[Federal Register Volume 63, Number 240 (Tuesday, December 15, 1998)]
[Proposed Rules]
[Pages 69027-69030]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-33175]


=======================================================================
-----------------------------------------------------------------------

FEDERAL RESERVE SYSTEM

12 CFR Part 229

[Regulation CC; Docket No. R-1031]


Availability of Funds and Collection of Checks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Advance notice of proposed rulemaking.

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

SUMMARY: The Board requests comment on the potential benefits and 
drawbacks of a modification to its Regulation CC, Availability of Funds 
and Collection of Checks, that would shorten the maximum hold for many 
nonlocal checks. This modification would shorten the availability 
schedule for nonlocal checks from five to four business days except 
that a depositary bank could retain a five-day schedule for categories 
of nonlocal checks for which it certifies that it does not receive a 
sufficient proportion of returned checks within four business days. 
This proposal is one of several alternative modifications to the 
nonlocal check availability schedule that the Board is considering. The 
Board may request comment on this or alternative modifications in a 
future notice of proposed rulemaking after analyzing the comments 
received in response to this notice.

DATES: Comments must be submitted on or before March 15, 1999.

ADDRESSES: Comments, which should refer to Docket No. R-1031, may be 
mailed to Ms. Jennifer Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington DC 20551. Comments may also be delivered to the Board's mail 
room between 8:45 a.m. and 5:15 p.m. on weekdays and to the security 
control room at all other times. The mail room and the security control 
rooms are accessible from the courtyard entrance on 20th Street between 
Constitution Avenue and C Street, N.W. Comments will be available for 
inspection and copying by members of the public in the Freedom of 
Information Office, Room MP-500, between 9:00 a.m. and 5:00 p.m. 
weekdays, except as provided in Section 261.14 of the Board's Rules 
Regarding Availability of Information.

FOR FURTHER INFORMATION CONTACT: Jack K. Walton II, Manager, Check 
Payments Section (202/452-2660) or Michele Braun, Project Leader (202/
452-2819), Division of Reserve Bank Operations and Payment Systems. For 
the hearing impaired only, contact Diane Jenkins, Telecommunications 
Device for the Deaf (TDD) (202/452-3544).

SUPPLEMENTARY INFORMATION:

I. Overview

    As a result of concerns about some banks' practice of delaying 
funds availability by placing holds on the proceeds of checks deposited 
into customers' transaction accounts, Congress passed the Expedited 
Funds Availability Act (EFAA) in 1987 (12 U.S.C. 4001-
4010).1 The EFAA specifies maximum time limits on the holds 
that banks may place on funds deposited into transaction accounts.
---------------------------------------------------------------------------

    \1\ As used in this notice and in Regulation CC, the term bank 
includes commercial banks, savings institutions, and credit unions. 
Depositary bank refers to the bank of first deposit (see 12 CFR 
Sec. 229.2 (e) and (o)).
---------------------------------------------------------------------------

    Prior to enactment of the EFAA, some banks had argued that their 
availability schedules reflected the time needed for the collection and 
return of checks that were not paid and provided a measure of 
protection against the risk that the bank could not recover funds from 
the depositor if those funds had already been withdrawn from the 
depositor's account. To balance depositors' interest in receiving 
prompt access to their funds with banks' ability to manage their risks, 
Congress required the Board to reduce the EFAA's funds availability 
schedules to as short a time as possible and equal to the period 
achievable under the improved check clearing system for a receiving 
depository institution to reasonably expect to learn of the nonpayment 
of most items for each category of checks. (12 U.S.C. 4002(d))
    The Board's Regulation CC (12 CFR part 229), which implements the 
EFAA, includes maximum availability schedules for funds deposited into 
transaction accounts as well as provisions designed to accelerate the 
check return system. Currently, funds deposited by most nonlocal checks 
(checks payable by banks located in different check processing regions 
than the depositary bank) must be made available for withdrawal within 
five business days (five-day availability).2 The Board is 
investigating whether it would be appropriate to define separate 
categories for various types of nonlocal checks so that it can assign 
maximum availability schedules to these categories of nonlocal checks. 
These categories would be designed to preserve hold periods as a fraud-
protection tool while providing depositors earlier access to their 
funds. Analysis of available data suggests that several alternative 
methods for defining categories of nonlocal checks might reasonably 
meet the Congressional mandate. Several of these alternatives rely on 
data collected by the Reserve Banks. One alternative relies on data 
collected by depositary banks that elect to use the full five-day hold 
period for some nonlocal checks.
---------------------------------------------------------------------------

    \2\ Under Regulation CC's temporary availability schedule, which 
was in effect from September 1, 1988, through August 31, 1990, funds 
deposited by most nonlocal checks had to be made available for 
withdrawal within seven business days. Other than the change from 
the temporary to the current, permanent schedule, the EFAA's 
nonlocal check availability schedules have not been modified since 
the EFAA was enacted. During this period, the Federal Reserve has 
consolidated several of its check processing regions, listed in 
Regulation CC's Appendix A, which has resulted in some checks being 
reclassified from nonlocal to local. Thus, the availability that 
must be accorded to some deposits has improved.
---------------------------------------------------------------------------

    The purpose of this notice is to gather information on the 
potential benefits and drawbacks of this latter alternative for 
assigning availability schedules to categories of checks because it 
relies on a self-certification procedure that differs from the approach 
the Board has previously used in Regulation CC. Based on its analysis 
of the comments to this notice, the Board will assess the feasibility 
of this method and may request comment on one or more specific 
regulatory proposals to modify the nonlocal check availability 
schedule.

[[Page 69028]]

II. Background

    When Congress established the EFAA funds availability schedules, it 
attempted to balance banks' concerns about managing their risk with 
consumers' concerns about the availability of their funds. Congress 
recognized that banks would be exposed to risks if they were required 
to make funds available before they had a reasonable opportunity to 
learn of the return of an unpaid check.
    Congress's 1987 Conference Report on the EFAA tied availability 
schedules to banks' ability to reasonably expect to learn of the 
nonpayment of a significant number of checks. The Report suggested that 
if improvements in the check clearing system make it possible for two-
thirds of the items in a category of checks to meet this test in a 
shorter period of time, then the Federal Reserve must shorten the 
schedules accordingly.3 The Board has considered this ``two-
thirds test'' in evaluating alternative amendments to Regulation CC 
that would implement the statutory requirement for shortened 
availability schedules for nonlocal checks.
---------------------------------------------------------------------------

    \3\ H.R. Conf. Rep. No. 100-261, at 179 (1987).
---------------------------------------------------------------------------

    The Conference Report also recognized that geographic proximity or 
transportation arrangements between check processing regions would 
permit the Federal Reserve to provide shorter times than the general 
schedule for nonlocal checks would require. The Conference Report noted 
that shorter times would be possible for checks transported between 
such nearby territories as New York City and Jericho, Long Island, and 
for checks transported between banks in cities with Federal Reserve 
check processing offices, such as banks in Boston and San 
Francisco.4 The Board recognized regional differences in the 
times needed to return checks in Regulation CC by establishing appendix 
B-1 under the temporary schedule and appendix B-2 under the permanent 
schedule.5 Appendix B-1 identified Federal Reserve check 
processing regions in which depositary banks were required to make 
funds from specified nonlocal checks available within four or five 
business days from the day of deposit, compared with the seven business 
days otherwise applicable under the temporary schedule. Appendix B-2 
provided a similar listing for nonlocal checks for which proceeds must 
be made available within three business days from the day of deposit 
rather than the five days otherwise applicable under the permanent 
schedule.6
---------------------------------------------------------------------------

    \4\ H.R. Conf. Rep. No. 100-261, at 179 (1987).
    \5\ Appendix B-1 was removed and appendix B-2 was redesignated 
as appendix B in 1995 (60 FR 51669, Oct. 3, 1995).
    \6\ Locations were included in these appendixes based on an 
informal survey of the transportation arrangements that existed when 
Regulation CC was developed.
---------------------------------------------------------------------------

III. Shortening the Nonlocal Check Availability Schedule

    The Board is currently considering whether the check clearing 
system has improved sufficiently to warrant amending Regulation CC to 
require that funds deposited by nonlocal checks be made available 
earlier than now provided. The legislative history does not indicate 
whether the Board should interpret the two-thirds test precisely, and 
the EFAA requirement that the Board reduce maximum holds to as short a 
time as possible in which a bank could reasonably expect to learn of 
the nonpayment appears to provide the Board with some discretion. The 
Board is also exploring various methods that are reasonable and cost 
effective for defining categories of nonlocal checks for the purposes 
of determining appropriate funds availability schedules.

A. Returned Check Surveys

    The Board drew on data from four surveys to determine whether it 
would be appropriate to reduce the nonlocal hold period. In 1996, the 
Board's comprehensive survey of check-fraud losses at banks asked 
respondents to indicate the proportion of returned checks that they 
typically received on each business day following the initial deposit 
of a check (1996 bank survey). In conjunction with that check-fraud 
study, Federal Reserve staff also collected detailed data from a sample 
of checks processed during one week through the Federal Reserve Banks 
(1996 Reserve Bank survey).7 In 1997, Federal Reserve staff 
repeated the Reserve Bank survey for six weeks and thereby increased 
the number of nonlocal returned checks sampled compared with the prior 
survey (1997 Reserve Bank survey).8 The results of the 1997 
survey were generally consistent with those of the 1996 survey. For 
historical comparison, the Board also reviewed a survey of checks 
returned through the Reserve Banks conducted shortly after the 
implementation of Regulation CC (1990 Reserve Bank survey).9 
The table below summarizes the average nonlocal return cycles observed 
in the 1990, 1996, and 1997 surveys.
---------------------------------------------------------------------------

    \7\ Report to the Congress on Funds Availability Schedules and 
Check Fraud at Depository Institutions (Board of Governors of the 
Federal Reserve System, October 1996).
    \8\ The 1997 survey was designed to provide a sufficient number 
of checks to estimate the proportion of nonlocal checks returned 
within four and five days nationwide. The sample was not intended to 
provide statistically valid results between each possible pairing of 
check processing regions throughout the country (previously 
unpublished 1997 Reserve Bank data).
    \9\ Report to Congress Under the Expedited Funds Availability 
Act (Board of Governors of the Federal Reserve System, March 1990).

                Cumulative Percentage of Nonlocal Checks Returned Within Number of Business Days
----------------------------------------------------------------------------------------------------------------
                                                                                                      Percent
                                  1997 reserve    1996 reserve      1996 bank      1990 reserve     improvement
                               bank survey \1\  bank survey \1\       survey        bank survey       1990-97
----------------------------------------------------------------------------------------------------------------
3 business days..............             27.8             33.3             32.0            21.0            32.4
4 business days..............             59.9             64.1             64.9            47.0            27.5
5 business days..............             82.8             83.3             84.3            73.0            13.4
Number of nonlocal checks
 sampled.....................         31,646            5,707          \2\ 773              n.a.            n.a.
----------------------------------------------------------------------------------------------------------------
\1\ Excludes outlier observations defined as nonlocal checks that exceed 15 business days. For example, the 1997
  survey data exclude 1.6 percent of nonlocal checks sampled.
\2\ Reflects the number of commercial banks, savings institutions, and credit unions sampled. Source. Board of
  Governors of the Federal Reserve System. See text notes 7, 8, and 9 for sources of data.

    In the 1996 and 1997 surveys, over eighty percent of nonlocal 
unpaid checks were returned to the depositary bank within the maximum 
availability period of five business days, up from 73 percent in 1990. 
The percentage of nonlocal checks returned unpaid within four business 
days ranged from 60 to 65 percent in the 1996 and 1997 surveys,

[[Page 69029]]

roughly a 30 percent improvement over 1990. Although returns within 
four days remained slightly below two-thirds, they were close to that 
threshold. The survey results suggest that it may be appropriate for 
the Board to reduce availability schedules for all or some categories 
of nonlocal checks from five business days to four.10
---------------------------------------------------------------------------

    \10\ The General Accounting Office (GAO) recently conducted a 
study to identify, among other things, whether electronic check 
presentment affects the length of time necessary for a dishonored 
check to be returned to the depositary bank. The GAO concluded that 
the check return performance of electronically presented nonlocal 
checks was not very different from that of physically presented 
checks. (U.S. General Accounting Office, GAO Report, Retail Payment 
Issues: Experience with Electronic Check Presentment, (July 14, 
1998)).
---------------------------------------------------------------------------

B. Alternative Approaches

    In developing guidelines to identify categories of nonlocal checks 
that could be subject to shorter availability schedules, the Board 
sought to define as precisely as possible those check categories 
returned to the depositary bank in fewer than five days at least two-
thirds of the time, taking into consideration the practical limitations 
of the data collection needed to support the categorization. 
Identifying a large number of categories of nonlocal checks should 
increase the likelihood that the checks are accurately categorized 
based on when they are returned. The greater accuracy afforded by a 
large number of categories would lower the risk that a particular check 
would have to be made available before it would normally be returned. 
Similarly, a higher degree of accuracy would increase the probability 
that customers would receive faster availability for those checks that 
are normally returned within fewer than five days. Thus, a large number 
of categories of nonlocal checks should provide a better balance, as 
sought by Congress, between banks' needs to manage their fraud-loss 
risk and their customers' interests in having as early access to their 
funds as possible.
    The Board has been exploring alternative approaches for defining 
appropriately precise categories of nonlocal checks that should receive 
earlier availability. These approaches range from categorizing the 
almost 2,000 possible pairs of check processing regions to a more 
aggregated approach that would group nonlocal checks into only three 
categories nationwide based on the availability zone (city, RCPC, or 
country) of the paying bank.11 Each approach recognizes the 
roles of geographic proximity and transportation arrangements in the 
check clearing and return cycle. It is not clear, however, what might 
be the most appropriate (reasonable and cost effective) way to identify 
those categories of nonlocal checks that should receive earlier 
availability. Collecting data, however, to support a valid analysis of 
return cycles for nonlocal checks becomes increasingly expensive and, 
in some cases, impractical as the number of categories 
increases.12
---------------------------------------------------------------------------

    \11\ In general, nonlocal checks payable by banks located 
closest to Federal Reserve check processing offices are returned 
fastest. Nonlocal checks payable by banks located further away 
require somewhat more time. The first four digits of the routing 
number (the routing symbol) on every check identify the location of 
the paying bank in relationship to the local Federal Reserve office. 
The locations are organized roughly in concentric circles. City 
checks are payable by banks located relatively close to a Federal 
Reserve office, RCPC checks are payable by banks located somewhat 
further from a Federal Reserve office, and country checks are 
payable by banks even more geographically remote. Only eight of 
forty-four check processing regions have country availability zones.
    \12\ While the alternatives thus far analyzed rely on data 
collected from nonlocal checks returned through a Federal Reserve 
Bank, the results of the 1996 bank and the 1996 Reserve Bank surveys 
suggest that there is little difference between nonlocal return 
times for checks returned through the Reserve Banks and for all 
nonlocal returned checks.
---------------------------------------------------------------------------

    The Board is considering reducing the availability schedules for 
nonlocal checks from five to four business days but permitting an 
individual bank to delay funds availability for a particular category 
of nonlocal check for five business days if it certifies that it does 
not receive at least two-thirds of nonlocal returned checks in that 
category within fewer than five days. This approach would match the 
bank's actual return experience for nonlocal checks with permitted 
availability schedules more precisely than any approach that relies on 
data that the Reserve Banks could collect. Under this alternative, 
banks that wished to use a five business day availability schedule for 
a category of checks would be required to conduct their own periodic 
data collection, based on criteria that would be included in Regulation 
CC, and to certify that they do not receive at least two-thirds of that 
category of nonlocal returned checks in fewer than five 
days.13 The bank's primary supervisor would be responsible 
for reviewing the self-certification and supporting data.
---------------------------------------------------------------------------

    \13\ If a bank imposes an exception hold on a customer's deposit 
in accordance with Sec. 229.13, it may extend the time within which 
it is required to make funds available for withdrawal by a 
reasonable period. Regulation CC deems a six business day extension 
of its nonlocal check available schedule to be reasonable; a longer 
extension may be reasonable, but the bank has the burden of so 
establishing. This safe-harbor extension would be added to the four-
day nonlocal check schedule or to the five-day schedule for those 
categories of nonlocal checks that a bank certifies are eligible for 
the longer hold.
    A bank that has a policy of generally making deposited funds 
available for withdrawal sooner than required may extend the hold up 
to the time allowed by the regulation on a case-by-case basis. 
(Under Sec. 229.16(c), a bank must provide a notice when funds from 
a particular deposit will not be available by the time a bank 
generally make funds available for withdrawal.) A bank would be 
permitted to hold a nonlocal check on a case-by-case basis up to 
five business days for those categories of nonlocal checks that the 
bank certifies are eligible for the longer hold.
---------------------------------------------------------------------------

    Permitting a bank to certify that it qualifies to use five-day 
availability schedules for some categories of nonlocal checks gives it 
the flexibility to weigh; (1) the costs of collecting data with which 
to certify that it should be permitted to hold certain categories of 
nonlocal checks for five days, (2) the fraud risk associated with its 
hold policy, and (3) the customer benefits of that policy. If a bank 
determines, for example, that the administrative cost associated with 
demonstrating that certain categories of nonlocal checks should be 
subject to five-day availability and the resulting increased complexity 
of its availability schedules outweighs the incremental fraud 
protection, then it could simply adopt a four-day or shorter schedule 
for all of its nonlocal check deposits.14
---------------------------------------------------------------------------

    \14\ The Board's 1996 check-fraud study found that 70 percent of 
banks make funds deposited by nonlocal checks available to their 
customers earlier than Regulation CC now requires. Report to the 
Congress on Funds Availability Schedules and Check Fraud at 
Depository Institutions, p. 39.
---------------------------------------------------------------------------

IV. Request for Comment

    The Board requests comment on the benefits and drawbacks of 
modifying Regulation CC to shorten the availability schedule for 
nonlocal checks from five business days to four unless a depositary 
bank certifies that it does not receive most of its nonlocal returned 
checks in fewer than five business days. Commenters' overall 
perspectives on the issues raised in this notice as well as their 
answers to the specific questions listed below will be useful in the 
Board's analysis of the alternative approaches to modify the nonlocal 
check availability schedules. Comments will help the Board balance 
consumers' interests in receiving access to their funds and banks' 
interest in minimizing check-fraud losses and will help the Board 
develop an appropriate method to implement Congress's directive to 
improve funds availability to match improvements in the check clearing 
system.
    The Board does not plan to implement any changes to Regulation CC's 
nonlocal check availability schedules prior to the spring of 2000 so 
that banks can minimize changes to

[[Page 69030]]

their internal systems during the period surrounding the century 
rollover.

A. Defining Categories of Checks

    For the purpose of assigning availability schedules, the Board is 
exploring several methods for categorizing nonlocal checks that rely on 
the check processing region and the availability zones in which banks 
are located. Because proximity and transportation infrastructure affect 
the time period needed to present and return nonlocal checks, the Board 
is considering several possible methods to define categories of 
nonlocal checks, including:
    (a) Pairs of check processing regions, for example checks deposited 
at banks in the Columbus check processing region and payable by banks 
located in the Utica check processing region;
    (b) The check processing region of the depositary bank and the 
availability zone of the paying bank, for example checks deposited at 
banks in the Columbus check processing region and payable by nonlocal 
banks in city availability zones; and
    (c) The availability zone of the paying bank, regardless of the 
location of the depositary bank, that is, any check payable by a 
nonlocal bank located in a city availability zone.
    Regulation CC could be modified to define appropriate categories of 
nonlocal checks for the analysis of return cycles. Alternatively, the 
regulation could permit banks to define their own categories, perhaps 
within some guidelines.
    1. Should Regulation CC define categories of checks for which a 
bank could certify that it should be permitted to hold funds for five 
days? If yes, what categories would be appropriate? If not, should a 
bank be permitted to define its own categories or select from among a 
variety of categories?
    2. Given the pace of change in the improvement of the check 
clearing system, how frequently should a bank be required to re-certify 
that it should be permitted to withhold the funds availability of a 
category of nonlocal returned checks for five business days? Every two 
years? Every five years? Some other time period?

B. Bank Hold Policies

    3. If this approach is adopted, to what extent will banks use the 
certification process to continue placing five-day holds on certain 
categories of nonlocal checks to protect themselves against some check-
fraud losses?

C. Data Collection and Statistical Significance

    Under the approach being considered in this notice, the Board 
anticipates requiring banks to use the two-thirds test indicated by 
Congress to assess whether a category of nonlocal checks at a bank 
should be subject to four- or five-day availability. Banks that choose 
to hold some categories of checks for five business days would be 
required to collect representative data that demonstrates that, for 
those categories of checks, they do not receive two-thirds of the 
returned nonlocal checks within four business days.
    4. What information should a bank be required to collect to certify 
that it does not receive at least two-thirds of a category of nonlocal 
returned checks within four business days? What would constitute 
representative data for a bank and over what period should it be 
collected? What procedures would reasonably ensure that a bank 
appropriately certifies that it is eligible to use five-day holds? 
Should the same methodology apply to small, medium, and large banks?
    5. Do banks currently collect the data needed for certification?

D. Consumer Disclosures

    Section 229.16(a) of Regulation CC provides that disclosures 
reflect the policy followed by the bank in most cases. The commentary 
to that section provides that a bank may not place a hold longer than 
the period disclosed. Therefore, a bank that discloses that it 
generally makes funds from nonlocal checks available in four business 
days but certifies that it is eligible to use the five-day availability 
schedule for some categories of nonlocal checks would have to disclose 
which categories of nonlocal checks would be available in five business 
days.15
---------------------------------------------------------------------------

    \15\ In contrast, based on guidance in the supplementary 
information to the Board's notice adopting the initial Regulation 
CC, a bank that discloses that it generally makes funds from 
nonlocal checks available in five business days would have to 
disclose the reduction in schedules to customers only upon request. 
(53 FR 19400, May 27, 1988)
---------------------------------------------------------------------------

    6. If the proportion of nonlocal checks available in five business 
days does not represent ``most cases,'' to what extent would the 
complexity of the disclosure requirement affect a bank's decision to 
use five-day availability for some categories of nonlocal checks?
    7. What amendments to the disclosure rules would assist banks in 
adopting a policy to hold some categories of nonlocal checks for four 
days and others for five days as well as assist customers to understand 
which nonlocal checks would be available for withdrawal in four days 
and which in five days? Would it be sufficient to provide detailed 
information as to which checks will receive four or five day 
availability only when requested by a customer or prospective customer?

    By order of the Board of Governors of the Federal Reserve 
System, December 9, 1998.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 98-33175 Filed 12-14-98; 8:45 am]
BILLING CODE 6210-01-P