not incorporate the 
operating circulars into Regulation J, but rather would provide greater 
detail as to the scope of the operating circulars. Issues related to 
adjustment posting alternatives generally can be settled between the 
Reserve Bank and the parties involved and would not be affected by the 
proposed amendment to Regulation J. Thus, the Board has adopted the 
amendment as proposed.

Section 210.3(f)

    The Board proposed to add a new paragraph to Sec. 210.3 to clarify 
that Regulation J supersedes the U.C.C., other state laws, and 
Regulation CC to the extent of any inconsistency. This provision 
parallels Sec. 229.41 of Regulation CC, which provides that Regulation 
CC supersedes the U.C.C. and other state law to the extent of the 
inconsistency. The Board received no comments on this section and has 
adopted the amendment as proposed.

Section 210.5(a)

    The Board proposed to amend Sec. 210.5(a) to conform the warranties 
made by banks that send items to Reserve Banks to the transfer and 
presentment warranties in U.C.C. 4-207 and 4-208. A sender would 
warrant that it was (or acted on behalf of a person who was) entitled 
to enforce the item. The U.C.C. substituted the concept of ``person 
entitled to enforce'' for ``person with good title'' in recognition 
that the right to enforce an instrument is not limited to holders. In 
addition, the proposed amendment would require the sender to warrant 
that the item was not altered, dropping the adverb ``materially.'' The 
U.C.C. formerly incorporated the concept of a ``material'' alteration 
as one that changed the contract of the parties in any respect. The 
revised U.C.C. refers to such a change simply as an alteration. 
Finally, the proposed amendment would clarify that the sender also 
makes the warranties set forth in Regulation CC and that the Regulation 
J warranties may not be disclaimed and are made regardless of whether 
the sender's indorsement appears on the item.
    One commenter was concerned that dropping the word ``materially'' 
would mean that repair of MICR encoding on a check that rejects from 
automated processing would constitute an alteration. Section 3-407 of 
the U.C.C. defines ``alteration'' as an unauthorized change that 
purports to modify the obligation of a party or an unauthorized 
addition of words or numbers or other change to an incomplete 
instrument relating to the obligation of a party. The 1990 version of 
the U.C.C. appears to use the terms ``alteration'' synonymously with 
the former term ``material alteration'' (see Official Comment (1) to 
U.C.C. 3-407). MICR repair, which is intended to facilitate check 
collection and not to affect the obligations of the parties to a check, 
is unlikely to be considered an alteration.

Sections 210.5(d) and 210.12(i)

    The Board proposed to add new paragraph (d) to Sec. 210.5 and new 
paragraph (i) to Sec. 210.12 to give a Reserve Bank a security interest 
in a sender's or prior collecting or returning bank's assets held by 
the Reserve Bank. The security interest would attach when a warranty is 
breached or other obligation is incurred. The proposed provisions were 
based on similar provisions in subpart B of Regulation J, which gives a 
Reserve Bank a security interest in the assets of a sender of a payment 
order to secure overdrafts and other obligations (Sec. 210.28(b) (3) 
and (4)).
    Two commenters were concerned that the proposal would give Reserve 
Banks greater rights than private-sector banks to resolve warranty 
breach issues. One of the commenters stated that the proposal appeared 
to give Reserve Banks a complete self-remedy for breaches absent a 
court order or agreement of the parties. The commenter noted that 
security interests under Sec. 210.28 are designed to secure overdrafts, 
which are easily determinable, as opposed to warranty breaches, which 
are often a matter of dispute. The commenter requested that the 
proposal be clarified to provide that security interests do not attach 
and a Reserve Bank may not set off or realize upon collateral without a 
judicial determination or agreement of the parties.
    Section 9-501(5) of the U.C.C. provides that when a claim of a 
secured party is reduced to judgment, the secured party's lien on 
collateral relates back to the date the security interest was 
perfected. Accordingly, the Board believes that a Reserve Bank's 
security interest in the assets of a warranting bank should attach on 
the date the warranty is breached (generally the date the Reserve Bank 
handles the check in question) so that the Reserve Bank may take 
actions to protect its collateral, if necessary, as discussed below.
    The Monetary Control Act of 1980 (12 U.S.C. 248a) directed the 
Board and the Reserve Banks to establish and set prices for services 
with due consideration to ensuring an adequate level of services 
nationwide. In keeping with this directive, the Board expects that 
Reserve Banks will provide check collection services to financially 
troubled banks that cannot obtain services elsewhere. If a troubled 
bank fails, the Reserve Bank may be liable on warranty claims that it 
cannot pass back to the failed bank. Accordingly, the Board believes 
that it is appropriate to provide some protection to the Reserve Banks 
from pending insolvencies. Thus, the Board has adopted the proposed 
security interest provisions, with modifications.
    The modifications to Secs. 229.5(d) and 229.12(i) clarify when a 
default occurs. Specifically, a Reserve Bank's rights to take any 
action under those sections will apply only: (1) If the Reserve Bank, 
in its sole discretion, deems itself insecure and gives notice thereof 
to the sender or (2) at the time the sender suspends payments and is 
closed. The Board believes that requiring the Reserve Bank to advise a 
bank of its concerns about the bank's solvency will prevent the routine 
use of set-off or other actions on collateral by Reserve Banks. The 
Board believes that private-sector banks often reserve the right under 
security agreements to take steps, such as placing a hold on 
collateral, to protect themselves in cases where the banks consider 
themselves insecure.
    Under the final rule, when a Reserve Bank receives notice of a 
warranty claim based on alleged forged indorsement or alteration, it 
would pass the notice back to the bank from which it received the 
check. The Reserve Bank would not, however, unilaterally pass judgment 
on such a claim. Rather, the Reserve Banks' uniform operating circulars 
provide that they will process adjustments for these types of warranty 
claims only with the agreement of the prior collecting bank. If such 
agreement is not forthcoming, the Reserve Bank would wait to be sued on 
the warranty claim and would tender defense of the suit to the prior 
collecting bank under Secs. 210.5 (b) and (c) and 210.12 (e) and (f) of 
Regulation J. Entries would be made or collateral disposed of only 
after judgment as provided in those sections. The amendments to 
Secs. 229.5(d) and 229.12(i), however, would not require a sender bank 
to fail or a Reserve Bank to deem itself insecure before the Reserve 
Bank could make credit or debit adjustments to reserve or clearing 
accounts in accordance with adjustment procedures established in 
Reserve Bank operating circulars.

Section 210.6(b)

    The Board proposed to amend Sec. 210.6(b) to conform the Reserve 
Bank warranties to the transfer and presentment warranties in U.C.C. 4-
207 and 4-208. (See discussion of Sec. 210.5(a).) The amendment 
clarifies that the Reserve Banks make the warranties set out in 
Sec. 229.34 of Regulation CC. The Board received no comments on this 
section and has adopted the amendment as proposed.

Section 210.6(c)

    Section 210.6(c) provides a 2-year statute of limitations for 
claims against Reserve Banks for lack of good faith or failure to 
exercise ordinary care under Regulation J. The Board proposed to amend 
this section to clarify that the Regulation CC limitation period of one 
year would apply to any claims against a Reserve Bank under Regulation 
CC, such as breach of a warranty under Sec. 229.34 or lack of good 
faith or failure to exercise ordinary care under Sec. 229.38. This 
amendment clarifies that claims against Reserve Banks for Regulation CC 
violations are subject to the same time limitations as those against 
private-sector banks.
    The Board received three comments on this section. Two commenters 
believed that limitation period for breach of Regulation CC warranties 
should be two years rather than one year. One of these commenters often 
receives adjustment requests from the IRS one to two years after the 
fact and does not wish to be precluded from pursuing such adjustments 
with a Reserve Bank. This commenter suggested that the Regulation CC 
limitation period be extended to 2 years. Another commenter noted that, 
if the one year limitation period is adopted, it should run from the 
date of the last entry for the check in question rather than from the 
date the check first cleared.
    The Board believes that the same limitation period should apply to 
Reserve Banks and private-sector banks for Regulation CC violations. As 
Regulation CC provides a one-year statute of limitations, the Board 
does not believe Regulation J should lengthen this period for Reserve 
Banks and has adopted the proposed amendment. The one-year period was 
established in subpart C of Regulation CC to match the one-year 
limitation period for subpart B (funds availability) violations, which 
was set by statute. As provided in Regulation CC Sec. 229.38(g), an 
action must be brought within one year after the date of the occurrence 
of the violation involved.

Section 210.9(a)(5)

    Section 210.9(a)(5) provides that paying banks must settle for 
checks presented by Reserve Banks by ``autocharge'' (i.e. a debit to an 
account at a Reserve Bank), cash, or other means agreed to by the 
Reserve Bank. The Board proposed to amend this section to clarify that 
a Reserve Bank may, in its discretion, elect to obtain settlement by 
autocharging the account of the paying bank for the amount of a cash 
letter. Virtually all Reserve Bank presentments are settled via 
autocharge. This amendment would restate the autocharge provisions that 
currently are set out in the Reserve Banks' uniform cash item operating 
circular.
    The Board also proposed to amend this section to provide that 
paying banks that receive presentment from Reserve Banks may not set 
off other claims against the amount of settlement owed to the Reserve 
Bank. Paying banks may set off against private-sector presenting banks 
under Sec. 229.34(c)(4) of Regulation CC. The Regulation CC set-off 
provision was designed to protect paying banks under the same-day 
settlement rule, which requires paying banks to accept presentment from 
and settle with all presenting banks, some of which may be in poor 
financial condition. If a paying bank overpays a cash letter in 
reliance on a cash letter total or check encoding warranted by the 
presenting bank, it could face the risk that the presenting bank would 
be unable to settle for adjustments. Protection against insolvency risk 
would not be necessary against a Reserve Bank. In addition, as banks 
generally settle with Reserve Banks via autocharge, set-off against a 
Reserve Bank would be impractical. Therefore, the Board does not 
believe this amendment would have a direct and material adverse effect 
on the ability of private-sector banks to compete effectively with 
Reserve Banks.
    The Board received no comments on this section and has adopted the 
amendments as proposed.

Section 210.12(a)

    Section 210.12(a) provides that a paying bank that has settled for 
a check presented by a Reserve Bank may return the check in accordance 
with Regulation CC, the U.C.C., and the Reserve Bank's operating 
circular. The Board proposed to amend this section to clarify that the 
paying bank may also return a check prior to settlement in accordance 
with Sec. 210.9(a) of Regulation J and the Reserve Bank's operating 
circular. This amendment would clarify that a paying bank would have 
the same return rights under Regulation J as under Regulation CC and 
the U.C.C. The Board received no comments on this section and has 
adopted the amendment as proposed.

Section 210.12(c)

    Section 210.12(c) sets out the warranties and agreements made by a 
bank that sends a returned check to a Reserve Bank. The Board proposed 
to amend this section to clarify that, in addition to the warranties 
set forth in Sec. 229.34 of Regulation CC, the sender also makes any 
applicable warranty under state law. For example, the amendment would 
clarify that a depositary bank that settled for a returned check could 
recover the amount paid plus expenses and lost interest from a prior 
bank that breached a transfer warranty, in accordance with U.C.C. 4-
208(d). In addition, similar to the amendments to Sec. 210.5(a), the 
proposed revisions to this paragraph would clarify that the Regulation 
J warranties may not be disclaimed and are made regardless of whether 
the sender's indorsement appears on the item. These amendments restate 
provisions that are already applicable to private-sector banks under 
Regulation CC and the U.C.C. The Board received no comments on this 
section and has adopted the amendments as proposed.

Section 210.12(d)

    The Board proposed to add a new paragraph (d) to Sec. 210.12 to 
clarify that when a Reserve Bank transfers and receives settlement for 
a returned check, it makes the warranties set out in Sec. 229.34 of 
Regulation CC. In addition, the new paragraph would parallel revised 
Sec. 210.6(b) (governing Reserve Bank warranties for cash items) by 
providing a limitation of the Reserve Bank's liabilities, other than 
those allowed for in Regulation J, to the Reserve Bank's own lack of 
good faith or failure to exercise ordinary care. (The amendments 
redesignate current Secs. 210.12(d) through (g) as Secs. 210.12(e) 
through (h).) The Board received no comments on this section and has 
adopted the amendments as proposed.

Section 210.12(e) (Formerly 210.12(d)) and Section 210.5(b)

    The U.C.C. (3-119) and Regulation CC (Sec. 229.34(e)) provide that 
a bank that receives a tender of defense may in turn tender defense to 
a prior bank in the collection or return chain. Unless the prior bank 
comes in and defends, it is bound by the determination of fact common 
to the current litigation and any subsequent litigation.
    Section 210.5(b) of Regulation J provides that, when a Reserve Bank 
tenders defense to a sender as a result of a tender to it, the Reserve 
Bank need not be a defendant in the suit in order to recover from the 
sender any losses that it incurs because of the judgment, so long as 
the judgment addresses the fact issue of breach of warranty. The Board 
adopted this provision in 1986 in order to reduce litigation and 
provide a more efficient way of handling forged indorsement cases (51 
FR 21740, June 16, 1986). Due to an oversight, when the Board amended 
Sec. 210.12 to provide a similar rule for returned checks, the language 
did not match that of Sec. 210.5(b) and could have been interpreted to 
apply only when a Reserve Bank is a defendant (53 FR 21983, June 13, 
1988). The Board proposed to amend Sec. 210.12(e) to conform it to 
Sec. 210.5(b). (The amendments redesignate current Sec. 210.12(d) as 
Sec. 210.12(e) and add a new paragraph (d) as discussed above.) The 
Board also proposed to correct a typographical error in Sec. 210.5(b). 
The Board received no comments on this section and has adopted the 
amendments as proposed.

Section 210.12(h) (Formerly 210.12(g))

    This section provides that a depositary bank must settle for 
returned checks received from a Reserve Bank in the same manner as it 
settles for cash items presented by the Reserve Bank. The Board 
proposed to amend this section to clarify that settlement for returned 
checks also must be made by the same time as settlement for cash items, 
as provided in Sec. 210.9(a). The Board received no comments on this 
section and has adopted the amendment as proposed.

Section 210.13(a)

    Section 210.13(a) authorizes a Reserve Bank that does not receive 
payment for an item to charge back the account of the sender, paying 
bank, or returning bank from which the item was received. The Board 
proposed to amend this section to clarify that a Reserve Bank also may 
charge the account of a prior collecting bank through which the item 
was received. This amendment is consistent with Sec. 229.35(b) of 
Regulation CC, which allows a bank that handles a check or returned 
check to recover from any prior indorser in the event that the bank 
does not receive payment for the check from a subsequent bank in the 
collection or return chain. In the event of such a recovery by a 
Reserve Bank, Sec. 229.13(a) provides that no bank or person in the 
forward collection or return chain would have an interest in any funds 
in the Reserve Bank's possession of the bank that failed to pay. The 
amendment would clarify that, when a Reserve Bank charges back an item, 
this limitation of interest applies only when a bank or person seeks 
payment of the amount of the item out of funds or property held by the 
Reserve Bank. The Board received no comments on this section and has 
adopted the amendment as proposed.

Section 210.13(b)

    Section 210.13(b) provides that a Reserve Bank will not debit an 
institution's reserve account for drafts or other orders on the account 
after receiving notice that the institution has been closed. The Board 
proposed to amend this section to clarify that Reserve Banks will not 
charge an account as authorized by Sec. 210.9(a)(5) after receiving 
notice the institution is closed. The amendment also would clarify that 
this section applies only to charges to reserve accounts to settle for 
items (including returned checks) and does not affect the Reserve 
Bank's security interest under proposed Secs. 210.5(d) and 210.12(i). 
The Board received no comments on this section and has adopted the 
amendments as proposed.

Section 210.14

    Section 210.14 describes those circumstances under which the time 
limits for acting on an item may be extended, such as interruption of 
communication facilities, suspension of payments by a bank, and other 
emergency conditions. The Board proposed to amend this section to 
clarify that computer and equipment failure would constitute emergency 
conditions. This amendment is consistent with the emergency provisions 
in Sec. 229.38(e) of Regulation CC and U.C.C. 4-109(b). The Board 
received no comments on this section and has adopted the amendment as 
proposed.

Final Regulatory Flexibility Analysis

    Two of the three requirements of a final regulatory flexibility 
analysis (5 U.S.C. 604), (1) a succinct statement of the need for and 
the objectives of the rule and (2) a summary of the issues raised by 
the public comments, the agency's assessment of the issues, and a 
statement of the changes made in the final rule in response to the 
comments, are discussed above. The third requirement of a final 
regulatory flexibility analysis is a description of significant 
alternatives to the rule that would minimize the rule's economic impact 
on small entities and reasons why the alternatives were rejected. The 
amendments apply to all depository institutions that receive items from 
or send items to Federal Reserve Banks, regardless of size. The 
amendments generally clarify rights and duties of banks and do not 
impose any substantial economic burden on small entities.

List of Subjects in 12 CFR Part 210

    Banks, Banking, Check collection.

    For the reasons set out in the preamble, 12 CFR part 210 is amended 
as follows:

PART 210--COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE 
BANKS AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J)

    1. The authority citation for part 210 is revised to read as 
follows:

    Authority: 12 U.S.C. 248 (i), (j), and (o), 342, 360, 464, and 
4001-4010.

    2. The first sentence of Sec. 210.1 is revised to read as follows:


Sec. 210.1  Authority, purpose, and scope.

    The Board of Governors of the Federal Reserve System (Board) has 
issued this subpart pursuant to the Federal Reserve Act, sections 11 
(i) and (j) (12 U.S.C. 248 (i) and (j)), section 13 (12 U.S.C. 342), 
section 16 (12 U.S.C. 248(o) and 360), and section 19(f) (12 U.S.C. 
464); the Expedited Funds Availability Act (12 U.S.C. 4001 et seq.); 
and other laws. * * *
    3. In Sec. 210.2, paragraph (g) introductory text is revised and a 
new paragraph (p) is added immediately before the concluding text to 
read as follows:


Sec. 210.2  Definitions.

* * * * *
    (g) Item means an instrument or a promise or order to pay money, 
whether negotiable or not, that is:
* * * * *
    (p) Uniform Commercial Code means the Uniform Commercial Code as 
adopted in a state.
* * * * *
    4. In Sec. 210.3, the last sentence of paragraph (a) is revised and 
a new paragraph (f) is added to read as follows:


Sec. 210.3  General provisions.

    (a) * * * The circulars may, among other things, classify cash 
items and noncash items, require separate sorts and letters, provide 
different closing times for the receipt of different classes or types 
of items, set forth terms of services, and establish procedures for 
adjustments on a Reserve Bank's books, including amounts, waiver of 
expenses, and payment of interest by as-of adjustment.
* * * * *
    (f) Relation to other law. The provisions of this subpart supersede 
any inconsistent provisions of the Uniform Commercial Code, of any 
other state law, or of part 229 of this title, but only to the extent 
of the inconsistency.
    5. In Sec. 210.5, paragraph (a) introductory text and paragraph 
(a)(2) are revised, in paragraph (b)(3) the phrase ``judgment or decree 
of the tender of defense'' is revised to read ``judgment or decree or 
the tender of defense'', and a new paragraph (d) is added to read as 
follows:


Sec. 210.5  Sender's agreement; recovery by Reserve Bank.

    (a) Sender's agreement. The warranties, authorizations, and 
agreements made pursuant to this paragraph may not be disclaimed and 
are made whether or not the item bears an indorsement of the sender. By 
sending an item to a Reserve Bank, the sender:
* * * * *
    (2) Warrants to each Reserve Bank handling the item that:
    (i) The sender is a person entitled to enforce the item or 
authorized to obtain payment of the item on behalf of a person entitled 
to enforce the item; and
    (ii) The item has not been altered; but this paragraph (a)(2) does 
not limit any warranty by a sender or other prior party arising under 
state law or under subpart C of part 229 of this title; and
* * * * *
    (d) Security interest. To secure any obligation due or to become 
due to a Reserve Bank by a sender or prior collecting bank under this 
subpart or subpart C of part 229 of this title, the sender and prior 
collecting bank, by sending an item directly or indirectly to the 
Reserve Bank, grant to the Reserve Bank a security interest in all of 
the sender's or prior collecting bank's assets in the possession of, or 
held for the account of, the Reserve Bank. The security interest 
attaches when a warranty is breached or any other obligation to the 
Reserve Bank is incurred. If the Reserve Bank, in its sole discretion, 
deems itself insecure and gives notice thereof to the sender or prior 
collecting bank, or if the sender or prior collecting bank suspends 
payments or is closed, the Reserve Bank may take any action authorized 
by law to recover the amount of an obligation, including, but not 
limited to, the exercise of rights of set off, the realization on any 
available collateral, and any other rights it may have as a creditor 
under applicable law.
    6. In Sec. 210.6, paragraphs (b)(1) and (b)(2) are revised, a new 
first sentence is added to paragraph (b) concluding text, and a new 
last sentence is added to paragraph (c) to read as follows:


Sec. 210.6  Status, warranties, and liability of Reserve Bank.

* * * * *
    (b) * * *
    (1) That the Reserve Bank is a person entitled to enforce the item 
(or is authorized to obtain payment of the item on behalf of a person 
who is either:
    (i) Entitled to enforce the item; or
    (ii) Authorized to obtain payment on behalf of a person entitled to 
enforce the item); and
    (2) That the item has not been altered.

The Reserve Bank also makes the warranties set forth in Sec. 229.34(c) 
of this title, subject to the terms of part 229 of this title. * * *
    (c) * * * This paragraph does not lengthen the time limit for 
claims under Sec. 229.38(g) of this title (which include claims for 
breach of warranty under Sec. 229.34 of this title).
    7. In Sec. 210.9, paragraph (a)(5) is revised to read as follows:


Sec. 210.9  Settlement and payment.

    (a) * * *
    (5) Settlement with a Reserve Bank under paragraphs (a)(1) through 
(4) of this section shall be made by debit to an account on the Reserve 
Bank's books, cash, or other form of settlement to which the Reserve 
Bank agrees, except that the Reserve Bank may, in its discretion, 
obtain settlement by charging the paying bank's reserve or clearing 
account. A paying bank may not set off against the amount of a 
settlement under this section the amount of a claim with respect to 
another cash item, cash letter, or other claim under Sec. 229.34(c) of 
this title or other law.
* * * * *
    8. In Sec. 210.12, a new sentence is added after the first sentence 
of paragraph (a), paragraph (c) introductory text and paragraph (c)(2) 
are revised, paragraphs (d) through (g) are redesignated as paragraphs 
(e) through (h), respectively, new paragraphs (d) and (i) are added, 
and newly-designated paragraph (e) concluding text and newly-designated 
paragraph (h) are revised to read as follows:


Sec. 210.12  Return of cash items and handling of returned checks.

    (a) * * * A paying bank that receives a cash item directly or 
indirectly from a Reserve Bank also may return the item prior to 
settlement, in accordance with Sec. 210.9(a) and its Reserve Bank's 
operating circular. * * *
* * * * *
    (c) Paying bank's and returning bank's agreement. The warranties, 
authorizations, and agreements made pursuant to this paragraph may not 
be disclaimed and are made whether or not the returned check bears an 
indorsement of the paying bank or returning bank. By sending a returned 
check to a Reserve Bank, the paying bank or returning bank--
* * * * *
    (2) Makes the warranties set forth in Sec. 229.34 of this title 
(but this paragraph does not limit any warranty by a paying or 
returning bank arising under state law); and
* * * * *
    (d) Warranties by Reserve Bank. By sending a returned check and 
receiving settlement or other consideration for it, a Reserve Bank 
makes the returning bank warranties as set forth in Sec. 229.34 of this 
title, subject to the terms of part 229 of this title. The Reserve Bank 
shall not have or assume any other liability to the transferee 
returning bank, to any subsequent returning bank, to the depository 
bank, to the owner of the check, or to any other person, except for the 
Reserve Bank's own lack of good faith or failure to exercise ordinary 
care as provided in subpart C of part 229 of this title.
    (e) * * *

The Reserve Bank may, upon the entry of a final judgment or decree, 
recover from the paying bank or returning bank the amount of attorneys' 
fees and other expenses of litigation incurred, as well as any amount 
the Reserve Bank is required to pay because of the judgment or decree 
or the tender of defense, together with interest thereon.
* * * * *
    (h) Settlement. A subsequent returning bank or depositary bank 
shall settle for returned checks in the same manner and by the same 
time as for cash items presented for payment under this subpart.
    (i) Security interest. To secure any obligation due or to become 
due to a Reserve Bank by a paying bank, returning bank, or prior 
returning bank under this subpart or subpart C of part 229 of this 
title, the paying bank, returning bank, and prior returning bank, by 
sending a returned check directly or indirectly to the Reserve Bank, 
grant to the Reserve Bank a security interest in all of the paying 
bank's, returning bank's, and prior returning bank's assets in the 
possession of, or held for the account of, the Reserve Bank. The 
security interest attaches when a warranty is breached or any other 
obligation to the Reserve Bank is incurred. If the Reserve Bank, in its 
sole discretion, deems itself insecure and gives notice thereof to the 
paying bank, returning bank, or prior returning bank, or if the paying 
bank, returning bank, or prior returning bank suspends payments or is 
closed, the Reserve Bank may take any action authorized by law to 
recover the amount of an obligation, including, but not limited to, the 
exercise of rights of set off, the realization on any available 
collateral, and any other rights it may have as a creditor under 
applicable law.
    9. Section 210.13 is revised to read as follows:


Sec. 210.13  Unpaid items.

    (a) Right of recovery. If a Reserve Bank does not receive payment 
in actually and finally collected funds for an item, the Reserve Bank 
shall recover by charge-back or otherwise the amount of the item from 
the sender, prior collecting bank, paying bank, or returning bank from 
or through which it was received, whether or not the item itself can be 
sent back. In the event of recovery from such a party, no party, 
including the owner or holder of the item, shall, for the purpose of 
obtaining payment of the amount of the item, have any interest in any 
reserve balance or other funds or property in the Reserve Bank's 
possession of the bank that failed to make payment in actually and 
finally collected funds.
    (b) Suspension or closing of bank. A Reserve Bank shall not pay or 
act on a draft, authorization to charge (including a charge authorized 
by Sec. 210.9(a)(5)), or other order on a reserve balance or other 
funds in its possession for the purpose of settling for items under 
Sec. 210.9 or Sec. 210.12 after it receives notice of suspension or 
closing of the bank making the settlement for that bank's own or 
another's account.
    10. Section 210.14 is revised to read as follows:


Sec. 210.14  Extension of time limits.

    If a bank (including a Reserve Bank) or nonbank payor is delayed in 
acting on an item beyond applicable time limits because of interruption 
of communication or computer facilities, suspension of payments by a 
bank or nonbank payor, war, emergency conditions, failure of equipment, 
or other circumstances beyond its control, its time for acting is 
extended for the time necessary to complete the action, if it exercises 
such diligence as the circumstances require.

    By order of the Board of Governors of the Federal Reserve 
System, April 28, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-10645 Filed 5-3-94; 8:45 am]
BILLING CODE 6210-01-P