[Federal Register Volume 64, Number 185 (Friday, September 24, 1999)]
[Notices]
[Pages 51762-51763]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24887]


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FEDERAL RESERVE SYSTEM


Policy Statement on Delayed Disbursement

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Policy statement.

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SUMMARY: The Board is issuing a consolidated and updated version of its 
three policy statements on delayed disbursement. The Board has 
eliminated obsolete provisions and combined the three policy statements 
into one. No new policies are included in this revised version.

EFFECTIVE DATE: October 1, 1999.

FOR FURTHER INFORMATION CONTACT: Jack K. Walton II, Manager, 202/452-
2660, or Larry Taft, Senior Financial Services Analyst, 202/530-6248, 
Division of Reserve Bank Operations and Payment Systems; or Stephanie 
Martin, Managing Senior Counsel, Legal Division, 202/452-3198; for 
users of Telecommunications Device for the Deaf (TDD) only, contact 
Diane Jenkins, at 202/452-3544, Board of Governors of the Federal 
Reserve System, 20th and C Streets NW, Washington, DC 20551.

SUPPLEMENTARY INFORMATION: Delayed disbursement is the practice of 
delaying payment of a check by drawing the check on a bank located in 
an area that is remote from the payee. Delayed disbursement practices 
are designed to increase the time it takes to clear a check, resulting 
in float benefits for paying banks and their customers. These practices 
reduce the efficiency of the check collection system and increase float 
and transportation costs for depositary banks.
    The Board has issued three policy statements intended to discourage 
delayed disbursement practices. The Board issued general policy 
statements in 1979 and 1984 and a policy statement directed 
specifically at delayed disbursement of cashier's checks and teller's 
checks in 1989. (See, Statement of January 11, 1979, 1979 Fed. Res. 
Bull. 140; Statement of February 23, 1984, 1984 Fed. Res. Bull. 217; 
and Statement of March 31, 1989, 54 FR 13839 (April 6, 1989).) Since 
1989, parts of the Board's 1979 and 1984 policy statements have become 
obsolete, due to changes in the check collection and return system and 
the implementation of the Expedited Funds Availability Act (12 U.S.C. 
4001 et seq.) and the Board's Regulation CC (12 CFR part 229). The 
Board is removing obsolete provisions and consolidating the three 
policy statements into one policy statement. No new policies are 
included in this consolidation. The policy statement is set out below:

Policy Statement on Delayed Disbursement

    General policy. Delayed disbursement (sometimes referred to as 
``remote'' disbursement) is the practice of issuing checks that are 
payable by, through, or at a bank 1 located in a 
geographic area such that collection of the checks is generally 
delayed. For example, these arrangements may be designed to delay 
the collection and payment of checks by drawing checks on banks 
located substantial distances from the payee or outside of Federal 
Reserve cities when alternate and more efficient payment 
arrangements are available.
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    \1\ As used in this policy statement, the term ``bank'' includes 
all depository institutions, such as commercial banks, savings and 
loan associations, and credit unions. A depositary bank is the first 
bank to which a check is transferred. A paying bank is a bank by, 
at, or through which a check is payable and to which it is sent for 
collection.
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    The Board is concerned that delayed disbursement practices 
reduce the efficiency of the check collection system. Drawing a 
check on a bank remote from the payee often increases the costs of 
handling the check. More institutions are likely to handle the check 
before it is finally paid, increasing processing costs, and higher 
transportation costs are incurred to move checks greater distances. 
In addition, delays in collection time can impose float costs on 
depositary banks. Furthermore, delayed disbursement practices delay 
the return of unpaid checks, increasing the possibilities for check 
fraud and other losses.
    The Board believes the banking industry has a public 
responsibility not to design, offer, promote, or otherwise encourage 
the use of a service that is intended to delay payment and that 
exposes payment recipients and depositary banks to greater-than-
ordinary risks. The Board urges the nation's banks and check-related 
service providers to eliminate delayed disbursement practices 
intended to obtain extended float.
    There is no intention to discourage corporate disbursement 
arrangements with banks that provide for improved control over daily 
cash requirements, provided that these arrangements do not result in 
the undesirable effects noted above. Banks should provide the cash 
management services needed by their customers through the use of 
payments methods that facilitate prompt funds availability to 
payment recipients and that protect banks from unnecessary risk.
    Delayed disbursement of teller's checks and cashier's checks. 
Although many classes

[[Page 51763]]

of checks are subject to delayed disbursement, the effects of 
delayed disbursement are particularly significant in the case of 
teller's checks and cashier's checks. 2 In addition to 
increased transportation costs, the delayed disbursement of teller's 
checks and cashier's checks imposes float costs on the depositary 
bank, which must generally make the proceeds of these checks 
available for withdrawal on the business day following deposit.
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    \2\ A ``teller's check'' is a check provided to a customer of a 
bank, or acquired from a bank for remittance purposes, that is drawn 
by the bank and drawn on another bank or payable through or at 
another bank. For the purposes of this policy statement, ``teller's 
check'' includes checks drawn on a Federal Reserve Bank or a Federal 
Home Loan Bank. A ``cashier's check'' is a check provided to a 
customer of a bank, or acquired from a bank for remittance purposes, 
that is drawn on the bank, is signed by an officer or employee of 
the bank on behalf of the bank as drawer, and is a direct obligation 
of the bank.
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    The Expedited Funds Availability Act and Regulation CC require a 
depositary bank to provide customers with next-day availability, 
under specified conditions, for certain checks deposited in 
transaction accounts, including cashier's checks and teller's 
checks. Depending on the location of the paying bank, a depositary 
bank may not receive credit for the check by the time funds must be 
made available to the customer for withdrawal. Thus, the practice of 
delayed disbursement permits a bank issuing such checks to impose 
costs, in terms of lost interest, on other banks and to benefit from 
interest or earnings credits earned on outstanding checks until the 
checks are presented for payment.
    The Board recognizes that many banks that issue teller's checks 
benefit from the specialization and economies of scale of certain 
banks and other service providers that can perform the tracking, 
reconciliation, and payment services associated with teller's checks 
at a lower cost than the issuing bank would incur by issuing and 
paying cashier's checks. In addressing the delayed disbursement 
problem, the Board believes that it is desirable to reduce the float 
created by the issuance of these checks while minimizing the 
disruption of efficient teller's check services.
    As a general matter, the Board believes that a depositary bank 
located in the same community as the bank that issues a teller's 
check should be able to receive next-day credit for the teller's 
check. The Board has determined, after review of Federal Reserve 
collection patterns and deposit deadlines across the country, that 
depositary banks in most areas generally can receive next-day credit 
for checks that are encoded with a nonlocal city routing number 
3 and presented in a nonlocal Federal Reserve city. For 
checks that are encoded with a nonlocal RCPC or country routing 
number and presented in a nonlocal check processing region, credit 
is generally deferred by one or two days. The Board recognizes, 
however, that depositary banks located on the west coast generally 
may not be able to receive next-day availability for checks 
presented in most nonlocal cities. In addition, in other isolated 
areas of the country, next-day credit is generally not available for 
any check payable by a nonlocal paying bank. The Board recognizes 
that banks in these areas may benefit by having access to a 
centralized teller's check service provider.
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    \3\ These checks are payable by banks located in the same city 
as a Federal Reserve office. RCPC (``Regional Check Processing 
Center'') checks are payable by banks outside Federal Reserve 
cities. Certain Federal Reserve regions also contain country zones, 
which are generally more remote from Federal Reserve cities than are 
RCPC zones.
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    The Board believes that banks issuing teller's checks and 
teller's check service providers should take steps to ensure that 
delays in the collection and return of teller's checks are kept to a 
minimum. First, the Board believes that any disbursement practice 
designed to extend the time needed to collect a teller's check is 
inappropriate. Although the Board believes that centralized 
disbursement is economically efficient in some cases, the location 
of the paying bank should be chosen so as to minimize collection 
time.
    Second, the Board has determined that depositary banks can 
generally receive credit faster for checks payable by a bank with a 
city routing number than for checks payable by a bank with an RCPC 
or country routing number. The Board believes that teller's check 
service providers that serve issuing banks in check processing 
regions that are nonlocal to the paying bank should help speed the 
collection and return of teller's checks by use of a city 
presentment point and a city routing number in the MICR line of its 
teller's checks.
    Some teller's check service providers confine the scope of their 
services to a state or other limited geographic area. Because the 
state or area may be divided into more than one check processing 
region, such service providers may use a paying bank that is 
nonlocal to many of their customer banks. In addition, the state or 
area may contain no Federal Reserve city. The Board recognizes that 
it may be impractical for such service providers to use a city 
presentment point.
    Third, the Board believes that those teller's check service 
providers that serve banks nationwide should accept teller's checks 
at more than one presentment point, particularly those providers 
that serve west coast banks. For example, a teller's check service 
provider that uses an east coast paying bank could shorten 
collection and return times for its California customers by also 
providing a west coast presentment point for teller's checks.
    The Board recognizes that similar delayed disbursement problems 
arise in connection with cashier's checks, issued by a bank with 
multistate branches, that depositary banks must send to a central 
location for payment. The Board believes that the same general 
guidelines should apply to the disbursement of cashier's checks as 
apply to teller's checks and will take further action regarding 
cashier's checks should abusive delayed disbursement practices 
occur.
    The Board will monitor the industry's adherence to the policy 
statement and delayed disbursement practices in general and, should 
abuses continue, will consider appropriate further action.
    By order of the Board of Governors of the Federal Reserve 
System, acting through the Secretary of the Board under delegated 
authority, September 20, 1999.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 99-24887 Filed 9-23-99; 8:45 am]
BILLING CODE 6210-01-P