[Federal Register Volume 64, Number 36 (Wednesday, February 24, 1999)]
[Proposed Rules]
[Pages 9105-9107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4600]


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FEDERAL RESERVE SYSTEM

12 CFR Part 229

[Regulation CC; Docket No. R-1034]


Availability of Funds and Collection of Checks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board is requesting comment on options for amending 
Subpart C of Regulation CC, which contains rules governing the 
collection and return of checks. The proposed options would amend 
Subpart C's provisions on sending notices in lieu of returning the 
original checks. The proposal is intended to provide more flexibility 
to depository institutions to experiment with methods to return checks 
electronically.

DATES: Comments must be submitted on or before April 30, 1999.

ADDRESSES: Comments, which should refer to Docket No. R-1034, may be 
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th and C Streets, NW, Washington, D.C. 20551. 
Comments addressed to Ms. Johnson also may be delivered to the Board's 
mail room between 8:45 a.m. and 5:15 p.m. and to the security control 
room outside of those hours. Both the mail room and the security 
control room are accessible from the courtyard entrance on 20th Street 
between Constitution Avenue and C Street, NW. Comments may be inspected 
in Room MP-500 between 9:00 a.m. and 5:00 p.m.

FOR FURTHER INFORMATION CONTACT: Oliver I. Ireland, Associate General 
Counsel (202/452-3625), Stephanie Martin, Senior Counsel (202/452-
3198), Legal Division. For the hearing impaired only, contact Diane 
Jenkins, Telecommunications Device for the Deaf (TDD) (202/452-3544), 
Board of Governors of the Federal Reserve System, 20th and C Streets, 
NW, Washington, D.C. 20551.

SUPPLEMENTARY INFORMATION:

Background

    Subpart C of the Board's Regulation CC (12 CFR Part 229) contains 
rules governing the collection and return of checks. These rules are 
intended to expedite the check collection and return process, thereby 
reducing risk to banks 1 and their customers. Regulation CC 
was designed to work in accord with the state law check-collection 
rules in Articles 3 and 4 of the Uniform Commercial Code (U.C.C.), 
although in some areas the regulation preempts the U.C.C.
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    \1\ In Regulation CC and its Commentary, as well as in this 
docket, the term ``bank'' refers to all depository institutions, 
including commercial banks, savings institutions, and credit unions.
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    When a paying bank decides to return a check, the U.C.C. and 
Regulation CC require it to send the check or a notice within certain 
deadlines.2 If a check is unavailable for return, U.C.C. 4-
301(a) allows a paying bank to charge back the check by revoking 
provisional settlement based on a ``notice of dishonor'' (or a ``notice 
of nonpayment'' where the check is returned for reasons other than 
dishonor). The U.C.C. would appear to allow a paying bank to return a 
notice when a check has been truncated. The Official Comment to U.C.C. 
4-301 states that an item may be considered unavailable for return if 
it is retained by the collecting bank in accordance with a bank check 
retention plan.
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    \2\ The paying bank must initiate the return by midnight of the 
banking day following the day the check was presented (U.C.C. 4-
301). The paying bank must return the check so that it reaches the 
depositary bank expeditiously, in accordance with Sec. 229.30(a) of 
Regulation CC.
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    Regulation CC (Secs. 229.30(f) and 229.31(f)) establishes a 
``notice in lieu of return,'' which substitutes for the original check 
and carries value. The ``notice-in-lieu'' provisions of Regulation CC 
provide that the paying (or returning) bank must return the original 
check unless the check is unavailable, in which case the bank may 
return a copy of the front and back of the check, or, if no such copy 
is available, a written notice containing specified information about 
the check. The Commentary to Secs. 229.30(f) and 229.31(f) states that 
notice in lieu of return is permitted only when a bank does not have 
and cannot obtain possession of the check or must retain possession of 
the check for protest. The Commentary explains that a check is not 
unavailable for return if it is merely difficult to retrieve from a 
filing system or from storage by a keeper of checks in a truncation 
system.

[[Page 9106]]

    Regulation CC (Sec. 229.37) permits the parties to a check to vary 
the notice-in-lieu provisions; however, an agreement under Regulation 
CC cannot affect banks or customers that are not party to the agreement 
or otherwise bound by it. The Regulation CC variation-by-agreement 
provision differs from the corresponding language in U.C.C. 4-103 in 
that the U.C.C. allows Federal Reserve regulations and operating 
circulars, clearinghouse rules, and the like to be effective as 
agreements whether or not specifically assented to by all interested 
parties.3 Regulation CC does not incorporate the U.C.C.'s 
special treatment for Federal Reserve rules and operating circulars and 
clearinghouse rules but does not affect the status of such rules and 
circulars under the U.C.C.
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    \3\ The Official Comment to U.C.C. 4-103 (note 3) indicates, 
however, that there are limitations on the scope of clearinghouse 
rules' ability to bind non-assenting parties.
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    Private-sector payments system participants have requested that the 
Board clarify the interrelationship of Regulation CC and the U.C.C. 
They have questioned whether Regulation CC limits a clearinghouse's 
ability to bind non-assenting third parties to a check truncation 
system under which the depositary bank would receive a notice, such as 
in the form of an electronically-produced check image, in lieu of the 
return of the original check. These payments system participants stated 
that resolving uncertainty in this area could lead to greater 
experimentation and innovation in the provision of payments services.
    The Board wishes to support development of new payments services 
and to take steps to remove any federal regulatory impediments to 
innovation in the payments area where appropriate. The Board is, 
therefore, requesting comment on options for amending Regulation CC 
and/or its Commentary to clarify the permissibility of notices in a 
check truncation environment instead of return of the actual check. The 
Board will consider the proposed regulatory changes in light of its 
statutory authority and responsibilities under section 609 of the 
Expedited Funds Availability Act (12 U.S.C. 4008(c)) to regulate any 
aspect of the payment system, including the check collection and return 
system, in order to carry out the provisions of the Act. The Board will 
consider the associated benefits and burdens of a regulatory change to 
the payment system as a whole as well as the implications for each 
party to a payment transaction affected by the rule. The Board also 
requests comment on whether there are other options that would be more 
appropriate than the two discussed below.

Options for Notices in Lieu of Return

    The Board is considering two options for amending the Regulation CC 
provisions on notices in lieu of return. The Board requests comment on 
the feasibility of these options, whether either of the options would 
remove impediments to the development of a more efficient payments 
mechanism, and the advantages and disadvantages of each option to the 
various participants in the check system, including depositary banks, 
intermediary banks, paying banks, drawers, depositors, and non-
depositor payees.
    Option One. One of the purposes of subpart C of Regulation CC was 
to speed up the check return system that existed under the U.C.C. The 
U.C.C. contemplates that the paying bank will return a check to the 
presenting bank, which in turn will charge back the check against the 
prior collecting bank, and so on back up the forward collection chain 
until the check reaches the depositary bank. Regulation CC eliminated 
the requirement that returned checks follow the forward collection 
chain. Under Regulation CC, the paying bank may send the returned check 
directly to the depositary bank or to any returning bank, even if that 
bank did not handle the check for forward collection.
    Regulation CC did not prohibit the return of checks back through 
the forward collection chain, but rather authorized banks to use a more 
efficient and direct route. Accordingly, one interpretation of 
Regulation CC is that banks may continue to return checks in accordance 
with the U.C.C. charge-back rules and the corresponding rules governing 
when notice may be sent instead of the original check, subject to 
Regulation CC's expeditious return requirements. Under this 
interpretation, banks would need to follow the notice-in-lieu 
provisions of Regulation CC only if they wished to return the check 
through a route other than the forward collection chain. As noted 
above, the U.C.C. Official Comment indicates that the U.C.C. would 
allow return of a notice rather than the physical check in the event 
the check is being stored in accordance with a check retention system.
    The Board could amend the Commentary to reflect this interpretation 
of the interplay of Regulation CC and the U.C.C. by stating that banks 
could send a notice of dishonor or nonpayment under the provisions of 
U.C.C. 4-301 when they return the notice through the forward collection 
chain, as contemplated in the U.C.C. The U.C.C. notices would be 
subject to the Regulation CC expeditious return rules. This proposal 
would clarify that banks can avail themselves of the U.C.C. rules 
regarding return of notices to the same extent they could before 
Regulation CC was adopted. This interpretation, however, may not 
provide relief for check truncation or image systems if returns do not 
follow the forward collection chain.
    This option could also have consequences for the depositors or 
payees of the checks in that they would receive notices of returns 
rather than the original checks on a more frequent basis. They may have 
difficulty recovering from the drawers if they cannot obtain the 
original checks. Furthermore, despite the fact that the depositary bank 
could charge back its customer's account based on the notice in 
accordance with U.C.C. 4-214(a), the customer may, as owner of the 
check, ultimately have the right to possession of the check.
    Option Two. Another approach would be for the Board to delete the 
Regulation CC Commentary language that explains when a check is 
unavailable for return. Specifically, the Board could remove the 
following provisions in the Commentary to Secs. 229.30(f) and 
229.31(f):

Notice in lieu of return is permitted only when a bank does not have 
and cannot obtain possession of the check or must retain possession 
of the check for protest. A check is not unavailable for return if 
it is merely difficult to retrieve from a filing system or from 
storage by a keeper of checks in a truncation system.

    Instead of this language, the Commentary to those sections could 
indicate that notices in lieu of return are permissible whenever they 
would be permissible under the U.C.C.
    The advantage of this option is that it would liberalize the 
circumstances under which banks could use notices in lieu of return and 
potentially make it easier for banks to establish electronic check 
return mechanisms that feature check truncation. The disadvantage of 
this option is that it would force depositary banks to accept notices 
from banks with whom they may have no established relationship. Under 
the U.C.C. charge-back system, banks receive returned checks or notices 
only from those banks to whom they sent the check for forward 
collection. Under Regulation CC, a return could come directly from the 
paying bank or from an unfamiliar returning bank. Banks in the past 
have expressed concern about the quality of some notices of nonpayment.

[[Page 9107]]

Some have stated that they are reluctant to charge back their 
customers' accounts on the basis of notices of nonpayment but prefer to 
wait for the return of the original check. Under this option, the 
return of a notice in lieu of an original check could become more 
prevalent, and the depositary bank would have to charge back based on 
that notice, as the original check might never be returned. Notices in 
the form of an electronically-produced check image, however, may be 
more reliable than other types of notices that describe the check, 
depending on the quality of the image. This option could also have 
consequences for the depositors or payees of the checks as discussed 
above under option one.

Amendment Regarding Electronic Check Presentment Agreements

    The Board is also proposing to delete Sec. 229.36(c) of Regulation 
CC and its associated Commentary, which states that a bank may present 
a check electronically under an agreement with the paying bank and that 
the agreement may not extend return times or otherwise vary the 
provisions of Regulation CC with respect to persons not party to the 
agreement. This provision of the regulation is subsumed by the 
variation-by-agreement provisions in Sec. 229.37, and the Board 
believes it is unnecessary and potentially confusing to retain special 
provisions regarding a particular type of variation by agreement. The 
Board proposes to add an example to the Commentary to Sec. 229.37 
listing an electronic check presentment agreement as a permissible 
variation by agreement under Regulation CC. Eliminating Sec. 229.36(c) 
and its Commentary would result in no substantive change to the 
regulation regarding the validity of electronic presentment agreements.

Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 603) requires an agency to 
publish an initial regulatory flexibility analysis with any notice of 
proposed rulemaking. Two of the requirements of an initial regulatory 
flexibility analysis, a description of the reasons why action by the 
agency is being considered and a statement of the objectives of, and 
legal basis for, the proposed rule, are contained in the supplementary 
material above. The proposed rules require no additional reporting, 
recordkeeping, or other compliance requirements and do not overlap with 
other federal rules. The proposed rule would apply to all depository 
institutions and other entities who participate in the check collection 
system, regardless of size. The Board believes that the proposed rule 
could result in depositary banks (of all sizes) being required to 
accept more notices in lieu of returned original checks and has 
requested comment on the burdens associated with that aspect of the 
proposal. The Board believes, however, that it would not be feasible to 
create different check return rules for large and small banks, and 
therefore no alternatives for small banks were considered.

List of Subjects in 12 CFR Part 229

    Banks, banking, Federal Reserve System, Reporting and recordkeeping 
requirements.
    For the reasons set forth in the preamble, 12 CFR Part 229 is 
proposed to be amended as set forth below:

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

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

    Authority: 12 U.S.C. 4001 et seq.

    2. In Sec. 229.36, paragraph (c) is removed and reserved.
Option one
    3a. In Appendix E, under section XVI, paragraph F.2. is revised to 
read as follows:

Appendix E to Part 229--Commentary

* * * * *

XVI. Section 229.30 Paying Bank's Responsibility for Return of 
Checks

* * * * *
    F. * * *

    2. Sending a notice in lieu of return in accordance with this 
section satisfies the requirements of U.C.C. 4-301(a) to send a 
notice of dishonor or nonpayment. A paying bank could also send a 
notice in accordance with U.C.C. 4-301(a) (which requires returned 
checks and return notices to flow back through the forward 
collection chain) if it did not wish to avail itself of the 
provisions of this section, provided that the notice met the 
expeditious return requirements of this section. Reference in the 
regulation and this commentary to a returned check includes a notice 
in lieu of return under this section or a notice of dishonor or 
nonpayment under U.C.C. 4-301(a) unless the context indicates 
otherwise.
* * * * *
End of Option one
Option two
    3b. In Appendix E to part 229, under section XVI, paragraph F. 1. 
is amended by removing the fifth and sixth sentences and by adding a 
new sentence after the fourth sentence to read as follows:

XVI. Section 229.30 Paying Bank's Responsibility for Return of 
Checks

* * * * *
    F. * * *

    1. * * * This paragraph adopts the standards of U.C.C. 4-301(a) 
as to when a check is unavailable for return. * * *
* * * * *
    3c. In Appendix E, under section XVII, the second and third 
sentences of paragraph F.1. are removed.
End of Option Two
    4. In Appendix E, under section XXII, paragraph C. is removed and 
reserved.
    5. In Appendix E, under section XXIII, a new paragraph C.9. is 
added to read as follows:

XXIII. Section 229.37 Variations by Agreement

* * * * *
    C. * * *

    9. A presenting bank and a paying bank may agree that 
presentment takes place when the paying bank receives an electronic 
transmission of information describing the check rather than upon 
delivery of the physical check. (See Sec. 229.36(b).)
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, February 19, 1999.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 99-4600 Filed 2-23-99; 8:45 am]
BILLING CODE 6210-01-P