[Federal Register Volume 76, Number 58 (Friday, March 25, 2011)]
[Proposed Rules]
[Pages 16861-16976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-5449]



[[Page 16861]]

Vol. 76

Friday,

No. 58

March 25, 2011

Part II





Federal Reserve System





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12 CFR Part 229



Availability of Funds and Collection of Checks; Proposed Rule

Federal Register / Vol. 76 , No. 58 / Friday, March 25, 2011 / 
Proposed Rules

[[Page 16862]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 229

[Regulation CC; Docket No. R-1409]
RIN No. 7100-AD68


Availability of Funds and Collection of Checks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule, request for comment.

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SUMMARY: The Board of Governors (Board) is proposing amendments to 
facilitate the banking industry's ongoing transition to fully-
electronic interbank check collection and return, including proposed 
amendments to condition a depositary bank's right of expeditious return 
on the depositary bank agreeing to accept returned checks 
electronically either directly or indirectly from the paying bank. The 
Board also is proposing amendments to the funds availability schedule 
provisions to reflect the fact that there are no longer any nonlocal 
checks. The Board proposes to revise the model forms that banks may use 
in disclosing their funds-availability policies to their customers and 
to update the preemption determinations. Finally, the Board is 
requesting comment on whether it should consider future changes to the 
regulation to improve the check collection system, such as decreasing 
the time afforded to a paying bank to decide whether to pay a check in 
order to reduce the risk to a depositary bank of having to make funds 
available for withdrawal before learning whether a deposited check has 
been returned unpaid.

DATES: Comments on the proposed rule must be received not later than 
June 3, 2011.

ADDRESSES: You may submit comments, identified by Docket No. R-1409 and 
RIN No. 7100-AD68, by any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include docket 
number in the subject line of the message.
     FAX: 202/452-3819 or 202/452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.

    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, except as necessary for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Dena L. Milligan, Attorney, (202/452-
3900), Legal Division; or Joseph P. Baressi, Financial Services Project 
Leader (202/452-3959), Division of Reserve Bank Operations and Payment 
Systems; for users of Telecommunication Devices for the Deaf (TDD) 
only, contact 202/263-4869.

SUPPLEMENTARY INFORMATION: 

Background

    Regulation CC (12 CFR part 229) implements the Expedited Funds 
Availability Act (EFA Act) and the Check Clearing for the 21st Century 
Act (Check 21 Act).\1\ The Board implemented the EFA Act in subparts A, 
B, and C of Regulation CC. The EFA Act was enacted to provide 
depositors of checks with prompt funds availability and to foster 
improvements in the check collection and return processes. Subpart A of 
Regulation CC contains general information, such as definitions of 
terms. Subpart B of Regulation CC specifies availability schedules 
within which banks must make funds available for withdrawal. Subpart B 
also includes rules regarding exceptions to the schedules, disclosure 
of funds availability policies, and payment of interest. These 
provisions implement specific requirements set forth in the EFA Act. 
The provisions of subpart C were adopted by the Board pursuant to the 
authority granted to it in Sec. Sec.  609(b) and (c) of the EFA Act.\2\ 
Section 609(b) directs the Board to consider requiring that depository 
institutions and Federal Reserve Banks take certain steps to improve 
the check-processing system, such by taking steps necessary to automate 
the check-return process (Sec.  609(b)(4)).\3\ Section 609(c) grants 
the Board authority to regulate any aspect of the payment system and 
any related function of the payment system with respect to checks.\4\ 
Subpart C includes rules to speed the collection and return of checks, 
such as rules covering the expeditious return responsibilities of 
paying and returning banks, authorization of direct returns, 
notification of nonpayment of large-dollar returns, check indorsement 
standards, and same-day settlement of checks presented to the paying 
bank.
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    \1\ Expedited Funds Availability Act, 12 U.S.C. 4001 et seq.; 
Check Clearing for the 21st Century Act, 12 U.S.C. 5001 et seq.
    \2\ 12 U.S.C. 4008 (b) and (c).
    \3\ Section 609(b)(4) states that ``[i]n order to improve the 
check processing system, the Board shall consider (among other 
proposals) requiring, by regulation, that * * * the Federal Reserve 
banks and depository institutions take such actions as are necessary 
to automate the process of returning unpaid checks.'' 12 U.S.C. 
4008(b)(4).
    \4\ Section 609(c)(1) states that ``[i]n order to carry out the 
provisions of this title, the Board of Governors of the Federal 
Reserve System shall have the responsibility to regulate--(A) any 
aspect of the payment system, including the receipt, payment, 
collection, or clearing of checks.'' 12 U.S.C. 4008(c)(1).
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    Subpart C's provisions presume that banks generally handle checks 
in paper form. Since the provisions were adopted in 1988, however, 
banks have largely migrated to an electronic interbank check collection 
and return system.\5\ This migration was facilitated by the Check 21 
Act,\6\ which became effective in October 2004 and is implemented in 
subparts A and D of Regulation CC. The Check 21 Act permits banks to 
use a properly prepared substitute check in place of the original 
check, which enables banks to take the original check out of the 
collection and return process and to handle check images for much of 
the check collection and return process without having to retain the 
original check. The Check 21 Act has been a catalyst for rapid growth 
in banks' electronic handling of checks over the last 5 years. For 
example, at year-end 2005, the Reserve Banks received about 4 percent 
of checks deposited with them for collection in electronic form and 
presented approximately 28 percent of their checks in electronic 
form.\7\ In December 2010, the Reserve Banks received about 99.7 
percent of checks deposited for forward collection electronically, and 
presented about 98.4 percent of checks electronically. In addition, at 
the end of 2005 virtually all returned checks handled by the Reserve 
Banks were sent to and from the Reserve Banks in paper form. By 
December 2010, the Reserve Banks received 97.1 percent of returned 
checks

[[Page 16863]]

electronically, and delivered about 76.7 percent of returned checks to 
depositary banks electronically.\8\ Based on information from banking 
industry sources, the Board believes that these trends with respect to 
checks handled by the Reserve Banks are representative of trends 
nationwide.\9\
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    \5\ Certain provisions, such as the same-day settlement 
provisions in Sec.  229.36(f), were adopted at later times.
    \6\ Public Law 108-100, 117 Stat. 1177 (codified at 12 U.S.C. 
5001-5018) (2003).
    \7\ Prior to the Check 21 Act, the Reserve Banks presented about 
20 to 25 percent of their check volume electronically, primarily 
under MICR-presentment programs.
    \8\ The proportion of returned checks the Reserve Banks 
delivered electronically to the depositary bank increased from 28 
percent in June 2009 to 76.7 percent in December 2010. The 
proportion of depositary banks to which the Reserve Banks deliver 
returns electronically, while lower, has also increased, from 8 
percent in June 2009 to 52 percent in December 2010.
    \9\ The Electronic Check Clearing House Organization (ECCHO) 
collects data from various check-clearing intermediaries, including 
the Reserve Banks, to estimate the percent of interbank checks that 
are presented electronically. See http://www.eccho.org/check_ps.php.
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Overview of the Proposal

I. Amendments To Encourage Electronic Check Clearing and Check Return

    As a general matter, the Board believes that electronic check-
clearing and check-return methods improve the efficiency of the check 
system. Electronic methods are faster and more resilient, and, at the 
same time, they are less costly and less error prone. Despite the 
increasing number of checks presented and returned electronically, some 
banks continue to demand paper returned checks or present paper checks 
for same-day settlement under Sec.  229.36(f) of Regulation CC. The 
full benefits and cost savings of the electronic methods, however, 
cannot be realized so long as some banks continue to employ paper-
processing methods. Accordingly, under its authority provided in Sec.  
609(c) of the EFA Act, the Board is proposing amendments to subpart C 
of Regulation CC to provide incentives for depositary banks to receive, 
and paying banks to send, returned checks electronically. The Board 
also is proposing amendments to the same-day settlement provisions to 
promote electronic presentment of checks. Further, based on experience 
since the Check 21 Act became effective, the Board is proposing minor 
amendments to subpart D of Regulation CC with respect to substitute 
checks.

A. Expeditious-Return Rule

1. Current Rule
    Regulation CC currently provides that if a paying bank determines 
not to pay a check, it must return the check in an expeditious manner, 
as provided under either the ``two-day/four-day test'' (Sec.  
229.30(a)(1)), or the ``forward-collection test'' ((Sec.  
229.30(a)(2)).\10\ To meet the two-day/four-day test, a paying bank 
must send a returned local check in a manner such that the check would 
normally be received by the depositary bank not later than 4 p.m. local 
time of the depositary bank on the second business day following the 
banking day on which the check was presented to the paying bank. For 
nonlocal checks, a paying bank must send a returned check in a manner 
such that the check would normally be received by the depositary bank 
not later than 4 p.m. local time of the depositary bank on the fourth 
business day following the banking day on which the check was presented 
to the paying bank. Because there now is only one Federal Reserve Bank 
check-processing region, there are no longer any nonlocal checks, and 
the four-day test applies to a null set of checks.\11\
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    \10\ Section 229.31(a) sets forth similar tests for returning 
banks.
    \11\ A local check is a check drawn on a paying bank located in 
the same check-processing region as the depositary bank. 12 CFR 
229.2(r). A nonlocal check is a check drawn on a paying bank located 
in a different check-processing region as the depositary bank. 12 
CFR 229.2(v).
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    The forward-collection test is satisfied if a paying bank sends the 
returned check in a manner that a similarly situated bank would send a 
check (i) of similar amount as the returned check, (ii) drawn on the 
depositary bank, and (iii) deposited for forward collection in the 
similarly situated bank by noon on the banking day following the 
banking day on which the check was presented to the paying bank.\12\
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    \12\ The forward-collection test is satisfied if the paying bank 
``returns a check by means as swift as the means similarly situated 
banks would use for the forward collection of a check drawn on the 
depositary bank.'' See commentary to Sec.  229.30(a)(2).
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    When these tests were adopted in the late 1980s, the expeditious-
return standard presumed that banks could use the same modes of 
transportation for returned checks that they used for forward-
collection checks. Delivering returned checks in the same time and 
manner as forward checks would satisfy the regulation's expeditious-
return requirements. Today, by contrast, forward-check collection is 
almost entirely electronic, and the dedicated air and ground 
transportation for paper checks has largely been discontinued. Some 
depositary banks, however, continue to require that returned checks be 
delivered to them in paper form, making it difficult for paying banks 
and returning banks to meet the expeditious-return requirement. 
Accordingly, the full benefits and cost savings of electronic check-
return methods cannot be realized if paying banks and returning banks 
must incur substantial expense to deliver returned checks to the banks 
that continue to require that paper checks be returned. Moreover, as 
technology has improved, the Board understands that the initial 
implementation and ongoing costs incurred by a depositary bank to 
receive returned items electronically have decreased substantially. For 
example, the Reserve Banks now provide electronic copies of returned 
checks in .pdf files to small depositary banks, which can use the .pdf 
file to print substitute checks on their own premises if necessary. 
Compared to alternative means of receiving electronic returns, this 
approach involves only minimal upfront costs to a depositary bank, such 
as the purchase of a printer capable of double-sided printing and 
magnetic-ink toner cartridges.\13\ After printing the electronic 
copies, the depositary bank can process them in the same way it 
processes paper checks that are physically delivered to it.
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    \13\ Prior to developing the capability of providing the 
electronic .pdf copies, it may have been necessary for a depositary 
bank, or its processor, to develop systems capable of automated 
processing of incoming electronic data files (e.g., X9.100-187 
files) representing returned checks and to integrate these systems 
with the bank's other existing systems, such as the bank's demand-
deposit-account systems that maintain the bank's customer balances.
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2. Proposed Expeditious Return Requirement
    The Board believes that a fully-electronic check-return system 
benefits the nation's payment system, as well as consumers and 
businesses. Additionally, the Board believes that electronic check 
return substantially reduces risks to the check system and that the 
costs to a bank to receive returned checks electronically have markedly 
declined. Therefore, the Board believes that it is appropriate for the 
risk of non-expeditious return to rest with a depositary bank that 
chooses not to accept electronic returns. Accordingly, to encourage 
depositary banks to agree to receive returned checks electronically, 
and to avoid imposing increased cost on paying banks to return checks 
expeditiously to depositary banks that do not accept electronic 
returns, the Board proposes to amend Regulation CC to provide that a 
depositary bank would not be entitled to expeditious return unless it 
agrees to receive electronic returns directly or indirectly from the 
paying bank returning the check.\14\ The Board proposes to define a new 
term,

[[Page 16864]]

``electronic return,'' and to establish requirements for an item to 
qualify as an electronic return.\15\ Under the proposal, an electronic 
return would be treated as if it were a check for purposes of subpart C 
of the regulation (See Sec.  229.33 in the section-by-section 
analysis).\16\
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    \14\ The paying bank initiating the return would still be 
subject to the midnight deadline for all returned checks. See 
Uniform Commercial Code (UCC) Sec.  4-302.
    \15\ See proposed Sec.  229.2(v) (definition of ``electronic 
return'') in the section-by-section analysis.
    \16\ See proposed Sec.  229.34 in the section-by-section 
analysis for warranties made with respect to electronic returns.
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    Sections 229.30(a) and 229.31(a), respectively, would continue to 
set forth the general expeditious return rule for paying banks and 
returning banks. Proposed Sec. Sec.  229.30(b) and 229.31(b) would set 
forth the exceptions to the expeditious return requirements, one of 
which would be a new exception: There is no expeditious return 
requirement if the depositary bank has not agreed to accept the 
returned check electronically as described in proposed Sec.  229.32(a). 
Under proposed Sec.  229.32(a), a depositary bank may agree to receive 
an ``electronic return'' from the paying bank so as to be entitled to 
expeditious return: (1) Directly from the paying bank; (2) directly 
from a returning bank that holds itself out as willing to accept 
electronic returns directly or indirectly from the paying bank and has 
agreed to return checks expeditiously under Sec.  229.31(a); or (3) as 
otherwise agreed with the paying bank, such as through a network 
provided by a clearing house or other third party.
    The Board proposes to delete the forward-collection test for 
expeditious return from Sec. Sec.  229.30(a) and 229.31(a). This test 
was originally included because paying banks and returning banks were 
in some cases (such as that of a remote depositary bank) not able to 
meet the two-day/four-day test, and the forward-collection test 
provided that in these cases paying banks and returning banks 
nonetheless satisfied the expeditious return requirement so long as the 
returned check was delivered to the depositary bank in the same time 
and manner that a forward-collection check would be delivered to the 
bank (in its role as paying bank). Given that under the Board's 
proposal, however, a paying bank or returning bank must satisfy the 
expeditious return requirement only if the depositary bank agrees to 
receive electronic returns, a paying bank or returning bank should 
always be able to satisfy the two-day test with respect to a depositary 
bank to which the test applies. Specifically, geographic remoteness of 
a depositary bank from the paying bank should not preclude an 
electronic return from reaching the depositary bank within two business 
days of a check's presentment to the paying bank. Accordingly, the 
Board believes that the forward-collection test is not necessary in 
light of the Board's proposal.
    Additionally, because there are no longer nonlocal checks (see the 
discussion below in section III), the four-day test for expeditious 
return of a nonlocal check no longer applies to any checks, and the 
Board proposes to eliminate that test as well. Under the Board's 
proposed rule, the two-day test for expeditious return will be the only 
test in Sec. Sec.  229.30(a) and 229.31(a). Therefore, a paying bank or 
returning bank would have to send the returned check expeditiously such 
that the depositary bank would normally receive the check no later than 
4 p.m. (local time of the depositary bank) on the second business day 
following the banking day on which the check was presented to the 
paying bank.
3. Alternate Approaches Considered
    The Board requests comment on alternate approaches to revising the 
expeditious return rule to encourage electronic returns. One possible 
alternate approach would require a bank that holds itself out as a 
returning bank to accept an electronic return from any other bank that 
similarly holds itself out as a returning bank. This approach would 
ensure that even if the paying bank and depositary bank had electronic 
return agreements with different returning banks, the electronic return 
could reach the depositary bank. This approach, however, may be costly 
for returning banks to implement, because they would have to establish 
electronic return connections and agreements with every other returning 
bank. A second alternative would require an electronic return to be 
returned through the forward-collection chain (essentially reverting to 
the pre-Regulation CC rule). Some depositary banks, however, have 
arrangements under which returned checks are delivered to a different 
location than that from which the depositary bank sends its checks for 
forward collection.\17\ The second alternative might impose barriers to 
these arrangements. Both of these alternatives therefore appeared to be 
more operationally complex and costly than the proposed approach. 
Nonetheless, the Board requests comment on the desirability of these 
and other alternatives to the Board's proposal.
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    \17\ For example, a depositary bank may collect checks through a 
correspondent bank or processor, but have returned checks delivered 
directly to the depositary bank itself. Conversely, a depositary 
bank may arrange with another bank to apply the other bank's 
indorsement as the depositary-bank indorsement, such that depositary 
bank's returned checks are handled by the other bank. See Sec.  
229.35(d).
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B. Notice of Nonpayment Requirement

    Under current Sec.  229.33(a), if a paying bank determines not to 
pay a check in the amount of $2,500 or more, it must provide notice of 
nonpayment such that the notice is received by the depositary bank by 4 
p.m. (local time) on the second business day following the banking day 
on which the check was presented to the paying bank. Return of the 
check itself satisfies the notice of nonpayment requirement if the 
return meets the timeframe requirement for a notice of nonpayment. The 
current two-day timeframe for notice of nonpayment is the same as the 
two-day timeframe for expeditious return set forth in proposed 
Sec. Sec.  229.30(a) and 229.31(a). Accordingly, because a depositary 
bank should receive the returned check within the current notice-of-
nonpayment timeframe, the Board proposes to delete the notice of 
nonpayment provision as unnecessary.
    Under the Board's proposal, a depositary bank that does not agree 
to receive electronic returns from the paying bank, as specified in 
Sec.  229.32(a), will not receive expeditious return or a notice of 
nonpayment. The Board, however, believes that the proposed changes give 
depositary banks a strong incentive to make arrangements to receive 
returns electronically. The Board requests comment on whether the 
notice-of-nonpayment requirement should be retained for banks that do 
not agree to accept electronic returns in a nearly all-electronic 
environment.

C. Same-Day Settlement Rule

    Section 229.36(f) requires a paying bank to provide same-day 
settlement for checks presented in accordance with reasonable delivery 
requirements established by the paying bank and presented at a location 
designated by the paying bank and by 8 a.m. (local time of the paying 
bank) on a business day. Prior to the Regulation CC same-day settlement 
rule, which became effective in 1994, private-sector collecting banks 
sometimes (1) did not obtain settlement from the paying bank until the 
day after presentment or (2) were charged ``presentment fees'' by the 
paying bank, which the paying bank would deduct from the amount it paid 
in settlement of the checks presented to it.\18\ By contrast, under 
Sec. Sec.  13(1) and 16(13) of the Federal Reserve Act and Sec.  
210.9(b)(1) of Regulation J (12 CFR

[[Page 16865]]

part 210), the Reserve Banks obtain same-day settlement at par for 
checks presented to a paying bank before its cut-off hour, which is 
generally 2:00 p.m. or later.\19\ To reduce the competitive disparity 
between the Reserve Banks and other collecting banks, and to more 
equitably balance the bargaining power between collecting and paying 
banks, the same-day settlement rule (1) required a paying bank to 
provide same-day settlement to a private-sector collecting bank, 
provided that presentment was made by 8 a.m. in accordance with 
reasonable delivery requirements established by the paying bank and (2) 
prohibited the paying bank from deducting fees from the amount of its 
settlement for checks presented in accordance with the terms of the 
rule.\20\
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    \18\ 57 FR 46956 (Oct. 14, 1992).
    \19\ Times are stated as local time of the paying bank.
    \20\ In April 1988 the Board requested comment on a proposal 
requiring paying banks to settle on the day of presentment for 
checks presented by any bank prior to 2 p.m., i.e., the same 
timeframe as is applicable to the Reserve Banks. (53 FR 11911 (Apr. 
11, 1988)) The overwhelming majority of commenters, however, 
objected to the proposed 2 p.m. deadline because they believed that 
it would severely disrupt corporate cash management and controlled 
disbursement services, as well as paying banks' operations. See 57 
FR 46956, 46957 (Oct. 14, 1992).
    Further, in March 1998, the Board requested comment on the 
effect of the same-day settlement rule, and on whether remaining 
legal discrepancies between the Reserve Banks and private-sector 
collecting banks, such as the 8 a.m. versus 2 p.m. presentment time 
for same-day settlement, should be further reduced (63 FR 12700, 
Mar. 16, 1998). Most commenters did not believe that the six-hour 
difference in presentment deadlines or other remaining legal 
disparities were a significant impediment to the ability of private-
sector collecting banks to compete with the Reserve Banks. See 63 FR 
68701, 68703 (Dec. 14, 1998). The Board concluded that the costs 
associated with reducing the remaining legal disparities would 
outweigh any payments system efficiency gains, and therefore decided 
not to propose any specific regulatory changes.
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    As noted above, the Check 21 Act facilitated substantial changes in 
the manner in which checks are collected in the United States. In 
December 2010, the Reserve Banks received about 99.7 percent of check-
collection volume electronically, and presented about 98.4 percent of 
their volume electronically. Many paying banks that receive check 
presentments electronically have indicated that they prefer to receive 
all of their interbank check presentments electronically, so that they 
can streamline their back-office operations and eliminate the costs 
associated with processing paper-check presentments. Some collecting 
banks, however, continue to present paper checks to these paying banks 
under the Regulation CC same-day settlement rule.
    To encourage the banking industry's ongoing transition to fully-
electronic interbank check clearing, the Board proposes to allow a 
paying bank to require checks presented for same-day settlement to be 
presented electronically as ``electronic collection items.'' A paying 
bank, however, must have agreed to receive electronic collection items 
from the presenting bank under proposed Sec.  229.36(a). Similar to 
electronic returns, the Board proposes to define a new term, 
``electronic collection item,'' and to establish substantive 
requirements for an item to qualify as an electronic collection item. 
Under the proposal, the timeframes, deadlines, and settlement methods 
for same-day settlement presentments of electronic collection items 
would be the same as those currently in effect for same-day settlement 
presentments of paper checks. The proposed definition of an electronic 
collection item and the ways by which a paying bank agrees to accept 
electronic presentment items from a presenting bank are discussed more 
below in the section-by-section analysis of proposed Sec. Sec.  
229.2(s) and 229.36(a), respectively.
    The proposed rule would not preclude interbank presentment of 
checks in paper form; settlement for such presentments would be subject 
to the UCC, Sec.  229.36(d) if the paying bank has not specified that 
checks presented for same-day settlement be presented as electronic 
collection items, or Regulation J.\21\ The Board requests comment on 
the proposed modification to the same-day settlement rule.
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    \21\ See UCC 4-213 and 4-301.
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II. Electronic Items Not Derived From Checks

    The Board is aware of industry practices in which an electronic 
image of a ``check'' is created, but a check never existed in paper 
(``electronically-created items''). For example, payees collect payment 
by means of electronically-created items (i.e., items that never 
existed in paper form) that resemble images of remotely created checks. 
Similarly, the drawer's bank (the paying bank) might supply a smart-
phone application through which the drawer is able to execute a 
``handwritten'' signature on the phone's screen, and through which the 
signature is attached to an electronic ``check'' that the drawer sends 
via the Internet to the payee, for the payee's subsequent electronic 
deposit with its bank.
    An electronically-created item is not derived from an original 
paper check, and therefore it cannot be used to create a substitute 
check that meets the requirements of the Check 21 Act and Regulation 
CC.\22\ As a practical matter, a bank (including perhaps the depositary 
bank) receiving an electronically-created item cannot distinguish the 
item from any other image of a check that it receives electronically. 
The bank, nonetheless, may transfer the image as if it were an 
electronic collection item or electronic return, or produce a paper 
item that is indistinguishable from a substitute check (although not a 
valid substitute check because the item never existed in paper). A bank 
that transfers an image as if it were an electronic collection item or 
electronic return may be liable under the proposed new warranties (see 
proposed Sec.  229.34) related to electronic collection items and 
electronic returns, or may be liable for breach of the Check 21 Act's 
warranty that a substitute check accurately represents all of the 
information from the original check as of the time the original check 
was truncated. In order to protect a bank that receives an 
electronically-created item from another bank from potential liability, 
the Board proposes that any bank transferring an electronically-created 
image and related information as either an electronic collection item 
or an electronic return would make any warranty the bank would make if 
the electronically-created item were in fact an electronic collection 
item or an electronic return (in other words, as if the item were 
derived from a paper check). As discussed in the section-by-section 
analysis of proposed Sec.  229.34, the proposal would apply the same 
warranties to electronic collection items and electronic returns that 
would apply had those items been handled as paper checks (including 
remotely created checks) or substitute checks.
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    \22\ Under the terms of the Check 21 Act, a substitute check is 
a paper reproduction of an original check that contains an image of 
the front and back of the original check. Regulation CC defines 
original check as ``the first paper check issued with respect to a 
particular payment transaction.'' In the case of an electronically 
created item, there is no original check of which a substitute check 
can be a reproduction.
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    As a result of these proposed new warranties, a bank receiving a 
warranty claim related to an electronic collection item, electronic 
return, or a nonconforming substitute check could pass back its 
liability for the item to the bank from which it had received the 
electronically-created image and information. Although in some 
instances the first bank to make the warranty also may not know whether 
an image and information came from a paper instrument, the Board 
believes that that bank is in the best position to

[[Page 16866]]

know and to protect itself contractually against the risk that it did 
not.
    As noted above, a bank often cannot distinguish between electronic 
items derived from paper checks and electronically-created items. 
Therefore, under the proposal, banks might treat electronically-created 
items as if they were electronic collection items or electronic 
returns. The Board requests comment on whether, in addition to the 
proposed warranties discussed above, it should in the future consider 
making an electronically-created item subject to subpart C of 
Regulation CC as if it were a check. Such a change would result, for 
example, in the paying bank to which the item is presented being 
subject to the regulation's expeditious-return requirement. The Board 
emphasizes that the proposed warranties, as well as making 
electronically-created items subject to subpart C as if they were 
checks, would not necessarily affect any future determinations by the 
Board or the Bureau of Consumer Financial Protection as to whether such 
electronically-created items are electronic fund transfers subject to 
Regulation E (12 CFR part 205).
    The Board proposes that the existing warranties related to remotely 
created checks be extended to electronically-created items that 
resemble images of remotely created checks. As a general matter, the 
Board is not aware of reliable data regarding the prevalence of 
remotely created checks and similar electronically-created items.\23\ 
The Board requests comment on the frequency of use of these types of 
checks and items, the rate at which they are returned unpaid, and the 
extent to which payees have valid reasons to obtain payment by means of 
these items, as opposed to using an ACH debit transaction or other 
means.
---------------------------------------------------------------------------

    \23\ Banks cannot readily differentiate remotely created checks 
and electronically-created items that resemble remotely created 
checks from regular checks, which makes data regarding these items 
difficult to obtain.
    In March 2008, the Reserve Banks published an estimate, based on 
visual inspection of a sample of about 35,000 checks, that about one 
percent of all checks in 2007 were remotely created. See page 33 of 
the Reserve Banks' 2007 Check Sample Study: http://www.frbservices.org/files/communications/pdf/research/2007_check_sample_study.pdf. The study's definition of the item in question 
was somewhat different than Regulation CC's definition of a remotely 
created check.
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III. Amendments Related to the Elimination of Nonlocal Checks

    In response to the continued nationwide decline in check usage and 
banks' rapidly increasing use of electronic check-clearing methods 
since the Check 21 Act, as well as to meet the cost recovery 
requirements of the Monetary Control Act of 1980, the Federal Reserve 
Banks have ceased check-processing operations at all of their check-
processing offices except one.\24\
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    \24\ In 2003, the Reserve Banks had 45 check-processing offices. 
Cleveland became the sole remaining Reserve Bank check-processing 
office on February 27, 2010. Historically, appendix A to Regulation 
CC identified each Federal Reserve Bank check-processing office and 
listed under each office the first four digits of the routing 
numbers of the depository institutions served by that office. 
Appendix A thereby helped depositary banks determine whether a 
deposited check's paying bank was local or nonlocal. In conjunction 
with the Reserve Banks' cessation of check-processing activities at 
each office, the Board published conforming amendments to appendix A 
so that the appendix accurately reflected which institutions were 
served by each remaining office. With Cleveland now the sole office, 
all paying banks' routing symbols are listed under it.
---------------------------------------------------------------------------

    The EFA Act's and Regulation CC's funds-availability schedule 
differentiates between ``local checks'' and ``nonlocal checks,'' which 
are defined in terms of which ``check-processing region'' the paying 
bank is located in relative to the depositary bank.\25\ The EFA Act and 
Regulation CC define a ``check-processing region'' in terms of the 
geographical area served by a Federal Reserve Bank check-processing 
center.\26\ The Reserve Banks' office closures have had the effect of 
reducing to one the number of check-processing regions. Accordingly, 
there are no more ``nonlocal checks,'' because all paying banks and 
depositary banks are located in the same check-processing region.\27\
---------------------------------------------------------------------------

    \25\ 12 CFR 229.2(r) and 229.2(v). A ``local check'' is one that 
is payable by a bank located in the same check-processing region as 
the depositary bank. By contrast, a ``nonlocal check'' is one that 
is payable by a bank located in a different check-processing region 
than the depositary bank.
    \26\ Section 602(9) of EFA Act defines check processing region 
as ``the geographical area served by a Federal Reserve bank check 
processing center or such larger area as the Board may prescribe by 
regulations.'' Section 229.2(m) defines check processing region as 
``the geographical area served by an office of a Federal Reserve 
Bank for purposes of its check-processing activities.''
    \27\ A deposit of a ``local check'' receives two-day funds 
availability under the regulation, whereas nonlocal checks received 
five-day availability. The elimination of nonlocal checks therefore 
has improved funds availability for banks' customers.
---------------------------------------------------------------------------

    Because there are no more nonlocal checks, certain provisions in 
the regulation can be substantially simplified. Specifically, the Board 
proposes to delete the definitions in subpart A that relate to 
distinguishing local from nonlocal checks (specifically, the 
definitions of ``check-processing region,'' ``local check,'' ``local 
paying bank,'' ``nonlocal check,'' and ``nonlocal paying bank''), as 
well as the related portions of appendix A to the regulation. The Board 
also proposes to streamline the funds-availability and disclosure 
provisions in subpart B and to update the model funds-availability 
forms set forth in appendix C to the regulation.\28\ The Board proposes 
that a bank basing its disclosures on the models currently in the 
appendix would continue to receive a safe harbor for doing so up to 12 
months after a final rule becomes effective, provided that the 
disclosures accurately reflect the bank's policies and practices. 
Finally, the Board proposes to update the preemption determinations, 
with respect to states' funds-availability laws, that are set forth in 
appendix F to the regulation.\29\
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    \28\ The proposed updates to the model forms in appendix C are 
based on consumer testing of the forms, and are discussed in more 
detail in the section-by-section analysis below. A detailed report 
regarding the consumer testing is available on the Board's public 
Web site, http://www.federalreserve.gov, along with this proposed 
rule.
    \29\ See Regulation CC Sec.  229.20 and EFA Act Sec.  608. A 
state's funds-availability law must have been in effect on or before 
September 1, 1989, to not be preempted by the regulation.
---------------------------------------------------------------------------

IV. Dodd-Frank Act Amendments

A. EFA Act Dollar Amounts

    Section 1086 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (Dodd-Frank Act) amends the EFA Act by 
increasing from $100 to $200 the amount of deposited funds that banks 
must make available for withdrawal by opening of business on the next 
day.\30\ The effective date of this provision of the act is the 
``designated transfer date,'' which the Secretary of the Treasury has 
determined to be July 21, 2011.\31\ This provision of the EFA Act is 
implemented in Sec.  229.10(c)(1)(vii). Additionally, the model 
disclosure forms set forth in current appendix C reflect the 
requirement that a bank must make $100 of the deposit available on the 
next business day. When the Dodd-Frank Act's increase to $200 becomes 
effective, banks should ensure that their disclosures reflect the new 
funds-availability schedule and that customers are notified of the 
changes in policy in accordance with Sec.  229.18(e). Specifically, 
effective July 21, 2011, a bank basing its funds-availability 
disclosure on current model C-3, C-4, or C-5 must ensure that its 
disclosure indicates that the first $200 (rather than $100) of a check 
deposit will be

[[Page 16867]]

available on the next business day after the day of deposit.\32\
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    \30\ See Sec.  1086(e) of the Dodd-Frank Act, Public Law 111-
203, 124 Stat. 1376 (2010).
    \31\ See Sec.  1062 of the Dodd-Frank Act. The designated 
transfer date is subject to an extension to up to 18 months after 
the Dodd-Frank Act's date of enactment.
    \32\ Per Sec.  229.18(e), a bank must provide a change-in-terms 
notice to existing consumer customers by August 21, 2011.
---------------------------------------------------------------------------

    Section 1086 amends the EFA Act to require the Board, jointly with 
the Bureau of Consumer Financial Protection (Bureau), to update the 
dollar amounts to reflect inflation every five years after December 31, 
2011.\33\ These amounts include the amount of funds a depositary bank 
must make available from a deposit of a check not subject to next-day 
availability (Sec.  229.10(c)(1)(vii)), by cash or similar means (Sec.  
229.12(b)), and under the new-account and large-deposit exceptions 
(Sec. Sec.  229.13(a) and (b)). These amounts also include the EFA 
Act's damage limitations (Sec.  229.21(a)). To facilitate future 
amendments to the regulation in this regard, the proposed amendments 
minimize the number of references to specific dollar amounts. For 
example, in the future, the $100 (which increases to $200 as of the 
transfer date) mentioned above would be considered ``the minimum amount 
of a deposit that must be made available on the next day.'' The Board 
plans to seek comment on proposed methods of indexing the amounts to 
inflation jointly with the Bureau at a later date.
---------------------------------------------------------------------------

    \33\ The amounts are indexed to the Consumer Price Index for 
Urban Wage Earners and Clerical Workers (CPI-W), as published by the 
Bureau of Labor Statistics (BLS), rounded to the nearest multiple of 
$25. See Sec.  1086(f) of the Dodd-Frank Act.
---------------------------------------------------------------------------

B. Rule-Writing Authority

    Section 1086 also amends the Board's rule-writing authority under 
the EFA Act by making certain rule-writing authorities joint with the 
Bureau. Specifically, as of the transfer date, the Board's authority to 
implement the EFA Act's provisions (EFA Act Sec.  609(a)), reduce hold 
periods (EFA Act Sec.  603(d)(1)), establish exceptions to the funds-
availability schedule (EFA Act Sec.  604(f)), and publish model 
disclosure provisions (EFA Act Sec.  605(f)(1)) will become joint with 
the Bureau. Accordingly, after the transfer date, any rules promulgated 
pursuant to these authorities will be done so jointly with the Bureau.

C. Administrative Enforcement

    The Dodd-Frank Act eliminates the Office of Thrift Supervision as 
of July 21, 2011, the ``transfer date'' provided in Sec.  311 of the 
Dodd-Frank Act, and transfers enforcement authority for insured savings 
associations under Sec.  8 of the Federal Deposit Insurance Act to the 
Office of the Comptroller of the Currency.\34\ Accordingly, as of the 
transfer date, compliance with part 229 will be enforced by the Office 
of the Comptroller of the Currency in the case of savings associations 
with deposits insured by the Federal Deposit Insurance Corporation. The 
administrative enforcement provisions are contained in Sec.  229.3.
---------------------------------------------------------------------------

    \34\ The transfer date is subject to an extension of up to 18 
months after the Dodd-Frank Act's date of enactment. See Sec.  311 
of the Dodd-Frank Act.
---------------------------------------------------------------------------

V. Other Proposed Amendments

    The Board proposes other amendments to the provisions of Regulation 
CC and its commentary. These proposed changes are discussed in the 
section-by-section analysis below.

Section-by-Section Analysis

    Paragraph citations in this section-by-section analysis are as 
proposed to be renumbered, unless otherwise explicitly stated. Sections 
not discussed below are either unchanged or have only technical or 
conforming amendments. The Board requests comment on all aspects of the 
proposed rule.

I. Subpart A

A. Section 229.1--Authority and Purpose, Organization

    The Board proposes to add to Sec.  229.1(b) descriptions of the 
appendices to the regulation, as well as amendments to conform Sec.  
229.1(b) to amendments proposed in this notice.

B. Section 229.2--Definitions

    The definitions of terms in Sec.  229.2 were incorporated into the 
regulation at different times and are not currently in alphabetical 
order. The Board proposes that the paragraphs in this section be 
renumbered so that defined terms are in alphabetical order. Similarly, 
the Board proposes to renumber the paragraphs in the commentary to 
reflect the proposed renumbering.
1. Section 229.2(b)--Automated Clearinghouse (ACH) Credit Transfer
    Because the regulation uses the term ACH only within other 
definitions, the Board proposes to delete the definition of the term 
``automated clearinghouse'' and replace it with a new defined term, 
``automated clearinghouse (ACH) credit transfer.'' This phrase is used 
in the definition of electronic payment (Sec.  229.2(t)) and in the 
commentary to Sec.  229.10(b), which requires a bank to make funds 
received for deposit by an electronic payment available for withdrawal 
the next day. The Board intends no change to the regulation's substance 
by this proposed clarifying definitional change.
2. Section 229.2(c)--Automated Teller Machine or ATM
    The Board proposes to clarify that an automated teller machine 
(ATM) includes only those devices at which a person may make deposits 
by cash or paper check. For example, a remote deposit capture device 
would not be considered an ATM because a bank's customer would be 
depositing an image of the check, not the paper check, into the 
account. The Board proposes conforming amendments to the commentary of 
this section. Additionally, the Board proposes to provide an example of 
the ``other account transactions'' that may be performed at an 
automated teller machine (ATM); specifically, making cash withdrawals 
from an account.
3. Section 229.2(r)--Depositary Bank
    The Board proposes to clarify that a bank that rejects a check 
submitted for deposit is not a depositary bank. The rationale for this 
proposed change is discussed in more detail below in this section-by-
section analysis under Sec.  229.52.
4. Section 229.2(s)--Electronic Collection Item
    The Board proposes in new Sec.  229.2(s) to define the new term 
``electronic collection item'' as an electronic image of and 
information related to a check that a bank sends for forward collection 
and that a paying bank has agreed to receive under Sec.  229.36(a), and 
that is sufficient to create a substitute check.\35\ Under the proposed 
definition, the image and information must conform to American National 
Standard Specifications for Electronic Exchange of Check and Image 
Data--X9.100-187, in conjunction with its Universal Companion Document, 
(hereinafter collectively referred to as ANS X9.100-187), unless the 
parties otherwise agree.\36\ If an electronic collection item satisfies 
the requirements set forth in proposed Sec.  229.2(s), then, as stated 
in proposed Sec.  229.33, the provisions of subpart C would apply to 
the electronic collection item as if it were a check. (See proposed 
commentary to

[[Page 16868]]

Sec.  229.2(s)).\37\ Some electronic presentment agreements, however, 
may not require an image of the check. Electronic items presented under 
these agreements would not be electronic collection items because they 
are not sufficient to create a substitute check, nor would they be 
treated as checks for purposes of subpart C. The proposed commentary 
also explains that an electronic collection item that contains an image 
of the front and back of a substitute check (as opposed to an original 
check) would be an electronic representation of a substitute check, as 
that phrase is defined in proposed Sec.  229.2(hh) (current Sec.  
229.2(xx)). Not all electronic representations of substitute checks, 
however, would qualify as an electronic collection item, because, to be 
an electronic collection item, an electronic representation of a 
substitute check must contain sufficient information to create a 
substitute check.
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    \35\ The agreement to receive an electronic collection item 
could be in the form of a Federal Reserve Bank operating circular or 
a clearinghouse rule.
    \36\ X9.100-187 is available from http://www.x9.org. The UCD for 
X9.100-187 is available at http://www.checkimagecentral.org/pdf/UCD_X9_100-187-2008_Version_1.2.pdf.
    \37\ For example, a paying bank receiving presentment of an 
electronic collection item would be subject to the regulation's 
expeditious-return requirement, provided the depositary bank has 
agreed to accept electronic returns from the paying bank under Sec.  
229.32(a).
---------------------------------------------------------------------------

    The Board believes that ANS X9.100-187 is the most prevalent 
industry standard for electronic images and information that will 
enable the receiving bank to create a substitute check. The Board 
recognizes, however, that certain banks may use a different standard 
and that, as is the case with many technology standards, the standard 
likely will evolve. To the extent that banks use a different standard, 
the proposed definition of electronic collection item would permit 
parties to agree to a standard other than ANS X9.100-187 and still have 
the item qualify as an electronic collection item that is treated as a 
check for purposes of subpart C, provided that the item is sufficient 
to create a substitute check. The Board requests comment on the 
proposed standard for an electronic collection item and whether any 
other standard should be specified in the regulation.
5. Section 229.2(u)--Electronic Presentment Point
    The Board proposes in new Sec.  229.2(u) to define electronic 
presentment point as the electronic location that the paying bank has 
designated for receiving electronic collection items. This point may be 
either an e-mail address or other electronic address. The Board 
requests comment on whether this definition provides enough 
specificity.
6. Section 229.2(v)--Electronic Return
    The Board proposes in new Sec.  229.2(v) to define the new term 
``electronic return'' as an electronic image of and information related 
to a check that a paying bank has determined not to pay and that a 
depositary bank has agreed to receive under Sec.  229.32(a), and that 
is sufficient to create a substitute check. The image and information 
must conform to ANS X9.100-187, unless the parties otherwise agree. The 
proposed commentary explains that if an electronic return satisfies the 
requirements set forth in Sec.  229.2(v), then the provisions of 
subpart C apply to the electronic return as if it were a check (See 
proposed Sec.  229.33).\38\
---------------------------------------------------------------------------

    \38\ Like an electronic collection item, an electronic return 
may be an electronic representation of a substitute check, but not 
all electronic representations of substitute checks would qualify as 
an electronic return.
---------------------------------------------------------------------------

    The proposed commentary to Sec.  229.2(v) explains that a 
depositary bank's agreement with a returning bank to accept .pdf files 
that are sufficient to create substitute checks would be one example of 
banks varying by agreement the regulation's requirement that an 
electronic return conform with ANS X9.100-187. By agreeing with a 
returning bank to accept an electronic return in the form of a .pdf 
file, a depositary bank would thereby be entitled to expeditious 
return. The Board requests comment on the proposed standard for an 
electronic return and whether any other standard should be specified in 
the regulation.
7. Section 229.2(w)--Electronic Return Point
    The Board proposes in new Sec.  229.2(w) to define electronic 
return point as the electronic location that the depositary bank has 
designated for receiving electronic returns. The proposed commentary 
notes that an electronic return point may be an e-mail address or other 
electronic address that a depositary bank has designated as the place 
to which electronic returns must be delivered. The Board requests 
comment on whether this definition provides enough specificity.
8. Section 229.2(hh)--Paper or Electronic Representation of a 
Substitute Check
    The Board proposes to modify the commentary to the definition of 
this term to note that an electronic representation of a substitute 
check may also be an electronic collection item or electronic return if 
the electronic representation contains sufficient information for 
creating a substitute check and conforms to ANS X9.100-187, or another 
format to which the parties agreed.
9. Section 229.2(pp)--Routing Number
    The Board proposes to add to the definition a new subparagraph 
providing that the term also includes the bank-identification number 
contained in the electronic image of or information related to a check. 
Further, the Board also proposes to move the two introductory 
paragraphs in appendix A, which provide general information about 
routing numbers, to the commentary to the definition of routing number.
10. Deleted Terms
    Check-processing region, local check, local paying bank, nonlocal 
check, and nonlocal paying bank. Because there is now only one 
nationwide check-processing region, there are no longer any nonlocal 
checks, and the definitions in the regulation implementing the 
distinctions between local and nonlocal checks are no longer necessary. 
Accordingly, the Board proposes to delete from the regulation the 
definitions of ``check-processing region (current Sec.  229.2(m)), 
``local check'' (current Sec.  229.2(r)), ``local paying bank'' 
(current Sec.  229.2(s)), and ``nonlocal paying bank'' (current Sec.  
229.2(w)), and the commentary thereto.
    Similarly situated bank. The only place the current regulation uses 
this term is in the forward-collection test for expeditious return. 
Because the Board proposes to delete that test from the regulation (as 
discussed below in this section-by-section analysis under Sec. Sec.  
229.30(a) and 229.31(a)), the regulation's definition of similarly 
situated bank is no longer necessary and the Board proposes to delete 
current Sec.  229.2(ee).

II. Subpart B

    Throughout subpart B and the commentary thereto, the Board proposes 
to eliminate all references to ``check-processing regions,'' ``local 
checks,'' ``local paying banks,'' ``nonlocal checks,'' and ``nonlocal 
paying banks.''

A. Section 229.10(c)--Next-Day Availability of Certain Check Deposits

1. Section 229.10(c)(1)(vi)
    Given that there is only one nationwide check-processing region, 
the Board proposes in Sec.  229.10(c)(1)(vi) to delete the phrase ``if 
both branches are located in the same state or check-processing 
region.'' As a result, the subparagraph would require a depositary bank 
to provide next-day availability for a check deposited in a

[[Page 16869]]

branch of the depositary bank and drawn on the same or another branch 
of the same bank.
2. Section 229.10(c)(1)(vii)
    Section 1086(e) of the Dodd-Frank Act increases from $100 to $200 
the minimum amount of funds deposited by check or checks on a given 
business day that a bank must make available by opening of business on 
the next business day pursuant to Sec.  603(a)(2)(D) of the EFA Act. 
That provision of the EFA Act is implemented in Sec.  229.10(c)(1)(vii) 
of Regulation CC, and the increase is expected to take effect on July 
21, 2011, regardless of whether the Board and the Bureau have amended 
Regulation CC. Accordingly, the Board proposes to amend the commentary 
to Sec.  229.10(c)(1)(vii) to facilitate future amendments to the 
minimum amount of a deposited check a bank must make available on the 
business day following the banking day of deposit. Specifically, the 
Board proposes to replace references to ``$100'' with references to 
``the minimum amount.'' The Board proposes to make this amendment 
throughout the commentary, as well as in the model forms.
3. Section 229.10(c)(2)
    The Board proposes to delete current Sec.  229.10(c)(2), which 
states that a depositary bank shall make funds available by the second 
business day after the banking day on which a check is deposited in the 
case of a check deposit that meets the requirements of Sec. Sec.  
229.10(c)(1)(ii), (iii), (iv), or (v), except the check is not 
deposited in person.\39\ In the absence of nonlocal checks, the checks 
described Sec.  229.10(c)(2) are subject to the same rule as the 
general rule set forth in proposed Sec.  229.12. Section 229.10(c)(2) 
is therefore no longer necessary.
---------------------------------------------------------------------------

    \39\ These checks include U.S. Postal Service money orders, 
checks drawn on Federal Reserve Banks or Federal Home Loan Banks, 
checks drawn by state or local governments, or cashier's checks, 
certified checks, or teller's checks.
---------------------------------------------------------------------------

B. Section 229.12--Availability Schedule

1. Proposed Sec.  229.12(a)--In General
    The Board proposes to delete current Sec.  229.12(a). It specifies 
the effective date (September 1, 1990) for Sec.  229.12 and is no 
longer necessary.
    The Board proposes that new Sec.  229.12(a) set forth the general 
funds-availability rule for deposits of checks: Unless subject to one 
of the enumerated exceptions, funds from a check deposit must be made 
available for withdrawal by the second business day following the 
banking day of deposit. Proposed new Sec.  229.12(a) is derived from 
current Sec.  229.12(b), which sets forth local check availability. In 
the absence of a distinction between local checks and nonlocal checks, 
current Sec.  229.12(b)(1), (2), (3), and (4) are subsumed within this 
general rule, and the Board proposes to delete them.\40\ Similarly, 
current Sec.  229.12(c) applies to nonlocal checks, which is now a null 
set, and the Board proposes to delete Sec.  229.12(c) and commentary 
thereto.
---------------------------------------------------------------------------

    \40\ Current Sec.  229.12(b) states which checks are subject to 
second-day availability. These checks include local checks and 
checks that meet the requirements of Sec. Sec.  229.10(c)(1)(ii), 
(iii), (iv), or (v), except the check is not deposited in person.
---------------------------------------------------------------------------

2. Section 229.12(b)--Withdrawal by Cash or Similar Means
    Section 229.12(b) implements the EFA Act's permissive adjustment to 
the funds-availability rules for withdrawals by cash or similar means. 
In part, a bank may delay availability for withdrawal by cash or 
similar means by one business day, provided that the bank makes $400 of 
the deposited funds available for withdrawal not later than 5 p.m. on 
the business days on which the funds must be made available under the 
funds-available schedule. Like other amounts specified in the EFA Act, 
this $400 will be adjusted every five years for inflation. In order to 
facilitate future adjustments to the amount, the Board proposes to 
amend the commentary to Sec.  229.12(b) by replacing references to 
``$400'' with references to ``the cash withdrawal amount.'' The Board 
proposes to make similar amendments throughout the commentary and model 
forms.
3. Section 229.12(d)--Deposits at Nonproprietary ATMs
    As indicated in the EFA Act's legislative history, Congress adopted 
the five-day maximum hold on nonproprietary ATM deposits to match the 
five-day maximum hold on a nonlocal check deposit, because the 
depositary bank did not know the composition of a nonproprietary ATM 
deposit (that is, whether the deposit consisted of cash, local checks, 
nonlocal checks, etc.).\41\ In the absence of nonlocal checks, however, 
there is no longer any class of check that is subject to a maximum 
five-day hold.
---------------------------------------------------------------------------

    \41\ The EFA Act conference report states that ``nonproprietary 
ATMs today do not distinguish among check deposits or between check 
and cash deposits'' (H.R. Rep. No. 261, 100th Cong., 1st Sess. 179 
(1987)).
---------------------------------------------------------------------------

    EFA Act Sec.  603(d)(1) states that ``The Board shall, by 
regulation, reduce the time periods established under subsections (b), 
(c), and (e) to as short a time as possible and equal to the period of 
time 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.'' The statute's 
legislative history recommends a quantitative benchmark for the Board 
to use to determine whether to reduce these hold periods: a receiving 
bank could reasonably expect to learn of the return of two-thirds of 
the checks in a given category before a bank must make the deposited 
funds available for withdrawal at the opening of business.\42\
---------------------------------------------------------------------------

    \42\ Conference Report on H.R. 27 (H. Rept. 100-261), 100th 
Congress, 1st session, 179 (1987), pp. H6906-7.
---------------------------------------------------------------------------

    As mentioned above, in December 2010 the Reserve Banks received 
about 99.7 percent of deposited for forward collection electronically, 
presented 98.4 percent of their checks electronically, received 97.1 
percent of returned checks electronically, and delivered about 76.7 
percent of returned checks to depositary banks electronically. Thus, 
about 73.0 percent of checks cleared and returned through the Reserve 
Banks complete the roundtrip from the depositary bank to the paying 
bank and back again in electronic form. It is reasonable to expect that 
a check cleared and returned entirely in electronic form would complete 
this roundtrip in three business days. For example, if a check is 
deposited on Monday and collected electronically, the check would 
generally be presented to the paying bank on Tuesday. The paying bank 
would generally send the return electronically to a returning bank on 
the night between Wednesday and Thursday, which would electronically 
deliver the returned check to the depositary bank on Thursday.
    The Board therefore proposes to reduce in proposed Sec.  229.12(d) 
(current Sec.  229.12(f)) the maximum hold period for nonproprietary 
ATM deposits from 5 business days to 4 business days. Four business 
days will provide the depositary bank with reasonable opportunity to 
learn of the nonpayment of a check deposited at a nonproprietary ATM 
before it must make the funds available for withdrawal.\43\ In the 
example above, the depositary bank can reasonably expect to learn of an 
unpaid electronically returned check on Thursday, and will be required 
under the proposed 4-business-day hold period to make funds deposited 
by check at a nonproprietary ATM

[[Page 16870]]

available for withdrawal at the opening of business on Friday.\44\
---------------------------------------------------------------------------

    \43\ Section 229.19(b) requires that funds be made available for 
withdrawal by the opening of business on the day on which funds are 
required to be made available for withdrawal.
    \44\ The Board is proposing to follow the analysis it set forth 
in 1999 that it would reduce the availability schedules in 
Regulation CC only after determining that the depositary bank can 
reasonably expect to learn of an unpaid check on the business day 
before the day on which the bank must make funds available for 
withdrawal at the opening of business. See 64 FR 37712 (July 13, 
1999).
---------------------------------------------------------------------------

    As mentioned above, Congress recognized in the EFA Act legislative 
history that depositary banks generally do not know the composition of 
deposits made at nonproprietary ATMs (that is, whether the deposit 
consisted of cash, local checks, nonlocal checks, etc.), and therefore 
adopted a five-day maximum hold on nonproprietary ATM deposits to match 
the five-day maximum hold on a nonlocal check deposit. Currently, 
however, all cash deposits not made in person to an employee of the 
depositary bank and check deposits must be made available for 
withdrawal by the second business day following deposit. The Board 
requests comment on whether the funds-availability schedule's 
distinction between deposits to proprietary ATMs and deposits to 
nonproprietary ATMs continues to make sense in an environment where all 
in-person cash deposits and check deposits must be made available for 
withdrawal by the second business day following deposit.

C. Section 229.13--Exceptions

1. Section 229.13(b)--Large Deposits
    Section 229.13(b) sets forth an exception to the funds-availability 
schedule for the aggregate amount of deposited checks totaling more 
than $5,000 on any one banking day to the extent the aggregate amount 
exceeds $5,000. Like other amounts specified in the EFA Act, this 
$5,000 threshold will be adjusted every five years for inflation. In 
order to facilitate future adjustments to the amount, the Board 
proposes to amend the commentary to Sec.  229.13(b) by replacing 
references to ``$5,000'' with references to ``the large-deposit 
amount.'' The Board proposes to make similar amendments throughout the 
commentary and model forms.
2. Section 229.13(d)--Repeated Overdrafts
    Section 229.13(d) provides the depositary bank with an exception to 
the general availability schedule in Sec.  229.12 for a check deposited 
into an account that has been repeatedly overdrawn in the preceding six 
months. The exception relates not only to overdrafts caused by checks, 
but also those caused by, for example, debit card transactions. The 
Board proposes to add a new paragraph, Sec.  229.13(d)(3), clarifying 
that the exception does not include an attempted debit card transaction 
for which the depositary bank declined the authorization request, 
because in that case no debit card transaction has occurred.
3. Section 229.13(e)--Reasonable Cause to Doubt Collectability
    Section 229.13(e) provides the depositary bank with an exception to 
the Sec.  229.12 general availability schedule if the depositary bank 
has reasonable cause to believe that the check is uncollectible from 
the paying bank. The commentary currently states that a depositary bank 
cannot invoke this exception simply because a check is drawn on a bank 
in a rural area and the depositary bank knows it will not have the 
opportunity to learn of the nonpayment of the check before funds must 
be made available. If a check is collected and returned electronically, 
however, the rural location of a paying bank will not affect the time 
required to collect and return the check. The Board proposes to update 
the example in paragraph (4) of the commentary to Sec.  229.13(e). 
Specifically, a depositary bank may not invoke this exception simply 
because a paying bank demands paper presentment and the depositary bank 
believes it is unlikely to receive the return prior to the time by 
which it must make the deposited funds available.
3. Section 229.13(g)--Notice of Exception
    A depositary bank must provide notice to its customer when it 
invokes one of the exceptions in Sec.  229.13 to apply an extended hold 
to a deposit. Section 229.13(g)(1)(i) sets forth the information that 
the notice must include. Currently, the notice must include the amount 
of the deposit that is being delayed. During consumer testing of the 
model forms, however, consumers were more readily able to recall the 
deposited check for which the funds were being held when the notice 
included the total amount of the deposit, rather than only the amount 
being held. Accordingly, the Board proposes to require that the notice 
of an exception hold contain the total amount of the deposit, in 
addition to the amount of the deposit being held. Additionally, 
consumers more readily understood when funds would be made available if 
the notice stated the day on which the funds will be made available, 
rather than explain availability in reference to the date of deposit. 
Therefore, the Board proposes to require that the notice specify the 
day funds will be made available instead of ``the time period within 
which'' the funds will be available for withdrawal. The Board proposes 
conforming changes to proposed model notice C-9.
    Section 229.13(g)(1)(ii) states that if the notice is not given at 
the time of the deposit, the depositary bank shall mail or deliver the 
notice to the customer as soon as practicable, but no later than the 
first business day following the day the facts become known to the 
depositary bank, or the deposit is made, whichever is later. With the 
elimination of nonlocal checks, depositary banks must generally make 
check deposits available by opening of business on the second business 
day following the banking day of deposit. The Board believes that it is 
desirable for a customer to learn that its bank is extending a hold 
before the customer would expect the funds to become available under 
the bank's generally applicable availability policy. Further, it has 
become more feasible for banks to provide notices to their customers 
electronically, which results in near instant receipt of the notice to 
the customer. The Board therefore proposes that, if the customer has 
agreed to accept notices electronically, the depositary bank is 
required to send the notice such that the bank may reasonably expect 
the customer to receive it no later than the first business day 
following the day the deposit is made or the facts become known to the 
depositary bank, whichever is later. For example, the bank could e-mail 
notice of the hold to the customer. The Board requests comment on 
whether providing a notice in this fashion is practical.
    Finally, Sec.  229.13(g)(4) describes the notice that a depositary 
bank must provide when it applies an emergency-conditions hold. The 
Board proposes to update the commentary to Sec.  229.13(g) to explain 
that a depositary bank may provide notice via postings to the 
depositary bank's website or through a directed e-mail.
4. Section 229.13(h)--Availability of Deposits Subject to Exceptions
    If a check deposit is subject to an exception hold, Sec.  
229.13(h)(4) provides that a reasonable period for a hold extension is 
one business day (for a total of two) for a deposit of on-us checks, 
five business days (for a total of seven) for local checks, and six 
business days (for a total of eleven) for nonlocal checks and deposits 
into nonproprietary ATMs. The Board proposes that the safe harbor for 
the reasonable hold extension for a deposit of on-us checks remain one 
business day, and that safe harbor for the reasonable hold extension 
for other

[[Page 16871]]

checks be reduced to two business days (from five or six business 
days), for a total of four business days for all other checks.\45\
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    \45\ As described above, the Board proposes to reduce the 
generally-applicable hold period for nonproprietary ATM deposits 
from five business days to four. The proposed reasonable hold 
extension of two business days would therefore provide a total of 
six business days for nonproprietary ATM deposits.
---------------------------------------------------------------------------

    Section 229.13(h)(4) would continue to permit a bank to apply a 
longer hold extension than this, but the bank would have the burden of 
establishing that the longer hold extension is reasonable. The Board is 
proposing conforming changes to the commentary to Sec.  229.13(h).
    In adopting Regulation CC's permanent availability schedules, the 
Board stated that the reasonable extended-hold periods are ``designed 
to provide adequate time for the depositary bank to learn of the 
nonpayment of virtually all checks that are returned.'' \46\ If a check 
is cleared and returned electronically, the depositary bank should 
receive the returned check in three business days. Checks that are not 
cleared and returned entirely in electronic form, however, will 
typically take longer to be returned to the depositary bank. The 
Reserve Banks, however, project that by year-end 2011, 97 percent of 
their checks will be cleared and returned entirely in electronic form, 
which the Board believes is representative of the industry as a 
whole.\47\ Therefore, depositary banks will receive virtually all 
returned checks by the third business day after the day of deposit, 
with the depositary bank making funds available at opening of business 
on the fourth day. Although the proposed reasonable extended-hold 
period of two business days (four business days total) may increase 
risk for a depositary bank that does not accept electronic returns, the 
Board believes that the reduction in the exception hold safe harbor is 
warranted given that it will provide faster availability for depositors 
as well as an incentive for depositary banks to take advantage of 
electronic check-return infrastructure.
---------------------------------------------------------------------------

    \46\ See 55 FR 21848, 21850 (May 30, 1990).
    \47\ See the Board's Federal Register notice announcing its 
approval of the Federal Reserve Banks' 2011 fee schedules for priced 
services, 75 FR 67740 (Nov. 3, 2010).
---------------------------------------------------------------------------

    If the paying bank does not return checks electronically, the time 
required for a check to be delivered from the depositary bank to the 
paying bank and back again may be greater than three business days. A 
paying bank that does not send returned checks electronically, however, 
generally will not meet its expeditious return requirement, and the 
depositary bank may have a claim for any losses it incurs due to the 
failure of the paying bank to send the returned check expeditiously.

D. Section 229.15--General Disclosure Requirements

1. Section 229.15(a)
    Section 229.15(a) sets forth the form requirements for disclosures 
under subpart B. In general, there are two types of disclosures under 
subpart B--funds-availability policy disclosures and delayed 
availability notices. Both types of disclosures must be written and in 
a form the customer may keep. The Board proposes to amend Sec.  
229.15(a) to clarify that the form requirements apply to both funds-
availability policy disclosures and delayed availability notices 
required by subpart B.
2. Section 229.15(b)(1)
    Section 229.15(b) states that ``[i]n its disclosure, a bank shall 
describe funds as being available on `the ---------- business day 
after' the day of deposit.'' The Board's consumer testing of the model 
disclosures in Appendix C (discussed in more detail below), however, 
indicated that consumers may more readily understand alternative 
formulations of statements of when deposited funds will be available 
for withdrawal. The Board therefore proposes in Sec.  229.15(b)(1) to 
provide banks with more flexibility regarding this description.\48\ The 
proposal requires a bank in its disclosure or notice to specify the 
business day on which funds are available for withdrawal by describing 
that day in relation to the banking day on which the deposit is 
received, and to use in this description language substantially similar 
to that set forth in proposed Sec.  229.15(b)(1). Under the proposal, 
for example, the banking day of receipt may be described as ``the same 
business day,'' and the business day after the banking day of receipt 
may be described as ``the next business day,'' or described using 
either cardinal or ordinal numbers, such as ``2 business days'' or 
``the second business day.''
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    \48\ Under the Board's proposal, a bank that bases its 
availability-policy disclosure on the models currently provided in 
Appendix C will continue to receive a safe harbor for doing so. See 
the discussion of Appendix C below in this section-by-section 
analysis.
---------------------------------------------------------------------------

E. Section 229.16--Specific Availability Policy Disclosure

1. Section 229.16(b)(2)
    Because the Board is eliminating references to local and nonlocal 
checks throughout the regulation and commentary, the Board proposes to 
delete the requirement that banks that distinguish between local and 
nonlocal checks in their availability policy disclose that a check 
payable through one bank (the bank whose routing number appears in the 
MICR line) and payable by another bank would be considered local or 
nonlocal on the basis of the location of the bank by which the check is 
payable. In the absence of nonlocal checks, that disclosure requirement 
is obsolete.
2. Section 229.16(c)(2)
    Section 229.16(c)(2) sets forth the information required in a 
notice when a bank invokes a case-by-case hold. These information 
requirements are similar to the information requirements for exception-
hold notices under Sec.  229.13(g). Consumer testing demonstrated that 
consumers are both able to recall the deposit to which the hold is 
being applied if the notice states the total deposit amount and able to 
understand more readily the day on which funds will be made available 
if given a specific date. Therefore, the Board proposes to amend the 
case-by-case notice requirements in Sec.  229.16(c)(2)(i) to require 
that a case-by-case notice include the total amount of the deposit and 
the specific date on which funds will be made available.
    Further, in the absence of nonlocal checks, the case-by-case hold 
period is so short that a paper notice of the hold sent through the 
mail may not reach the customer until after the hold has been lifted. 
The Board therefore proposes to amend Sec.  229.16(c)(2)(ii) and the 
related commentary to provide that, if the customer has agreed to 
accept notices electronically, a bank that invokes a case-by-case hold 
after the time of deposit be required to deliver the notice such that 
the bank may reasonably expect the notice to be received by the 
customer not later than the first business day following the banking 
day of deposit. For example, the bank could e-mail notice of the hold 
to the customer on the business day after the banking day of deposit. 
The Board requests comment on whether providing a notice in this 
fashion is practical.
    In addition, the Board requests comment on the extent to which 
banks continue to find it useful to apply case-by-case holds to check 
deposits and on whether the regulation's provision for case-by-case 
holds should be deleted. In the absence of nonlocal checks, the extra 
hold period that a depositary bank may obtain by applying a case-by-
case hold is generally not sufficient for the bank to learn that a 
deposited check has been returned unpaid before making funds available 
to the depositor.

[[Page 16872]]

F. Section 229.19--Miscellaneous

1. Section 229.19(e)(2)
    Section 229.19(e)(2) limits the ability of a depositary bank that 
cashes a check for a customer to place a hold on other funds of the 
customer. The Board proposes to amend Sec.  229.19(e)(2) to clarify 
that a depositary bank that cashes a check for a customer over the 
counter may place a hold on funds in an account of the customer only if 
the check is not drawn on the depositary bank. In contrast, if a 
depositary bank cashes a check drawn on itself, the check is considered 
finally paid when cashed under the U.C.C.\49\ The Board intends no 
change to the substance of this provision.
---------------------------------------------------------------------------

    \49\ See UCC 4-215 and commentary to Regulation CC Sec.  
229.19(e).
---------------------------------------------------------------------------

2. Section 229.19(g)(2)
    The Board proposes to delete as obsolete the provision regarding 
mergers between July 1, 1998, and March 1, 2000.

G. Section 229.21(g)--Record Retention

    Current Sec.  229.21(g) requires a bank to maintain records 
evidencing compliance with subpart B's requirements for not less than 
two years, and states that a bank may store records using, among other 
media, ``microfiche, microfilm, [and] magnetic tape.'' These listed 
examples in Sec.  229.21(g) of the types of media on which a bank may 
store records are obsolete, and the Board proposes to replace them with 
a more general provision that a bank may store records using 
``electronic storage media,'' among other media.

H. Appendix A--Routing Number Guide to Next-Day-Availability Checks

    In the absence of nonlocal checks, it is no longer necessary to 
retain the portion of appendix A that lists under the single remaining 
Reserve Bank check-processing office (the head office of the Federal 
Reserve Bank of Cleveland) all banks' four-digit routing symbols. The 
Board proposes to delete this portion of the appendix, as well as the 
reference to the Federal Reserve Bank of Cleveland. The Board proposes 
to retain in the appendix the lists of nine-digit routing numbers 
associated with certain next-day-availability checks.\50\ The Board 
also proposes to delete certain listed routing numbers of the Federal 
Reserve Banks and Federal Home Loan Banks that have been retired.
---------------------------------------------------------------------------

    \50\ Treasury checks, postal money orders, and checks drawn on 
the Federal Reserve Banks and Federal Home Loan Banks can be 
identified by routing number, and these routing numbers will 
continue to be listed in appendix A. Next-day-availability checks 
such as cashier's, certified, and teller's checks cannot be 
identified by routing number, however, and are not listed in the 
appendix.
---------------------------------------------------------------------------

I. Appendix C, Model Availability-Policy Disclosures, Clauses and 
Notices

1. Consumer Testing Process
    The model availability-policy forms in appendix C of Regulation CC 
include numerous obsolete provisions related to nonlocal checks. 
Additionally, the model forms were first published over 20 years ago, 
when Regulation CC was first promulgated. More recently, the Board has 
tested with consumers the model forms included with its other 
regulations.\51\ In this instance, the Board used ICF Macro, a research 
and consulting firm that specializes in designing and testing 
documents, to conduct consumer testing to help the Board's review of 
the model availability-policy forms proposed in this notice. ICF Macro 
prepared a detailed report of the results of the testing, which is 
available on the Board's Web site (http://www.federalreserve.gov) along 
with this proposed rule.
---------------------------------------------------------------------------

    \51\ See Interim Final Rule on Mortgage Disclosures (Regulation 
Z), 75 FR 58470 (Sept. 24, 2010).
---------------------------------------------------------------------------

    The consumer testing consisted of two rounds of in-depth interviews 
with 9 consumers in Alexandria, Virginia, on August 19 and 20, 2010, 
and 11 consumers in Denver, Colorado, on September 13 and 14, 2010. 
Consumer participants were recruited to ensure the selection of a range 
of participants in terms of gender, education, ethnicity, and checking 
and savings account balances.\52\ While the interview protocol varied 
slightly between rounds, the general structure and most of the 
questions were the same.
---------------------------------------------------------------------------

    \52\ A sample of the screening instrument used to recruit 
interview participants is included as Appendix A to the ICF Macro 
report. Appendix B to the report provides a summary of the 
demographics of the interview participants.
---------------------------------------------------------------------------

    Prior to the first round of interviews, Board staff and ICF Macro 
collaboratively revised the forms from those currently found in 
appendix C.\53\ For example, the format was substantially modified; 
provisions related to nonlocal checks were eliminated; and language was 
added regarding a bank's right to charge back a customer's account if a 
deposited check is returned unpaid. Based on the results of each round 
of interviews, the forms were again revised. The Board plans to conduct 
additional consumer testing of the forms in response to public comments 
received on this proposal, as appropriate.
---------------------------------------------------------------------------

    \53\ The sample forms used during the consumer interviews are 
included as Appendix C to the ICF Macro report.
---------------------------------------------------------------------------

2. Model Disclosures Generally
    Citations below are to the forms in the appendix as they are 
proposed to be renumbered, unless otherwise explicitly stated. Forms 
not discussed below are either unchanged or have only technical or 
conforming amendments.
    In the absence of nonlocal checks, the Board proposes throughout 
appendix C to delete all references to the nonlocal-check and local-
check categories. Instead, the Board proposes that the forms, as 
applicable, specify the types of check deposits that receive next-day 
availability, and then state the availability that will be provided for 
checks ``other than those specified.''
    The Board proposes to modify the format of the model disclosures 
from a mostly narrative form to a more tabular form. For example, the 
Board proposes that the portions of the model disclosures specifying 
funds availability for deposits to established accounts and for 
deposits to new accounts (accounts open for 30 days or less) be 
presented within tables. The Board's testing on forms under other rules 
has consistently indicated that consumers more readily understand 
information presented in a tabular form.\54\
---------------------------------------------------------------------------

    \54\ See 75 FR 58539 at 58542 (September 24, 2010) and ICF Macro 
report, p. 4.
---------------------------------------------------------------------------

    The Board is not proposing any changes to the model substitute-
check-policy disclosure and notices in the appendix.

    i. Format of Banks' Funds-availability Disclosures and Notices

    The Board proposes to add to the commentary to appendix C a new 
paragraph A(4) discussing banks' formatting of disclosures and notices 
based on the proposed model funds-availability disclosures and notices 
in the appendix. Specifically, although the regulation does not require 
banks to use a certain paper size for their funds-availability 
disclosures and notices, the proposed model funds-availability policy 
disclosures are generally designed to be printed on an 8\1/2\ x 11 inch 
sheet of paper with black text on a white background, so as to increase 
their readability for consumers. Further, Sec.  229.15(a) requires that 
banks generally provide disclosures and notices in a form that the 
customer may keep.\55\ The proposed commentary notes that a bank that 
provides a disclosure or notice

[[Page 16873]]

electronically to a customer would comport with the formatting 
specifications of the proposed model disclosures and notices by 
providing a disclosure or notice in a file format, such as a .pdf file 
format, that electronically represents an 8\1/2\ x 11 inch sheet of 
paper with black text and a white background. In addition, a bank may 
vary (either enlarge or decrease) the font size of the model forms. As 
explained in the proposed commentary, a bank that uses too small a font 
may not be in compliance with Sec.  229.15(a)'s clear-and-conspicuous 
requirement.
---------------------------------------------------------------------------

    \55\ The commentary to Sec.  229.13(g) indicates that notice of 
an extended hold should be provided in a form the customer may keep. 
The proposed commentary to Sec.  229.16(c)(2) indicates that notice 
of a case-by-case hold should be provided in this form as well.
---------------------------------------------------------------------------

ii. Charge Back After Making Funds From Check Deposits Available
    Paragraph 5 of the commentary to appendix C states that banks may 
add information related to funds availability to the model forms. One 
of the examples currently provided is that a bank's disclosure may 
state that although funds have become available and the customer has 
withdrawn them, the customer remains responsible for deposited checks 
that are returned unpaid. The Board believes that all banks reserve the 
right to charge back a customer's account if a deposited check is 
returned unpaid.\56\ The Board proposes to incorporate language to this 
effect within the model availability-policy disclosures themselves and 
to delete this as an example from paragraph A(5) of the commentary and 
add a provision to paragraph B(1)(a) describing the charge-back 
statement in the proposed model disclosures. The Board requests comment 
on whether this proposed revision reflects the practice of most banks.
---------------------------------------------------------------------------

    \56\ See Sec.  UCC 4-214, which generally permits a collecting 
bank that has made provisional settlement with its customer to 
revoke the settlement (e.g., charge back the amount or obtain a 
refund) if the bank itself fails to receive settlement.
---------------------------------------------------------------------------

iii. Reference to Day of Availability
    The Board is proposing model availability-policy disclosures that 
in many cases would use cardinal numbers, instead of ordinal numbers, 
to describe the business day on which funds will be available in 
relation to the day on which funds are deposited. For example, the 
Board proposes in many cases to use ``2'' in place of ``second,'' 
because consumers readily perceived that formulation. In addition, the 
Board proposes that the disclosures refer to the ``next'' business day 
after a deposit, rather than the ``first'' business day. The Board 
proposes to modify paragraph B(1)(b) of the commentary accordingly. 
Notwithstanding the language used in the proposed model forms, use of 
ordinal numbers would continue to be permitted (see proposed Sec.  
229.15(b)).
iv. Inclusion of Optional Information
    The Board proposes model availability-policy disclosures that would 
reflect certain provisions of the regulation that apply only to certain 
banks, depending on the banks' policies and practices. For example, the 
proposed model disclosures would include language about use of special 
deposit slips as a condition for next-day availability for certain 
types of check deposits (see Sec.  229.10(c)(2) and language similar to 
the appendix's current model clauses C-6 and C-7 related to check 
cashing, immediate availability, and holds on other funds (see Sec.  
229.19(e)).\57\ The text of these portions of the disclosures would be 
enclosed within brackets to indicate that a bank should include it in 
the bank's disclosures only if it is applicable given the bank's 
policies and practices. The Board proposes that paragraph B(1)(c) of 
the commentary to appendix C be modified accordingly.
---------------------------------------------------------------------------

    \57\ Because the Board proposes to incorporate the information 
set forth in current model clauses C-6 and C-7 as bracketed 
information within the model disclosures, the Board proposes to 
delete model clauses C-6 and C-7 from the appendix.
---------------------------------------------------------------------------

v. Same-Day Availability
    Although Sec.  229.10(a) of the regulation requires next-day 
availability for cash deposits, and Sec.  229.10(b) requires next-day 
availability for electronic payments (as defined in Sec.  229.2(t)), 
the model availability-policy disclosures in appendix C include clauses 
that state that funds from electronic direct deposits are available on 
the day the bank receives the funds. As indicated in paragraph B(1)(b) 
of the commentary to the appendix, this is because U.S. Treasury 
regulations and ACH association rules require that preauthorized 
credits, such as direct deposits, be made available on the day the bank 
receives the funds.
    During the Board's consumer testing, many consumers expressed 
surprise that the sample disclosures indicated that funds from cash 
deposits and wire transfers (defined in Sec.  229.2(bbb)) would not be 
available until the next day. When the models in Appendix C were first 
published over 20 years ago, most banks updated their demand-deposit-
account systems on an overnight basis, such that a cash deposit or 
incoming wire transfer would not be reflected in the receiving 
customer's account balance until opening of business the next day. The 
Board believes, however, that most banks now provide same-day (if not 
immediate) availability for cash deposits and wire transfers.
    The Board therefore proposes that model funds-availability 
disclosures C-1 through C-3B, which are designed for banks that 
generally make deposits available by the next day (and are discussed in 
more detail below), be modified to indicate that funds from cash 
deposits and wire transfers will be available for withdrawal on the 
same business day that the bank receives the funds. The proposed 
commentary states that a bank basing its disclosure on one of these 
models should modify its disclosure to indicate that funds from cash 
deposits and wire transfers will be available the next day if that 
reflects the bank's practice.
    In contrast, proposed models C-4A and C-4B, which are designed for 
banks that hold funds from deposits to the statutory limits, indicate 
that funds from cash deposits and wire transfers will be available on 
the business day following receipt. The proposed commentary states that 
a bank that bases its disclosures on one of these models but that makes 
funds from cash deposits and wire transfers available the same day they 
are received--i.e., a bank that places holds to statutory limits only 
on check deposits--should modify its disclosures accordingly.
3. Model C-1--Next-Day Availability
    Proposed model C-1 may be used by a bank that has a policy of 
making funds from all deposits available by the first business day 
after a deposit is made, but not reserving the right to invoke the new-
account and other exceptions in Sec.  229.13. The Board requests 
comment on whether any banks have such a policy and on whether model C-
1 can be deleted from Appendix C.
4. Model C-2--Next-Day Availability and Sec.  229.13 Exceptions
    Proposed model C-2 may be used by a bank that has a policy of 
making funds from deposits available by the first business day after a 
deposit is made, but reserves the right to invoke the new-account and 
other exceptions in Sec.  229.13.
5. Model C-3A--Next-Day Availability, Case-by-Case Holds to Statutory 
Limits Without Cash-Withdrawal Limitation, and Sec.  229.13 Exceptions; 
and Model C-3B--Next-Day Availability, Case-by-Case Holds to Statutory 
Limits With Cash-Withdrawal Limitation, and Sec.  229.13 Exceptions
    The Board proposes to include in the appendix two versions of model 
C-3. The first version, proposed C-3A, would be used by a bank that, 
when it

[[Page 16874]]

delays availability on a case-by-case basis, does not impose the cash-
withdrawal limitation permitted by Sec.  229.12(b). The second version, 
proposed C-3B, would be used by a bank that does impose this limitation 
when it delays availability on a case-by-case basis. The additional 
text that is included in proposed C-3B, but not C-3A, related to the 
cash-withdrawal limitation, derives from current model clause C-10, 
modified to promote consumer comprehension on the basis of the Board's 
testing.\58\ The Board proposes that this text be structured as a 
bulleted list, because the Board's testing indicated that consumers 
better noticed and understood the cash-withdrawal limitation (and the 
distinction between other uses of funds) when it is in this form rather 
than in a text paragraph.\59\
---------------------------------------------------------------------------

    \58\ Because the Board proposes to incorporate into C-3B and C-
4B (discussed below) the information set forth in current model 
clause C-10, the Board proposes to delete model clause C-10 from the 
appendix.
    \59\ See p. vii of the ICF Macro report.
---------------------------------------------------------------------------

    Proposed models C-3A and C-3B include in brackets language similar 
to current model clauses C-6 and C-7, related to check cashing, 
immediate availability, and holds on other funds, modified on the basis 
of the Board's testing to promote consumer comprehension. A bank that 
bases its disclosure on proposed model C-3A or C-3B would need to 
include this bracketed text in its disclosure only if the text 
corresponds to the bank's policy and practice. A bank that has such a 
policy would include the proposed bracketed text in the same location 
as in the proposed model. Testing indicated that consumers notice and 
retain the information presented in these clauses better if the 
location of the clauses is early in the disclosure.\60\
---------------------------------------------------------------------------

    \60\ The Board proposes to take an identical approach in 
proposed model disclosures C-4A and C-4B. Specifically, a bank that 
bases its disclosure on proposed model C-4A or C-4B would include 
the bracketed text in its disclosure only if the text corresponds to 
the bank's policy and practice.
---------------------------------------------------------------------------

    Banks that base their availability-policy disclosure on model 
disclosure C-3A or C-3B and whose availability policy necessitates 
incorporation of one or more of the proposed appendix's remaining model 
clauses (proposed C-6, C-7, and C-8; current C-9, C-11, or C-11A) would 
append those model clauses to the end of the second page of proposed 
model C-3A or C-3B. The appendix's remaining model clauses pertain to a 
bank's funds-availability policy for deposits at ATMs (proposed C-6), a 
credit union's interest-payment policy (proposed C-7), and the 
availability of funds deposited at other locations (proposed C-8).
6. Model C-4A--Holds to Statutory Limits on All Deposits Without Cash-
Withdrawal Limitation; and Model C-4B--Holds to Statutory Limits on All 
Deposits With Cash-Withdrawal Limitation
    The Board proposes to remove current model disclosures C-4 (holds 
to statutory limits on all deposits (includes chart)) and C-5 (holds to 
statutory limits on all deposits), because those models are no longer 
necessary in the absence of nonlocal checks. The Board proposes to add 
new model disclosures C-4A and C-4B for a bank to use if the bank's 
policy is to hold funds on all deposits up to the statutory limits.
    Proposed model disclosure C-4A would be used by a bank that delays 
availability as allowed under Sec.  229.12 but does not impose the 
cash-withdrawal limitation permitted by Sec.  229.12(b), whereas 
proposed model C-4B would be used by a bank that delays availability as 
allowed under Sec.  229.12 and does impose the cash-withdrawal 
limitation permitted by Sec.  229.12(b). The Board proposes the 
position of the text related to the cash-withdrawal limitation in C-4B 
because the Board's testing indicated that consumers better noticed and 
understood the information when placed at the proposed location and in 
the proposed format within the disclosure. Banks that base their 
availability-policy disclosure on proposed model disclosure C-4A or C-
4B and whose availability policy necessitates incorporation of one or 
more of the proposed appendix's remaining model clauses (proposed C-6, 
C-7, or C-8) would append those model clauses to the end of the second 
page of proposed model C-4A or C-4B.
7. Proposed Model Clauses
    The Board proposes to delete current model clauses C-6 (holds on 
other funds (check cashing)), C-7 (holds on other funds (other 
account)), and C-10 (cash-withdrawal limitation), all of which the 
Board proposes to be incorporated into other model forms. The Board 
also proposes to delete current model clause C-8 (Appendix B 
availability (nonlocal checks)) because it is obsolete in the absence 
of nonlocal checks. Within current model clause C-9 (Automated Teller 
Machine Deposits (Extended Hold)) (proposed C-6), the Board proposes to 
change ``fifth business day'' to ``fourth business day'' to conform to 
the changes in proposed Sec.  229.12(d), discussed above in this 
section-by-section analysis.
8. Proposed Model Notices
i. Format
    As with the proposed model funds-availability policy disclosures, 
the Board proposes to modify the format of the model notices, where 
appropriate, from a mostly narrative form to a more tabular form. For 
example, the Board proposes to convert current model notice C-18 
(notice at locations where employees accept consumer deposits (case-by-
case holds)) (proposed C-14) to a table.
ii. Proposed Model C-9--Exception or Reasonable-Cause Hold Notice
    Current models C-12 and C-13 each include a checklist of reasons 
for which a bank may apply an exception hold. The Board's consumer 
testing on other disclosures has found that consumers may be confused 
by a listing of reasons, even though only one reason is checked and the 
others do not apply to the consumer's situation.\61\ The Board 
therefore proposes model notices that describe only one reason for the 
hold, instead of a checklist of reasons. A bank using proposed model C-
9 would insert the reason for the hold that is applicable to the 
consumer's situation in the location designated by ``(reason for 
hold).'' The checklist of reasons that is included in the current model 
would be moved to the proposed commentary, with proposed revisions for 
clarity. The proposed commentary also states that a bank may insert, in 
place of ``(reason for hold),'' a reason other than those listed in the 
commentary.
---------------------------------------------------------------------------

    \61\ See 75 FR 58539 at 58560 (September 24, 2010), discussing 
the results of the Board's testing of model forms related to the 
suspension or reduction of a home equity line of credit. See also 
the ICF Macro report, page viii.
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    Current model C-12 (proposed C-9) indicates that a bank's notice of 
an exception hold should refer to the dollar amount being held from a 
deposit.\62\ The Board proposes that proposed models C-12 also refer to 
the dollar amount of the deposit from which funds are being held. 
During the Board's testing, consumers more readily understood this 
approach and thought that the amount of the deposit would be more 
helpful in remembering the deposit in question.\63\
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    \62\ Specifically, the model reads ``We are delaying the 
availability of $(amount being held) from this deposit.''
    \63\ See ICF Macro report, p. ix.
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iii. Proposed Model C-12A--Case-by-Case Hold Notice Without Cash-
Withdrawal Limitation and Proposed Model C-12B, Case-by-Case Hold 
Notice With Cash-Withdrawal Limitation
    Current model C-16 (case-by-case hold notice) states that the day 
on

[[Page 16875]]

which funds will be available for withdrawal may be ``([subject to our 
cash-withdrawal limitation policy]).'' The limitation is material to 
the length of the hold, and, without additional inquiry, consumers may 
not know what the limitation is. Accordingly, the Board proposes to 
include in appendix C two versions of a model case-by-case hold notice: 
proposed C-12A may be used by a bank that imposes a case-by-case hold, 
but does not have a policy of imposing the cash-withdrawal limitation, 
whereas proposed model notice C-12B may be used by a bank that imposes 
such a hold and does have such a policy. Each of the two proposed 
versions would incorporate the specific days by which funds would be 
available.
    Current model C-16 indicates that a bank's notice of an exception 
hold should refer to the dollar amount being held from a deposit. The 
Board proposes that proposed models C-12A, and C-12B also refer to the 
dollar amount of the deposit from which funds are being held, because 
consumers thought that the amount of the deposit would be more helpful 
in remembering the deposit in question.\64\
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    \64\ See ICF Macro report, p. ix.
---------------------------------------------------------------------------

iv. Proposed Model C-13--Notice at Locations Where Employees Accept 
Consumer Deposits and Proposed Model C-14--Notice at Locations Where 
Employees Accept Consumer Deposits (Case-by-Case Holds)
    Current models C-17 and C-18 (proposed C-13 and C-14) are notices 
that are designed to be posted, for example, on a wall near a teller 
window in a bank branch, and set forth a brief summary of a bank's 
funds-availability policy. Current model C-17 may be used by a bank 
that has a policy of placing holds to statutory limits on deposits, 
whereas current model C-18 may be used by a bank that has a policy of 
placing case-by-case holds on check deposits.
    The Board proposes to modify current model notice C-18 (proposed C-
14) to indicate that funds from cash deposits and wire transfers will 
be available for withdrawal on the same business day that the bank 
receives the funds. Therefore, a bank with a case-by-case availability 
policy that makes cash deposits and wire transfers available the next 
business day would modify the notice accordingly. By contrast, current 
model C-17 (proposed C-14) indicates that funds from cash deposits and 
wire transfers will be available on the next business day. A bank that 
holds check deposits up to the statutory limits but that makes funds 
from cash deposits and wire transfers available on the day they are 
received would modify the notice accordingly.
    A bank using either notice that imposes cash-withdrawal limitations 
under proposed Sec.  229.12(b) would indicate that funds from check 
deposits will generally be available by the third, rather than second, 
business day after the day of deposit, by replacing ``(number)'' in the 
lower-right-hand box of the tables in the proposed models with 
``third,'' rather than ``second.''

J. Appendix F--Official Board Interpretations; Preemption 
Determinations

    Section 608 of the EFA Act provides that any state law in effect on 
September 1, 1989, that provides that funds be made available in a 
shorter period of time than provided in Regulation CC will supersede 
the time periods in the Act and regulation. Section 229.20 of the 
regulation implements Sec.  608, and Sec.  229.20(e) sets forth the 
procedures by which a state may submit to the Board a request for a 
preemption determination. In response to states' requests, the Board 
issued determinations specifying the provisions of the funds 
availability laws in California, Connecticut, Illinois, Maine, 
Massachusetts, New Jersey, New York, Rhode Island, and Wisconsin that 
supersede the EFA Act and Regulation CC. These determinations are 
contained in appendix F to the regulation.
    Since September 1, 1989, Connecticut, New Jersey, Rhode Island, and 
Wisconsin have repealed all state-specific funds availability 
provisions. California has repealed the funds availability provisions 
applicable to credit unions. In addition, the elimination of nonlocal 
checks under the EFA Act and Regulation CC affect the regulation's 
preemption of states' laws. The Board notes that the Dodd-Frank Act's 
increase from $100 to $200 of the minimum amount of check deposits that 
banks must make available by the next business day may affect the EFA 
Act and Regulation CC preemption of state law. The Board therefore 
proposes to update the preemption determinations in the appendix. The 
proposed determinations would supersede any previous determinations 
made by the Board.

III. Subpart C

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

1. Section 229.30(a)--Expeditious Return of Checks
i. Section 229.30(a)(1)
    Section 229.30(a)(1) sets forth the proposed test for expeditious 
return of a check by the paying bank. The current rule provides that if 
a paying bank determines not to pay a check, it must return the check 
in an expeditious manner, as provided under either the two-day/four-day 
test or the forward-collection test. For the reasons discussed above, 
the Board proposes to eliminate the forward-collection test and the 
four-day test for expeditious return of a check by the paying bank. As 
a result, the Board proposes that the two-day test for expeditious 
return be the only test for expeditious return in Sec.  229.30(a)(1) 
(and Sec.  229.31(a)(1)). In general, the paying bank may satisfy any 
expeditious return requirement by sending an electronic return if the 
depositary bank has agreed to receive electronic returns from the 
paying bank under proposed Sec.  229.32(a), a paper check or a notice 
in lieu if the check is unavailable. The exceptions to this general 
rule, including where the depositary bank has not agreed to accept 
electronic returns from the paying bank, are set forth in proposed 
Sec.  229.30(b).
ii. Section 229.30(a)(3)
    The Board proposes to amend Sec.  229.30(a)(3) to clarify that a 
paying bank may send a returned check to any bank that handled the 
check for forward collection if the paying bank is unable to identify 
the depositary bank.
iii. Section 229.30(a)(6)
    The Board proposes to move current Sec.  229.36(a), which states 
that a check payable at or through a paying bank is considered to be 
drawn on that bank for purposes of the expeditious-return requirement 
of this subpart, to proposed Sec.  229.30(a)(6).
2. Section 229.30(b)--Exceptions to Expeditious Return of Checks
i. Section 229.30(b)(1)
    The Board proposes to group together the exceptions to a paying 
bank's duty of expeditious return in Sec.  229.30(b)(1). Currently, the 
requirement does not apply if a paying bank is unable to identify the 
depositary bank or if the depositary bank does not maintain

[[Page 16876]]

accounts.\65\ As described above, the Board proposes that a paying bank 
have a duty of expeditious return only if the depositary bank has 
agreed to accept electronic returns from the paying bank under proposed 
Sec.  229.32(a). The Board proposes to set forth this rule as an 
exception to the general rule stated in proposed Sec.  229.30(a)(1). 
Accordingly, proposed Sec.  229.30(b)(1)(i) states that a paying bank 
need not return a check expeditiously if a depositary bank has not 
agreed to accept electronic returns from the paying bank under Sec.  
229.32(a). Although not imposing an expeditious return requirement on 
the paying bank in this situation will expose the depositary bank to 
risk, the Board believes that risk should rest with the bank choosing 
not to take advantage of an electronic infrastructure that provides 
expeditious return.
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    \65\ In the current regulation. these exceptions to a paying 
bank's duty of expeditious return are set forth, respectively, in 
Sec. Sec.  229.30(b) and 229.30(e). The exceptions to a returning 
bank's duty are in Sec. Sec.  229.31(b) and 229.31(e).
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    The proposed commentary to Sec.  229.30(b)(1) includes an example 
of when the paying bank's duty of expeditious return would and would 
not apply. For example, assume that a depositary bank has not agreed to 
accept electronic returns directly from the paying bank, but has agreed 
to accept electronic returns from Returning Bank A, which has agreed to 
handle returns expeditiously under Sec.  229.31(a). If Returning Bank A 
has not held itself out as willing accept electronic returns directly 
or indirectly from the paying bank (e.g., the returning bank has not 
published electronic return service set-up guides), the depositary bank 
has not agreed to accept electronic returns from the paying bank under 
proposed Sec.  229.32(a). If a check is presented to the paying bank on 
Monday, the paying bank would not need to send the returned check such 
that the depositary bank normally would receive the returned check by 4 
p.m. (local time of the depositary bank) on Wednesday. The paying bank, 
however, must comply with any deadlines under the Uniform Commercial 
Code, Regulation J (if sent through the Reserve Banks), or Sec.  
229.30(c).
    Under the proposed approach, a paying bank that returns checks in 
paper form would be subject to the expeditious return requirement if 
the depositary bank has agreed to accept electronic returns from a 
returning bank that holds itself out as willing to accept electronic 
returns directly or indirectly from the paying bank and agrees to 
return checks expeditiously. The Board, however, notes that if the 
returning bank from which the depositary bank has agreed to accept 
electronic returns has either not held itself out as willing to accept 
electronic returns directly or indirectly from the paying bank or has 
not agreed to return checks expeditiously, then the paying bank would 
not be subject to the expeditious return requirement under the 
proposal.
ii. Section 229.30(b)(2)
    Proposed Sec.  229.30(b)(2) addresses the situation in which the 
requirement to return a check expeditiously does not apply because the 
paying bank is unable to identify the depositary bank. In most cases in 
today's predominantly electronic check-clearing environment, the 
depositary bank's indorsement will accompany an electronic check as an 
addenda record associated with the check, and the paying bank will be 
able to route an electronic return to the depositary bank in a highly 
automated manner.\66\
---------------------------------------------------------------------------

    \66\ As is discussed below under Sec.  229.35(a) and appendix D, 
the Board proposes to require a depositary bank that transfers an 
electronic collection item to apply its indorsement in accordance 
with ANS X9.100-187, unless the parties otherwise agree.
---------------------------------------------------------------------------

    In some cases, the depositary bank's indorsement may not be in the 
accompanying addenda record, and the paying bank will be unable to rely 
on purely automated returns. The Board proposes to clarify in the 
commentary that a paying bank is not ``unable'' to identify the 
depositary bank where the depositary bank's indorsement is not in an 
addenda record associated with the electronic image, but is legibly 
included within the image of a check presented electronically to the 
paying bank. In these cases, the paying bank may visually review the 
image of the check to determine the identity of the depositary bank and 
create an electronic return addressed to the depositary bank or a 
returning bank agreeing to handle it on the basis of that indorsement 
within the image. Provided the depositary bank accepts electronic 
returns (directly or indirectly) from the paying bank under Sec.  
229.32(a), the expeditious-return requirement would apply in this 
situation.
    In other cases, however, the depositary bank's indorsement may not 
be in an addenda record associated with an electronic image, and also 
may be absent from or illegible within the image of the check that is 
presented to the paying bank. In these cases, the paying bank may be 
unable to identify the depositary bank and the expeditious-return 
requirement would not apply to the paying bank. If the paying bank has 
an agreement to send electronic returns to a bank that handled the 
check for forward collection, the paying bank may under Sec.  
229.30(b)(2) send the electronic return to that bank, subject to that 
agreement. Such a bank may be better able to identify the depositary 
bank. In general, the paying bank must advise the bank to which the 
return is sent that it is unable to identify the depositary bank. The 
Board proposes to clarify in the commentary that, in the case of 
electronic returns, the paying bank meets this requirement by inserting 
the routing number of the bank to which it is sending the return where 
the paying bank otherwise would have inserted the routing number of the 
depositary bank. The Board requests comment on whether the regulation 
and commentary provide the appropriate level of detail with respect to 
paying banks' preparation and addressing of electronic returns in cases 
where it is unable to identify the depositary bank.
3. Section 229.30(c)--Extension of Deadline
    The Board proposes amending Sec.  229.30(c), which extends the 
paying bank's deadline to initiate the return of a check. The current 
rule generally extends the deadline to the time at which a paying bank 
dispatches the return, if the paying bank uses a means of delivery that 
ordinarily would result in receipt by the bank to which the return is 
sent on or before the receiving bank's next banking day following the 
day of the applicable deadline by the earlier of the close of that 
banking day or a 2 p.m. cutoff hour (or such later time as set by the 
receiving bank under UCC 4-108).\67\ The provision allows the paying 
bank an extension, provided that the paying bank sends the return such 
that it would ordinarily be received by the depositary bank within the 
timeframes mandated by the regulation's current tests for expeditious 
return.
---------------------------------------------------------------------------

    \67\ The current paragraph provides a further extension if the 
paying bank uses a ``highly expeditious'' means of return, or if the 
paying bank's deadline for return falls on a Saturday that is a 
banking day for the paying bank under the UCC. (Saturday is never a 
banking day under Regulation CC.)
---------------------------------------------------------------------------

    As discussed above, the Board proposes to eliminate the forward-
collection test and the four-day test for expeditious return of a 
nonlocal check, such that the two-day test for expeditious return would 
be the only remaining test. Correspondingly, the Board proposes to 
simplify the extension in Sec.  229.30(c): The paying bank's deadline 
for return would be extended to the time of dispatch if the paying bank 
sends the return such that

[[Page 16877]]

it reaches the depositary bank by 4 p.m. on the second business day 
after the banking day on which the check was presented to the paying 
bank; i.e., such that the return would ordinarily reach the depositary 
bank within the time required by the two-day expeditious-return test. 
The proposed 4 p.m. deadline would correspond to the expeditious return 
deadline in proposed Sec. Sec.  229.30(a). As noted in the proposed 
commentary, a paying bank may rely on the return schedules of a 
returning bank in determining whether the returned check or electronic 
return would ``ordinarily'' reach the depositary bank by 4 p.m. on the 
second business day after the banking day on which the check was 
presented to the paying bank.
    Alternatively, the Board requests comment on whether a paying bank 
that sends a returned check to a returning bank and relies on this 
extension should bear the risk that the returning bank may not return 
the check expeditiously. Specifically, the Board requests comment on 
whether it should modify the extension such that the return must 
actually reach the depositary bank within the two-day timeframe for 
expeditious return in order for the extension to apply. Such a 
modification to the extension might further encourage paying banks to 
initiate return of a check in a timely fashion.
4. Section 229.30(d)--Identification of a Returned Check
i. Placement of Reason for Return on a Substitute Check
    Section 229.30(d) currently states that ``[a] paying bank returning 
a check shall clearly indicate on the face of the check that it is a 
returned check and the reason for return. If the check is a substitute 
check, the paying bank shall place this information within the image of 
the original check that appears on the front of the substitute check.'' 
When current Sec.  229.30(d) became effective in 2004, the placement on 
substitute checks was consistent with the industry standard for 
substitute checks, American National Standard Specifications for an 
Image Replacement Document--IRD, X9.100-140 (ANS X9.100-140). Under the 
terms of the revised industry standard, however, the reason for return 
of a substitute check must be placed above a substitute check's image 
of the original check--i.e., not within the image of the original check 
that appears on the front of the substitute check, but nonetheless 
within the portion of the front of the substitute check that is 
``clipped'' when an image of the substitute check is captured.\68\ The 
change to the standard is intended to make it less likely that the 
return-reason information will obscure underlying data from the 
original check, such as the name of the payee or the amount of the 
check, while continuing to ensure that the reason for the return is 
retained in any captured image of the substitute check, as well as on 
any subsequent substitute check.
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    \68\ In addition to the image of the front of the original 
check, the portion of the front of the substitute check that is 
clipped includes the area on the check above the original check 
image and the routing number of the truncating bank to the left of 
the image.
---------------------------------------------------------------------------

    The current commentary explains that Sec.  229.30(d) specifies 
where to place the return-reason information on a returned substitute 
check in order to ensure that ``the information is retained on any 
subsequent substitute check.'' The revised industry standard, ANS 
X9.100-140, is consistent with this purpose. Accordingly, the Board 
proposes to modify the Sec.  229.30(d) to state that ``[i]f the check 
is a substitute check or electronic return, the paying bank shall place 
this information [the reason for the return] such that the information 
would be retained on any subsequent substitute check.'' Further, the 
Board proposes to amend the commentary to state that the requirement to 
place the return-reason information such that it is retained on any 
subsequent substitute check could be met by placing the information (1) 
in the location on the front of the substitute check that is specified 
by ANS X9.100-140 or (2) within the image of the original check that 
appears on the front of the substitute check. The Board believes it is 
necessary for the regulation to continue to permit this latter 
possibility in order to encompass situations in which a paying bank 
presented with a previously-created substitute check opts to physically 
stamp the reason for the return on the substitute check.
ii. Refer-to-Maker Reason for Return
    Current commentary to Sec.  229.30(d) states that ``refer to 
maker'' may be a permissible reason for return in appropriate cases but 
does not elaborate as to which cases may be appropriate. The Board, 
however, does not believe that ``refer to maker,'' by itself, is an 
appropriate reason for return in any case. ``Refer to maker'' is an 
instruction rather than a reason for return. Alone, it does not provide 
the depositary bank with sufficient information to determine whether it 
should represent the check. Accordingly, the Board proposes to amend 
the commentary to Sec.  229.30(d) to state that ``refer to maker'' is 
insufficient as a reason for return, because ``refer to maker'' is an 
instruction to the recipient of the returned check and not a reason for 
return (e.g., insufficient funds). A paying bank may use ``refer to 
maker'' in addition to the reason for return. The Board requests 
comment on whether there are circumstances in which it is appropriate 
to use only ``refer to maker'' when returning a check.
5. Section 229.30(e)--Notice in Lieu of Return
    Section 229.30(f) currently states that if a check is unavailable 
for return, the paying bank may send in its place a copy of the front 
and back of the returned check, or, if no such copy is available, a 
written notice of nonpayment containing the information specified in 
current Sec.  229.33(b).
    Historically, notices in lieu of return were used when an original 
check was lost or destroyed. Following implementation of the Check 21 
Act, however, the unavailability of an original check does not prevent 
return of the check, provided that an image of the check sufficient to 
create a substitute check is available. The Board therefore proposes to 
revise the Sec.  229.30(e) commentary to provide that a bank may send a 
notice in lieu of return only where neither the check itself nor an 
image of and information related to the check sufficient to create a 
substitute check is available.
    The commentary states that notice by electronic transmission, other 
than a legible facsimile or similar image of both sides of a check, 
does not satisfy the requirements for a notice in lieu of return. The 
Board proposes to amend the commentary to Sec.  229.30(e) to provide 
that, if no image of both sides of the check is available, the notice 
in lieu of return may be sent by means of an electronic transmission, 
so long as it contains the required information. For example, the 
notice may be sent by ACH payment record if permitted by applicable ACH 
rules, or by an electronic check record if permitted by applicable 
rules and standards. These records are similar to the currently-
permitted written notices of nonpayment where legible copies of both 
sides of the check are unavailable. The Board requests comment, 
however, on whether a bank would ever have the information necessary 
for a notice in lieu of return if it had neither the check nor an image 
of both sides of the check. As under the current rule, notice by 
telephone or other similar oral transmission would not be permitted.
    Because notice in lieu of return must include the information 
required for a notice of nonpayment, and the Board

[[Page 16878]]

proposes to eliminate the notice of nonpayment requirement, the Board 
proposes to move the information requirements for a notice in lieu of 
return from current Sec.  229.33(b) to new Sec.  229.30(e)(2). The 
Board proposes that the information requirements for a notice in lieu 
of return remain unchanged.
    Currently, a notice in lieu is not required to contain the check's 
original MICR line. The Board understands, however, that a depositary 
bank can often use the data from the original MICR line of a returned 
check to find in its computer systems an image of the item, which the 
depositary bank captured when it took the check for deposit, and which 
the depositary bank can either re-clear or charge back to its 
customer's account.\69\ The Board requests comment on whether the 
information-content specifications for a notice in lieu of return 
should be modified to reflect these capabilities by requiring that a 
notice in lieu of return include the check's original MICR line.
---------------------------------------------------------------------------

    \69\ If the depositary bank chooses to re-clear a check on the 
basis of an image of the check it captured when it took the check 
for deposit, it should ensure that the re-cleared check reflects the 
fact that the check has already been returned one time.
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    As an alternative to the proposed approach, the Board requests 
comment on whether the regulation's provision for notice in lieu of 
return should be deleted. Specifically, the only factual scenario in 
which a notice in lieu of return may be necessary under the proposal is 
where a paper check is presented to the paying bank and the paying bank 
loses the check, but has access to a copy that is not in the proper 
format to permit creation of a substitute check or electronic return. 
Forward interbank check collection, however, including presentment to 
the paying bank, is almost always electronic, and, furthermore, paying 
banks initiate almost all check returns electronically. Given the 
overwhelming prevalence of electronic presentment and electronic 
initiation of return, the paying bank almost always will be able to 
return an electronic collection item that was presented to it. 
Therefore, it may no longer be necessary for paying banks to use 
notices in lieu of return.\70\ The Board requests comment on whether a 
provision for notice in lieu of return continues to be necessary.
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    \70\ If an electronic collection item presented to the paying 
bank contained an illegible image of the check and the paying bank 
decided to return the item (perhaps for an unrelated reason, such as 
insufficient funds), the paying bank could return the electronic 
collection item as an electronic return, instead of initiating a 
notice in lieu of return.
---------------------------------------------------------------------------

6. Section 229.30(f)--Reliance on Routing Number
    The regulation currently provides that a paying bank may return a 
check based on any routing number designating the depositary bank 
appearing on the check in the depositary bank's indorsement. The Board 
proposes in Sec.  229.30(f) to add that the paying bank may also rely 
on any routing number designating the depositary bank in the electronic 
image of or information related to the check.

B. Section 229.31--Returning Bank's Responsibility for Return of Checks

1. Section 229.31(a)--Expeditious Return of Checks
i. Section 229.31(a)(1)
    For the reasons discussed above under Sec.  229.30(a)(1), the Board 
proposes to make conforming amendments to Sec.  229.31(a) and eliminate 
the forward-collection test and the four-day test for expeditious 
return of a check by the returning bank, such that the two-day test for 
expeditious return would be the only test in Sec.  229.31(a)(1). 
Further, a returning bank would be subject to the expeditious return 
requirement if it agrees to return checks expeditiously. The Board 
proposes to amend the commentary to Sec.  229.31(a)(1) to explain that 
a returning bank may condition its agreement to return checks 
expeditiously on receiving an electronic return from the paying bank or 
returning bank. The Board also proposes to amend the commentary to 
Sec.  229.31(a)(1), by removing as an example of when a returning bank 
agrees to return checks expeditiously a returning bank handling a 
returned check for return that it did not handle for forward 
collection. While the Board intends a paying bank to continue to be 
able to send a returned check to a returning bank that did not handle 
the check for forward collection, the Board does not believe that a 
returning bank that receives such a check should be deemed to agree to 
handle the returned check expeditiously. Under this proposed change, 
for example, a returning bank may accept a paper returned check that it 
did not handle for forward collection, while not being deemed to have 
agreed to handle it for expeditious return.
ii. Section 229.31(a)(3)
    The Board proposes to clarify in proposed Sec.  229.31(a)(3) 
(currently in Sec.  229.31(a)) that if the returning bank is unable to 
identify the depositary bank with respect to a returned check, it may 
send the returned check to any bank that handled the check for forward 
collection if it was not a collecting bank with respect to the check, 
or to a prior collecting bank if it was a collecting bank.
iii. Section 229.31(a)(4)
    The substance of proposed Sec.  229.31(a)(4) (currently in Sec.  
229.31(a)) currently provides that a returning bank's time for 
expeditious return under the forward-collection test and its deadline 
for return are extended by one business day if the returning bank 
converts a returned check to a qualified returned check.\71\ This 
extension does not apply to the two-day/four-day test, and it does not 
apply when the returning bank sends the check directly to the 
depositary bank, because in that case qualifying the check does not 
expedite its handling by the bank to which it is sent.
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    \71\ A qualified returned check is ``a returned check that is 
prepared for automated return to the depositary bank by placing the 
check in a carrier envelope or placing a strip on the check and 
encoding the strip or envelope in magnetic ink.'' Current 12 CFR 
229.2(bb).
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    The Board proposes to eliminate this extension. The extension does 
not apply to the two-day test for expeditious return, which the Board 
proposes to be the sole test. Further, the extension, if retained, 
might benefit returning banks that choose to qualify and send paper 
returned checks destined for depositary banks that have agreed to 
accept returns electronically; a result that is inconsistent with the 
policy of encouraging electronic return of checks. In addition, if a 
returned check is destined for a depositary bank that does not accept 
returned checks electronically (i.e., if the returned check is one to 
which the proposed two-day test does not apply), the Board believes 
that a returning bank's midnight deadline affords it sufficient time to 
process and send the returned check, irrespective of whether the 
returning bank qualifies the returned check or not.
    A qualified return check is prepared for automated return by 
placing the check in a carrier envelope or placing a strip on the 
check. According to current industry practice, however, such envelopes 
should be used only in situations in which the check has been mutilated 
and cannot be imaged or handled by automated check-processing 
equipment. Therefore, the Board requests comment on whether the 
regulation should continue to allow a bank to prepare a check for 
automated return by placing the check in a carrier envelope. Further, 
in today's predominantly electronic check-clearing environment, 
qualification of paper

[[Page 16879]]

returned checks happens only rarely and it is not clear that 
qualification continues to be a means of expediting returned checks' 
delivery to the depositary bank because carrier envelope's inhibit 
check imaging. The Board requests comment on whether the regulation's 
provisions for qualifying of paper returned checks by paying banks and 
returning banks should be deleted.
2. Section 229.31(b)--Exceptions to Expeditious Return of Checks
    The Board proposes changes to Sec.  229.31(b) similar to those 
discussed above under Sec.  229.30(b). Specifically, the Board proposes 
to group together the current exceptions to a returning bank's duty of 
expeditious return in Sec.  229.31(b)(1) and to provide that, in 
addition to the exceptions currently provided in the regulation, the 
returning bank's duty of expeditious return does not apply if the 
depositary bank has not agreed to accept electronic returns from the 
paying bank under Sec.  229.32(a).
    A returning bank does not have a duty to expeditiously return the 
check if the returning bank is not able to identify the depositary bank 
with respect to a returned check. Section 229.31(b) of the regulation 
currently provides, however, that if a paying bank is not able to 
identify the depositary bank with respect to a returned check and sends 
the returned check under the terms of Sec.  229.30(b) to a returning 
bank, but the returning bank can identify the depositary bank (for 
example, on the basis of its records from the forward collection of the 
check), then the returning bank must thereafter return the check 
expeditiously to the depositary bank. The Board proposes to remove this 
requirement from the regulation (proposed Sec.  229.31(b)(1)(iv)), 
because it may be difficult for a returning bank to meet the two-day 
test for expeditious return where the paying bank likely sent the 
return as if the return was not subject to the expeditious return 
requirement. In the absence of an expeditious-return requirement, the 
UCC would nonetheless require a returning bank in this situation to use 
ordinary care when returning the item.\72\
---------------------------------------------------------------------------

    \72\ UCC Sec.  4-202 states that a collecting bank exercises 
ordinary care ``by taking proper action before its midnight deadline 
following receipt of an item, notice, or settlement. Taking proper 
action within a reasonably longer time may constitute the exercise 
of ordinary care, but the bank has the burden of establishing 
timeliness.''
---------------------------------------------------------------------------

3. Section 229.31(d)--Charges
    The Board proposes to clarify in Sec.  229.31(d) that a returning 
bank may impose a charge for handling a returned check on the bank that 
sent the returned check to it, rather than another party.
4. Section 229.31(e)--Notice in Lieu of Return
    The Board proposes to make amendments to Sec.  229.31(e) to conform 
with proposed amendments to Sec.  229.30(e).
5. Section 229.31(f)--Reliance on Routing Number
    The regulation currently provides that a returning bank may return 
a check based on any routing number designating the depositary bank 
appearing on the check in the depositary bank's indorsement or in 
magnetic ink on a qualified returned check. The Board proposes to add 
that the returning bank may also rely on any routing number designating 
the depositary bank in the electronic image or information included in 
an electronic return.

C. Section 229.32--Depositary Bank's Responsibility for Returned Checks

1. Section 229.32(a)--Acceptance of Electronic Returns
i. Section 229.32(a)(1)
    The Board proposes in Sec.  229.32(a)(1) three different 
circumstances under which a depositary bank would be deemed to have 
agreed to accept an electronic return from the paying bank. The 
depositary bank must accept an electronic return in at least one of 
these ways so as to be entitled to expeditious return under the Board's 
proposal. The first way in which a depositary bank is considered to 
have agreed to accept electronic returns from the paying bank is by 
having a direct contractual relationship with the paying bank under 
which it agrees to accept electronic returns from the paying bank 
(proposed Sec.  229.32(a)(1)(i)).
    Secondly, under proposed Sec.  229.32(a)(1)(ii), a depositary bank 
could have a direct contractual relationship with a returning bank to 
accept electronic returns. In turn, that returning bank must hold 
itself out as willing to accept electronic returns directly or 
indirectly (e.g., from another returning bank) from the paying bank and 
must have agreed to handle returned checks expeditiously under Sec.  
229.31(a) in order for the depositary bank to have agreed to receive 
electronic returns from the paying bank under Sec.  229.32(a). The 
proposed commentary to proposed Sec.  229.32(a) provides an example of 
such an arrangement. The Board proposes to provide examples in the 
proposed commentary to proposed Sec.  229.32(a) of how a returning bank 
holds itself out as willing to accept electronic returns directly or 
indirectly from the paying bank. Specifically, a returning bank would 
be considered to hold itself out as willing to accept electronic 
returns if it published information about its generally available 
electronic return service, such as information about signing up for the 
service and fees. The Board requests comment on whether it should 
provide more specificity as to under what circumstances a returning 
bank is deemed to hold itself out as willing to accept electronic 
returns directly or indirectly from a paying bank.
    Third, a depositary bank may have otherwise agreed with the paying 
bank to receive an electronic return. The proposed commentary indicates 
that one example of such an agreement would be where the depositary 
bank and paying bank are both members of the same check clearing house, 
through which the depositary bank has agreed to accept electronic 
returns from the paying bank.
ii. Section 229.32(a)(2)
    Proposed Sec.  229.32(a)(2) establishes that a depositary bank 
receives an electronic return when the return is delivered to the 
electronic return point designated by the bank or, by agreement, 
otherwise is made available to the bank for retrieval or review. For 
example, if a depositary bank designates an e-mail address as its 
electronic receipt address, the depositary bank has received the 
electronic return when it is delivered to that e-mail address. In 
contrast, if the depositary bank has an arrangement with a returning 
bank whereby the returning bank sends the electronic return to its 
storage device and then provides the depositary bank with access to the 
storage device for retrieving electronic returns, the electronic return 
is received by the depositary bank when the returning bank makes the 
electronic return available for the depositary bank to retrieve or 
review from the storage device in accordance with the agreement between 
the depositary bank and the returning bank.
iii. Section 229.32(a)(3)
    Proposed Sec.  229.32(a)(3) would permit a depositary bank to 
require that electronic returns be separated from electronic collection 
items. This proposed rule is similar to the undesignated paragraph in 
existing Sec.  229.32(a) (proposed Sec.  229.32(b)(2)) that permits a 
depositary bank to require that returned checks be separated from 
forward-collection checks.

[[Page 16880]]

2. Section 229.32(b)--Acceptance of Paper Returned Checks
    The Board proposes to clarify that current Sec.  229.32(a) 
(proposed to be redesignated as Sec.  229.32(b)) is limited to setting 
forth the locations at which a depositary bank must accept paper 
returned checks. Further, because there are no more nonlocal checks, 
the Board proposes to delete current Sec.  229.32(a)(2)(iii) from the 
regulation, which states that if the address in the depositary bank's 
indorsement is not in the same check-processing region as the address 
associated with the routing number in its indorsement, the depositary 
bank must accept returned checks both at a location consistent with the 
address in the indorsement and at an office associated with the routing 
number.\73\ Under the proposal, a depositary bank that includes its 
address in its indorsement is required to receive paper returned checks 
at a location consistent with the address (proposed Sec.  
229.32(b)(1)(ii)(A)) and at a location, if any, at which it requests 
presentment of paper checks (proposed Sec.  229.32(b)(1)(i)). Moreover, 
the depositary bank may structure its operations such that these two 
locations are the same, i.e., such that the depositary bank accepts 
paper returned checks at only one location.
---------------------------------------------------------------------------

    \73\ The Board also proposes to delete the second sentence of 
paragraph 8 of the commentary to Sec.  229.35(a), which states that 
if the address in the indorsement is not consistent with the routing 
number, then the depositary bank must accept returned checks at a 
branch or head office consistent with the routing number.
---------------------------------------------------------------------------

    The Board proposes that a depositary bank is entitled to 
expeditious return only if it agrees to accept an electronic return 
under Sec.  229.32(a). The Board anticipates that virtually all 
depositary banks will agree to do so, and that a depositary bank that 
accepts electronic returns will generally prefer to receive all returns 
in electronic form. Further, return of a paper check to such a 
depositary bank should be rare, because under the Board's proposal a 
paper returned check must be delivered to the bank within the two-day 
timeframe for expeditious return, and delivery of a paper check within 
that timeframe is generally difficult and costly. The Board believes it 
is therefore appropriate for a depositary bank to be able to limit to 
one the number of locations at which it must accept returned checks. If 
the bank specifies a location for delivery of paper returned checks 
that is difficult to reach, and the depositary bank has not agreed to 
accept electronic returns from the paying bank, the risk of any delay 
falls mainly on the depositary bank itself.
3. Section 229.32(e)--Charges
    In Sec.  229.32(e), the Board proposes to clarify that a depositary 
bank may not impose a charge for accepting and paying the check on the 
bank returning a check to it, as opposed to other parties on which it 
is permitted to impose charges.
4. Section 229.32(f)--Notification to Customer
    Current Sec.  229.33(d) states that if the depositary bank receives 
a returned check, it must provide notice of the facts to its customer 
by midnight of the banking day following the banking day on which it 
received the returned check, or within a longer reasonable time. The 
Board proposes to redesignate current Sec.  229.33(d) as Sec.  
229.32(f). The commentary to this section is proposed to be revised to 
remove outdated provisions.

D. Current Sec.  229.33--Notice of Nonpayment

    For the reasons discussed above, the Board proposes to delete the 
requirement in current Sec.  229.33 that a paying bank provide notice 
of nonpayment of a check in the amount of $2,500 or more. Further, the 
Board proposes, where appropriate, to delete references to notices of 
nonpayment throughout subpart C.

E. Section 229.33--Electronic Returns and Collection Items

    The Board's proposal defines two new items: electronic returns and 
electronic collection items. The proposal permits paying banks to send 
electronic returns to depositary banks that have agreed to receive 
them, either directly or indirectly, from the paying bank; the proposal 
also permits paying banks to require that items presented for same-day 
settlement be presented as electronic collection items. Because such 
items are intended to take the place of original paper checks or 
substitute checks, proposed new Sec.  229.33 provides that electronic 
collection items and electronic returns are subject to the requirements 
of subpart C as if they were checks, unless the subpart provides 
otherwise. For example, if a paying bank receives presentment of an 
electronic collection item and returns it unpaid, it would be subject 
to the regulation's expeditious-return requirement, provided the 
depositary bank has agreed to accept electronic returns from the paying 
bank under Sec.  229.32(a). Similarly, a depositary bank that receives 
an electronic return must so notify its customer, as required under 
Sec.  229.32(f).

F. Section 229.34--Warranties and Indemnities

1. Section 229.34(a)--Transfer and Presentment Warranties With Respect 
to an Electronic Collection Item or an Electronic Return
    Proposed Sec.  229.34(a) sets forth the warranties that a bank 
makes when it transfers or presents an electronic collection item or 
electronic return and receives consideration. The Board proposes that 
the bank warrant that (1) the electronic image accurately represents 
all of the information on the front and back of the original check as 
of the time that the original check was truncated and the electronic 
information contains an accurate record of all MICR line information 
required for a substitute check under Sec.  229.2(rr) and the amount of 
the check; and (2) no person will receive a transfer, presentment, or 
return of, or otherwise be charged for, an electronic collection item, 
an electronic return, the original check, a substitute check, or a 
paper or electronic representation of a substitute check such that the 
person will be asked to make payment based on a check it has already 
paid. Each bank that transfers or presents an electronic collection 
item would make the warranties to the transferee bank, any subsequent 
collecting bank, the paying bank, and the drawer. Each bank that 
transfers an electronic return would make the warranties to the 
transferee returning bank, any subsequent returning bank, the 
depositary bank, and the owner of the check.
    These warranties are similar to the warranty that the transferor of 
a substitute check or paper or electronic representation of a 
substitute check makes under the terms of the Check 21 Act and Sec.  
229.52 of Regulation CC. These warranties would, for example, protect a 
bank that may need to create a substitute check from an electronic 
collection item or electronic return that it receives. The proposed 
warranties would not apply to electronic items transferred or presented 
pursuant to an agreement that does not require the items to include an 
image of the check, because such items would not purport to meet the 
proposed definition of an electronic collection item or electronic 
return and the receiving bank would not expect to be able create a 
legally equivalent substitute check from the item.
2. Current Sec.  229.34(b)--Warranty of Notice of Nonpayment
    Because the Board proposes to delete the regulation's provision for 
notice of nonpayment, the Board proposes to

[[Page 16881]]

delete the warranty applicable to such notice that is set forth in 
current Sec.  229.34(b).
3. Proposed Sec.  229.34(b)--Settlement Amount, Encoding, and Offset 
Warranties
    The Board proposes that the encoding warranty in current Sec.  
229.34(c)(3) (proposed Sec.  229.34(b)(3)) be extended to information 
encoded after issue as electronic information. For purposes of this 
paragraph, information encoded after issue includes any information in 
the electronic information of an electronic collection item or 
electronic return.
4. Proposed Sec.  229.34(c)--Transfer and Presentment Warranties With 
Respect to a Remotely Created Check
    Under current Sec.  229.34(d), a bank that transfers or presents a 
remotely created check and receives settlement or consideration for it 
warrants that the person on whose account the remotely created check is 
drawn authorized the issuance of the check in the amount stated on the 
check and to the payee stated on the check. The Board proposes to amend 
the commentary to proposed Sec.  229.34(c) to clarify that under 
proposed Sec.  229.34(e), the warranty would apply to an electronic 
image and information that purport to be derived from a remotely 
created check, even were they not in fact derived from a paper check. 
For example, a depositary bank transferring an electronic image and 
information that, upon inspection, appear to be derived from a check 
that meets the regulation's definition of remotely created check would 
make the warranty of authorization for a remotely created check even if 
no original check existed with respect to the transaction in question. 
Further, a paying bank receiving presentment of such an item would 
receive from the presenting bank a warranty that the item was 
authorized by the person on whose account the item is drawn.
    Currently, a bank that transfers a remotely created check makes the 
current Sec.  229.34(e) warranty to the transferee bank, any subsequent 
collecting bank, and the paying bank. The Board's proposed warranties 
with respect to electronic collection items (which could be derived 
from remotely created checks) extend to the drawer; similarly, the 
current notice of nonpayment and returned check warranties extend to 
the owner of the check. The Board requests comment on whether the 
remotely created check warranties should extend to the person on whose 
account the remotely created check is drawn.
5. Section 229.34(d)--Warranties With Respect to a Returned Check
    Proposed Sec.  229.34(d) contains the warranties set forth in 
current Sec.  229.34(a). The Board proposes to delete from these 
warranties the warranty of return of a check within the deadline 
specified in Regulation J. The Regulation J warranties apply only to 
those returned checks subject to the terms of that regulation, and need 
not be specified in Regulation CC.
6. Section 229.34(e)--Electronic Image and Information Transferred as 
an Electronic Collection Item or Electronic Return
    Under proposed Sec.  229.34(e), a bank that transfers or presents 
an electronic image and related electronic information as if it were an 
electronic collection item or electronic return would make all the 
warranties in Sec.  229.34 as if the image and information were an 
electronic collection item or electronic return. In turn, because 
electronic collection items and electronic returns would be treated as 
if they were checks or returned checks under Sec.  229.33, a bank also 
would make the warranties in Sec.  229.34 as if the images and related 
electronic information were checks or returned checks. This proposal 
protects recipients of these items that likely will not be able to 
distinguish them from similar items that originated as paper checks and 
therefore meet the definitions of ``electronic collection item'' and 
``electronic return.''
    In order for a substitute check to be the legal equivalent of the 
original check, the image and information contained in the substitute 
check must be of a paper check. Accordingly, the Board proposes 
definitions that require electronic collection items and electronic 
returns be derived from an item that existed as paper. In some cases, a 
bank may receive an electronic image and electronic information that 
looks like an electronic collection item or electronic return, but is 
neither, because it was originally created electronically and there was 
never a paper check. Banks that receive such images and related 
electronic information usually cannot differentiate them from actual 
electronic collection items or electronic returns. Nonetheless, a bank 
that unknowingly receives an electronic image and related electronic 
information not derived from a paper instrument may nonetheless 
transfer the image and related electronic information as if it were 
derived from a paper instrument. Therefore, the Board believes that 
electronic images and related electronic information transferred as 
electronic collection items or electronic returns should be subject to 
the same warranties as electronic collection items and electronic 
returns, and therefore, the same warranties as checks and returned 
checks (see proposed Sec.  229.34(a)).

G. Section 229.35(a)--Indorsement Standards; Appendix D--Indorsement, 
Reconverting-Bank Identification, and Truncating-Bank Identification 
Standards

    Section 229.35(a) requires a bank (other than the paying bank) that 
handles a check to indorse the check in a manner that permits a person 
to interpret the indorsement. Since implementation of the Check 21 Act, 
banks have increasingly complied with this requirement by associating 
their electronic indorsements with items that they handle 
electronically.
    In appendix D, the Board proposes to require a depositary bank that 
transfers an electronic collection item to another bank to apply its 
indorsement to that item electronically in accordance with ANS X9.100-
187, unless the parties otherwise agree.\74\ Similarly, the Board also 
proposes to require a collecting bank that transfers an electronic 
collection item, or a returning bank that transfers an electronic 
return, to another bank to apply its indorsement electronically in 
accordance with ANS X9.100-187, unless the parties otherwise agree. In 
general, the Board believes that inclusion of banks' indorsements as 
addenda records accompanying electronic collection items and electronic 
returns will facilitate the automated handling of the items by 
subsequent banks. In particular, inclusion of the depositary bank's 
indorsement as an addenda record accompanying an electronic collection 
item will facilitate the automated routing of electronic returns by 
paying banks and returning banks.
---------------------------------------------------------------------------

    \74\ This new requirement would not alter the flexibility 
provided by Sec.  229.35(d) to a depositary bank to arrange with 
another bank to apply the other bank's indorsement as the 
depositary-bank indorsement.
---------------------------------------------------------------------------

H. Section 229.36--Presentment and Issuance of Checks

1. Section 229.36(a)--Receipt of Electronic Collection Items
i. Section 229.36(a)(1)
    Proposed Sec.  229.36(a)(1) sets forth two circumstances in which a 
paying bank is deemed to have agreed to accept an electronic collection 
item from the presenting bank. First, a paying bank may agree to accept 
the electronic

[[Page 16882]]

collection item directly from the presenting bank. Second, a paying 
bank may have otherwise agreed with the presenting bank to accept an 
electronic collection item. The proposed commentary indicates that one 
example of such an agreement would be where the paying bank and 
presenting bank are both members of the same check clearing house, 
under the rules of which the paying bank has agreed to accept 
electronic collection items from the presenting bank.
ii. Section 229.36(a)(2)
    Similar to proposed Sec.  229.32(a)(2), proposed Sec.  229.36(a)(2) 
sets forth when a bank is considered to receive an electronic 
collection item. A bank receives an electronic collection item when it 
is delivered to the electronic presentment point designated by the bank 
or, by agreement, otherwise is made available to the bank for retrieval 
or review. For example, if a paying bank designates an Internet 
protocol (IP) address as its electronic presentment point, the paying 
bank has received an electronic collection item when it is delivered to 
that address. In contrast, the paying bank may have an arrangement with 
the collecting bank whereby electronic collection items are received by 
the paying bank when the collecting bank makes the items available for 
the paying bank to retrieve or review from a storage device in 
accordance with the agreement between the collecting bank and the 
paying bank.
iii. Section 229.36(a)(3)
    Similar to proposed Sec.  229.32(a)(2), proposed Sec.  229.36(a)(3) 
permits a paying bank, for ease of processing, to require that 
electronic collection items be separated from electronic returns.
2. Section 229.36(b)--Receipt of Paper Checks
    The Board proposes in Sec.  229.36(b)(2) that a paying bank be 
permitted to require that forward-collection checks be separated from 
returned checks. A similar provision in current Sec.  229.36(f)(1) is 
limited to checks presented for same-day settlement and permits a 
paying bank to require that paper checks presented for same-day 
settlement be separated from other forward-collection checks or 
returned checks. The Board requests comment on whether a requirement 
that paper checks presented for same-day settlement be separated from 
other checks presentments remains necessary.
3. Section 229.36(d)--Same-Day Settlement
    For the reasons discussed above in the overview of the proposal, 
the Board proposes in Sec.  229.36(d)(2) to permit a paying bank to 
require that checks presented for same-day settlement be presented as 
electronic collection items to a designated electronic presentment 
point.
4. Section 229.36(e)--Issuance of Payable-Through Checks
    Current Sec.  229.36(e) requires a bank that arranges for checks 
payable by it to be payable through another bank to print conspicuously 
on the face of the check the name, location, and first four digits of 
the routing number of the bank by which the check is payable. The 
purpose of this provision is to alert the depositary bank receiving a 
check for deposit that it could not rely on the routing number in the 
MICR line of the check to determine whether the check was local or 
nonlocal. Because there are no longer any nonlocal checks, the Board 
believes that Sec.  229.36(e) is no longer necessary and proposes to 
delete it.

I. Section 229.37--Variation by Agreement

    The commentary to Sec.  229.37 provides examples of situations 
where variation by agreement is permissible. The Board proposes to 
amend the commentary to Sec.  229.37 to include as an example of 
permissible variation by agreement the situation where a depositary 
bank and a paying bank or returning bank agree to send electronic 
returns even where the item is available for return. Similarly, the 
Board proposes to amend the commentary by adding an example that 
permits a presenting bank and paying bank to agree that presentment 
takes place upon receipt of an electronic collection item.

J. Section 229.38--Liability

    Section 229.38(d)(2) makes drawee banks liable to the extent they 
issue payable-through checks that are payable through a bank located in 
a different check-processing region and that circumstance causes a 
delay in return. Because there is now only one check-processing region, 
this liability provision is obsolete and the Board proposes to delete 
it.

K. Section 229.40--Mergers

    The Board proposes to delete as obsolete the provision in Sec.  
229.40(b) regarding mergers consummated on or after July 1, 1998, and 
before March 1, 2000.

L. Section 229.43--Checks Payable in Guam, American Samoa, and the 
Northern Mariana Islands

    The Board proposes to modify Sec.  229.43 to reflect how the 
proposed warranties for electronic collection items and electronic 
returns in Sec.  229.34 would apply to checks payable in Guam, American 
Samoa, and the Northern Mariana Islands. Specifically, a bank that 
handles Pacific island checks in the same manner as other checks may 
transfer electronic images and electronic information as electronic 
collection items or electronic returns derived from Pacific island 
checks. Accordingly, such a bank would make the warranties in 
Sec. Sec.  229.34(a) and (b) with respect to Pacific island checks.

IV. Subpart D

A. Section 229.52--Substitute-Check Warranties

    Sometimes a check submitted for deposit is subsequently 
``rejected'' by the bank that receives the check. For example, a bank's 
customer might submit a check at an ATM that captures an image of the 
check and sends the image electronically to the bank. In turn, the bank 
may provide provisional credit to the customer and review the item. For 
various reasons, the bank's review of the item might result in the item 
being rejected--for example, the bank might determine that the item is 
not payable to the customer who submitted it for deposit. It is costly 
for the bank to obtain the check from the ATM to provide it back to the 
customer; moreover, the check may have been destroyed. Accordingly, 
banks sometimes provide the rejected item to the customer in the form 
of a substitute check. In such a scenario, the bank would be both the 
reconverting bank (the bank that created the substitute check) and the 
truncating bank (the bank that truncated the original check).
    Under the terms of Sec.  229.52(a), a bank makes the Check 21 Act 
warranties with respect to a substitute check when it transfers the 
substitute check for consideration, as the terms ``transfer'' and 
``consideration'' are defined in current Sec.  229.2(ccc) (proposed to 
be redesignated as Sec.  229.2(tt)). However, a bank may not have 
received consideration for a substitute check it provides to its 
customer after it has rejected an original check submitted for deposit.
    As noted in the commentary to the definition of transfer and 
consideration, the Check 21 Act contemplates that a nonbank person that 
receives a substitute check from a bank will receive warranties and 
indemnities with

[[Page 16883]]

respect to that check. Therefore, in order to prevent a bank from being 
able to transfer a check that the bank truncated and then reconverted 
without providing the substitute-check warranties and indemnity, the 
Board proposes to add to Sec.  229.52(a) a new subsection stating that 
a bank that rejects a check submitted for deposit and sends back to its 
customer a substitute check (or a paper or electronic representation of 
a substitute check) makes the warranties in Sec.  229.52(a) regardless 
of whether it received consideration for the substitute check. Because 
the bank would make these warranties, the substitute check would be the 
legal equivalent of the rejected original check, provided that the 
substitute check meets the requirements for legal equivalence set forth 
in Sec.  229.51(a).\75\ If the substitute check does not meet the 
requirements for legal equivalence, then the substitute check recipient 
would have a Check 21 warranty claim against the bank.
---------------------------------------------------------------------------

    \75\ These requirements are that the substitute check (1) 
accurately represents all of the information on the front and back 
of the original check as of the time the original check was 
truncated; and (2) bears the legend, ``This is a legal copy of your 
check. You can use it the same way you would use the original 
check.''
---------------------------------------------------------------------------

    Because the bank is both the truncating bank and the reconverting 
bank with respect to the check, the bank must identify itself on the 
front of the substitute check as the truncating bank and on the front 
and back of the check as the reconverting bank, in accordance with the 
terms of Sec.  229.51(b). The bank is not, however, a depositary bank, 
collecting bank, or returning bank with respect to the check, and the 
Board proposes to add a clarifying statement to that effect in proposed 
Sec.  229.2(r) (current Sec.  229.2(o), the regulation's definition of 
depositary bank). Moreover, the bank's identification of itself on the 
back of the check as a reconverting bank does not constitute the bank's 
indorsement of the check. To address this latter point, the Board 
proposes changes to the commentaries to Sec. Sec.  229.35(a) and 
229.51(b), and to paragraph 3(ii) of appendix D.
    The Board also proposes to modify the commentary to reflect the 
fact that a bank that transfers and receives consideration for an 
electronic collection item or electronic return that is an electronic 
representation of a substitute check makes the warranties in Sec.  
229.52.

B. Section 229.53--Substitute-Check Indemnity

    In addition to imposing the substitute check warranties on a bank 
that rejects a check for deposit, the Board similarly proposes to add 
to Sec.  229.53(a) a new subsection stating that a bank that rejects a 
check submitted for deposit and sends back to its customer a substitute 
check provides the indemnity set forth in Sec.  229.53(a) regardless of 
whether the bank received consideration. The Board also proposes to 
modify the commentary to reflect the fact that a bank that transfers 
and receives consideration for an electronic collection item or 
electronic return that is an electronic representation of a substitute 
check is responsible for providing the indemnity in Sec.  229.53.

Other Requests for Comment

I. Effective Date

    The Board proposes that the revised subparts A and B take effect 30 
days following publication of the final rule. The Board recognizes that 
some banks may wish to use the model forms soon after the rule becomes 
effective, as part of their normal reordering or reprinting cycle for 
their funds-availability disclosures. In order to minimize the 
compliance costs, the Board proposes that banks would have 12 months to 
comply with the amendments to subpart B and the model forms in appendix 
C.
    The Board proposes that the amendments to subparts C and D become 
effective six months following publication of the final rule. As 
discussed above, these amendments provide, among other things, that a 
depositary bank must accept electronic returns in order to be entitled 
to expeditious return. The time required for depositary banks that 
currently accept paper returned checks to implement the operational 
changes necessary for receiving electronic returns generally should not 
be significant. Many of these depositary banks are small and receive a 
small number of returned checks. Accordingly, receiving returns as 
.pdfs, for example, should not require substantial changes. The Board 
does not expect that other changes to subpart C, such as the proposed 
provisions for electronic same-day settlement, would impose a 
significant transition burden given that almost all checks are already 
presented electronically. Further, under the proposal a collecting bank 
may continue to present paper checks under the terms of the UCC and 
Regulation J.

II. Potential Future Changes To Reduce Risks to Depositary Banks

    Given that there are no longer any nonlocal checks, a depositary 
bank must make funds available to the depositor for withdrawal by the 
second business day after the banking day of deposit, unless one of the 
time-period adjustments in Sec.  229.12 or one of the exceptions in 
Sec.  229.13 is applicable. Even assuming that banks collect and return 
all checks electronically, depositary banks will in many cases 
nonetheless be required to make the funds represented by a check 
deposit available for withdrawal before learning whether the check has 
been returned unpaid. The Board therefore requests comment on whether 
this risk is significant and whether there are feasible means to help 
reduce any risk to depositary banks. For example, the deadline in the 
UCC by which a paying bank must initiate return of an unpaid check is 
generally midnight of the banking day following the banking day of 
receipt of the check by the paying bank, except as the deadline may be 
extended by Sec.  229.30(c) of Regulation CC. As delivery of forward-
collection and returned checks becomes increasingly electronic, this 
amount of time (typically about 36 hours) afforded to the paying bank 
takes up a substantial portion of the total time required for a check 
to be sent from the depositary bank to the paying bank and back again. 
The Board requests comment on whether it would be desirable to reduce 
the amount of time afforded to the paying bank to decide whether or not 
to pay a check that has been presented to it. The Board also requests 
comment on whether there are other, preferable, ways to reduce this 
risk to depositary banks.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (PRA) (44 
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the 
proposed rulemaking under the authority delegated to the Board by the 
Office of Management and Budget (OMB). The collection of information 
that is proposed by this rulemaking is found in 12 CFR 229. The Board 
may not conduct or sponsor, and an organization is not required to 
respond to, this information collection unless it displays a currently 
valid OMB control number. The OMB control number is 7100-0235.
    The EFA Act, as amended, and the Check 21 Act authorizes the Board 
to issue regulations to carry out the provisions of those Acts (12 
U.S.C. 4008 and 12 U.S.C. 5014, respectively). Because the Federal 
Reserve does not collect any information, no issue of confidentiality 
arises. However, if, during a compliance examination of a financial 
institution, a violation or possible violation of the EFA Act or the 
Check 21 Act is noted then information regarding such violation may be 
kept

[[Page 16884]]

confidential pursuant to Section (b)(8) of the Freedom of Information 
Act. 5 U.S.C. 552(b)(8). This information collection is mandatory.
    Regulation CC applies to all banks, not just State Member Banks 
(SMBs). However, under the PRA, the Board accounts for the burden of 
the paperwork associated with the regulation only for entities that are 
supervised by the Federal Reserve. The Board accounts for the paperwork 
burden only for SMBs and uninsured state branches and agencies of 
foreign banks. Other Federal financial agencies are responsible for 
estimating and reporting to OMB the total paperwork burden for the 
institutions for which they have administrative enforcement authority.
    The current annual burden to comply with the provisions of 
Regulation CC is estimated to be 202,396 hours for the 1,060 
institutions supervised by the Federal Reserve and that are deemed to 
be respondents for the purposes of the PRA.
    As discussed above, the Board proposes to amend model disclosures, 
clauses, and notices, in appendix C that banks may use in disclosing 
their funds-availability policies to their customers and to update the 
preemption determinations in appendix F to incorporate content 
requirements prescribed by section 1086 of the Dodd-Frank Act.
    The Board estimates that the proposed rule would impose a one-time 
increase in the total annual burden under Regulation CC. The 1,060 
respondents would take, on average, 80 hours (two business weeks) to 
update their systems to comply with the proposed disclosure 
requirements addressed in 12 CFR part 229. This one-time revision would 
increase the burden by 84,800 hours. The Board estimates that, on a 
continuing basis, the revision to the rule would have a negligible 
effect on the annual burden. The total annual burden for the Regulation 
CC information collection is estimated to increase from 202,396 to 
287,196 hours.
    Comments are invited on: (1) Whether the proposed collection of 
information is necessary for the proper performance of the Board's 
functions; including whether the information has practical utility; (2) 
the accuracy of the Board's estimate of the burden of the proposed 
information collection, including the cost of compliance; (3) ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (4) ways to minimize the burden of information 
collection on respondents, including through the use of automated 
collection techniques or other forms of information technology. 
Comments on the collection of information should be sent to Cynthia 
Ayouch, Acting Federal Reserve Clearance Officer, Division of Research 
and Statistics, Mail Stop 95-A, Board of Governors of the Federal 
Reserve System, Washington, DC 20551, with copies of such comments sent 
to the Office of Management and Budget, Paperwork Reduction Project 
(7100-0235), Washington, DC 20503.

Regulatory Flexibility Act

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 601-612, the Board is publishing an initial regulatory 
flexibility analysis for the proposed amendments to Regulation CC. The 
RFA requires an agency either to provide an initial regulatory 
flexibility analysis with a proposed rule or to certify that the 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. In accordance with section 3(a) 
of the RFA, the Board has reviewed the proposed regulation. While the 
Board believes that the proposed rule likely would not have a 
significant economic impact on a substantial number of small entities 
(5 U.S.C. 605(b)), the Board has prepared an Initial Regulatory 
Flexibility Analysis in accordance with 5 U.S.C. 603. The Board will, 
if necessary, conduct a final regulatory flexibility analysis after 
consideration of comments received during the public comment period.
    The Board is proposing the foregoing amendments to Regulation CC 
pursuant to its authority under the EFA Act and the Check 21 Act. The 
proposed amendments would apply to all banks regardless of their size, 
and the Board anticipates that the proposal would reduce banks' overall 
costs of collecting and returning checks.
    By providing that a depositary bank preserves its right to 
expeditious return only of it agrees to receive returned checks 
electronically, the proposed rule would encourage, but not require, 
depositary banks to accept check returns in electronic form. A 
depositary bank that currently receives returned checks in paper form 
and that chooses, as encouraged by the proposal, to begin to receive 
returned checks electronically, will incur some cost associated with 
that transition. The Board expects that these costs would be relatively 
low for a small depositary bank, which typically would receive only a 
small volume of returned checks. For example, as mentioned above, the 
Federal Reserve Banks now offer a product under which they deliver 
electronically to small depositary banks copies (.pdf files) of 
returned checks, which the banks can print on their own premises if 
necessary.\76\ To receive returned checks in this fashion, a depositary 
bank may need to establish and maintain an electronic connection to the 
Reserve Banks, or another returning bank that offers a similar service, 
and to purchase certain equipment, such as a printer capable of double-
sided printing and magnetic-ink toner cartridges. Depending on the 
volume of returned checks that a small depositary bank receives, the 
Board estimates that this transition would cost a small depositary bank 
approximately $5,000 in net-present-value terms.\77\ Conversely, a 
small depositary bank that does not choose to accept returned checks 
electronically would, under the proposal, incur additional risk 
associated with that decision. Specifically, the bank would not retain 
its right to expeditious return of a check, and a returned check may 
not be delivered to the bank in a timely fashion. While this risk is 
difficult to quantify, it is reasonable to expect that each small 
depositary bank will weigh the costs and benefits of whether to accept 
returns electronically. If the bank determines that the net present 
value of the risk is greater than the cost to receive returned checks 
electronically, then the bank can minimize its cost associated with the 
Board's proposal by accepting returned checks electronically.
---------------------------------------------------------------------------

    \76\ After printing the .pdf files, the depositary bank would be 
able to process the checks exactly as it would process paper checks 
physically delivered to it.
    \77\ This estimate takes into account the cost to a small 
depositary bank to establish and maintain an electronic connection 
to the Reserve Banks, which is estimated to be $110 per month. See 
75 FR 67731 at 67747 (Nov. 3, 2010). Some small banks, however, may 
already have such a connection. Further, a small depositary bank may 
choose to receive its returns electronically in a manner that does 
not require this connection, such as through a different returning 
bank, an electronic check clearinghouse, or a nonbank processor.
---------------------------------------------------------------------------

    The proposed updates to the model funds-availability policy 
disclosures and notices in appendix C should not impose significant 
cost on small banks. Under the proposal, a bank that bases its 
disclosures and notices on the current models in the appendix will 
continue to receive a safe harbor for 12 months after the final rule 
becomes effective, provided that the bank's disclosures and notices 
accurately reflect the bank's policies and practices. Moreover, a bank 
that chooses to update its disclosures on the basis of the proposal 
would not generally need to redeliver disclosures to all of its 
existing customers if the bank's underlying funds-availability

[[Page 16885]]

policies did not change; instead, in accordance with the regulation, a 
bank would need to provide the disclosures at the time a customer opens 
an account, and upon request.
    Any costs to a small bank that may result from the rule will be 
offset to some extent by savings to the bank in other areas. For 
example, receiving returned checks electronically may enable a small 
bank to reduce its ongoing operating costs associated with receiving 
and processing returned checks. Further, as other banks with which the 
small bank does business also begin to receive returned checks 
electronically, the small bank, in its role as paying bank, may 
experience lower costs associated with sending returned checks to other 
banks, because a paying bank typically pays a higher fee to deliver a 
returned check in paper form to a depositary bank, as compared to 
delivering a returned check electronically to the depositary bank. In 
addition, the proposed provisions for electronic same-day settlement 
may reduce a small bank's costs associated with receiving check 
presentments, because it should further reduce the number of paper 
check presentments that it receives.
    According to the Small Business Administration size standards 
defining small entities, a commercial bank, savings association, or 
credit union is considered a ``small entity'' if it has assets of $175 
million or less.\78\ The Board can identify through data from Reports 
of Condition and Income (``call reports'') the approximate number of 
small depository institutions that would be subject to the proposed 
rule if finalized.\79\ Based on September 2010 call report data, there 
are approximately 11,030 depository institutions that have total 
domestic assets of $175 million or less and thus are considered small 
entities for purposes of the RFA. Based on December 2010 data regarding 
checks returned through the Reserve Banks, the Board estimates that 41 
percent of small depository institutions had at that time made 
arrangements to receive returned checks electronically, whereas 59 
percent had not. Banks are steadily adopting electronic check handling 
methods, however, and the Board expects that a substantially higher 
percentage of small depository institutions will have made arrangements 
to receive electronic check returns by the time the Board adopts a 
final rule. The Board specifically requests comment on the cost of its 
proposed rule to a small depository institution.
---------------------------------------------------------------------------

    \78\ U.S. Small Business Administration, Table of Small Business 
Size Standards Matched to North American Industry Classification 
System Codes, available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
    \79\ The proposed rule would not impose costs on any small 
entities other than depository institutions.
---------------------------------------------------------------------------

    The Board notes that subpart A of Regulation J overlaps with the 
proposed rule with respect to checks collected or returned through the 
Reserve Banks. The provisions of Regulation J supersede any 
inconsistent provisions of Regulation CC, but only to the extent of the 
inconsistency.\80\
---------------------------------------------------------------------------

    \80\ See 12 CFR 210.3(f).
---------------------------------------------------------------------------

Text of Proposed Revisions

    Certain conventions have been used to highlight the proposed 
changes to the text of the regulation and commentary. With the 
exception of appendices C and F to the regulation, new language is 
shown inside [rtrif]bold-faced arrows[ltrif], while language proposed 
to be deleted is set off with [lsqbb]bold-faced brackets[rsqbb]. In 
appendix C, each proposed new model form is set forth in its entirety 
and the corresponding current form is deleted in its entirety, because 
the convention described above for the changes to the text within each 
of the forms would render illegible the formatting of the proposed 
forms. The Board proposes to replace the text of appendix F in its 
entirety. Paragraphs in the commentary are numbered to comply with 
Federal Register publication rules.

List of Subjects in 12 CFR Part 229

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

Authority and Issuance

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

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

Subpart A--General

    1. Section 229.1 is revised to read as follows:


Sec.  229.1  Authority and purpose; organization.

    (a) Authority and purpose. This part is issued by the Board of 
Governors of the Federal Reserve System (Board) to implement the 
Expedited Funds Availability Act (12 U.S.C. 4001-4010) (the EFA Act) 
and the Check Clearing for the 21st Century Act (12 U.S.C. 5001-5018) 
(the Check 21 Act).
    (b) Organization. This part is divided into subparts and appendices 
as follows--
    (1) Subpart A contains general information. It sets forth--
    (i) The authority, purpose, and organization;
    (ii) Definition of terms; and
    (iii) Authority for administrative enforcement of this part's 
provisions.
    (2) Subpart B of this part contains rules regarding the duty of 
banks to make funds deposited into accounts available for withdrawal, 
including availability schedules. Subpart B of this part also contains 
rules regarding exceptions to the schedules, disclosure of funds 
availability policies, payment of interest, liability of banks for 
failure to comply with Subpart B of this part, and other matters.
    (3) Subpart C of this part contains rules to expedite the 
collection and return of checks by banks[rtrif], including provisions 
that accommodate electronic presentment and return of checks[ltrif]. 
These rules cover the direct return of checks, the manner in which the 
paying bank and returning banks must return checks to the depositary 
bank, [lsqbb]notification of nonpayment by the paying bank,[rsqbb] 
indorsement and presentment of checks, same-day settlement for certain 
checks, the liability of banks for failure to comply with subpart C of 
this part, and other matters.
    (4) Subpart D of this part contains rules relating to substitute 
checks. These rules address the creation and legal status of substitute 
checks; the substitute check warranties and indemnity; expedited 
recredit procedures for resolving improper charges and warranty claims 
associated with substitute checks provided to consumers; and the 
disclosure and notices that banks must provide.
    [rtrif](5) Appendix A of this part contains a routing number guide 
to next-day-availability checks. The guide lists the routing numbers of 
checks drawn on Federal Reserve Banks and Federal Home Loan Banks, and 
U.S. Treasury checks and Postal money orders that are subject to next-
day availability.
    (6) Appendix C of this part contains model funds-availability 
policy disclosures, clauses, and notices and a model disclosure and 
notices related to substitute-check policies.
    (7) Appendix D of this part contains indorsement standards and 
standards for identifying the reconverting bank and truncating bank.
    (8) Appendix E of this part contains Board interpretations, which 
are labeled ``Commentary,'' of the provisions of this

[[Page 16886]]

part. The Commentary provides background material to explain the 
Board's intent in adopting a particular part of the regulation and 
provides examples to aid in understanding how a particular requirement 
is to work. The Commentary is an official Board interpretation under 
section 611(e) of the EFA Act (12 U.S.C. 4010(e)).
    (9) Appendix F of this part contains the Board's determinations of 
the EFA Act and Regulation CC's preemption of state laws that were in 
effect on September 1, 1989.[ltrif]
    2. Section 229.2 is revised to read as follows:


Sec.  229.2  Definitions.

    As used in this part, and unless the context requires otherwise, 
the following terms have the meanings set forth in this section, and 
the terms not defined in this section have the meanings set forth in 
the Uniform Commercial Code:
    (a) Account. (1) Except as provided in paragraphs (a)(2) and (a)(3) 
of this section, account means a deposit as defined in 12 CFR 
204.2(a)(1)(i) that is a transaction account as described in 12 CFR 
204.2(e). As defined in these sections, account generally includes 
[rtrif]an[ltrif] account[lsqbb]s[rsqbb] at a bank from which the 
account holder is permitted to make transfers or withdrawals by 
negotiable or transferable instrument, payment order of withdrawal, 
telephone transfer, electronic payment, or other similar means for the 
purpose of making payments or transfers to third persons or others. 
Account also includes [rtrif]an[ltrif] account[lsqbb]s[rsqbb] at a bank 
from which the account holder may make third party payments at an ATM, 
remote service unit, or other electronic device, including by debit 
card, but the term does not include [rtrif]a[ltrif] savings 
deposit[lsqbb]s[rsqbb]or account[lsqbb]s[rsqbb] described in 12 CFR 
204.2(d)(2) even though such accounts permit third party transfers. An 
account may be in the form of--
    (i) A demand deposit account,
    (ii) A negotiable order of withdrawal account,
    (iii) A share draft account,
    (iv) An automatic transfer account, or
    (v) Any other transaction account described in 12 CFR 204.2(e).
    (2) For purposes of subpart B of this part and, in connection 
therewith, this subpart A, account does not include an account where 
the account holder is a bank, where the account holder is an office of 
an institution described in paragraphs (e)(1) through (e)(6) of this 
section or an office of a ``foreign bank'' as defined in section 1(b) 
of the International Banking Act (12 U.S.C. 3101) that is located 
outside the United States, or where the direct or indirect account 
holder is the Treasury of the United States.
    (3) For purposes of subpart D of this part and, in connection 
therewith, this subpart A, account means any deposit, as defined in 12 
CFR 204.2(a)(1)(i), at a bank, including a demand deposit or other 
transaction account and a savings deposit or other time deposit, as 
those terms are defined in 12 CFR 204.2.
    (b) [lsqbb]Automated clearinghouse or ACH means a facility that 
processes debit and credit transfers under rules established by a 
Federal Reserve Bank operating circular on automated clearinghouse 
items or under rules of an automated clearinghouse association.[rsqbb] 
[rtrif]Automated clearinghouse (ACH) credit transfer means a transfer 
whereby the originator orders that its account be debited and another 
account be credited through the ACH, which is a facility that processes 
debit and credit transfers under rules established by a Federal Reserve 
Bank operating circular on ACH items or under rules of an ACH 
association or similar interbank agreement.[ltrif]
    (c) Automated teller machine or ATM means an electronic device at 
which a natural person may make deposits to an account by cash or 
[rtrif]paper[ltrif] check and perform other account 
transactions[rtrif], for example, making cash withdrawals from an 
account.[ltrif]
    (d) Available for withdrawal with respect to funds deposited means 
available for all uses generally permitted to the customer for actually 
and finally collected funds under the bank's account agreement or 
policies, such as for payment of checks drawn on the account, 
certification of checks drawn on the account, electronic payments, 
withdrawals by cash, and transfers between accounts.
    (e)[rtrif](1)[ltrif] Bank means--
    [lsqbb](1)[rsqbb][rtrif](i)[ltrif] An insured bank as defined in 
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813) or a 
bank that is eligible to apply to become an insured bank under section 
5 of that Act (12 U.S.C. 1815);
    [lsqbb](2)[rsqbb][rtrif](ii)[ltrif] A mutual savings bank as 
defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
1813);
    [lsqbb](3)[rsqbb][rtrif](iii)[ltrif] A savings bank as defined in 
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813);
    [lsqbb](4)[rsqbb][rtrif](iv)[ltrif] An insured credit union as 
defined in section 101 of the Federal Credit Union Act (12 U.S.C. 1752) 
or a credit union that is eligible to make application to become an 
insured credit union under section 201 of that Act (12 U.S.C. 1781);
    [lsqbb](5)[rsqbb][rtrif](v)[ltrif] A member as defined in section 2 
of the Federal Home Loan Bank Act (12 U.S.C. 1422);
    [lsqbb](6)[rsqbb][rtrif](vi)[ltrif] A savings association as 
defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 
1813) that is an insured depository institution as defined in section 3 
of that Act (12 U.S.C. 1813(c)(2)) or that is eligible to apply to 
become an insured depository institution under section 5 of that Act 
(12 U.S.C. 1815); or
    [lsqbb](7)[rsqbb][rtrif](vii)[ltrif] An agency or a branch of a 
foreign bank as defined in section l(b) of the International Banking 
Act (12 U.S.C. 3101).
    [rtrif](2)[ltrif] For purposes of subparts C and D of this part 
and, in connection therewith, this subpart A, the term bank also 
includes any person engaged in the business of banking, as well as a 
Federal Reserve Bank, a Federal Home Loan Bank, and a state or unit of 
general local government to the extent that the state or unit of 
general local government acts as a paying bank. Unless otherwise 
specified, the term bank includes all of a bank's offices in the United 
States, but not offices located outside the United States.
    [lsqbb]Note:[rsqbb] [rtrif](3)[ltrif] For purposes of subpart D of 
this part and, in connection therewith, this subpart A, bank also 
includes the Treasury of the United States or the United States Postal 
Service to the extent that the Treasury or the Postal Service acts as a 
paying bank.
    (f) Banking day means that part of any business day on which an 
office of a bank is open to the public for carrying on substantially 
all of its banking functions.
    (g) Business day means a calendar day other than a Saturday or a 
Sunday, January 1, the third Monday in January, the third Monday in 
February, the last Monday in May, July 4, the first Monday in 
September, the second Monday in October, November 11, the fourth 
Thursday in November, or December 25. If January 1, July 4, November 
11, or December 25 fall on a Sunday, the next Monday is not a business 
day.
    (h) Cash means United States coins and currency.
    (i) Cashier's check means a check that is--
    (1) Drawn on a bank;
    (2) Signed by an officer or employee of the bank on behalf of the 
bank as drawer;
    (3) A direct obligation of the bank; and
    (4) Provided to a customer of the bank or acquired from the bank 
for remittance purposes.
    (j) Certified check means a check with respect to which the drawee 
bank

[[Page 16887]]

certifies by signature on the check of an officer or other authorized 
employee of the bank that--
    (1) (i) The signature of the drawer on the check is genuine; and
    (ii) The bank has set aside funds that--
    (A) Are equal to the amount of the check, and
    (B) Will be used to pay the check; or
    (2) The bank will pay the check upon presentment.
    (k)[rtrif](1)[ltrif] Check means--
    [lsqbb](1)[rsqbb][rtrif](i)[ltrif] A negotiable demand draft drawn 
on or payable through or at an office of a bank;
    [lsqbb](2)[rsqbb][rtrif](ii)[ltrif] A negotiable demand draft drawn 
on a Federal Reserve Bank or a Federal Home Loan Bank;
    [lsqbb](3)[rsqbb][rtrif](iii)[ltrif] A negotiable demand draft 
drawn on the Treasury of the United States;
    [lsqbb](4)[rsqbb][rtrif](iv)[ltrif] A demand draft drawn on a state 
government or unit of general local government that is not payable 
through or at a bank;
    [lsqbb](5)[rsqbb][rtrif](v)[ltrif] A United States Postal Service 
money order; or
    [lsqbb](6)[rsqbb][rtrif](vi)[ltrif] A traveler's check drawn on or 
payable through or at a bank.
    [lsqbb](7)[rsqbb][rtrif](2)[ltrif] The term check includes an 
original check and a substitute check.
    [rtrif](3)[ltrif] The term check does not include a noncash item or 
an item payable in a medium other than United States money.
    [rtrif](4)[ltrif] A draft may be a check even though it is 
described on its face by another term, such as money order.
    [rtrif](5)[ltrif] For purposes of subparts C and D, and in 
connection therewith, subpart A, of this part, the term check also 
includes a demand draft of the type described above that is 
nonnegotiable.
    (l) [lsqbb][Reserved][rsqbb] [rtrif]Claimant bank means a bank that 
submits a claim for a recredit for a substitute check to an 
indemnifying bank under Sec.  229.55.[ltrif]
    (m) [lsqbb]Check processing region means the geographical area 
served by an office of a Federal Reserve Bank for purposes of its check 
processing activities.[rsqbb] Collecting bank means any bank handling a 
check for forward collection, except the paying bank.
    (n) Consumer means a natural person who--
    (1) With respect to a check handled for forward collection, draws 
the check on a consumer account; or
    (2) With respect to a check handled for return, deposits the check 
into or cashes the check against a consumer account.
    (o) Consumer account means any account used primarily for personal, 
family, or household purposes.
    (p) Contractual branch, with respect to a bank, means a branch of 
another bank that accepts a deposit on behalf of the first bank.
    (q) Customer means a person having an account with a bank.
    (r) [lsqbb]Local check means a check payable by or at a local 
paying bank, or a check payable by a nonbank payor and payable through 
a local paying bank.[rsqbb] Depositary bank means the first bank to 
which a check is transferred even though it is also the paying bank or 
the payee. A check deposited in an account is deemed to be transferred 
to the bank holding the account into which the check is deposited, even 
though the check is physically received and indorsed first by another 
bank. [rtrif]A bank that rejects a check submitted for deposit is not a 
depositary bank with respect to that check.[ltrif]
    (s) [lsqbb]Local paying bank means a paying bank that is located in 
the same check processing region as the physical location of the 
branch, contractual branch, or proprietary ATM of the depositary bank 
in which that check was deposited.[rsqbb] [rtrif]Electronic collection 
item means an electronic image of and information related to a check 
that a bank sends for forward collection and that--
    (1) A paying bank has agreed to receive under Sec.  229.36(a);
    (2) Is sufficient to create a substitute check; and
    (3) Conforms with American National Standard Specifications for 
Electronic Exchange of Check and Image Data--X9.100-187, in conjunction 
with its Universal Companion Document (hereinafter collectively 
referred to as ANS X9.100-187), unless the Board by rule or order 
determines that different standard applies or the parties otherwise 
agree.[ltrif]
    (t) Electronic payment means a wire transfer or an ACH credit 
transfer.
    (u) [rtrif]Electronic presentment point means the electronic 
location that a paying bank has designated for receiving electronic 
collection items.[ltrif]
    (v) [lsqbb]Nonlocal check means a check payable by, through, or at 
a nonlocal paying bank.[rsqbb] [rtrif]Electronic return means an 
electronic image of and information related to a check that a paying 
bank determines not to pay and that--
    (1) A depositary bank has agreed to receive under Sec.  229.32(a);
    (2) Is sufficient to create a substitute check; and
    (3) Conforms with ANS X9.100-187, unless the Board by rule or order 
determines that a different standard applies or the parties otherwise 
agree.[ltrif]
    (w) [lsqbb]Nonlocal paying bank means a paying bank that is not a 
local paying bank with respect to the depositary bank.[rsqbb] 
[rtrif]Electronic return point means the electronic location that the 
depositary bank has designated for receiving electronic returns.[ltrif]
    (x) Fedwire has the same meaning as that set forth in Sec.  
210.26(e) of this chapter.
    (y) Forward collection means the process by which a bank sends a 
check on a cash basis to a collecting bank for settlement or to the 
paying bank for payment.
    (z) Good faith means honesty in fact and observance of reasonable 
commercial standards of fair dealing.
    (aa) Indemnifying bank means a bank that provides an indemnity 
under Sec.  229.53 with respect to a substitute check.
    (bb) Interest compensation means an amount of money calculated at 
the average of the Federal Funds rates published by the Federal Reserve 
Bank of New York for each of the days for which interest compensation 
is payable, divided by 360. The Federal Funds rate for any day on which 
a published rate is not available is the same as the published rate for 
the last preceding day for which there is a published rate.
    (cc) Magnetic ink character recognition line and MICR line mean the 
numbers, which may include the routing number, account number, check 
number, check amount, and other information, that are printed near the 
bottom of a check in magnetic ink in accordance with American National 
Standard Specifications for Placement and Location of MICR Printing, 
X9.13 (hereinafter ANS X9.13) for an original check and American 
National Standard Specifications for an Image Replacement Document--
IRD, X9.100-140 (hereinafter ANS X9.100-140) for a substitute check 
(unless the Board by rule or order determines that different standards 
apply).
    (dd) Merger transaction means--
    (1) A merger or consolidation of two or more banks; or
    (2) The transfer of substantially all of the assets of one or more 
banks or branches to another bank in consideration of the assumption by 
the acquiring bank of substantially all of the liabilities of the 
transferring banks, including the deposit liabilities.
    (ee) [lsqbb]Similarly situated bank means a bank of similar size, 
located in the same community, and with similar check handling 
activities as the paying bank or returning bank.[rsqbb] Noncash item 
means an item that would otherwise be a check, except that--
    (1) A passbook, certificate, or other document is attached;

[[Page 16888]]

    (2) It is accompanied by special instructions, such as a request 
for special advice of payment or dishonor;
    (3) It consists of more than a single thickness of paper, except a 
check that qualifies for handling by automated check processing 
equipment; or
    (4) It has not been preprinted or post-encoded in magnetic ink with 
the routing number of the paying bank.
    (ff) Nonproprietary ATM means an ATM that is not a proprietary ATM.
    (gg) Original check means the first paper check issued with respect 
to a particular payment transaction.
    (hh) Paper or electronic representation of a substitute check means 
any copy of or information related to a substitute check that a bank 
handles for forward collection or return, charges to a customer's 
account, or provides to a person as a record of a check payment made by 
the person.
    (ii)[rtrif](1)[ltrif] Paying bank means--
    [lsqbb](1)[rsqbb][rtrif](i)[ltrif] The bank by which a check is 
payable, unless the check is payable at another bank and is sent to the 
other bank for payment or collection;
    [lsqbb](2)[rsqbb][rtrif](ii)[ltrif] The bank at which a check is 
payable and to which it is sent for payment or collection;
    [lsqbb](3)[rsqbb] [rtrif](iii)[ltrif] The Federal Reserve Bank or 
Federal Home Loan Bank by which a check is payable;
    [lsqbb](4)[rsqbb][rtrif](iv)[ltrif] The bank through which a check 
is payable and to which it is sent for payment or collection, if the 
check is not payable by a bank; or
    [lsqbb](5)[rsqbb][rtrif](v)[ltrif] The state or unit of general 
local government on which a check is drawn and to which it is sent for 
payment or collection.
    [rtrif](2)[ltrif] For purposes of subparts C and D, and in 
connection therewith, subpart A, paying bank includes the bank through 
which a check is payable and to which the check is sent for payment or 
collection, regardless of whether the check is payable by another bank, 
and the bank whose routing number appears on a check in fractional or 
magnetic form and to which the check is sent for payment or collection.
    [lsqbb]Note:[rsqbb] [rtrif](3)[ltrif] For purposes of subpart D of 
this part and, in connection therewith, this subpart A, paying bank 
also includes the Treasury of the United States or the United States 
Postal Service for a check that is payable by that entity and that is 
sent to that entity for payment or collection.
    (jj) Person means a natural person, corporation, unincorporated 
company, partnership, government unit or instrumentality, trust, or any 
other entity or organization.
    (kk) Proprietary ATM means an ATM that is [rtrif](1)[ltrif] --
    [lsqbb](1)[rsqbb][rtrif](i)[ltrif] Owned or operated by, or 
operated exclusively for, the depositary bank;
    [lsqbb](2)[rsqbb][rtrif](ii)[ltrif] Located on the premises 
(including the outside wall) of the depositary bank; or
    [lsqbb](3)[rsqbb][rtrif](iii)[ltrif] Located within 50 feet of the 
premises of the depositary bank, and not identified as being owned or 
operated by another entity.
    [rtrif](2)[ltrif] If more than one bank meets the owned or operated 
criterion of paragraph [lsqbb](aa)[rsqbb][rtrif](kk)[ltrif](1) of this 
section, the ATM is considered proprietary to the bank that operates 
it.
    (ll) Qualified returned check means a returned check that is 
prepared for automated return to the depositary bank by placing the 
check in a carrier envelope or placing a strip on the check and 
encoding the strip or envelope in magnetic ink. A qualified returned 
check need not contain other elements of a check drawn on the 
depositary bank, such as the name of the depositary bank.
    (mm) Reconverting bank means--
    (1) The bank that creates a substitute check; or
    (2) With respect to a substitute check that was created by a person 
that is not a bank, the first bank that transfers, presents, or returns 
that substitute check or, in lieu thereof, the first paper or 
electronic representation of that substitute check.
    (nn) Remotely created check means a check that is not created by 
the paying bank and that does not bear a signature applied, or 
purported to be applied, by the person on whose account the check is 
drawn. For purposes of this definition, ``account'' means an account as 
defined in paragraph (a) of this section as well as a credit or other 
arrangement that allows a person to draw checks that are payable by, 
through, or at a bank.
    (oo) Returning bank means a bank (other than the paying or 
depositary bank) handling a returned check or notice in lieu of return. 
A returning bank is also a collecting bank for purposes of UCC 4-
202(b).
    (pp) Routing number means--
    (1) The [rtrif]bank-identification[ltrif] number printed on the 
face of a check in fractional form or in nine-digit form; 
[lsqbb]or[rsqbb]
    (2) The [rtrif]bank-identification[ltrif] number in a bank's 
indorsement in fractional or nine-digit form[lsqbb].[rsqbb][rtrif]; or
    (3) In the case of an electronic collection item or electronic 
return, the bank-identification number contained in the electronic 
image of or information related to a check.[ltrif]
    (qq) State means a state, the District of Columbia, Puerto Rico, or 
the U.S. Virgin Islands. For purposes of subpart D of this part and, in 
connection therewith, this subpart A, state also means Guam, American 
Samoa, [lsqbb]the Trust Territory of the Pacific Islands,[rsqbb] the 
Northern Mariana Islands, and any other territory of the United States.
    (rr) Substitute check means a paper reproduction of an original 
check that--
    (1) Contains an image of the front and back of the original check;
    (2) Bears a MICR line that, except as provided under ANS X9.100-140 
(unless the Board by rule or order determines that a different standard 
applies), contains all the information appearing on the MICR line of 
the original check at the time that the original check was issued and 
any additional information that was encoded on the original check's 
MICR line before an image of the original check was captured;
    (3) Conforms in paper stock, dimension, and otherwise with ANS 
X9.100-140 (unless the Board by rule or order determines that a 
different standard applies); and
    (4) Is suitable for automated processing in the same manner as the 
original check.
    (ss) Sufficient copy and copy. (1) A sufficient copy is a copy of 
an original check that accurately represents all of the information on 
the front and back of the original check as of the time the original 
check was truncated or is otherwise sufficient to determine whether or 
not a claim is valid.
    (2) A copy of an original check means any paper reproduction of an 
original check, including a paper printout of an electronic image of 
the original check, a photocopy of the original check, or a substitute 
check.
    (tt) Teller's check means 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 a bank.
    (uu) Transfer and consideration. The terms transfer and 
consideration have the meanings set forth in the Uniform Commercial 
Code and in addition, for purposes of subpart D--
    (1) The term transfer with respect to a substitute check or a paper 
or electronic representation of a substitute check means delivery of 
the substitute check or other representation of the substitute check by 
a bank to a person other than a bank; and
    (2) A bank that transfers a substitute check or a paper or 
electronic representation of a substitute check directly to a person 
other than a bank has received consideration for the substitute check 
or other paper or

[[Page 16889]]

electronic representation of the substitute check if it has charged, or 
has the right to charge, the person's account or otherwise has received 
value for the original check, a substitute check, or a representation 
of the original check or substitute check.
    (vv) Traveler's check means an instrument for the payment of money 
that--
    (1) Is drawn on or payable through or at a bank;
    (2) Is designated on its face by the term traveler's check or by 
any substantially similar term or is commonly known and marketed as a 
traveler's check by a corporation or bank that is an issuer of 
traveler's checks;
    (3) Provides for a specimen signature of the purchaser to be 
completed at the time of purchase; and
    (4) Provides for a countersignature of the purchaser to be 
completed at the time of negotiation.
    (ww) Truncate means to remove an original check from the forward 
collection or return process and send to a recipient, in lieu of such 
original check, a substitute check or, by agreement, information 
relating to the original check (including data taken from the MICR line 
of the original check or an electronic image of the original check), 
whether with or without the subsequent delivery of the original check.
    (xx) Truncating bank means--
    (1) The bank that truncates the original check; or
    (2) If a person other than a bank truncates the original check, the 
first bank that transfers, presents, or returns, in lieu of such 
original check, a substitute check or, by agreement with the recipient, 
information relating to the original check (including data taken from 
the MICR line of the original check or an electronic image of the 
original check), whether with or without the subsequent delivery of the 
original check.
    (yy) Uniform Commercial Code, Code, or U.C.C. means the Uniform 
Commercial Code as adopted in a state.
    (zz) United States means the states, including the District of 
Columbia, the U.S. Virgin Islands, and Puerto Rico.
    (aaa) Unit of general local government means any city, county, 
parish, town, township, village, or other general purpose political 
subdivision of a state. The term does not include special purpose units 
of government, such as school districts or water districts.
    (bbb) Wire transfer means an unconditional order to a bank to pay a 
fixed or determinable amount of money to a beneficiary upon receipt or 
on a day stated in the order, that is transmitted by electronic or 
other means through Fedwire, the Clearing House Interbank Payments 
System, other similar network, between banks, or on the books of a 
bank. Wire transfer does not include an electronic fund transfer as 
defined in section 903(6) of the Electronic Fund Transfer Act (15 
U.S.C. 1693a(6)).
    3. In Sec.  229.3, paragraph (a) is revised as follows:


Sec.  229.3  Administrative enforcement.

    (a) Enforcement agencies. Compliance with this part is enforced 
under--
    (1) Section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818 
et seq.) in the case of--
    (i) National banks, Federal branches and Federal agencies of 
foreign banks, by the Office of the Comptroller of the Currency;
    (ii) Member banks of the Federal Reserve System (other than 
national banks), and offices, branches, and agencies of foreign banks 
located in the United States (other than Federal branches, Federal 
agencies, and insured State branches of foreign banks), by the Board; 
and
    (iii) Banks insured by the Federal Deposit Insurance Corporation 
(other than members of the Federal Reserve System) and insured State 
branches of foreign banks, by the Board of Directors of the Federal 
Deposit Insurance Corporation;
    (2) Section 8 of the Federal Deposit Insurance Act, by the Director 
of the Office of Thrift Supervision in the case of savings associations 
the deposits of which are insured by the Federal Deposit Insurance 
Corporation; and
    (3) The Federal Credit Union Act (12 U.S.C. 1751 et seq.) by the 
National Credit Union Administration Board with respect to any Federal 
credit union or credit union insured by the National Credit Union Share 
Insurance Fund.
    [rtrif](4)[ltrif]The terms used in paragraph (a)(1) of this section 
that are not defined in this part or otherwise defined in section 3(s) 
of the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the 
meaning given to them in section 1(b) of the International Banking Act 
of 1978 (12 U.S.C. 3101).
* * * * *

Subpart B--Availability of Funds and Disclosure of Funds 
Availability Policies

    4. In Sec.  229.10, revise paragraphs (b) and (c) as follows:


Sec.  229.10  Next-Day availability.

* * * * *
    (b) Electronic payments--(1) In general. A bank shall make funds 
received for deposit in an account by an electronic payment available 
for withdrawal not later than the business day after the banking day on 
which the bank received the electronic payment.
    (2) When an electronic payment is received. An electronic payment 
is received when the bank receiving the payment has received both--
    (i) Payment in actually and finally collected funds; and
    (ii) Information on the account and amount to be credited.
    [rtrif](3) Extent of payment received.[ltrif] A bank receives an 
electronic payment only to the extent that the bank has received 
payment in actually and finally collected funds.
    (c) Certain check deposits--(1) [lsqbb]General rule[rsqbb][rtrif]In 
general[ltrif]. A depositary bank shall make funds deposited in an 
account by check available for withdrawal not later than the business 
day after the banking day on which the funds are deposited, in the case 
of--
    (i) A check drawn on the Treasury of the United States and 
deposited in an account held by a payee of the check;
    (ii) A U.S. Postal Service money order deposited--
    (A) In an account held by a payee of the money order; and
    (B) In person to an employee of the depositary bank.
    (iii) A check drawn on a Federal Reserve Bank or Federal Home Loan 
Bank and deposited--
    (A) In an account held by a payee of the check; and
    (B) In person to an employee of the depositary bank;
    (iv) A check drawn by a state or a unit of general local government 
and deposited--
    (A) In an account held by a payee of the check;
    (B) In a depositary bank located in the state that issued the 
check, or the same state as the unit of general local government that 
issued the check;
    (C) In person to an employee of the depositary bank; and
    (D) With a special deposit slip or deposit envelope, if such slip 
or envelope is required by the depositary bank under paragraph 
(c)[lsqbb](3)[rsqbb][rtrif](2)[ltrif] of this section.
    (v) A cashier's, certified, or teller's check deposited--
    (A) In an account held by a payee of the check;
    (B) In person to an employee of the depositary bank; and
    (C) With a special deposit slip or deposit envelope, if such slip 
or envelope is required by the depositary bank under paragraph 
(c)[lsqbb](3)[rsqbb][rtrif](2)[ltrif] of this section.

[[Page 16890]]

    (vi) A check deposited in a branch of the depositary bank and drawn 
on the same or another branch of the same bank [if both branches are 
located in the same state or the same check processing region]; and,
    (vii) The lesser of--
    (A) $100, or
    (B) The aggregate amount deposited on any one banking day to all 
accounts of the customer by check or checks not subject to next-day 
availability under paragraphs (c)(1)(i) through (vi) of this section.
    [lsqbb](2) Checks not deposited in person. A depositary bank shall 
make funds deposited in an account by check or checks available for 
withdrawal not later than the second business day after the banking day 
on which funds are deposited, in the case of a check deposit described 
in and that meets the requirements of paragraphs (c)(1)(ii), (iii), 
(iv), and (v), of this section, except that it is not deposited in 
person to an employee of the depositary bank.[rsqbb]
    [lsqbb](3)[rsqbb][rtrif](2)[ltrif] Special deposit slip. (i) As a 
condition to making the funds available for withdrawal in accordance 
with this section, a depositary bank may require that a state or local 
government check or a cashier's, certified, or teller's check be 
deposited with a special deposit slip or deposit envelope that 
identifies the type of check.
    (ii) If a depositary bank requires the use of a special deposit 
slip or deposit envelope, the bank must either provide the special 
deposit slip or deposit envelope to its customers or inform its 
customers how the slip or envelope may be prepared or obtained and make 
the slip or envelope reasonably available.
    5. Section 229.12 is revised to read as follows:


Sec.  229.12  Availability schedule.

    [lsqbb](a) Effective date. The availability schedule contained in 
this section is effective September 1, 1990.[rsqbb]
    [lsqbb](b) Local checks and certain other checks[rsqbb][rtrif](a) 
In general[ltrif]. Except as provided in [rtrif]Sec.  229.10(c),[ltrif] 
paragraphs [rtrif](b), (c), and[ltrif] (d)[lsqbb], (e), and (f)[rsqbb] 
of this section, [rtrif]and in Sec.  229.13,[ltrif] a depository bank 
shall make funds deposited in an account by a check available for 
withdrawal not later than the second business day following the banking 
day on which funds are deposited.[ltrif][lsqbb], in the case of--
[rsqbb]
    [lsqbb](1) A local check;
    (2) A check drawn on the Treasury of the United States that is not 
governed by the availability requirements of Sec.  229.10(c);
    (3) A U.S. Postal Service money order that is not governed by the 
availability requirements of Sec.  229.10(c); and
    (4) A check drawn on a Federal Reserve Bank or Federal Home Loan 
Bank; a check drawn by a state or unit of general local government; or 
a cashier's, certified, or teller's check; if any check referred to in 
this paragraph (b)(4) is a local check that is not governed by the 
availability requirements of Sec.  229.10(c).[rsqbb]
    [lsqbb](c) Nonlocal checks--(1) In general. Except as provided in 
paragraphs (d), (e), and (f) of this section, a depositary bank shall 
make funds deposited in an account by a check available for withdrawal 
not later than the fifth business day following the banking day on 
which funds are deposited, in the case of--
    (i) A nonlocal check; and
    (ii) A check drawn on a Federal Reserve Bank or Federal Home Loan 
Bank; a check drawn by a state or unit of general local government; a 
cashier's, certified, or teller's check; or a check deposited in a 
branch of the depositary bank and drawn on the same or another branch 
of the same bank, if any check referred to in this paragraph (c)(1)(ii) 
is a nonlocal check that is not governed by the availability 
requirements of Sec.  229.10(c).
    (2) Nonlocal checks specified in appendix B-2 to this part must be 
made available for withdrawal not later than the times prescribed in 
that appendix.[rsqbb]
    [lsqbb](d)[rsqbb][rtrif](b)[ltrif] Time period adjustment for 
withdrawal by cash or similar means. A depositary bank may extend by 
one business day the time that funds deposited in an account by one or 
more checks subject to paragraphs [lsqbb](b), (c), or (f)[rsqbb] 
[rtrif](a) or (d)[ltrif]of this section are available for withdrawal by 
cash or similar means. Similar means include electronic payment, 
issuance of a cashier's or teller's check, [lsqbb]or[rsqbb] 
certification of a check, or other irrevocable commitment to pay, but 
do not include the granting of credit to a bank, a Federal Reserve 
Bank, or a Federal Home Loan Bank that presents a check to the 
depositary bank for payment. A depositary bank shall, however, make 
$400 of these funds available for withdrawal by cash or similar means 
not later than 5 p.m. on the business day on which the funds are 
available under paragraph[lsqbb]s (b), (c), or (f)[rsqbb] [rtrif](a) or 
(d)[ltrif] of this section. This $400 is in addition to the $100 
available under Sec.  229.10(c)(1)(vii).
    [lsqbb](e)[rsqbb][rtrif](c)[ltrif] Extension of schedule for 
certain deposits in Alaska, Hawaii, Puerto Rico, and the U.S. Virgin 
Islands. The depositary bank may extend the time periods set forth in 
this section by one business day in the case of any deposit, other than 
a deposit described in Sec.  229.10, that is--
    (1) Deposited in an account at a branch of a depositary bank if the 
branch is located in Alaska, Hawaii, Puerto Rico, or the U.S. Virgin 
Islands; and
    (2) Deposited by a check drawn on or payable at or through a paying 
bank not located in the same state as the depositary bank.
    [lsqbb](f)[rsqbb][rtrif](d)[ltrif] Deposits at nonproprietary ATMs. 
A depositary bank shall make funds deposited in an account at a 
nonproprietary ATM by cash or check available for withdrawal not later 
than the [lsqbb]fifth[rsqbb] [rtrif]fourth[ltrif] business day 
following the banking day on which the funds are deposited.
    6. Section 229.13 is revised as follows:


Sec.  229.13  Exceptions.

    (a) New accounts. For purposes of this paragraph, checks subject to 
Sec.  229.10(c)(1)(v) include traveler's checks.
    (1) A deposit in a new account--
    (i) Is subject to the requirements of Sec.  229.10(a) and (b) to 
make funds from deposits by cash and electronic payments available for 
withdrawal on the business day following the banking day of deposit or 
receipt;
    (ii) Is subject to the requirements of Sec.  229.10(c)(1)(i) 
through (v) [lsqbb]and Sec.  229.10(c)(2)[rsqbb] only with respect to 
the first $5,000 of funds deposited on any one banking day; but the 
amount of the deposit in excess of $5,000 shall be available for 
withdrawal not later than the ninth business day following the banking 
day on which funds are deposited; and
    (iii) Is not subject to the availability requirements of Sec. Sec.  
229.10(c)(1)(vi) and (vii) and 229.12.
    (2) An account is considered a new account during the first 30 
calendar days after the account is established. An account is not 
considered a new account if each customer on the account has had, 
within 30 calendar days before the account is established, another 
account at the depositary bank for at least 30 calendar days.
    (b) Large deposits. Sections 229.10(c) and 229.12 do not apply to 
the aggregate amount of deposits by one or more checks to the extent 
that the aggregate amount is in excess of $5,000 on any one banking 
day. For customers that have multiple accounts at a depositary bank, 
the bank may apply this exception to the aggregate deposits to all 
accounts held by the customer, even if the customer is not the sole 
holder of the accounts and not all of the holders of the accounts are 
the same.
    (c) Redeposited checks. Sections 229.10(c) and 229.12 do not apply 
to a

[[Page 16891]]

check that has been returned unpaid and redeposited by the customer or 
the depositary bank. This exception does not apply--
    (1) To a check that has been returned due to a missing indorsement 
and redeposited after the missing indorsement has been obtained, if the 
reason for return indication on the check states that it was returned 
due to a missing indorsement; or
    (2) To a check that has been returned because it was post dated, if 
the reason for return indicated on the check states that it was 
returned because it was post dated, and if the check is no longer post 
dated when redeposited.
    (d) Repeated overdrafts. [rtrif](1)[ltrif] If any account or 
combination of accounts of a depositary bank's customer has been 
repeatedly overdrawn, then for a period of six months after the last 
such overdraft, Sec. Sec.  229.10(c) and 229.12 do not apply to any of 
the accounts.
    [rtrif](2)[ltrif] A depositary bank may consider a customer's 
account to be repeatedly overdrawn if--
    [lsqbb](1)[rsqbb][rtrif](i)[ltrif] On six or more banking days 
within the preceding six months, the account balance is negative, or 
the account balance would have become negative if checks or other 
charges to the account had been paid; or
    [lsqbb](2)[rsqbb][rtrif](ii)[ltrif] On two or more banking days 
within the preceding six months, the account balance is negative, or 
the account balance would have become negative, in the amount of $5,000 
or more, if checks or other charges to the account had been paid.
    [rtrif](iii) For purposes of this paragraph (d)(2), such other 
charges to the account shall not include attempted charges initiated by 
debit card that the depositary bank declines to authorize.[ltrif]
    (e) Reasonable cause to doubt collectibility--(1) In general. 
Sections 229.10(c) and 229.12 do not apply to a check deposited in an 
account at a depositary bank if the depositary bank has reasonable 
cause to believe that the check is uncollectible from the paying bank. 
Reasonable cause to believe a check is uncollectible requires the 
existence of facts that would cause a well-grounded belief in the mind 
of a reasonable person. Such belief shall not be based on the fact that 
the check is of a particular class or is deposited by a particular 
class of persons. The reason for the bank's belief that the check is 
uncollectible shall be included in the notice required under paragraph 
(g) of this section.
    (2) Overdraft and returned check fees. [rtrif](i)[ltrif] A 
depositary bank that extends the time when funds will be available for 
withdrawal as described in paragraph (e)(1) of this section, and does 
not furnish the depositor with written notice at the time of deposit 
shall not assess any fees for any subsequent overdrafts (including use 
of a line of credit) or return of checks of other debits to the 
account, if--
    [lsqbb](i)[rsqbb][rtrif](A)[ltrif] The overdraft or return of the 
check would not have occurred except for the fact that the deposited 
funds were delayed under paragraph (e)(1) of this section; and
    [lsqbb](ii)[rsqbb][rtrif](B)[ltrif] The deposited check was paid by 
the paying bank.
    [rtrif](ii)[ltrif] Notwithstanding the foregoing, the depositary 
bank may assess an overdraft or returned check fee if it includes a 
notice concerning overdraft and returned check fees with the notice of 
exception required in paragraph (g) of this section and, when required, 
refunds any such fees upon the request of the customer. The notice must 
state that the customer may be entitled to a refund of overdraft or 
returned check fees that are assessed if the check subject to the 
exception is paid and how to obtain a refund.
    (f) Emergency conditions. Sections 229.10(c) and 229.12 do not 
apply to funds deposited by check in a depositary bank[rtrif], if the 
depositary bank exercises such diligence as the circumstances 
require,[ltrif] in the case of--
    (1) An interruption of communications or computer or other 
equipment facilities;
    (2) A suspension of payments by another bank;
    (3) A war; or
    (4) An emergency condition beyond the control of the depositary 
bank[lsqbb], if the depositary bank exercises such diligence as the 
circumstances require[rsqbb].
    (g) Notice of exception--(1) In general. Subject to paragraphs 
(g)(2) and (g)(3) of this section, when a depositary bank extends the 
time when funds will be available for withdrawal based on the 
application of an exception contained in paragraphs (b) through (e) of 
this section, it must provide the depositor with a written notice.
    (i) The notice shall include the following information--
    (A) A number or code, which need not exceed four digits, that 
identifies the customer's account;
    (B) The date of the deposit;
    [rtrif](C) The total amount of the deposit;[ltrif]
    [lsqbb](C)[rsqbb][rtrif](D)[ltrif] The amount of the deposit that 
is being delayed;
    [lsqbb](D)[rsqbb][rtrif](E)[ltrif] The reason the exception was 
invoked; and
    [lsqbb](E)[rsqbb][rtrif](F)[ltrif] The [lsqbb]time period within 
which[rsqbb][rtrif]day[ltrif] the funds will be available for 
withdrawal.
    (ii) Timing of notice. The notice shall be provided to the 
depositor at the time of the deposit, unless the deposit is not made in 
person to an employee of the depositary bank, or, if the facts upon 
which a determination to invoke one of the exceptions in paragraphs (b) 
through (e) of this section to delay a deposit only become known to the 
depositary bank after the time of the deposit. If the notice is not 
given at the time of the deposit, the depositary bank shall mail or 
deliver the notice to the customer as soon as practicable, but no later 
than the first business day following the day the facts become known to 
the depositary bank, or the deposit is made, whichever is later. 
[rtrif]If the customer has agreed to accept notices electronically, the 
bank shall send the notice such that the bank may reasonably expect it 
to be received by the customer no later than the first business day 
following the day the facts become known to the depositary bank, or the 
deposit is made, whichever is later.[ltrif]
    (2) One-time exception notice. [rtrif](i)[ltrif] In lieu of 
providing notice pursuant to paragraph (g)(1) of this section, a 
depositary bank that extends the time when the funds deposited in a 
nonconsumer account will be available for withdrawal based on an 
exception contained in paragraph (b) or (c) of this section may provide 
a single notice to the customer that includes the following 
information--
    [lsqbb](i)[rsqbb][rtrif](A)[ltrif] The reason(s) the exception may 
be invoked; and
    [lsqbb](ii)[rsqbb][rtrif](B)[ltrif] The time period within which 
deposits subject to the exception generally will be available for 
withdrawal.
    [rtrif](ii)[ltrif] This one-time notice shall be provided only if 
each type of exception cited in the notice will be invoked for most 
check deposits in the account to which the exception could apply. This 
notice shall be provided at or prior to the time notice must be 
provided under paragraph (g)(1)(ii) of this section.
    (3) Notice of repeated overdrafts exception. [rtrif](i)[ltrif] In 
lieu of providing notice pursuant to paragraph (g)(1) of this section, 
a depositary bank that extends the time when funds deposited in an 
account will be available for withdrawal based on the exception 
contained in paragraph (d) of this section may provide a notice to the 
customer for each time period during which the exception will be in 
effect. The notice shall include the following information--
    [lsqbb](i)[rsqbb][rtrif](A)[ltrif] [lsqbb]The account number of the 
customer[rsqbb][rtrif]A number or code, which need not exceed four 
digits, that identifies the customer's account[ltrif];
    [lsqbb](ii)[rsqbb][rtrif](B)[ltrif] The fact that the availability 
of funds deposited in the customer's account will be delayed

[[Page 16892]]

because the repeated overdrafts exception will be invoked;
    [lsqbb](iii)[rsqbb][rtrif](C)[ltrif] The time period within which 
deposits subject to the exception generally will be available for 
withdrawal; and
    [lsqbb](iv)[rsqbb][rtrif](D)[ltrif] The time period during which 
the exception will apply.
    [rtrif](ii)[ltrif] This notice shall be provided at or prior to the 
time notice must be provided under paragraph (g)(1)(ii) of this section 
and only if the exception cited in the notice will be invoked for most 
check deposits in the account.
    (4) Emergency conditions exception notice. When a depositary bank 
extends the time when funds will be available for withdrawal based on 
the application of the emergency conditions exception contained in 
paragraph (f) of this section, it must provide the depositor with 
notice in a reasonable form and within a reasonable time given the 
circumstances. The notice shall include the reason the exception was 
invoked and the time period within which funds shall be made available 
for withdrawal, unless the depositary bank, in good faith, does not 
know at the time the notice is given the duration of the emergency and, 
consequently, when the funds must be made available. The depositary 
bank is not required to provide a notice if the funds subject to the 
exception become available before the notice must be sent.
    (5) Record retention. A depositary bank shall retain a record, in 
accordance with Sec.  229.21(g), of each notice provided pursuant to 
its application of the reasonable[rtrif]-[ltrif]cause exception under 
paragraph (e) of this section, together with a brief statement of the 
facts giving rise to the bank's reason to doubt the collectibility of 
the check.
    (h) Availability of deposits subject to exceptions. (1) If an 
exception contained in paragraphs (b) through (f) of this section 
applies, the depositary bank may extend the time periods established 
under Sec. Sec.  229.10(c) and 229.12 by a reasonable period of time.
    (2) If a depositary bank invokes an exception contained in 
paragraphs (b) through (e) of this section with respect to a check 
described in Sec.  229.10(c)(1) (i) through (v) [or Sec.  
229.10(c)(2)], it shall make the funds available for withdrawal not 
later than a reasonable period after the day the funds would have been 
required to be made available had the check been subject to 
[rtrif]Sec.  [ltrif]229.12.
    (3) If a depositary bank invokes an exception under paragraph (f) 
of this section based on an emergency condition, the depositary bank 
shall make the funds available for withdrawal not later than a 
reasonable period after the emergency has ceased or the period 
established in Sec. Sec.  229.10(c) and 229.12, whichever is later.
    (4) For the purposes of this section, a ``reasonable period'' is an 
extension of up to one business day for checks described in Sec.  
229.10(c)(1)(vi)[lsqbb],[rsqbb] [rtrif]and two[ltrif] 
[lsqbb]five[rsqbb] business days for [lsqbb]checks described in Sec.  
229.12(b) (1) through (4), and six business days for checks described 
in Sec.  229.12(c) (1) and (2) or Sec.  229.12(f)[rsqbb][rtrif]all 
other checks[ltrif]. A longer extension may be reasonable, but the bank 
has the burden of so establishing.
    7. Section 229.14 is revised to read as follows:


Sec.  229.14  Payment of interest.

    (a) In general. A depositary bank shall begin to accrue interest or 
dividends on funds deposited in an interest-bearing account not later 
than the business day on which the depositary bank receives credit for 
the funds. For the purposes of this section, the depositary bank may--
    (1) Rely on the availability schedule of its Federal Reserve 
Bank[lsqbb], Federal Home Loan Bank,[rsqbb] or correspondent bank to 
determine the time credit is actually received; and
    (2) Accrue interest or dividends on funds deposited in interest-
bearing accounts by checks that the depositary bank sends to paying 
banks or subsequent collecting banks for payment or collection based on 
the availability of funds the depositary bank receives from the paying 
or collecting banks.
    (b) Special rule for credit unions. Paragraph (a) of this section 
does not apply to any account at a bank described in Sec.  229.2(e)(4), 
if the bank--
    (1) Begins the accrual of interest or dividends at a later date 
than the date described in paragraph (a) of this section with respect 
to all funds, including cash, deposited in the account; and
    (2) Provides notice of its interest or dividend payment policy in 
the manner required under Sec.  229.16(d).
    (c) Exception for checks returned unpaid. This subpart does not 
require a bank to pay interest or dividends on funds deposited by a 
check that is returned unpaid.
    8. Section 229.15 is revised to read as follows:


Sec.  229.15  General disclosure [rtrif]and notice[ltrif] requirements.

    (a) Form of disclosures [rtrif]and notices[ltrif]. A bank shall 
make the disclosures [rtrif]and notices[ltrif] required by this subpart 
clearly and conspicuously in writing. Disclosures [rtrif]and 
notices[ltrif], other than those posted at locations where employees 
accept consumer deposits and ATMs and the notice on preprinted deposit 
slips, must be in a form that the customer may keep. The disclosures 
shall be grouped together and shall not contain any information not 
related to the disclosures required by this subpart. If contained in a 
document that sets forth other account terms, the disclosures shall be 
highlighted within the document by, for example, use of a separate 
heading.
    (b) [lsqbb]Uniform r[rsqbb] [rtrif]R[ltrif]eference to day of 
availability. In its disclosure[rtrif]s and notices[ltrif], a bank 
shall [lsqbb]describe funds as being available for withdrawal on ``the 
------ business day after'' the day of deposit. In this calculation, 
the first business day is the business day following the banking day 
the deposit was received, and the last business day is the day on which 
the funds are made available.[rsqbb] [rtrif]specify the business day on 
which funds are available for withdrawal by describing that day in 
relation to the banking day on which the bank received the deposit. A 
bank shall use the following, or substantially similar, language--
    (1) The banking day of receipt may be described as ``the same 
business day;''
    (2) The business day after the banking day of receipt may be 
described as ``the next business day;'' and
    (3) A business day after the banking day of receipt may be 
described using a phrase that includes--
    (i) A cardinal number, such as ``1 business day'' or ``2 business 
days;'' or
    (ii) An ordinal number, such as ``the first business day'' or ``the 
second business day.''[ltrif]
    (c) Multiple accounts and multiple account holders. A bank need not 
give multiple disclosures to a customer that holds multiple accounts if 
the accounts are subject to the same availability policies. Similarly, 
a bank need not give separate disclosures to each customer on a jointly 
held account.
    (d) Dormant or inactive accounts. A bank need not give availability 
disclosures to a customer that holds a dormant or inactive account.
    9. Section 229.16 is revised to read as follows:


Sec.  229.16  Specific availability policy disclosure.

    (a) [lsqbb]General[rsqbb][rtrif]In general[ltrif]. To meet the 
requirements of a specific availability policy disclosure under 
Sec. Sec.  229.17 and 229.18(d), a bank shall provide a disclosure 
describing the bank's policy as to when funds deposited in an account 
are available for withdrawal. The disclosure must reflect the policy 
followed by the bank in most cases. A bank may impose longer delays on 
a case-by-case basis or by invoking

[[Page 16893]]

one of the exceptions in Sec.  229.13, provided this is reflected in 
the disclosure.
    (b) Content of specific availability policy disclosure. The 
specific availability policy disclosure shall contain the following, as 
applicable--
    (1) A summary of the bank's availability policy;
    (2) A description of any categories of deposits or checks 
[rtrif]that are subject to differing[ltrif] [lsqbb]used by the bank 
when it delays[rsqbb] availability (such as [lsqbb]local or 
nonlocal[rsqbb] [rtrif]next-day-availability[ltrif] checks [rtrif]and 
other checks[ltrif])[lsqbb]; how to determine the category to which a 
particular deposit or check belongs;[rsqbb] and when each category will 
be available for withdrawal (including a description of the bank's 
business days and when a deposit is considered 
received);[lsqbb]\1\[rsqbb]
    [lsqbb]\1\ A bank that distinguishes in its disclosure between 
local and nonlocal checks based on the routing number on the check must 
disclose that certain checks, such as some credit union share drafts 
that are payable by one bank but payable through another bank, will be 
treated as local or nonlocal checks based upon the location of the bank 
by which they are payable and not on the basis of the location of the 
bank whose routing number appears on the check. A bank that makes funds 
from nonlocal checks available for withdrawal within the time periods 
required for local checks under Sec. Sec.  229.12 and 229.13 is not 
required to provide this disclosure on payable-through checks to its 
customers. The statement concerning payable-through checks must 
describe how the customer can determine whether these checks will be 
treated as local or nonlocal, or state that special rules apply to such 
checks and that the customer may ask about the availability of these 
checks.[rsqbb]
    (3) A description of any of the exceptions in Sec.  229.13 that may 
be invoked by the bank, including the time following a deposit that 
funds generally will be available for withdrawal and a statement that 
the bank will notify the customer if the bank invokes one of the 
exceptions;
    (4) A description, as specified in paragraph (c)(1) of this 
section, of any case-by-case policy of delaying availability that may 
result in deposited funds being available for withdrawal later than the 
time periods stated in the bank's availability policy; and
    (5) A description of how the customer can differentiate between a 
proprietary and a nonproprietary ATM, if the bank makes funds from 
deposits at nonproprietary ATMs available for withdrawal later than 
funds from deposits at proprietary ATMs.
    (c) Longer delays on a case-by-case basis--(1) Notice in specific 
policy disclosure. A bank that has a policy of making deposited funds 
available for withdrawal sooner than required by this subpart may 
extend the time when funds are available up to the time periods allowed 
under this subpart on a case-by-case basis, provided the bank includes 
the following in its specific policy disclosure--
    (i) A statement that the time when deposited funds are available 
for withdrawal may be extended in some cases, and the latest time 
following a deposit that funds will be available for withdrawal;
    (ii) A statement that the bank will notify the customer if funds 
deposited in the customer's account will not be available for 
withdrawal until later than the time periods stated in the bank's 
availability policy; and
    (iii) A statement that customers should ask if they need to be sure 
about when a particular deposit will be available for withdrawal.
    (2) Notice at time of case-by-case delay--(i) In general. When a 
depositary bank extends the time when funds will be available for 
withdrawal on a case-by-case basis, it must provide the depositor with 
a written notice. The notice shall include the following information--
    (A) A number or code, which need not exceed four digits, that 
identifies the customer's account.
    (B) The date of the deposit;
    [rtrif](C) The total amount of the deposit[ltrif]
    [lsqbb](C)[rsqbb][rtrif](D)[ltrif] The amount of the deposit that 
is being delayed; and
    [lsqbb](D)[rsqbb][rtrif](E)[ltrif] The day the funds will be 
available for withdrawal.
    (ii) Timing of notice. The notice shall be provided to the 
depositor at the time of the deposit, unless the deposit is not made in 
person to an employee of the depositary bank or the decision to extend 
the time when the deposited funds will be available is made after the 
time of the deposit. If notice is not given at the time of the deposit, 
the depositary bank shall mail or deliver the notice to the customer 
not later than the first business day following the banking day the 
deposit is made. [rtrif]If the customer has agreed to accept notices 
electronically, the bank shall send the notice such that the bank may 
reasonably expect it to be received by the customer not later than the 
first business day following the banking day the deposit is 
made.[ltrif]
    (3) Overdraft and returned check fees. [rtrif](i)[ltrif] A 
depositary bank that extends the time when funds will be available for 
withdrawal on a case-by-case basis and does not furnish the depositor 
with written notice at the time of deposit shall not assess any fees 
for any subsequent overdrafts (including use of a line of credit) or 
return of checks or other debits to the account, if--
    [lsqbb](i)[rsqbb][rtrif](A)[ltrif] The overdraft or return of the 
check or other debit would not have occurred except for the fact that 
the deposited funds were delayed under paragraph (c)(1) of this 
section; and
    [lsqbb](ii)[rsqbb][rtrif](B)[ltrif] The deposited check was paid by 
the paying bank.
    [rtrif](ii)[ltrif] Notwithstanding the foregoing, the depositary 
bank may assess an overdraft or returned check fee if it includes a 
notice concerning overdraft and returned check fees with the notice 
required in paragraph (c)(2) of this section and, when required, 
refunds any such fees upon the request of the customer. The notice must 
state that the customer may be entitled to a refund of overdraft or 
returned check fees that are assessed if the check subject to the delay 
is paid and how to obtain a refund.
    (d) Credit union notice of interest payment policy. If a bank 
described in Sec.  229.2(e)(4) begins to accrue interest or dividends 
on all deposits made in an interest-bearing account, including cash 
deposits, at a later time than the day specified in Sec.  229.14(a), 
the bank's specific policy disclosures shall contain an explanation of 
when interest or dividends on deposited funds begin to accrue.
    10. Sec.  229.17 is republished to read as follows:


Sec.  229.17  Initial disclosures.

    Before opening a new account, a bank shall provide a potential 
customer with the applicable specific availability policy disclosure 
described in Sec.  229.16.
    11. Sec.  229.18 is republished to read as follows:


Sec.  229.18  Additional disclosure requirements.

    (a) Deposit slips. A bank shall include on all preprinted deposit 
slips furnished to its customers a notice that deposits may not be 
available for immediate withdrawal.
    (b) Locations where employees accept consumer deposits. A bank 
shall post in a conspicuous place in each location where its employees 
receive deposits to consumer accounts a notice that sets forth the time 
periods applicable to the availability of funds deposited in a consumer 
account.
    (c) Automated teller machines. (1) A depositary bank shall post or 
provide a notice at each ATM location that funds deposited in the ATM 
may not be available for immediate withdrawal.
    (2) A depositary bank that operates an off-premises ATM from which 
deposits

[[Page 16894]]

are removed not more than two times each week, as described in Sec.  
229.19(a)(4), shall disclose at or on the ATM the days on which 
deposits made at the ATM will be considered received.
    (d) Upon request. A bank shall provide to any person, upon oral or 
written request, a notice containing the applicable specific 
availability policy disclosure described in Sec.  229.16.
    (e) Changes in policy. A bank shall send a notice to holders of 
consumer accounts at least 30 days before implementing a change to the 
bank's availability policy regarding such accounts, except that a 
change that expedites the availability of funds may be disclosed not 
later than 30 days after implementation.
    13. Section 229.19 is revised to read as follows:


Sec.  229.19  Miscellaneous.

    (a) When funds are considered deposited. For the purposes of this 
subpart--
    (1) Funds deposited at a staffed facility, ATM, or contractual 
branch are considered deposited when they are received at the staffed 
facility, ATM, or contractual branch;
    (2) Funds mailed to the depositary bank are considered deposited on 
the day they are received by the depositary bank;
    (3) Funds deposited to a night depository, lock box, or similar 
facility are considered deposited on the day on which the deposit is 
removed from such facility and is available for processing by the 
depositary bank;
    (4) Funds deposited at an ATM that is not on, or within 50 feet of, 
the premises of the depositary bank are considered deposited on the day 
the funds are removed from the ATM, if funds normally are removed from 
the ATM not more than two times each week; and
    (5) Funds may be considered deposited on the next banking day, in 
the case of funds that are deposited--
    (i) On a day that is not a banking day for the depositary bank; or
    (ii) After a cut-off hour set by the depositary bank for the 
receipt of deposits of 2 p.m. or later, or, for the receipt of deposits 
at ATMs, contractual branches, or off-premise facilities, of 12 noon or 
later. Different cut-off hours later than these times may be 
established for the receipt of different types of deposits, or receipt 
of deposits at different locations.
    (b) Availability at start of business day. Except as otherwise 
provided in Sec.  229.12[lsqbb](d)[rsqbb][rtrif](b)[ltrif], if any 
provision of this subpart requires that funds be made available for 
withdrawal on any business day [rtrif]after the banking day of 
deposit[ltrif], the funds shall be available for withdrawal by the 
later of:
    (1) 9 a.m. (local time of the depositary bank); or
    (2) The time the depositary bank's teller facilities (including 
ATMs) are available for customer account withdrawals.
    (c) Effect on policies of depositary bank. This part does not--
    (1) Prohibit a depositary bank from making funds available to a 
customer for withdrawal in a shorter period of time than the time 
required by this subpart;
    (2) Affect a depositary bank's right--
    (i) To accept or reject a check for deposit;
    (ii) To revoke any settlement made by the depositary bank with 
respect to a check accepted by the bank for deposit, to charge back the 
customer's account for the amount of a check based on the return of the 
check or receipt of a notice of nonpayment of the check, or to claim a 
refund of such credit; and
    (iii) To charge back funds made available to its customer for an 
electronic payment for which the bank has not received payment in 
actually and finally collected funds;
    (3) Require a depositary bank to open or otherwise to make its 
facilities available for customer transactions on a given business day; 
or
    (4) Supersede any policy of a depositary bank that limits the 
amount of cash a customer may withdraw from its account on any one day, 
if that policy--
    (i) Is not dependent on the time the funds have been deposited in 
the account, as long as the funds have been on deposit for the time 
period specified in Sec. Sec.  229.10, 229.12, or 229.13; and
    (ii) In the case of withdrawals made in person to an employee of 
the depositary bank--
    (A) Is applied without discrimination to all customers of the bank; 
and
    (B) Is related to security, operating, or bonding requirements of 
the depositary bank.
    (d) Use of calculated availability. A depositary bank may provide 
availability to its nonconsumer accounts based on a sample of checks 
that represents the average composition of the customer's deposits, if 
the terms for availability based on the sample are equivalent to or 
more prompt than the availability requirements of this subpart.
    (e) Holds on other funds. (1) A depositary bank that receives a 
check for deposit in an account may [lsqbb]not[rsqbb] place a hold on 
any funds of the customer at the bank, [lsqbb]where[rsqbb][rtrif]only 
if[ltrif] --
    (i) The amount of funds that are held [rtrif]does not[ltrif] 
exceed[lsqbb]s[rsqbb] the amount of the check; [lsqbb]or[rsqbb] 
[rtrif]and[ltrif]
    (ii) The funds are [lsqbb]not[rsqbb] made available for withdrawal 
within the times specified in Sec. Sec.  229.10, 229.12, and 229.13.
    (2) A depositary bank that cashes a check for a customer over the 
counter [lsqbb], other than a check drawn on the depositary 
bank,[rsqbb] may [lsqbb]not[rsqbb] place a hold on funds in an account 
of the customer at the bank, [rtrif]only[ltrif] if--
    (i) The amount of funds that are held [rtrif]does not[ltrif] 
exceed[lsqbb]s[rsqbb] the amount of the check; [lsqbb]or[rsqbb]
    (ii) The funds are [lsqbb]not[rsqbb] made available for withdrawal 
within the times specified in Sec. Sec.  229.10, 229.12, and 
229.13[lsqbb].[rsqbb][rtrif]; and
    (iii) The check is not drawn on the depositary bank. [ltrif]
    (f) Employee training and compliance. Each bank shall establish 
procedures to ensure that the bank complies with the requirements of 
this subpart, and shall provide each employee who performs duties 
subject to the requirements of this subpart with a statement of the 
procedures applicable to that employee.
    (g) Effect of merger transaction--[lsqbb](1) In general[rsqbb]. For 
purposes of this subpart, except for the purposes of the new accounts 
exception of Sec.  229.13(a), and when funds are considered deposited 
under Sec.  229.19(a), two or more banks that have engaged in a merger 
transaction may be considered to be separate banks for a period of one 
year following the consummation of the merger transaction.
    [lsqbb](2) Merger transactions on or after July 1, 1998, and before 
March 1, 2000. If banks have consummated a merger transaction on or 
after July 1, 1998, and before March 1, 2000, the merged banks may be 
considered separate banks until March 1, 2001.[rsqbb]
    13a. Section 229.20 is revised to read as follows:


Sec.  229.20  Relation to state law.

    (a) In general. [rtrif](1)[ltrif] Any provision of a law or 
regulation of any state in effect on or before September 1, 1989, that 
requires funds deposited in an account at a bank chartered by the state 
to be made available for withdrawal in a shorter time than the time 
provided in subpart B, and, in connection therewith, subpart A, shall--
    [lsqbb](1)[rsqbb][rtrif](i)[ltrif] Supersede the provisions of the 
EFA Act and subpart B, and, in connection therewith, subpart A, to the 
extent the provisions relate to the time by which funds deposited or 
received for deposit in an account are available for withdrawal; and
    [lsqbb](2)[rsqbb][rtrif](ii)[ltrif] Apply to all federally insured 
banks located within the state.
    [rtrif](2)[ltrif] No amendment to a state law or regulation 
governing the availability

[[Page 16895]]

of funds that becomes effective after September 1, 1989, shall 
supersede the EFA Act and subpart B, and, in connection therewith, 
subpart A, but unamended provisions of state law shall remain in 
effect.
    (b) Preemption of inconsistent law. Except as provided in paragraph 
(a), the EFA Act and subpart B, and, in connection therewith, subpart 
A, supersede any provision of inconsistent state law.
    (c) Standards for preemption. A provision of a state law in effect 
on or before September 1, 1989, is not inconsistent with the EFA Act, 
or subpart B, or in connection therewith, subpart A, if it requires 
that funds shall be available in a shorter period of time than the time 
provided in this subpart. Inconsistency with the EFA Act and subpart B, 
and in connection therewith, subpart A, may exist when state law--
    (1) Permits a depositary bank to make funds deposited in an account 
by cash, electronic payment, or check available for withdrawal in a 
longer period of time than the maximum period of time permitted under 
subpart B, and, in connection therewith, subpart A; or
    (2) Provides for disclosures or notices concerning funds 
availability relating to accounts.
    (d) Preemption determinations. The Board may determine, upon the 
request of any state, bank, or other interested party, whether the EFA 
Act and subpart B, and, in connection therewith, subpart A, preempt 
provisions of state laws relating to the availability of funds.
    (e) Procedures for preemption determinations.[rtrif](1)[ltrif] A 
request for a preemption determination shall include the following--
    [lsqbb](1)[rsqbb][rtrif](i)[ltrif] A copy of the full text of the 
state law in question, including any implementing regulations or 
judicial interpretations of that law; and
    [lsqbb](2)[rsqbb][rtrif](ii)[ltrif] A comparison of the provisions 
of state law with the corresponding provisions in the EFA Act and 
subparts A and B of this part, together with a discussion of the 
reasons why specific provisions of state law are either consistent or 
inconsistent with corresponding sections of the EFA Act and subparts A 
and B of this part.
    [rtrif](2)[ltrif] A request for a preemption determination shall be 
addressed to the Secretary, Board of Governors of the Federal Reserve 
System.
    14. Amend Sec.  229.21 by revising paragraphs (f) and (g) to read 
as follows:


Sec.  229.21  Civil liability.

* * * * *
    (f) Exclusions. This section does not apply to claims that arise 
under subpart[rtrif]s[ltrif] C [rtrif]or D[ltrif] of this part or to 
actions for wrongful dishonor.
    (g) Record retention. (1) A bank shall retain evidence of 
compliance with the requirements imposed by this subpart for not less 
than two years. Records may be stored by use of [lsqbb]microfiche, 
microfilm, magnetic tape,[rsqbb][rtrif]electronic storage media[ltrif] 
or other methods capable of accurately retaining and reproducing 
information.
    (2) If a bank has actual notice that it is being investigated, or 
is subject to an enforcement proceeding by an agency charged with 
monitoring that bank's compliance with the EFA Act and this subpart, or 
has been served with notice of an action filed under this section, it 
shall retain the records pertaining to the action or proceeding pending 
final disposition of the matter, unless an earlier time is allowed by 
order of the agency or court.

Subpart C--Collection of Checks

    15. Revise Sec.  229.30 to read as follows:


Sec.  229.30  Paying bank's responsibility for return of checks.

    (a) [rtrif]Expeditious[ltrif] [lsqbb]R[rsqbb][rtrif]r[ltrif]eturn 
of checks. [rtrif](1)[ltrif]If a paying bank determines not to pay a 
check [lsqbb]it shall return the check in an expeditious manner as 
provided in either paragraph (a)(1) or (a)(2) of this 
section[rsqbb][rtrif], the paying bank shall send the returned check 
expeditiously such that the depositary bank normally would receive the 
returned check no later than 4 p.m. (local time of the depositary bank) 
on the second business day following the banking day on which the check 
was presented to the paying bank[ltrif].
    [lsqbb](1) Two-day/four-day test. A paying bank returns a check in 
an expeditious manner if it sends the returned check in a manner such 
that the check would normally be received by the depositary bank not 
later than 4 p.m. (local time of the depositary bank) of--
    (i) The second business day following the banking day on which the 
check was presented to the paying bank, if the paying bank is located 
in the same check processing region as the depositary bank; or
    (ii) The fourth business day following the banking day on which the 
check was presented to the paying bank, if the paying bank is not 
located in the same check processing region as the depositary 
bank.[rsqbb]
    [rtrif](2)[ltrif]If the last business day on which the paying bank 
may deliver a returned check to the depositary bank is not a banking 
day for the depositary bank, the paying bank [lsqbb]meets the two-day/
four-day test[rsqbb][rtrif]satisfies its expeditious return 
requirement[ltrif] if the returned check is received by the depositary 
bank on or before the depositary bank's next banking day.
    [lsqbb](2) Forward collection test. A paying bank also returns a 
check in an expeditious manner if it sends the returned check in a 
manner that a similarly situated bank would normally handle a check--
    (i) Of similar amount as the returned check;
    (ii) Drawn on the depositary bank; and
    (iii) Deposited for forward collection in the similarly situated 
bank by noon on the banking day following the banking day on which the 
check was presented to the paying bank.[rsqbb]
    [rtrif](3)[ltrif][lsqbb]Subject to the requirement for expeditious 
return, a[rsqbb] [rtrif]A[ltrif] paying bank may send a returned check 
to the depositary bank, [lsqbb]or[rsqbb] to any other bank agreeing to 
handle the returned check expeditiously under Sec.  229.31(a)[rtrif], 
or, under Sec.  229.30(b)(2), to any bank that handled the check for 
forward collection[ltrif].
    [rtrif](4)[ltrif] A paying bank may convert a check to a qualified 
returned check. A qualified returned check shall be encoded in magnetic 
ink with the routing number of the depositary bank, the amount of the 
returned check, and a ``2'' in the case of an original check (or a 
``5'' in the case of a substitute check) in position 44 of the 
qualified return MICR line as a return identifier. A qualified returned 
original check shall be encoded in accordance with ANS X9.13, and a 
qualified returned substitute check shall be encoded in accordance with 
ANS X9.100-140.
    [rtrif](5)[ltrif] This paragraph [rtrif](a)[ltrif] does not affect 
a paying bank's responsibility to return a check within the deadlines 
required by the U.C.C., Regulation J (12 CFR part 210), or Sec.  
229.30(c).
    [rtrif](6) A check payable at or through a paying bank is 
considered to be drawn on that bank for purposes of the expeditious 
return requirement of this subpart.[ltrif]
    (b) [lsqbb]Unidentifiable depositary bank.[rsqbb][rtrif]Exceptions 
to expeditious return of checks. (1) The expeditious return requirement 
of paragraph (a) of this section does not apply if--
    (i) The depositary bank has not agreed to accept electronic returns 
from the paying bank under Sec.  229.32(a);
    (ii) The check is deposited in a depositary bank that does not 
maintain accounts; or
    (iii) A paying bank is unable to identify the depositary bank with 
respect to a check.
    (2)[ltrif] A paying bank that is unable to identify the depositary 
bank [lsqbb]with respect to a check[rsqbb] may send the

[[Page 16896]]

returned check to any bank that handled the check for forward 
collection even if that bank does not agree to handle the check 
expeditiously under Sec.  229.31(a). A paying bank sending a returned 
check under this paragraph [rtrif](b)(2)[ltrif] to a bank that handled 
the check for forward collection must advise the bank to which the 
check is sent that the paying bank is unable to identify the depositary 
bank. [lsqbb]The expeditious-return requirements in Sec.  229.30(a) do 
not apply to the paying bank's return of a check under this 
paragraph.[rsqbb]
    (c) Extension of deadline. [rtrif](1)[ltrif]The deadline for return 
[lsqbb]or notice of nonpayment[rsqbb] under the U.C.C. or Regulation J 
(12 CFR part 210), or [lsqbb]Sec.  229.36(f)(2)[rsqbb] [rtrif]Sec.  
229.36(d)(3)[ltrif] is extended to the time of dispatch of such return 
[or notice of nonpayment] where a paying bank uses a means of delivery 
that would ordinarily result in receipt by the [rtrif]depositary[ltrif] 
bank [lsqbb]to which it is sent[rsqbb] [rtrif]by 4 p.m. (local time of 
the depositary bank) on the second business day after the banking day 
on which the check was presented to the paying bank.[ltrif][lsqbb]--
    (1) On or before the receiving bank's next banking day following 
the otherwise applicable deadline by the earlier of the close of that 
banking day or a cutoff hour of 2 p.m. or later set by the receiving 
bank under U.C.C. 4-108, for all deadlines other than those described 
in paragraph (c)(2) of this section; this deadline is extended further 
if a paying bank uses a highly expeditious means of transportation, 
even if this means of transportation would ordinarily result in 
delivery after the receiving bank's next cutoff hour or banking day 
referred to above; or
    (2) [Prior to the cut-off hour for the next processing cycle (if 
sent to a returning bank), or on the next banking day (if sent to the 
depositary bank), for a deadline falling on a Saturday that is a 
banking day (as defined in the applicable U.C.C.) for the paying 
bank.[rsqbb]
    [rtrif]If the last business day on which the paying bank may 
deliver a returned check to the depositary bank is not a banking day 
for the depositary bank, the paying bank's deadline under the U.C.C. or 
Regulation J (12 CFR part 210), or Sec.  229.36(d)(3) is extended to 
the time of dispatch of such return where a paying bank uses a means of 
delivery such that the returned check would ordinarily be received by 
the depositary bank on or before the depositary bank's next banking 
day.[ltrif]
    (d) Identification of returned check. A paying bank returning a 
check shall clearly indicate on the [lsqbb]face[rsqbb] 
[rtrif]front[ltrif] of the check that it is a returned check and the 
reason for return. If the check is a substitute check [rtrif]or 
electronic return[ltrif], the paying bank shall place this information 
[lsqbb]within the image of the original check that appears on the front 
of the substitute check[rsqbb] [rtrif]such that the information would 
be retained on any subsequent substitute check.[ltrif]
    [lsqbb](e) Depositary bank without accounts. The expeditious return 
requirements of paragraph (a) of this section does not apply to checks 
deposited in a depositary bank that does not maintain accounts.[rsqbb]
    [lsqbb](f)[rsqbb][rtrif](e)[ltrif] Notice in lieu of return. 
[rtrif](1)[ltrif] If a check is unavailable for return, the paying bank 
may send in its place a copy of the front and back of the returned 
check, or, if no such copy is available, a written notice of nonpayment 
containing the information specified in [lsqbb]Sec.  
229.33(b)[rsqbb][rtrif]paragraph (e)(2) of this section[ltrif]. The 
copy or notice shall clearly state that it constitutes a notice in lieu 
of return. A notice in lieu of return is considered a returned check 
subject to the expeditious return requirements of this section and to 
the other [lsqbb]requirements[rsqbb][rtrif]provisions[ltrif] of this 
subpart.
    [rtrif](2) The notice must include, if available, the--
    (i) Name and routing number of the paying bank;
    (ii) Name of the payee(s);
    (iii) Amount of the returned check;
    (iv) Date of the indorsement of the depositary bank;
    (v) Account number of the customer(s) of the depositary bank;
    (vi) Branch name or number of the depositary bank from its 
indorsement;
    (vii) Trace number associated with the indorsement of the 
depositary bank; and
    (viii) Reason for return.
    (3) The notice may include other information from the check that 
may be useful in identifying the check being returned and the customer 
and must include the name and routing number of the depositary bank 
from its indorsement.
    (4) If the paying bank is not sure of an item of information, it 
shall include the information required by this paragraph to the extent 
possible, and identify any item of information for which the bank is 
not sure of the accuracy.[ltrif]
    [lsqbb](g)[rsqbb][rtrif](f)[ltrif] Reliance on routing number. A 
paying bank may [lsqbb]return[rsqbb][rtrif]send[ltrif] a returned check 
based on any routing number designating the depositary bank appearing 
on the [lsqbb]returned[rsqbb] check in the depositary bank's 
indorsement [rtrif]or in the electronic image of or information related 
to the check[ltrif].
    16. Revise Sec.  229.31 to read as follows:


Sec.  229.31  Returning bank's responsibility for return of checks.

    (a) [rtrif]Expeditious [lsqbb]R[rsqbb][rtrif]r[ltrif]eturn of 
checks. [rtrif](1)[ltrif] [lsqbb]A[rsqbb] [rtrif]If the returning bank 
agrees to handle the return expeditiously, the[ltrif] returning bank 
shall [lsqbb]return a returned check in an expeditious manner as 
provided in either paragraph (a)(1) or (a)(2) of this 
section[rsqbb][rtrif]send the returned check expeditiously such that 
the depositary bank normally would receive the returned check no later 
than 4 p.m. (local time of the depositary bank) on the second business 
day following the banking day on which the check was presented to the 
paying bank[ltrif].
    [lsqbb](1) Two-day/four-day test. A returning bank returns a check 
in an expeditious manner if it sends the returned check in a manner 
such that the check would normally be received by the depositary bank 
not later than 4 p.m. (local time) of--
    (i) The second business day following the banking day on which the 
check was presented to the paying bank if the paying bank is located in 
the same check processing region as the depositary bank; or
    (ii) The fourth business day following the banking day on which the 
check was presented to the paying bank if the paying bank is not 
located in the same check processing region as the depositary 
bank.[rsqbb]
    (2) If the last business day on which the returning bank may 
deliver a returned check to the depositary bank is not a banking day 
for the depositary bank, the returning bank meets this requirement if 
the returned check is received by the depositary bank on or before the 
depositary bank's next banking day.
    [lsqbb](2) Forward collection test. A returning bank also returns a 
check in an expeditious manner if it sends the returned check in a 
manner that a similarly situated bank would normally handle a check--
    (i) Of similar amount as the returned check;
    (ii) Drawn on the depositary bank; and
    (iii) Received for forward collection by the similarly situated 
bank at the time the returning bank received the returned check, except 
that a returning bank may set a cut-off hour for the receipt of 
returned checks that is earlier than the similarly situated bank's cut-
off hour for checks received for forward collection, if the cut-off 
hour is not earlier than 2 p.m.[rsqbb]
    [rtrif](3)[ltrif] [lsqbb]Subject to the requirement for expeditious 
return, t[rsqbb][rtrif]T[ltrif]he returning bank may send the returned 
check to the depositary bank, [lsqbb]or[rsqbb] to

[[Page 16897]]

any bank agreeing to handle the returned check expeditiously under 
Sec.  229.31(a)[rtrif], or, under Sec.  229.31(b)(2), to any bank that 
handled the check for forward collection[ltrif].
    [rtrif](4)[ltrif] The returning bank may convert the returned check 
to a qualified returned check. A qualified returned check shall be 
encoded in magnetic ink with the routing number of the depositary bank, 
the amount of the returned check, and a ``2'' in the case of an 
original check (or a ``5'' in the case of a substitute check) in 
position 44 of the qualified return MICR line as a return identifier. A 
qualified returned original check shall be encoded in accordance with 
ANS X9.13, and a qualified returned substitute check shall be encoded 
in accordance with ANS X9.100-140. [lsqbb]The time for expeditious 
return under the forward collection test, and the deadline for return 
under the U.C.C. and Regulation J (12 CFR part 210), are extended by 
one business day if the returning bank converts a returned check to a 
qualified returned check. This extension does not apply to the two-day/
four-day test specified in paragraph (a)(1) of this section or when a 
returning bank is returning a check directly to the depositary 
bank.[rsqbb]
    [rtrif](b) Exceptions to expeditious return of checks. (1) The 
expeditious return requirement of paragraph (a) of this section does 
not apply if--
    (i) The depositary bank has not agreed to accept electronic returns 
from the paying bank under Sec.  229.32(a);
    (ii) The check is deposited in a depositary bank that does not 
maintain accounts;
    (iii) A returning bank is unable to identify the depositary bank 
with respect to a check; or
    (iv) The returning bank received the returned check pursuant to 
paragraph (b)(2) of this section or Sec.  229.30(b)(2).
    (2) If a returning bank is unable to identify the depositary bank, 
the returning bank may send the returned check to any bank that handled 
the check for forward collection, if the returning bank was not a 
collecting bank with respect to the returned check; or a prior 
collecting bank, if the returning bank was a collecting bank with 
respect to the returned check. A returning bank sending a returned 
check under this paragraph (b)(2) to a bank that handled the check for 
forward collection must advise the bank to which the check is sent that 
the returning bank is unable to identify the depositary bank.[ltrif]
    [lsqbb](b) Unidentifiable depositary bank. A returning bank that is 
unable to identify the depositary bank with respect to a returned check 
may send the returned check to--
    (1) Any collecting bank that handled the check for forward 
collection if the returning bank was not a collecting bank with respect 
to the returned check; or
    (2) A prior collecting bank, if the returning bank was a collecting 
bank with respect to the returned check;
    A returning bank sending a returned check under this paragraph must 
advise the bank to which the check is sent that the returning bank is 
unable to identify the depositary bank.
    The expeditious return requirements in paragraph (a) of this 
section do not apply to return of a check under this paragraph. A 
returning bank that receives a returned check from a paying bank under 
Sec.  229.30(b), or from a returning bank under this paragraph, but 
that is able to identify the depositary bank, must thereafter return 
the check expeditiously to the depositary bank.[rsqbb]
    (c) Settlement. A returning bank shall settle with a bank sending a 
returned check to it for return by the same means that it settles or 
would settle with the sending bank for a check received for forward 
collection drawn on the depositary bank. This settlement is final when 
made.
    (d) Charges. A returning bank may impose a charge [rtrif]on a bank 
sending a returned check[ltrif] for handling the returned check.
    [lsqbb](e) Depositary bank without accounts. The expeditious return 
requirement[s] of paragraph (a) of this section does not apply to 
checks deposited with a depositary bank that does not maintain 
accounts.[rsqbb]
    [lsqbb](f)[rsqbb][rtrif](e)[ltrif] Notice in lieu of return. If a 
check is unavailable for return, the returning bank may send in its 
place a copy of the front and back of the returned check, or, if no 
copy is available, a written notice of nonpayment containing the 
information specified in [lsqbb]Sec.  229.33(b)[rsqbb][rtrif]Sec.  
229.30(e)(2)[ltrif]. The copy or notice shall clearly state that it 
constitutes a notice in lieu of return. A notice in lieu of return is 
considered a returned check subject to the expeditious return 
requirements of this section and to the other 
[lsqbb]requirements[rsqbb][rtrif]provisions[ltrif] of this subpart.
    [lsqbb](g)[rsqbb][rtrif](f)[ltrif] Reliance on routing number. A 
returning bank may [lsqbb]return[rsqbb][rtrif]send[ltrif] a returned 
check based on any routing number designating the depositary bank 
appearing on the returned check in the depositary bank's 
indorsement[rtrif],[ltrif] [lsqbb]or[rsqbb] in magnetic ink on a 
qualified returned check[rtrif], or in the electronic image or 
information included in the electronic return[ltrif].
    17. Revise Sec.  229.32 to read as follows:


Sec.  229.32  Depositary bank's responsibility for returned checks.

    [rtrif](a) Acceptance of electronic returns. (1) A depositary bank 
agrees to accept an electronic return from a paying bank if it has 
agreed to receive the electronic return--
    (i) Directly from the paying bank;
    (ii) Directly from a returning bank that has held itself out as 
willing to accept electronic returns directly or indirectly from the 
paying bank and has agreed to return checks expeditiously under Sec.  
229.31(a); or
    (iii) As otherwise agreed with the paying bank.
    (2) When electronic return received. A depositary bank receives an 
electronic return when the return is delivered to the electronic return 
point designated by the depositary bank or, by agreement, otherwise is 
made available to the depositary bank for retrieval or review.
    (3) A depositary bank may require that electronic returns be 
separated from electronic collection items.[ltrif]
    [lsqbb](a)[rsqbb][rtrif](b)[ltrif] Acceptance of 
[rtrif]paper[ltrif] returned checks. [rtrif](1)[ltrif]A depositary bank 
shall accept [rtrif]paper[ltrif] returned checks [lsqbb]and written 
notices of nonpayment[rsqbb].
    [lsqbb](1)[rsqbb][rtrif](i)[ltrif]At a location [rtrif], if 
any,[ltrif] at which presentment of [rtrif]paper[ltrif] checks for 
forward collection is requested by the depositary bank; and
    [lsqbb](2)(i)[rsqbb][rtrif](ii)(A)[ltrif] At a branch, head office, 
or other location consistent with the name and address of the bank in 
its indorsement on the check;
    [lsqbb](ii)[rsqbb][rtrif](B)[ltrif] If no address appears in the 
indorsement, at a branch or head office associated with the routing 
number of the bank in its indorsement on the check;
    [lsqbb](iii) If the address in the indorsement is not in the same 
check processing region as the address associated with the routing 
number of the bank in its indorsement on the check, at a location 
consistent with the address in the indorsement and at a branch or head 
office associated with the routing number in the bank's 
indorsement;[rsqbb] or
    [lsqbb](iv)[rsqbb][rtrif](C)[ltrif] If no routing number or address 
appears in its indorsement on the check, at any branch or head office 
of the bank.
    [rtrif](2)[ltrif] A depositary bank may require that returned 
checks be separated from forward collection checks.
    [lsqbb](b)[rsqbb][rtrif](c)[ltrif] Payment. [rtrif](1)[ltrif] A 
depositary bank shall pay the returning [rtrif]bank[ltrif] or paying 
bank returning the check to it for the amount of the check prior to the 
close of business on the banking day on which it received the check 
(``payment date'') by--

[[Page 16898]]

    [lsqbb](1)[rsqbb][rtrif](i)[ltrif] Debit to an account of the 
depositary bank on the books of the returning [rtrif]bank[ltrif] or 
paying bank;
    [lsqbb](2)[rsqbb][rtrif](ii)[ltrif] Cash;
    [lsqbb](3)[rsqbb][rtrif](iii)[ltrif] Wire transfer; or
    [(4)][rtrif](iv)[ltrif] Any other form of payment acceptable to the 
returning [rtrif]bank[ltrif] or paying 
bank[lsqbb];[rsqbb][rtrif].[ltrif]
    [rtrif](2)[ltrif] [provided that t] [rtrif]T[ltrif]he proceeds of 
the payment [lsqbb]are[rsqbb] [rtrif]must be[ltrif] available to the 
returning [rtrif]bank[ltrif] or paying bank in cash or by credit to an 
account of the returning [rtrif]bank[ltrif] or paying bank on or as of 
the payment date. If the payment date is not a banking day for the 
returning [rtrif]bank[ltrif] or paying bank or the depositary bank is 
unable to make the payment on the payment date, payment shall be made 
by the next day that is a banking day for the returning 
[rtrif]bank[ltrif] or paying bank. These payments are final when made.
    [lsqbb](c)[rsqbb][rtrif](d)[ltrif] Misrouted returned checks 
[lsqbb]and written notices of nonpayment[rsqbb]. If a bank receives a 
returned check [lsqbb]or written notice of nonpayment[rsqbb] on the 
basis that it is the depositary bank, and the bank determines that it 
is not the depositary bank with respect to the check [lsqbb]or 
notice[rsqbb], it shall either promptly send the returned check 
[lsqbb]or notice[rsqbb] to the depositary bank directly or by means of 
a returning bank agreeing to handle the returned check 
[lsqbb]expeditiously under Sec.  229.31(a)[rsqbb], or send the check 
[lsqbb]or notice[rsqbb] back to the bank from which it was received.
    [lsqbb](d)[rsqbb][rtrif](e)[ltrif] Charges. A depositary bank may 
not impose [rtrif]on the bank returning the check[ltrif] a charge for 
accepting and paying checks being returned to it.
    [rtrif](f) Notification to customer. If the depositary bank 
receives a returned check, it shall send or give notice to its customer 
of the facts by midnight of the banking day following the banking day 
on which it received the returned check, or within a longer reasonable 
time.[ltrif]
    18. Revise Sec.  229.33 to read as follows.


[rtrif]Sec.  229.33  Electronic collection items and electronic 
returns.

    (a) Checks under this subpart. Electronic collection items and 
electronic returns are subject to the provisions of this subpart as if 
they were checks or returned checks, unless otherwise provided in this 
subpart.
    (b) [Reserved][ltrif]
    19. Revise Sec.  229.34 to read as follows:


Sec.  229.34  Warranties.

    [rtrif](a) Transfer and presentment warranties with respect to an 
electronic collection item or an electronic return. (1) Each bank that 
transfers or presents an electronic collection item or an electronic 
return and receives a settlement or other consideration for it warrants 
that--
    (i) The electronic image accurately represents all of the 
information on the front and back of the original check as of the time 
that the original check was truncated and the electronic information 
contains an accurate record of all MICR line information required for a 
substitute check under Sec.  229.2(rr) of this part and the amount of 
the check, and
    (ii) No person will receive a transfer, presentment, or return of, 
or otherwise be charged for, an electronic collection item, an 
electronic return, the original check, a substitute check, or a paper 
or electronic representation of a substitute check such that the person 
will be asked to make payment based on a check it has already paid.
    (2) Each bank that transfers or presents an electronic collection 
item makes the warranties in paragraph (a)(1) of this section to the 
transferee bank, any subsequent collecting bank, the paying bank, and 
the drawer; and
    (3) Each bank that transfers an electronic return makes the 
warranties in paragraph (a)(1) of this section to the transferee 
returning bank, any subsequent returning bank, the depositary bank, and 
the owner of the check.[ltrif]
    [lsqbb](b) Warranty of notice of nonpayment. Each paying bank that 
gives a notice of nonpayment warrants to the transferee bank, to any 
subsequent transferee bank, to the depositary bank, and to the owner of 
the check that--
    (1) The paying bank, or in the case of a check payable by a bank 
and payable through another bank, the bank by which the check is 
payable, returned or will return the check within its deadline under 
the U.C.C., Regulation J (12 CFR part 210), or Sec.  229.30(c) of this 
part;
    (2) It is authorized to send the notice; and
    (3) The check has not been materially altered.
    These warranties are not made with respect to checks drawn on a 
state or a unit of general local government that are not payable 
through or at a bank.[rsqbb]
    [lsqbb](c) Warranty of s[rsqbb][rtrif](b) S[ltrif]ettlement amount, 
encoding, and offset [rtrif]warranties for all items[ltrif]. (1) Each 
bank that presents one or more checks to a paying bank and in return 
receives a settlement or other consideration warrants to the paying 
bank that the total amount of the checks presented is equal to the 
total amount of the settlement demanded by the presenting bank from the 
paying bank.
    (2) Each bank that transfers one or more checks or returned checks 
to a collecting [rtrif]bank[ltrif], returning [rtrif]bank[ltrif], or 
depositary bank and in return receives a settlement or other 
consideration warrants to the transferee bank that the accompanying 
information, if any, accurately indicates the total amount of the 
checks or returned checks transferred.
    (3) Each bank that presents or transfers a check or returned check 
warrants to any bank that subsequently handles it that, at the time of 
presentment or transfer, the information encoded after issue in 
magnetic ink [rtrif]or as electronic information[ltrif] on the check or 
returned check is [lsqbb]correct[rsqbb][rtrif]accurate[ltrif]. For 
purposes of this paragraph, the information encoded after issue on the 
check or returned check includes any information placed in the MICR 
line of a substitute check [rtrif] or in the electronic information of 
an electronic collection item or electronic return[ltrif][lsqbb]that 
represents that check or returned check[rsqbb].
    (4) If a bank settles with another bank for checks presented, or 
for returned checks for which it is the depositary bank, in amount 
exceeding the total amount of the checks, the settling bank may set off 
the excess settlement amount against subsequent settlements for checks 
presented, or for returned checks for which it is the depositary bank, 
that it receives from the other bank.
    [lsqbb](d)[rsqbb][rtrif](c)[ltrif] Transfer and presentment 
warranties with respect to a remotely created check. (1) A bank that 
transfers or presents a remotely created check and receives a 
settlement or other consideration warrants to the transferee bank, any 
subsequent collecting bank, and the paying bank that the person on 
whose account the remotely created check is drawn authorized the 
issuance of the check in the amount stated on the check and to the 
payee stated on the check. For purposes of this paragraph (d)(1), 
``account'' includes an account as defined in Sec.  229.2(a) as well as 
a credit or other arrangement that allows a person to draw checks that 
are payable by, through, or at a bank.
    (2) If a paying bank asserts a claim for breach of warranty under 
paragraph (d)(1) of this section, the warranting bank may defend by 
proving that the customer of the paying bank is precluded under U.C.C. 
4-406, as applicable, from asserting against the paying bank the 
unauthorized issuance of the check.
    [lsqbb](a) Warranties[rsqbb][rtrif](d) Warranty of returned 
check[ltrif]. [rtrif](1)[ltrif]Each paying bank or returning bank that 
transfers a

[[Page 16899]]

returned check and receives a settlement or other consideration for it 
warrants to the transferee returning bank, to any subsequent returning 
bank, to the depositary bank, and to the owner of the check, that--
    [lsqbb](1)[rsqbb][rtrif](i)[ltrif]The paying bank, or in the case 
of a check payable by a bank and payable through another bank, the bank 
by which the check is payable, returned the check within its deadline 
under the U.C.C. [, or Regulation J (12 CFR part 210),] or Sec.  
229.30(c) [of this part];
    [lsqbb](2)[rsqbb][rtrif](ii)[ltrif] It is authorized to return the 
check;
    [lsqbb](3)[rsqbb][rtrif](iii)[ltrif] The check has not been 
materially altered; and
    [lsqbb](4)[rsqbb][rtrif](iv)[ltrif] In the case of a notice in lieu 
of return, the [original] check has not and will not be returned.
    [rtrif](2)[ltrif] These warranties are not made with respect to 
checks drawn on the Treasury of the United States, U.S. Postal Service 
money orders, or checks drawn on a state or a unit of general local 
government that are not payable through or at a bank.
    [rtrif](e) Electronic image and information transferred as an 
electronic collection item or electronic return. A bank that transfers 
or presents an electronic image and related electronic information as 
if it were an electronic collection item or electronic return makes the 
warranties in this section as if the image and information were an 
electronic collection item or electronic return.[ltrif]
    [lsqbb](e)[rsqbb][rtrif](f)[ltrif] Damages. Damages for breach of 
these warranties shall not exceed the consideration received by the 
bank that presents or transfers a check or returned check, plus 
interest compensation and expenses related to the check or returned 
check, if any.
    [lsqbb](f)[rsqbb][rtrif](g)[ltrif] Tender of defense. If a bank is 
sued for breach of a warranty under this section, it may give a prior 
bank in the collection or return chain written notice of the 
litigation, and the bank notified may then give similar notice to any 
other prior bank. If the notice states that the bank notified may come 
in and defend and that failure to do so will bind the bank notified in 
an action later brought by the bank giving the notice as to any 
determination of fact common to the two litigations, the bank notified 
is so bound unless after seasonable receipt of the notice the bank 
notified does come in and defend.
    [lsqbb](g)[rsqbb][rtrif](h)[ltrif] Notice of claim. Unless a 
claimant gives notice of a claim for breach of warranty under this 
section to the bank that made the warranty within 30 days after the 
claimant has reason to know of the breach and the identity of the 
warranting bank, the warranting bank is discharged to the extent of any 
loss caused by the delay in giving notice of the claim.
    23. In Sec.  229.35, paragraph (b) is revised to read as follows:


Sec.  229.35  Indorsements.

* * * * *
    (b) Liability of bank handling check. A bank that handles a check 
for forward collection or return is liable to any bank that 
subsequently handles the check to the extent that the subsequent bank 
does not receive payment for the check because of suspension of 
payments by another bank or otherwise. This paragraph applies whether 
or not a bank has [lsqbb]placed its indorsement 
on[rsqbb][rtrif]indorsed[ltrif] the check. This liability is not 
affected by the failure of any bank to exercise ordinary care, but any 
bank failing to do so remains liable. A bank seeking recovery against a 
prior bank shall send notice to that prior bank reasonably promptly 
after it learns the facts entitling it to recover. A bank may recover 
from the bank with which it settled for the check by revoking the 
settlement, charging back any credit given to an account, or obtaining 
a refund. A bank may have the rights of a holder with respect to each 
check it handles.
* * * * *
    24. Revise Sec.  229.36 to read as follows:


Sec.  229.36  Presentment [and issuance] of checks.

    [lsqbb](a) Payable through and payable at checks. A check payable 
at or through a paying bank is considered to be drawn on that bank for 
purposes of the expeditious return and notice of nonpayment 
requirements of this subpart[rsqbb].
    [lsqbb](b)[rsqbb][rtrif](a)[ltrif] [lsqbb]Receipt at bank office or 
processing center[rsqbb][rtrif]Receipt of electronic collection items. 
(1) A paying bank agrees to receive an electronic collection item from 
a presenting bank if it has agreed to receive the electronic collection 
item--
    (i) Directly from the presenting bank; or
    (ii) As otherwise agreed with the presenting bank.
    (2) When electronic collection item received. A bank receives an 
electronic collection item when the item is delivered to the electronic 
presentment point designated by the bank or, by agreement, otherwise is 
made available to the bank for retrieval or review.
    (3) A paying bank may require that electronic collection items be 
separated from electronic returns.[ltrif]
    [rtrif](b) Receipt of paper checks. (1)[ltrif] A check [rtrif]in 
paper form[ltrif] is considered received by the paying bank when it is 
received:
    [lsqbb](1)[rsqbb][rtrif](i)[ltrif] At a location to which delivery 
is requested by the paying bank;
    [lsqbb](4)[rsqbb][rtrif](ii)[ltrif] At a branch, head office, or 
other location consistent with the name and address of the bank on the 
check if the bank is identified on the check by name and 
address[rtrif];[ltrif]
    [lsqbb](2)[rsqbb][rtrif](iii)[ltrif] At an address of the bank 
associated with the routing number on the check, whether in magnetic 
ink or in fractional form[rtrif], or in the electronic image of or 
electronic information related to the check[ltrif]; or
    [lsqbb](3)[rsqbb][rtrif](iv)[ltrif] At any branch or head office, 
if the bank is identified on the check by name without address.
    [rtrif](2) A paying bank may require that forward collection checks 
be separated from returned checks.[ltrif]
    [lsqbb](c) Reserved[rsqbb]
    [lsqbb](d)[rsqbb][rtrif](c)[ltrif] Liability of bank during forward 
collection. Settlements between banks for the forward collection of a 
check are final when made; however, a collecting bank handling a check 
for forward collection may be liable to a prior collecting bank, 
including the depositary bank, and the depositary bank's customer.
    [lsqbb](e) Issuance of payable-through checks. (1) A bank that 
arranges for checks payable by it to be payable through another bank 
shall require that the following information be printed conspicuously 
on the face of each check:
    (i) The name, location, and first four digits of the nine-digit 
routing number of the bank by which the check is payable; and
    (ii) The words ``payable through'' followed by the name of the 
payable-through bank.
    (2) A bank is responsible for damages under Sec.  229.38 to the 
extent that a check payable by it and not payable through another bank 
is labeled as provided in this section.[rsqbb]
    [lsqbb](f)[rsqbb][rtrif](d)[ltrif] Same-day settlement. (1) A check 
is considered presented, and a paying bank must settle for or return 
the check pursuant to paragraph 
[lsqbb](f)(2)[rsqbb][rtrif](d)(3)[ltrif] of this section, 
if[rtrif],[ltrif] [lsqbb]a presenting bank delivers the check[rsqbb] in 
accordance with reasonable delivery requirements established by the 
paying bank[rtrif], a presenting bank delivers the check[ltrif] and 
demands payment under this paragraph [lsqbb](f)[rsqbb][rtrif](d)[ltrif] 
--
    (i) [rtrif](A) As an electronic collection item to the electronic 
presentment point designated by the paying bank, if the paying bank 
agrees to receive electronic collection items from the presenting bank 
under Sec.  229.36(a); or[ltrif]

[[Page 16900]]

    [rtrif](B)[ltrif] At a location designated by the paying bank for 
receipt of checks under this paragraph 
[lsqbb](f)[rsqbb][rtrif](d)[ltrif] [lsqbb]that is in the check 
processing region consistent with the routing number encoded in 
magnetic ink on the check and[rsqbb] at which the paying bank would be 
considered to have received the check under paragraph 
(b)[rtrif](1)[ltrif] of this section or, if no location is designated, 
at any location described in paragraph (b)[rtrif](1)[ltrif] of this 
section; and
    (ii) By 8 a.m. on a business day (local time of the location 
described in paragraph [(f)(1)(i)][rtrif](d)(1)(i)[ltrif] of this 
section).
    [rtrif](2) A paying bank may require that checks presented under 
paragraph (d)(1) for settlement pursuant to paragraph (d)(3) of this 
section be presented as electronic collection items and be presented 
electronically to a designated electronic presentment point.[ltrif]
    [lsqbb]A paying bank may require that checks presented for 
settlement pursuant to this paragraph (f)(1) be separated from other 
forward-collection checks or returned checks.[rsqbb]
    [lsqbb](2)[rsqbb][rtrif](3)[ltrif] If presentment of a check meets 
the requirements of paragraph [lsqbb](f)(1)[rsqbb][rtrif](d)(1)[ltrif] 
of this section, the paying bank is accountable to the presenting bank 
for the amount of the check unless, by the close of Fedwire on the 
business day it receives the check, it either:
    (i) Settles with the presenting bank for the amount of the check by 
credit to an account at a Federal Reserve Bank designated by the 
presenting bank; or
    (ii) Returns the check.
    [lsqbb](3)[rsqbb][rtrif](4)[ltrif] Notwithstanding paragraph 
[lsqbb](f)(2)[rsqbb][rtrif](d)(3)[ltrif] of this section, if a paying 
bank closes on a business day and receives presentment of a check on 
that day in accordance with paragraph [(f)(1)][rtrif](d)(1)[ltrif] of 
this section, the paying bank is accountable to the presenting bank for 
the amount of the check unless, by the close of Fedwire on its next 
banking day, it either:
    (i) Settles with the presenting bank for the amount of the check by 
credit to an account at a Federal Reserve Bank designated by the 
presenting bank; or
    (ii) Returns the check.
    [rtrif](5)[ltrif] If the closing [rtrif]in paragraph (d)(4)[ltrif] 
is voluntary, unless the paying bank settles for or returns the check 
in accordance with paragraph [lsqbb](f)(2)[rsqbb][rtrif](d)(3)[ltrif] 
of this section, it shall pay interest compensation to the presenting 
bank for each day after the business day on which the check was 
presented until the paying bank settles for the check, including the 
day of settlement.
    25. Revise Sec.  229.38 to read as follows:


Sec.  229.38  Liability.

    (a) Standard of care; liability; measure of damages. A bank shall 
exercise ordinary care and act in good faith in complying with the 
requirements of this subpart. A bank that fails to exercise ordinary 
care or act in good faith under this subpart may be liable to the 
depositary bank, the depositary bank's customer, the owner of a check, 
or another party to the check. The measure of damages for failure to 
exercise ordinary care is the amount of the loss incurred, up to the 
amount of the check, reduced by the amount of the loss that party would 
have incurred even if the bank had exercised ordinary care. A bank that 
fails to act in good faith under this subpart may be liable for other 
damages, if any, suffered by the party as a proximate consequence. 
Subject to a bank's duty to exercise ordinary care or act in good faith 
in choosing the means of return [lsqbb]or notice of nonpayment[rsqbb], 
the bank is not liable for the insolvency, neglect, misconduct, 
mistake, or default of another bank or person, or for loss or 
destruction of a check [lsqbb]or notice of nonpayment[rsqbb] in transit 
or in the possession of others. This section does not affect a paying 
bank's liability to its customer under the U.C.C. or other law.
    (b) Paying bank's failure to make timely return. If a paying bank 
fails both to comply with Sec.  229.30(a) and to comply with the 
deadline for return under the U.C.C., Regulation J (12 CFR part 210), 
or Sec.  229.30(c) in connection with a single nonpayment of a check, 
the paying bank shall be liable under either Sec.  229.30(a) or such 
other provision, but not both.
    (c) Comparative negligence. If a person, including a bank, fails to 
exercise ordinary care or act in good faith under this subpart in 
indorsing a check (Sec.  229.35), accepting a returned check [lsqbb]or 
notice of nonpayment[rsqbb] (Sec. Sec.  229.32(a) and 
[lsqbb]229.33(c)[rsqbb][rtrif](b)[ltrif]), or otherwise, the damages 
incurred by that person under Sec.  229.38(a) shall be diminished in 
proportion to the amount of negligence or bad faith attributable to 
that person.
    (d) Responsibility for certain aspects of checks--(1) A paying 
bank, or in the case of a check payable through the paying bank and 
payable by another bank, the bank by which the check is payable, is 
responsible for damages under paragraph (a) of this section to the 
extent that the condition of the check when issued by it or its 
customer adversely affects the ability of a bank to indorse the check 
legibly in accordance with Sec.  229.35. A depositary bank is 
responsible for damages under paragraph (a) of this section to the 
extent that the condition of the back of a check arising after the 
issuance of the check and prior to acceptance of the check by it 
adversely affects the ability of a bank to indorse the check legibly in 
accordance with Sec.  229.35. A reconverting bank is responsible for 
damages under paragraph (a) of this section to the extent that the 
condition of the back of a substitute check transferred, presented, or 
returned by it--
    (i) Adversely affects the ability of a subsequent bank to indorse 
the check legibly in accordance with Sec.  229.35; or
    (ii) Causes an indorsement that previously was applied in 
accordance with Sec.  229.35 to become illegible.
    [lsqbb]Note:[rsqbb][rtrif](2)[ltrif] Responsibility under this 
paragraph (d) shall be treated as negligence of the paying bank, 
depositary bank, or reconverting bank for purposes of paragraph (c) of 
this section.
    [lsqbb](2) Responsibility for payable through checks. In the case 
of a check that is payable by a bank and payable through a paying bank 
located in a different check processing region than the bank by which 
the check is payable, the bank by which the check is payable is 
responsible for damages under paragraph (a) of this section, to the 
extent that the check is not returned to the depositary bank through 
the payable through bank as quickly as the check would have been 
required to be returned under Sec.  229.30(a) had the bank by which the 
check is payable--
    (i) Received the check as paying bank on the day the payable 
through bank received the check; and
    (ii) Returned the check as paying bank in accordance with Sec.  
229.30(a)(1).
    Responsibility under this paragraph shall be treated as negligence 
of the bank by which the check is payable for purposes of paragraph (c) 
of this section.[rsqbb]
    (e) Timeliness of action. If a bank is delayed in acting beyond the 
time limits set forth in this subpart because of interruption of 
communication or computer facilities, suspension of payments by a bank, 
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.
    (f) Exclusion. Section 229.21 of this part and section 611 (a), 
(b), and (c) of the EFA Act (12 U.S.C. 4010 (a), (b), and (c)) do not 
apply to this subpart.
    (g) Jurisdiction. Any action under this subpart may be brought in 
any United States district court, or in any other court of competent 
jurisdiction, and shall be brought within one year after

[[Page 16901]]

the date of the occurrence of the violation involved.
    (h) Reliance on Board rulings. No provision of this subpart 
imposing any liability shall apply to any act done or omitted in good 
faith in conformity with any rule, regulation, or interpretation 
thereof by the Board, regardless of whether the rule, regulation, or 
interpretation is amended, rescinded, or determined by judicial or 
other authority to be invalid for any reason after the act or omission 
has occurred.
    26. In Sec.  229.39, revise paragraph (c) to read as follows:


Sec.  229.39  Insolvency of bank.

* * * * *
    (c) Preference against collecting, paying, or returning bank. If a 
collecting, paying, or returning bank receives settlement from a 
subsequent bank for a check or returned check, which settlement is or 
becomes final, and suspends payments without making a settlement for 
the check with the prior bank, which is or becomes final, the prior 
bank has a preferred claim against the collecting [rtrif]bank[ltrif] or 
returning bank.
* * * * *
    27. Revise Sec.  229.40 to read as follows:


Sec.  229.40  Effect of merger transaction.

    [lsqbb](a) In general.[rsqbb] For purposes of this subpart, two or 
more banks that have engaged in a merger transaction may be considered 
to be separate banks for a period of one year following the 
consummation of the merger transaction.
    [lsqbb](b) Merger transactions on or after July 1, 1998, and before 
March 1, 2000. If banks have consummated a merger transaction on or 
after July 1, 1998, and before March 1, 2000, the merged banks may be 
considered separate banks until March 1, 2001.[rsqbb]
    28. Revise Sec.  229.41 to read as follows:


Sec.  229.41  Relation to [S][rtrif]s[ltrif]tate law.

    The provisions of this subpart supersede any inconsistent 
provisions of the U.C.C. as adopted in any state, or of any other state 
law, but only to the extent of the inconsistency.
    29. Revise Sec.  229.42 to read as follows:


Sec.  229.42  Exclusions.

    The expeditious-return (Sec. Sec.  229.30(a) and 229.31(a))[lsqbb], 
notice-of-nonpayment (Sec.  229.33),[rsqbb] and same-day settlement 
[lsqbb](Sec.  229.36(f))[rsqbb][rtrif](Sec.  229.36(d))[ltrif] 
requirements of this subpart do not apply to a check drawn upon the 
United States Treasury, to a U.S. Postal Service money order, or to a 
check drawn on a state or a unit of general local government that is 
not payable through or at a bank.
    30. Revise Sec.  229.43 to read as follows:


Sec.  229.43  Checks payable in Guam, American Samoa, and the Northern 
Mariana Islands.

    (a) Definitions. The definitions in Sec.  229.2 apply to this 
section, unless otherwise noted. In addition, for the purposes of this 
section--
    (1) Pacific island bank means an office of an institution that 
would be a bank as defined in Sec.  229.2(e) but for the fact that the 
office is located in Guam, American Samoa, or the Northern Mariana 
Islands;
    (2) Pacific island check means a demand draft drawn on or payable 
through or at a Pacific island bank, which is not a check as defined in 
Sec.  229.2(k).
    (b) Rules applicable to Pacific island checks. To the extent a bank 
handles a Pacific island check as if it were a check defined in Sec.  
229.2(k), the bank is subject to the following sections of this part 
(and the word ``check'' in each such section is construed to include a 
Pacific island check)--
    (1) Sec.  229.31, except that the returning bank is not subject to 
the requirement to return a Pacific island check in an expeditious 
manner;
    (2) Sec.  229.32;
    (3) Sec.  229.34 [rtrif](a), (b),[ltrif] (c)(2), (c)(3), (d), 
[[lsqbb](e), and[rsqbb] (f)[rtrif], and (g)[ltrif];
    (4) Sec.  229.35; for purposes of Sec.  229.35(c), the Pacific 
island bank is deemed to be a bank;
    (5) [lsqbb][Sec.  229.36(d)[rsqbb]][rtrif]Sec.  229.36(b)[ltrif];
    (6) Sec.  229.37;
    (7) Sec.  229.38(a) and (c) through (h);
    (8) Sec.  229.39(a), (b), (c) and (e); and
    (9) Sec. Sec.  229.40 through 229.42.

Subpart D--Substitute Checks

    31. In Sec.  229.52, revise paragraph (a) to read as follows:


Sec.  229.52  Substitute check warranties.

    (a) Content and provision of substitute check warranties. 
[rtrif](1)[ltrif] A bank that transfers, presents, or returns a 
substitute check (or a paper or electronic representation of a 
substitute check) for which it receives consideration warrants to the 
parties listed in paragraph (b) of this section that--
    [1] (i) The substitute check meets the requirements for legal 
equivalence described in Sec.  229.51(a)(1)-(2); and
    [2] (ii) No depositary bank, drawee, drawer, or indorser will 
receive presentment or return of, or otherwise be charged for, the 
substitute check, the original check, or a paper or electronic 
representation of the substitute check or original check such that that 
person will be asked to make a payment based on a check that it already 
has paid.
    [rtrif](2) A bank that rejects a check submitted for deposit and 
returns to its customer a substitute check (or a paper or electronic 
representation of a substitute check) makes the warranties described in 
paragraph (a)(1) of this section regardless of whether the bank 
received consideration.[ltrif]
* * * * *
    32. In Sec.  229.53, revise paragraph (a) to read as follows:


Sec.  229.53  Substitute check indemnity.

    (a) Scope of indemnity. [rtrif](1)[ltrif] A bank that transfers, 
presents, or returns a substitute check or a paper or electronic 
representation of a substitute check for which it receives 
consideration shall indemnify the recipient and any subsequent 
recipient (including a collecting or returning bank, the depositary 
bank, the drawer, the drawee, the payee, the depositor, and any 
indorser) for any loss incurred by any recipient of a substitute check 
if that loss occurred due to the receipt of a substitute check instead 
of the original check.
    [rtrif](2) A bank that rejects a check submitted for deposit and 
returns to its customer a substitute check (or a paper or electronic 
representation of a substitute check) shall indemnify the recipient as 
described in paragraph (a)(1) of this section regardless of whether the 
bank received consideration.[ltrif]
* * * * *
    33. Revise Appendix A to Part 229 to read as follows:

Appendix A to Part 229--Routing Number Guide to Next-Day-Availability 
Checks [and Local Checks]

    [lsqbb]A. Each bank is assigned a routing number by an agent of 
the American Bankers Association. The routing number takes two 
forms: a fractional form and a nine-digit form. A paying bank 
generally is identified on the face of a check by its routing number 
in both the fractional form (which generally appears in the upper 
right-hand corner of the check) and the nine-digit form (which is 
printed in magnetic ink along the bottom of the check). Where a 
check is payable by one bank but payable through another bank, the 
routing number appearing on the check is that of the payable-through 
bank, not the payor bank.
    B. The first four digits of the nine-digit routing number (and 
the denominator of the fractional routing number) form the ``Federal 
Reserve routing symbol,'' and the first two digits of the routing 
number identify the Federal Reserve District in which the bank is 
located. Thus, 01 will be the first two digits of the routing number 
of a bank in the First Federal Reserve District (Boston), and 12 
will be the first two digits of the routing number of a bank in the 
Twelfth District (San Francisco). Adding 2 to the first digit 
denotes

[[Page 16902]]

a thrift institution. Thus, 21 identifies a thrift in the First 
District, and 32 denotes a thrift in the Twelfth District.

Fourth Federal Reserve District

Federal Reserve Bank of Cleveland

Head Office

               \1\ 0110                                 0215
                   0111                                 0216
                   0112                                 0219
                   0113                                 0220
                   0114                                 0223
                   0115                                 0260
                   0116                                 0280
                   0117                                 0310
                   0118                                 0311
                   0119                                 0312
                   0210                                 0313
                   0211                                 0319
                   0212                                 0360
                   0213                                 0410
                   0214                                 0412
                   0420                                 0441
                   0421                                 0442
                   0422                                 0510
                   0423                                 0514
                   0430                                 0515
                   0432                                 0519
                   0433                                 0520
                   0434              ...................................
                   0440
                   0521                                 0650
                   0522                                 0651
                   0530                                 0652
                   0531                                 0653
                   0532                                 0654
                   0539                                 0655
                   0540                                 0660
                   0550                                 0670
                   0560                                 0710
                   0570                                 0711
                   0610                                 0712
                   0611                                 0719
                   0612                                 0720
                   0613                                 0724
                   0620                                 0730
                   0621                                 0739
                   0622                                 0740
                   0630                                 0749
                   0631                                 0750
                   0632                                 0759
                   0640                                 0810
                   0641                                 0812
                   0642                                 0813
                   0815                                 0960
                   0819                                 1010
                   0820                                 1011
                   0829                                 1012
                   0830                                 1019
                   0839                                 1020
                   0840                                 1021
                   0841                                 1022
                   0842                                 1023
                   0843                                 1030
                   0863                                 1031
                   0865                                 1039
                   0910                                 1040
                   0911                                 1041
                   0912                                 1049
                   0913                                 1070
                   0914                                 1110
                   0915                                 1111
                   0918                                 1113
                   0919                                 1119
                   0920                                 1120
                   0921                                 1122
                   0929                                 1123
                   1130                                 1251
                   1131                                 1252
                   1140                                 2111
                   1149                                 2112
                   1163                                 2113
                   1210                                 2114
                   1211                                 2115
                   1212                                 2116
                   1213                                 2117
                   1220                                 2118
                   1221                                 2119
                   1222                                 2210
                   1223                                 2211
                   1224                                 2212
                   1230                                 2213
                   1231                                 2214
                   1232                                 2215
                   1233                                 2216
                   1240                                 2219
                   1241                                 2220
                   1242                                 2223
                   1243                                 2260
                   1250                                 2280
                   2310                                 2520
                   2311                                 2521
                   2312                                 2522
                   2313                                 2530
                   2319                                 2531
                   2360                                 2532
                   2410                                 2539
                   2412                                 2540
                   2420                                 2550
                   2421                                 2560
                   2422                                 2570
                   2423                                 2610
                   2430                                 2611
                   2432                                 2612
                   2433                                 2613
                   2434                                 2620
                   2440                                 2621
                   2441                                 2622
                   2442                                 2630
                   2510                                 2631
                   2514                                 2632
                   2515                                 2640
                   2519                                 2641
                   2642                                 2813
                   2650                                 2815
                   2651                                 2819
                   2652                                 2820
                   2653                                 2829
                   2654                                 2830
                   2655                                 2839
                   2660                                 2840
                   2670                                 2841
                   2710                                 2842
                   2711                                 2843
                   2712                                 2863
                   2719                                 2865
                   2720                                 2910
                   2724                                 2911
                   2730                                 2912
                   2739                                 2913
                   2740                                 2914
                   2749                                 2915
                   2750                                 2918
                   2759                                 2919
                   2810                                 2920
                   2812                                 2921
                   2929                                 3123
                   2960                                 3130
                   3010                                 3131
                   3011                                 3140
                   3012                                 3149
                   3019                                 3163
                   3020                                 3210
                   3021                                 3211
                   3022                                 3212
                   3023                                 3213
                   3030                                 3220
                   3031                                 3221
                   3039                                 3222
                   3040                                 3223
                   3041                                 3224
                   3049                                 3230
                   3070                                 3231
                   3110                                 3232
                   3111                                 3233
                   3113                                 3240
                   3119                                 3241
                   3120                                 3242
                   3122                                 3243
                   3250                                 3252
                   3251
 
\1\ The first two digits identify the bank's Federal Reserve District.
  For example, 01 identifies the First Federal Reserve District
  (Boston), and 12 identifies the Twelfth District (San Francisco).
  Adding 2 to the first digit denotes a thrift institution. For example,
  21 identifies a thrift in the First District, and 32 denotes a thrift
  in the Twelfth District.[rsqbb]

Federal Reserve Banks

            0110 0001 5                          0539 0008 9
            0111 0048 1                          0610 0014 6
            0210 0120 8                          0620 0019 0
            0212 0400 5                          0630 0019 9
            0213 0500 1                          0640 0010 1
            0220 0026 6                          0650 0021 0
            0310 0004 0                          0660 0010 9
            0410 0001 4                          0710 0030 1
            0420 0043 7              [lsqbb]0711 0711 0[rsqbb]
            0430 0030 0                          0720 0029 0
            0440 0050 3                          0730 0033 8
            0510 0003 3              [lsqbb]0740 0020 1[rsqbb]
            0519 0002 3              ...................................
            0520 0027 8              [lsqbb]0750 0012 9[rsqbb]
            0530 0020 6                          0810 0004 5
            0820 0013 8                          1120 0001 1
            0830 0059 3                          1130 0004 9
            0840 0003 9                          1140 0072 1
            0910 0008 0                          1210 0037 4
            0920 0026 7                          1220 0016 6
            1010 0004 8                          1230 0001 3
            1020 0019 9                          1240 0031 3
            1030 0024 0                          1250 0001 1
            1040 0012 6
            1110 0003 8
 

Federal Home Loan Banks

            0110 0053 6                          0740 0101 9
            0212 0639 1              [lsqbb]0810 0091 9[rsqbb]
            0260 0973 9              [lsqbb]0910 0091 2[rsqbb]
            0410 0291 5              [lsqbb]1010 0091 2[rsqbb]
            0420 0091 6                          1011 0194 7
            0430 0143 5                          1110 1083 7
[lsqbb]0430 1862 2[rsqbb]                        1119 1083 0
            0610 0876 6                          1210 0070 1
            0710 0450 1                          1240 0287 4
            0730 0091 4                          1250 0050 3
  [rtrif]U.S. Treasury Checks and                0000 0051 8
                  Postal
           Money Orders                  Postal Money Orders
         U.S. Treasury Checks                    0000 0119 3
            0000 0050 5                   0000 0800 2[ltrif]
 

    34. Revise Appendix C to Part 229 to read as follows:

[[Page 16903]]

Appendix C to Part 229--Model Availability-Policy Disclosures, Clauses, 
and Notices; Model Substitute-Check-Policy Disclosure and Notices

    This appendix contains model availability-policy and substitute-
check-policy disclosures, clauses, and notices to facilitate 
compliance with the disclosure and notice requirements of Regulation 
CC (12 CFR part 229). Although use of these models is not required, 
banks using them properly (with the exception of models C-22 through 
C-25) to make disclosures required by Regulation CC are deemed to be 
in compliance.

Model Disclosures

C-1 Next-day availability
C-2 Next-day availability and section 229.13 exceptions
C-3[rtrif]A[ltrif] Next-day availability, case-by-case holds to 
statutory limits [rtrif]without cash-withdrawal limitation[ltrif], 
and section 229.13 exceptions
[rtrif]C-3B Next-day availability, case-by-case holds to statutory 
limits with cash-withdrawal limitation, and section 229.13 
exceptions[ltrif]
C-4[rtrif]A[ltrif] Holds to statutory limits on all deposits 
[lsqbb](includes chart)[rsqbb] [rtrif]without cash-withdrawal 
limitation[ltrif]
C-[lsqbb]5[rsqbb][rtrif]4B[ltrif] Holds to statutory limits on all 
deposits [rtrif]with cash-withdrawal limitation[ltrif]
C-5[lsqbb]A[rsqbb] Substitute-Check-Policy Disclosure Model

Model Clauses

[lsqbb]C-6 Holds on other funds (check cashing)[rsqbb]
[lsqbb]C-7 Holds on other funds (other account)[rsqbb]
[lsqbb]C-8 Appendix B availability (nonlocal checks)[rsqbb]
C-[lsqbb]9[rsqbb][rtrif]6[ltrif] Automated teller machine deposits 
(extended hold)
[lsqbb]C-10 Cash-withdrawal limitation[rsqbb]
C-[lsqbb]11[rsqbb][rtrif]7[ltrif] Credit union interest-payment 
policy
C-[lsqbb]11A[rsqbb][rtrif]8[ltrif] Availability of funds deposited 
at other locations

Model Notices

C-[lsqbb]12[rsqbb][rtrif]9[ltrif] Exception [rtrif]or reasonable-
cause[ltrif] hold notice
[lsqbb]C-13 Reasonable-cause hold notice[rsqbb]
C-[lsqbb]14[rsqbb][rtrif]10[ltrif] One-time notice for large-deposit 
and redeposited-check exception holds
C-[lsqbb]15[rsqbb][rtrif]11[ltrif] One-time notice for repeated-
overdraft exception holds
C-[lsqbb]16[rsqbb][rtrif]12A[ltrif] Case-by-case hold notice 
[rtrif]without cash-withdrawal limitation
C-16[lsqbb]B[rsqbb][rtrif]12B[ltrif] Case-by-case hold notice with 
cash-withdrawal limitation[ltrif]
C-[lsqbb]17[rsqbb][rtrif]13[ltrif] Notice at locations where 
employees accept consumer deposits
C-[lsqbb]18[rsqbb][rtrif]14[ltrif] Notice at locations where 
employees accept consumer deposits (case-by-case holds)
C-[lsqbb]19[rsqbb][rtrif]15[ltrif] Notice at automated teller 
machines
C-[lsqbb]20[rsqbb][rtrif]16[ltrif] Notice at automated teller 
machines (delayed receipt)
C-[lsqbb]21[rsqbb][rtrif]17[ltrif] Deposit-slip notice
C-[lsqbb]22[rsqbb][rtrif]18[ltrif] Expedited-Recredit Claim, Valid-
Claim Refund Notice
C-[lsqbb]23[rsqbb][rtrif]19[ltrif] Expedited-Recredit Claim, 
Provisional-Refund Notice
C-[lsqbb]24[rsqbb][rtrif]20[ltrif] Expedited-Recredit Claim, Denial 
Notice
C-[lsqbb]25[rsqbb][rtrif]21[ltrif] Expedited-Recredit Claim, 
Reversal Notice
[lsqbb]C-1 Next-Day Availability

YOUR ABILITY TO WITHDRAW FUNDS

    Our policy is to make funds from your cash and check deposits 
available to you on the first business day after the day we receive 
your deposit. Electronic direct deposits will be available on the 
day we receive the deposit. Once the funds are available, you can 
withdraw them in cash and we will use them to pay checks that you 
have written. For determining the availability of your deposits, 
every day is a business day, except Saturdays, Sundays, and Federal 
holidays. If you make a deposit before (time of day) on a business 
day that we are open, we will consider that day to be the day of 
your deposit. However, if you make a deposit after (time of day) or 
on a day we are not open, we will consider that the deposit was made 
on the next business day we are open.
C-2--Next-Day Availability and Section 229.13 Exceptions

YOUR ABILITY TO WITHDRAW FUNDS

    Our policy is to make funds from your cash and check deposits 
available to you on the first business day after the day we receive 
your deposit. Electronic direct deposits will be available on the 
day we receive the deposit. Once they are available, you can 
withdraw the funds in cash and we will use the funds to pay checks 
that you have written.
    For determining the availability of your deposits, every day is 
a business day, except Saturdays, Sundays, and Federal holidays. If 
you make a deposit before (time of day) on a business day that we 
are open, we will consider that day to be the day of your deposit. 
However, if you make a deposit after (time of day) or on a day we 
are not open, we will consider that the deposit was made on the next 
business day we are open.

Longer Delays May Apply

    Funds you deposit by check may be delayed for a longer period 
under the following circumstances:
     We believe a check you deposit will not be paid.
     You deposit checks totaling more than $5,000 on any one 
day.
     You redeposit a check that has been returned unpaid.
     You have overdrawn your account repeatedly in the last 
six months.
     There is an emergency, such as failure of computer or 
communications equipment.
    We will notify you if we delay your ability to withdraw funds 
for any of these reasons, and we will tell you when the funds will 
be available. They will generally be available no later than the 
(number) business day after the day of your deposit.

Special Rules for New Accounts

    If you are a new customer, the following special rules will 
apply during the first 30 days your account is open.
    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit. Funds from deposits of 
cash, wire transfers, and the first $5,000 of a day's total deposits 
of cashier's, certified, teller's, traveler's, and federal, state 
and local government checks will be available on the first business 
day after the day of your deposit if the deposit meets certain 
conditions. For example, the checks must be payable to you (and you 
may have to use a special deposit slip). The excess over $5,000 will 
be available on the ninth business day after the day of your 
deposit. If your deposit of these checks (other than a U.S. Treasury 
check) is not made in person to one of our employees, the first 
$5,000 will not be available until the second business day after the 
day of your deposit.
    Funds from all other check deposits will be available on the 
(number) business day after the day of your deposit.

C-3--Next-Day Availability, Case-by-Case Holds to Statutory Limits, and 
Section 229.13 Exceptions

YOUR ABILITY TO WITHDRAW FUNDS

    Our policy is to make funds from your cash and check deposits 
available to you on the first business day after the day we receive 
your deposit. Electronic direct deposits will be available on the 
day we receive the deposit. Once they are available, you can 
withdraw the funds in cash and we will use the funds to pay checks 
that you have written. For determining the availability of your 
deposits, every day is a business day, except Saturdays, Sundays, 
and Federal holidays. If you make a deposit before (time of day) on 
a business day that we are open, we will consider that day to be the 
day of your deposit. However, if you make a deposit after (time of 
day) or on a day we are not open, we will consider that the deposit 
was made on the next business day we are open.

Longer Delays May Apply

    In some cases, we will not make all of the funds that you 
deposit by check available to you on the first business day after 
the day of your deposit. Depending on the type of check that you 
deposit, funds may not be available until the fifth business day 
after the day of your deposit. The first $100 of your deposits, 
however, will be available on the first business day.
    If we are not going to make all of the funds from your deposit 
available on the first business day, we will notify you at the time 
you make your deposit. We will also tell you when the funds will be 
available. If your deposit is not made directly to one of our 
employees, or if we decide to take this action after you have left 
the premises, we will mail you the notice by the day after we 
receive your deposit. If you will need the funds from a deposit 
right away, you should ask us when the funds will be available.
    In addition, funds you deposit by check may be delayed for a 
longer period under the following circumstances:
     We believe a check you deposit will not be paid.
     You deposit checks totaling more than $5,000 on any one 
day.
     You redeposit a check that has been returned unpaid.
     You have overdrawn your account repeatedly in the last 
six months.
     There is an emergency, such as failure of computer or 
communications equipment.

[[Page 16904]]

    We will notify you if we delay your ability to withdraw funds 
for any of these reasons, and we will tell you when the funds will 
be available. They will generally be available no later than the 
(number) business day after the day of your deposit.

Special Rules for New Accounts

    If you are a new customer, the following special rules will 
apply during the first 30 days your account is open.
    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit. Funds from deposits of 
cash, wire transfers, and the first $5,000 of a day's total deposits 
of cashier's, certified, teller's, traveler's, and federal, state 
and local government checks will be available on the first business 
day after the day of your deposit if the deposit meets certain 
conditions. For example, the checks must be payable to you (and you 
may have to use a special deposit slip). The excess over $5,000 will 
be available on the ninth business day after the day of your 
deposit. If your deposit of these checks (other than a U.S. Treasury 
check) is not made in person to one of our employees, the first 
$5,000 will not be available until the second business day after the 
day of your deposit. Funds from all other check deposits will be 
available on the (number) business day after the day of your 
deposit.

C-4--Holds to Statutory Limits on All Deposits (Includes Chart)

YOUR ABILITY TO WITHDRAW FUNDS

    Our policy is to delay the availability of funds from your cash 
and check deposits. During the delay, you may not withdraw the funds 
in cash and we will not use the funds to pay checks that you have 
written.

Determining the Availability of a Deposit

    The length of the delay is counted in business days from the day 
of your deposit. Every day is a business day except Saturdays, 
Sundays, and federal holidays. If you make a deposit before (time of 
day) on a business day that we are open, we will consider that day 
to be the day of your deposit. However, if you make a deposit after 
(time of day) or on a day we are not open, we will consider that the 
deposit was made on the next business day we are open.
    The length of the delay varies depending on the type of deposit 
and is explained below.

Same-Day Availability

    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit.

Next-Day Availability

    Funds from the following deposits are available on the first 
business day after the day of your deposit:
     U.S. Treasury checks that are payable to you
     Wire transfers
     Checks drawn on (bank name) [unless (any limitations 
related to branches in different states or check-processing 
regions)]
    If you make the deposit in person to one of our employees, funds 
from the following deposits are also available on the first business 
day after the day of your deposit:
     Cash
     State and local government checks that are payable to 
you [if you use a special deposit slip available from (where deposit 
slip may be obtained)]
     Cashier's, certified, and teller's checks that are 
payable to you [if you use a special deposit slip available from 
(where deposit slip may be obtained)]
     Federal Reserve Bank checks, Federal Home Loan Bank 
checks, and postal money orders, if these items are payable to you
    If you do not make your deposit in person to one of our 
employees (for example, if you mail the deposit), funds from these 
deposits will be available on the second business day after the day 
we receive your deposit.

Other Check Deposits

    To find out when funds from other check deposits will be 
available, look at the first four digits of the routing number on 
the check:
[GRAPHIC] [TIFF OMITTED] TP25MR11.000

[GRAPHIC] [TIFF OMITTED] TP25MR11.001


[[Page 16905]]


    Some checks are marked ``payable through'' and have a four- or 
nine-digit number nearby. For these checks, use this four-digit 
number (or the first four digits of the nine-digit number), not the 
routing number on the bottom of the check, to determine if these 
checks are local or nonlocal. Once you have determined the first 
four digits of the routing number (1234 in the examples above), the 
chart below will show you when funds from the check will be 
available. If you deposit both categories of checks, $100 from the 
checks will be available on the first business day after the day of 
your deposit, not $100 from each category of check.
[GRAPHIC] [TIFF OMITTED] TP25MR11.002

Longer Delays May Apply

    Funds you deposit by check may be delayed for a longer period 
under the following circumstances:
     We believe a check you deposit will not be paid.
     You deposit checks totaling more than $5,000 on any one 
day.
     You redeposit a check that has been returned unpaid.
     You have overdrawn your account repeatedly in the last 
six months.
     There is an emergency, such as failure of computer or 
communications equipment.
    We will notify you if we delay your ability to withdraw funds 
for any of these reasons, and we will tell you when the funds will 
be available. They will generally be available no later than the 
(number) business day after the day of your deposit.

Special Rules for New Accounts

    If you are a new customer, the following special rules will 
apply during the first 30 days your account is open.
    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit. Funds from deposits of 
cash, wire transfers, and the first $5,000 of a day's total deposits 
of cashier's, certified, teller's, traveler's, and federal, state 
and local government checks will be available on the first business 
day after the day of your deposit if the deposit meets certain 
conditions. For example, the checks must be payable to you (and you 
may have to use a special deposit slip). The excess over $5,000 will 
be available on the ninth business day after the day of your 
deposit. If your deposit of these checks (other than a U.S. Treasury 
check) is not made in person to one of our employees, the first 
$5,000 will not be available until the second business day after the 
day of your deposit. Funds from all other check deposits will be 
available on the (number) business day after the day of your 
deposit.

C-5--Holds to Statutory Limits on All Deposits

YOUR ABILITY TO WITHDRAW FUNDS

    Our policy is to delay the availability of funds from your cash 
and check deposits. During the delay, you may not withdraw the funds 
in cash and we will not use the funds to pay checks that you have 
written.

Determining the Availability of a Deposit

    The length of the delay is counted in business days from the day 
of your deposit. Every day is a business day except Saturdays, 
Sundays, and Federal holidays. If you make a deposit before (time of 
day) on a business day that we are open, we will consider that day 
to be the day of your deposit. However, if you make a deposit after 
(time of day) or on a day we are not open, we will consider that the 
deposit was made on the next business day we are open.
    The length of the delay varies depending on the type of deposit 
and is explained below.

Same-Day Availability

    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit.

Next-Day Availability

    Funds from the following deposits are available on the first 
business day after the day of your deposit:
     U.S. Treasury checks that are payable to you
     Wire transfers
     Checks drawn on (bank name) [unless (any limitations 
related to branches in different states or check-processing 
regions)]
    If you make the deposit in person to one of our employees, funds 
from the following deposits are also available on the first business 
day after the day of your deposit:
     Cash
     State and local government checks that are payable to 
you [if you use a special deposit slip available from (where deposit 
slip may be obtained)]
     Cashier's, certified, and teller's checks that are 
payable to you [if you use a special deposit slip available from 
(where deposit slip may be obtained)]
     Federal Reserve Bank checks, Federal Home Loan Bank 
checks, and postal money orders, if these items are payable to you
    If you do not make your deposit in person to one of our 
employees (for example, if you mail the deposit), funds from these 
deposits will be available on the second business day after the day 
of your deposit.

Other Check Deposits

    The delay for other check deposits depends on whether the check 
is a local or a nonlocal check. To see whether a check is a local or 
a nonlocal check, look at the routing number on the check:

[[Page 16906]]

[GRAPHIC] [TIFF OMITTED] TP25MR11.003

[GRAPHIC] [TIFF OMITTED] TP25MR11.004

    If the first four digits of the routing number (1234 in the 
examples above) are (list of local numbers), then the check is a 
local check. Otherwise, the check is a nonlocal check. Some checks 
are marked ``payable through'' and have a four- or nine-digit number 
nearby. For these checks, use the four-digit number (or the first 
four digits of the nine-digit number), not the routing number on the 
bottom of the check, to determine if these checks are local or 
nonlocal. Our policy is to make fundsfrom local and nonlocal checks 
available as follows.
    1. Local checks. The first $100 from a deposit of local checks 
will be available on the first business day after the day of your 
deposit. The remaining funds will be available on the second 
business day after the day of your deposit. For example, if you 
deposit a local check of $700 on a Monday, $100 of the deposit is 
available on Tuesday. The remaining $600 is available on Wednesday.
    2. Nonlocal checks. The first $100 from a deposit of nonlocal 
checks will be available on the first business day after the day of 
your deposit. The remaining funds will be available on the fifth 
business day after the day of your deposit.
    For example, if you deposit a $700 nonlocal check on a Monday, 
$100 of the deposit is available on Tuesday. The remaining $600 is 
available on Monday of the following week.

Longer Delays May Apply

    Funds you deposit by check may be delayed for a longer period 
under the following circumstances:
     We believe a check you deposit will not be paid.
     You deposit checks totaling more than $5,000 on any one 
day.
     You redeposit a check that has been returned unpaid.
     You have overdrawn your account repeatedly in the last 
six months.
     There is an emergency, such as failure of computer or 
communications equipment.
    We will notify you if we delay your ability to withdraw funds 
for any of these reasons, and we will tell you when the funds will 
be available. They will generally be available no later than the 
(number) business day after the day of your deposit. If you deposit 
both categories of checks, $100 from the checks will be available on 
the first business day after the day of your deposit, not $100 from 
each category of check.

Special Rules for New Accounts

    If you are a new customer, the following special rules will 
apply during the first 30 days your account is open.
    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit. Funds from deposits of 
cash, wire transfers, and the first $5,000 of a day's total deposits 
of cashier's, certified, teller's, traveler's, and federal, state 
and local government checks will be available on the first business 
day after the day of your deposit if the deposit meets certain 
conditions. For example, the checks must be payable to you (and you 
may have to use a special deposit slip). The excess over $5,000 will 
be available on the ninth business day after the day of your 
deposit. If your deposit of these checks (other than a U.S. Treasury 
check) is not made in person to one of our employees, the first 
$5,000 will not be available until the second business day after the 
day of your deposit.

[[Page 16907]]

    Funds from all other check deposits will be available on the 
(number) business day after the day of your deposit.
BILLING CODE 6210-01-P
[GRAPHIC] [TIFF OMITTED] TP25MR11.005


[[Page 16908]]


[GRAPHIC] [TIFF OMITTED] TP25MR11.006


[[Page 16909]]


[GRAPHIC] [TIFF OMITTED] TP25MR11.007


[[Page 16910]]


[GRAPHIC] [TIFF OMITTED] TP25MR11.008


[[Page 16911]]


[GRAPHIC] [TIFF OMITTED] TP25MR11.009


[[Page 16912]]


[GRAPHIC] [TIFF OMITTED] TP25MR11.010


[[Page 16913]]


[GRAPHIC] [TIFF OMITTED] TP25MR11.011


[[Page 16914]]


[GRAPHIC] [TIFF OMITTED] TP25MR11.012


[[Page 16915]]


[GRAPHIC] [TIFF OMITTED] TP25MR11.013


[[Page 16916]]


[GRAPHIC] [TIFF OMITTED] TP25MR11.014


[[Page 16917]]


[GRAPHIC] [TIFF OMITTED] TP25MR11.015

BILLING CODE 6210-01-C

[ltrif]C-5[lsqbb]A[rsqbb]--Substitute-Check-Policy Disclosure

    Substitute Checks and Your Rights

[IMPORTANT INFORMATION ABOUT YOUR CHECKING ACCOUNT]

Substitute Checks and Your Rights

What is a substitute check?

    To make check processing faster, federal law permits banks to 
replace original checks with ``substitute checks.'' These checks are 
similar in size to original checks with a slightly reduced image of 
the front and back of the original check. The front of a substitute 
check states: ``This is a legal copy of your check. You can use it 
the same way you would use the original check.'' You may use a 
substitute check as proof of payment just like the original check.
    Some or all of the checks that you receive back from us may be 
substitute checks. This notice describes rights you have when you 
receive substitute checks from us. The rights in this notice do not 
apply to original checks or to electronic debits to your account. 
However, you have rights under other law with respect to those 
transactions.

What are my rights regarding substitute checks?

    In certain cases, Federal law provides a special procedure that 
allows you to request a refund for losses you suffer if a substitute 
check is posted to your account (for example, if you think that we 
withdrew the wrong amount from your account or that we withdrew 
money from your account more than once for the same check). The 
losses you may attempt to recover under this procedure may include 
the amount that was withdrawn from your account and fees that were 
charged as a result of the withdrawal (for example, bounced-check 
fees).

[[Page 16918]]

    The amount of your refund under this procedure is limited to the 
amount of your loss or the amount of the substitute check, whichever 
is less. You also are entitled to interest on the amount of your 
refund if your account is an interest-bearing account. If your loss 
exceeds the amount of the substitute check, you may be able to 
recover additional amounts under other law.
    If you use this procedure, you may receive up to (amount, not 
lower than $2,500) of your refund (plus interest if your account 
earns interest) within (number of days, not more than 10) business 
days after we received your claim and the remainder of your refund 
(plus interest if your account earns interest) not later than 
(number of days, not more than 45) calendar days after we received 
your claim.
    We may reverse the refund (including any interest on the refund) 
if we later are able to demonstrate that the substitute check was 
correctly posted to your account.

How do I make a claim for a refund?

    If you believe that you have suffered a loss relating to a 
substitute check that you received and that was posted to your 
account, please contact us at (contact information, for example 
phone number, mailing address, e-mail address). You must contact us 
within (number of days, not less than 40) calendar days of the date 
that we mailed (or otherwise delivered by a means to which you 
agreed) the substitute check in question or the account statement 
showing that the substitute check was posted to your account, 
whichever is later. We will extend this time period if you were not 
able to make a timely claim because of extraordinary circumstances.
    Your claim must include--
     A description of why you have suffered a loss (for 
example, you think the amount withdrawn was incorrect);
     An estimate of the amount of your loss;
     An explanation of why the substitute check you received 
is insufficient to confirm that you suffered a loss; and
     A copy of the substitute check [and/or] the following 
information to help us identify the substitute check: (identifying 
information, for example the check number, the name of the person to 
whom you wrote the check, the amount of the check).

[lsqbb]C-6--Holds on Other Funds (Check Cashing)

    If we cash a check for you that is drawn on another bank, we may 
withhold the availability of a corresponding amount of funds that 
are already in your account. Those funds will be available at the 
time funds from the check we cashed would have been available if you 
had deposited it.[rsqbb]

[lsqbb]C-7--Holds on Other Funds (Other Account)

    If we accept for deposit a check that is drawn on another bank, 
we may make funds from the deposit available for withdrawal 
immediately but delay your availability to withdraw a corresponding 
amount of funds that you have on deposit in another account with us. 
The funds in the other account would then not be available for 
withdrawal until the time periods that are described elsewhere in 
this disclosure for the type of check that you deposited.[rsqbb]
    [lsqbb]C-8--Appendix B Availability (Nonlocal Checks)
    3. Certain other checks. We can process nonlocal checks drawn on 
financial institutions in certain areas faster than usual. 
Therefore, funds from deposits of checks drawn on institutions in 
those areas will be available to you more quickly. Call us if you 
would like a list of the routing numbers for these 
institutions.[rsqbb]
    C-[lsqbb]9[rsqbb][rtrif]6[ltrif]--Automated Teller Machine 
Deposits (Extended Hold)
    Funds from any deposits (cash or checks) made at automated 
teller machines (ATMs) we do not own or operate will not be 
available until the [lsqbb]fifth[rsqbb][rtrif]fourth[ltrif] business 
day after the day of your deposit. This rule does not apply at ATMs 
that we own or operate.
    (A list of our ATMs is enclosed. or A list of ATMs where you can 
make deposits but that are not owned or operated by us is enclosed. 
or All ATMs that we own or operate are identified as our machines.)
    [lsqbb]C-10--Cash-Withdrawal Limitation

CASH-WITHDRAWAL LIMITATION

    We place certain limitations on withdrawals in cash. In general, 
$100 of a deposit is available for withdrawal in cash on the first 
business day after the day of deposit. In addition, a total of $400 
of other funds becoming available on a given day is available for 
withdrawal in cash at or after (time no later than 5 p.m.) on that 
day. Any remaining funds will be available for withdrawal in cash on 
the following business day.[rsqbb]
    C-[lsqbb]11[rsqbb][rtrif]7[ltrif]--Credit-Union Interest-Payment 
Policy

INTEREST-PAYMENT POLICY

    If we receive a deposit to your account on or before the tenth 
of the month, you begin earning interest on the deposit (whether it 
was a deposit of cash or checks) as of the first day of that month. 
If we receive the deposit after the tenth of the month, you begin 
earning interest on the deposit as of the first of the following 
month. For example, a deposit made on June 7 earns interest from 
June 1, while a deposit made on June 17 earns interest from July 1.
    C-[lsqbb]11A[rsqbb][rtrif]8[ltrif]--Availability of Funds 
Deposited at Other Locations

DEPOSITS AT OTHER LOCATIONS

    This availability policy only applies to funds deposited at 
(location). Please inquire for information about the availability of 
funds deposited at other locations.

[lsqbb]C-12--Exception Hold Notice

NOTICE OF HOLD

Account number: Date of deposit:

(number) (date)

    We are delaying the availability of $(amount being held) from 
this deposit. These funds will be available on the (number) business 
day after the day of your deposit.
    We are taking this action because:

---------- A check you deposited was previously returned unpaid.
---------- You have overdrawn your account repeatedly in the last 
six months.
---------- The checks you deposited on this day exceed $5,000.
---------- An emergency, such as failure of computer or 
communications equipment, has occurred.
---------- We believe a check you deposited will not be paid for the 
following reasons:[*]

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

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

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

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

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

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

    [* If you did not receive this notice at the time you made the 
deposit and the check you deposited is paid, we will refund to you 
any fees for overdrafts or returned checks that result solely from 
the additional delay that we are imposing. To obtain a refund of 
such fees, (description of procedure for obtaining refund).]

C-13--Reasonable-Cause Hold Notice

NOTICE OF HOLD

Account number: Date of deposit:

(number) (date)

    We are delaying the availability of the funds you deposited by 
the following check: description of check, such as amount and 
drawer)
    These funds will be available on the (number) business day after 
the day of your deposit. The reason for the delay is explained 
below:

---------- We received notice that the check is being returned 
unpaid.
---------- We have confidential information that indicates that the 
check may not be paid.
---------- The check is drawn on an account with repeated 
overdrafts.
---------- We are unable to verify the indorsement of a joint payee.
---------- Some information on the check is not consistent with 
other information on the check.
---------- There are erasures or other apparent alterations on the 
check.
---------- The routing number of the paying bank is not a current 
routing number.
---------- The check is postdated or has a stale date.
---------- Information from the paying bank indicates that the check 
may not be paid.
---------- We have been notified that the check has been lost or 
damaged in collection.
---------- Other:

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

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

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

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

    [If you did not receive this notice at the time you made the 
deposit and the check you deposited is paid, we will refund to you 
any fees for overdrafts or returned checks that result solely from 
the additional delay that we are imposing. To obtain a refund of 
such fees, (description of procedure for obtaining refund).[rsqbb]

C-14--One-Time Notice for Large-Deposit and Redeposited-Check Exception 
Holds

NOTICE OF HOLD

    If you deposit into your account:

[[Page 16919]]

     Checks totaling more than $5,000 on any one day, the 
first $5,000 deposited on any one banking day will be available to 
you according to our general policy. The amount in excess of $5,000 
will generally be available on the (number) business day after the 
day of deposit for checks drawn on (bank name), the (number) 
business day after the day of deposit for local checks and (number) 
business day after the day of deposit for nonlocal checks after the 
day of your deposit. If checks (not drawn on us) that otherwise 
would receive next-day availability exceed $5,000, the excess will 
be treated as either local or nonlocal checks depending on the 
location of the paying bank. If your check deposit, exceeding $5,000 
on any one day, is a mix of local checks, nonlocal checks, checks 
drawn on (bank name), or checks that generally receive next-day 
availability, the excess will be calculated by first adding together 
the (type of check), then the (type of check), then the (type of 
check), then the (type of check).
     A check that has been returned unpaid, the funds will 
generally be available on the (number) business day after the day of 
deposit for checks drawn on (bank name), the (number) business day 
after the day of deposit for local checks and the (number) business 
day for nonlocal checks. Checks (not drawn on us) that otherwise 
would receive next-day availability will be treated as either local 
or nonlocal checks depending on the location of the paying bank.

C-15--One-Time Notice for Repeated-Overdraft Exception Holds

NOTICE OF HOLD

Account number: Date of deposit:

(number) (date)

    We are delaying the availability of checks deposited into your 
account due to repeated overdrafts of your account. For the next six 
months, deposits will generally be available on the (number) 
business day after the day of your deposit for checks drawn on (bank 
name), the (number) business day after the day of your deposit for 
local checks, and the (number) business day after the day of deposit 
for nonlocal checks. Checks (not drawn on us) that otherwise would 
have received next-day availability will be treated as either local 
or nonlocal checks depending on the location of the paying bank.

C-16--Case-by-Case Hold Notice

NOTICE OF HOLD

Account number: Date of deposit:
(number) (date)

    We are delaying the availability of $(amount being held) from 
this deposit. These funds will be available on the (number) business 
day after the day of your deposit ([subject to our cash-withdrawal 
limitation policy]).
    [If you did not receive this notice at the time you made the 
deposit and the check you deposited is paid, we will refund to you 
any fees for overdrafts or returned checks that result solely from 
the additional delay that we are imposing. To obtain a refund of 
such fees, (description of procedure for obtaining refund).]

C-17--Notice at Locations Where Employees Accept Consumer Deposits
[GRAPHIC] [TIFF OMITTED] TP25MR11.016

C-18--Notice at Locations Where Employees Accept Consumer Deposits 
(Case-by-Case Holds)

FUNDS--AVAILABILITY POLICY

    Our general policy is to allow you to withdraw funds deposited 
in your account on the (number) business day after the day we 
receive your deposit. Funds from electronic deposits will be 
available on the day we receive the deposit. In some cases, we may 
delay your ability to withdraw funds beyond the (number) business 
day. Then, the funds will generally be available by the fifth 
business day after the day of deposit.[rsqbb]
BILLING CODE 6210-01-P

[[Page 16920]]

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[[Page 16921]]


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[[Page 16922]]


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[[Page 16923]]


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[[Page 16926]]


[GRAPHIC] [TIFF OMITTED] TP25MR11.023

BILLING CODE 6210-01-C
    [ltrif]C-[lsqbb]19[rsqbb][rtrif]15[ltrif]--Notice at Automated 
Teller Machines

AVAILABILITY OF DEPOSITS

    Funds from deposits may not be available for immediate 
withdrawal. Please refer to your institution's rules governing funds 
availability for details.

C-[lsqbb]20[rsqbb][rtrif]16[ltrif]--Notice at Automated Teller Machines 
(Delayed Receipt)

NOTICE

    Deposits at this ATM between (day) and (day) will not be 
considered received until (day). The availability of funds from the 
deposit may be delayed as a result.

C-[lsqbb]21[rsqbb][rtrif]17[ltrif]--Deposit-Slip Notice

    Deposits may not be available for immediate withdrawal.

C-[lsqbb]22[rsqbb][rtrif]18[ltrif]--Expedited-Recredit Claim, 
Valid-Claim Refund Notice

Notice of Valid Claim and Refund

    We have determined that your substitute-check claim is valid. We 
are refunding (amount) [of which [(amount) represents fees] [and] 
[(amount) represents accrued interest]] to your account. You may 
withdraw these funds as of (date). [This refund is the amount in 
excess of the $2,500 [plus interest] that we credited to your 
account on (date).]

C-[lsqbb]23[rsqbb][rtrif]19[ltrif]--Expedited-Recredit Claim, 
Provisional-Refund Notice

Notice of Provisional Refund

    In response to your substitute-check claim, we are refunding 
(amount) [of which [(amount) represents fees] [and] [(amount) 
represents accrued interest]] to your account, while we complete our 
investigation of your claim. You may withdraw these funds as of 
(date). [Unless we determine that your claim is not valid, we will 
credit the remaining amount of your refund to your account no later 
than the 45th calendar day after we received your claim.]
    If, based on our investigation, we determine that your claim is 
not valid, we will reverse the refund by withdrawing the amount of 
the refund [plus interest that we have paid you on that amount] from 
your account. We will notify you within one day of any such 
reversal.

C-[lsqbb]24[rsqbb][rtrif]20[ltrif]--Expedited-Recredit Claim, 
Denial Notice

Denial of Claim

    Based on our review, we are denying your substitute-check claim. 
As the enclosed (type of document, for example original check or 
sufficient copy) shows, (describe reason for denial, for example the 
check was properly posted, the signature is authentic, there was no 
warranty breach).
    [We have also enclosed a copy of the other information we used 
to make our decision.] [Upon your request, we will send you a copy 
of the other information that we used to make our decision.]

C-[lsqbb]25[rsqbb][rtrif]21[ltrif]--Expedited-Recredit Claim, 
Reversal Notice

Reversal of Refund

    In response to your substitute-check claim, we provided a refund 
of (amount) by crediting your account on (date(s)). We now have 
determined that your substitute check claim was not valid. As the 
enclosed (type of document, for example original check or sufficient 
copy) shows, (describe reason for reversal, for example the check 
was properly posted, the signature is authentic, there was no 
warranty breach). As a result, we have reversed the refund to your 
account [lsqbb]plus interest that we have paid you on that 
amount[rsqbb] by withdrawing (amount) from your account on (date).
    [lsqbb]We have also enclosed a copy of the other information we 
used to make our decision.[rsqbb]

[[Page 16927]]

[lsqbb]Upon your request, we will send you a copy of the information 
we used to make our decision.[rsqbb]

    35. Appendix D to Part 229 is revised to read as follows:

Appendix D to Part 229--Indorsement, Reconverting Bank Identification, 
and Truncating Bank Identification Standards

    (1) The depositary bank shall indorse an original check or 
substitute check according to the following specifications:
    (i) The indorsement shall contain--
    (A) The bank's nine-digit routing number, set off by an arrow at 
each end of the number and pointing toward the number, and, if the 
depositary bank is a reconverting bank with respect to the check, an 
asterisk outside the arrow at each end of the routing number to 
identify the bank as a reconverting bank;
    (B) The indorsement date; and
    (C) The bank's name or location, if the depositary bank applies 
the indorsement physically.
    (ii) The indorsement also may contain--
    (A) A branch identification;
    (B) A trace or sequence number;
    [lsqbb](C) A telephone number for receipt of notification of 
large-dollar returned checks;[rsqbb] and
    [lsqbb](D)[rsqbb][rtrif](C)[ltrif] Other information, provided 
that the inclusion of such information does not interfere with the 
readability of the indorsement.
    (iii)[rtrif](A)[ltrif] The indorsement, if applied to an 
existing paper check, shall be placed on the back of the check so 
that the routing number is wholly contained in the area 3.0 inches 
from the leading edge of the check to 1.5 inches from the trailing 
edge of the check.[lsqbb]\31\[rsqbb]
    [lsqbb]\31\[rsqbb] [rtrif](B) The leading edge is defined as the 
right side of the check looking at it from the front. The trailing 
edge is defined as the left side of the check looking at it from the 
front. See American National Standards Specifications for the 
Placement and Location of MICR Printing, X9.13.[ltrif]
    (iv) When printing its depositary bank indorsement (or a 
depositary bank indorsement that previously was applied 
electronically) onto a substitute check at the time that the 
substitute check is created, a reconverting bank shall place the 
indorsement on the back of the check between 1.88 and 2.74 inches 
from the leading edge of the check. The reconverting bank may omit 
the depositary bank's name and location from the indorsement.
    (2) Each subsequent collecting bank or returning bank indorser 
shall protect the identifiability and legibility of the depositary 
bank indorsement by indorsing an original check or substitute check 
according to the following specifications:
    (i) The indorsement shall contain only--
    (A) The bank's nine-digit routing number (without arrows) and, 
if the collecting bank or returning bank is a reconverting bank with 
respect to the check, an asterisk at each end of the number to 
identify the bank as a reconverting bank;
    (B) The indorsement date, and
    (C) An optional trace or sequence number.
    (ii) The indorsement, if applied to an existing paper check, 
shall be placed on the back of the check from 0.0 inches to 3.0 
inches from the leading edge of the check.
    (iii) When printing its collecting bank or returning bank 
indorsement (or a collecting bank or returning bank indorsement that 
previously was applied electronically) onto a substitute check at 
the time that the substitute check is created, a reconverting bank 
shall place the indorsement on the back of the check between 0.25 
and 2.50 inches from the trailing edge of the check.
    (3) A reconverting bank shall comply with the following 
specifications when creating a substitute check:
    (i)[rtrif](A)[ltrif] If it is a depositary bank, collecting 
bank, or returning bank with respect to the substitute check, the 
reconverting bank shall place its own indorsement onto the back of 
the check as specified in this appendix.
    [lsqbb](ii)[rsqbb][rtrif](B) If it is a paying bank with respect 
to the substitute check or a bank that rejected a check submitted 
for deposit,[ltrif] [lsqbb]A[rsqbb][rtrif]the[ltrif] reconverting 
bank [lsqbb]that also is the paying bank with respect to the 
substitute check[rsqbb] shall so identify itself by placing on the 
back of the check, between 0.25 and 2.50 inches from the trailing 
edge of the check, its nine-digit routing number (without arrows) 
and an asterisk at each end of the number.
    [lsqbb](iii)[rsqbb][rtrif](ii)[ltrif] The reconverting bank 
shall place on the front of the check, outside the image of the 
original check[lsqbb],[rsqbb][rtrif]--[ltrif]
    [rtrif](A)[ltrif] its nine-digit routing number (without arrows) 
and an asterisk at each end of the number, in accordance with ANS 
X9.100-140[lsqbb].[rsqbb][rtrif], and[ltrif]
    [lsqbb](iv)[rsqbb][rtrif](B)[ltrif] [lsqbb]The reconverting bank 
shall place on the front of the check, outside the image of the 
original check,[rsqbb] the truncating bank's nine-digit routing 
number (without arrows) and a bracket at each end of the number, in 
accordance with ANS X9.100-140.
    (4) Any indorsement, reconverting bank identification, or 
truncating bank identification placed on an original check or 
substitute check shall be printed in black ink.
    [rtrif](5) A depositary bank shall indorse an electronic 
collection item in accordance with ANS X9.100-187, unless the 
parties otherwise agree, and according to the following 
specifications--
    (i) The electronic indorsement shall contain--
    (A) The depositary bank's nine-digit routing number; and
    (B) The indorsement date.
    (ii) The electronic indorsement also may contain other 
information, provided that the inclusion of such information does 
not interfere with the readability of the indorsement.
    (6) Each subsequent collecting bank or returning bank indorser 
shall protect the identifiability and legibility of the depositary 
bank indorsement by indorsing an electronic collection item or 
electronic return in accordance with ANS X9.100-187, unless the 
parties otherwise agree.[ltrif]

    36. Amend Appendix E to Part 229 as follows:
    A. Revise Sections II through XI.
    B. In Section XII, revise paragraphs A. and E.
    C. Revise Sections XIII through XXVIII.
    D. In Section XXIX, revise paragraph B.
    E. Revise Sections XXX through XXXIII.
    F. Revise Section XXXVIII.
    The revisions read as follows:

Appendix E to Part 229--Commentary

I. Introduction

A. Background

    1. The Board interpretations, which are labeled 
``Commentary[rtrif],[ltrif]'' [lsqbb]and 
follow[rsqbb][rtrif]of[ltrif] each section of Regulation CC (12 CFR 
part 229)[lsqbb],[rsqbb] provide background material to explain the 
Board's intent in adopting a particular part of the regulation; the 
Commentary also provides examples to aid in understanding how a 
particular requirement is to work. Under section 611(e) of the 
Expedited Funds Availability Act (12 U.S.C. 4010(e)) [rtrif](the EFA 
Act)[ltrif], no provision of section 611 imposing any liability 
shall apply to any act done or omitted in good faith conformity with 
any rule, regulation, or interpretation thereof by the Board of 
Governors of the Federal Reserve System, notwithstanding the fact 
that after such act or omission has occurred, such rule, regulation, 
or interpretation is amended, rescinded, or determined by judicial 
or other authority to be invalid for any reason. The Commentary is 
an ``interpretation'' of a regulation by the Board within the 
meaning of section 611.

II. Section 229.2 Definitions

A. Background

    1. Section 229.2 defines the terms used in the regulation. For 
the most part, terms are defined as they are in section 602 of the 
[lsqbb]Expedited Funds Availability[rsqbb] [rtrif]EFA[ltrif] Act (12 
U.S.C. 4001) [rtrif]or in section 3 of the Check 21 Act (12 U.S.C. 
5002)[ltrif]. The Board has made a number of changes for the sake of 
clarity, to conform the terminology to that which is familiar to the 
banking industry, to define terms that are not defined in the EFA 
Act [rtrif]or the Check 21 Act[ltrif], and to carry out the purposes 
of the EFA Act [rtrif]and the Check 21 Act[ltrif]. The Board also 
has incorporated by reference the definitions of the Uniform 
Commercial Code where appropriate. Some of Regulation CC's 
definitions are self-explanatory and therefore are not discussed in 
this Commentary.

B. 229.2(a) Account

    1. The EFA Act defines account to mean ``a demand deposit 
account or similar transaction account at a depository 
institution.'' The regulation defines account, for purposes other 
than subpart D, in terms of the definition of ``transaction 
account'' in the Board's Regulation D (12 CFR part 204). This 
definition of account, however, excludes certain deposits, such as 
nondocumentary obligations (see 12 CFR 204.2(a)(1)(vii)), that are 
covered under the definition of ``transaction account'' in 
Regulation D. The definition applies to

[[Page 16928]]

accounts with general third party payment powers but does not cover 
time deposits or savings deposits, including money market deposit 
accounts, even though they may have limited third party payment 
powers. [lsqbb]The Board believes that it is appropriate to exclude 
t[rsqbb][rtrif]T[ltrif]hese accounts [rtrif]are excluded[ltrif] 
because of the reference to demand deposits in the EFA Act, which 
suggests that the EFA Act is intended to apply only to accounts that 
permit unlimited third party transfers.
    2. The term account also differs from the definition of 
transaction account in Regulation D because the term account refers 
to accounts held at banks. Under 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubparts A and C, the term bank 
includes not only any depository institution, as defined in the EFA 
Act, but also any person engaged in the business of banking, such as 
a Federal Reserve Bank, a Federal Home Loan Bank, or a private 
banker that is not subject to Regulation D. Thus, accounts at these 
institutions benefit from the expeditious return requirements of 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C.
    3. Interbank deposits, including accounts of offices of domestic 
banks or foreign banks located outside the United States, and direct 
and indirect accounts of the United States Treasury (including 
Treasury General Accounts and Treasury Tax and Loan deposits) are 
exempt from subpart B and, in connection therewith, subpart A. 
However, interbank deposits are included as accounts for purposes of 
subparts C and D and, in connection therewith, subpart A.
    4. The Check 21 Act defines account to mean any deposit account 
at a bank. Therefore, for purposes of subpart D and, in connection 
therewith, subpart A, account means any deposit, as that term is 
defined by Sec.  204.2(a)(1)(i) of Regulation D, at a bank. Many 
deposits that are not accounts for purposes of the other subparts of 
Regulation CC, such as savings deposits, are accounts for purposes 
of subpart D.

C. 229.2(b) Automated Clearinghouse (ACH) [rtrif]Credit Transfer[ltrif]

    1. [rtrif]Automated Clearinghouse (ACH) credit transfers are 
included in the definition of electronic payment.[ltrif] [lsqbb]The 
Board has defined automated clearinghouse as[rsqbb] [rtrif]An ACH 
is[ltrif] a facility that processes debit and credit transfers under 
rules established by a Federal Reserve Bank operating circular 
governing [lsqbb]automated clearinghouse[rsqbb][rtrif]ACH[ltrif] 
items or the rules of an ACH association [rtrif]or similar interbank 
agreement[ltrif]. [lsqbb]ACH credit transfers are included in the 
definition of electronic payment.[rsqbb] [rtrif]The reference to 
``debit and credit transfers'' does not refer to the corresponding 
debit and credit entries that are part of the same transaction, but 
to the different kinds of ACH payments. In an ACH credit transfer, 
the originator orders that its account be debited and another 
account credited. In contrast, in an ACH debit transfer, the 
originator, with prior authorization, orders another account to be 
debited and the originator's account to be credited.[ltrif] 
[lsqbb]2. The reference to ``debit and credit transfers'' does not 
refer to the corresponding debit and credit entries that are part of 
the same transaction, but to the different kinds of ACH payments. In 
an ACH credit transfer, the originator orders that its account be 
debited and another account credited. In an ACH debit transfer, the 
originator, with prior authorization, orders another account to be 
debited and the originator's account to be credited.[rsqbb]
    [lsqbb]3[rsqbb][rtrif]2[ltrif]. A facility that handles only 
wire transfers (defined elsewhere) is not an ACH.

D. 229.2(c) Automated Teller Machine (ATM)

    1. [lsqbb]ATM is not defined in the EFA Act. The regulation 
defines a[rsqbb][rtrif]A[ltrif]n ATM 
[lsqbb]as[rsqbb][rtrif]is[ltrif] an electronic device at which a 
natural person may make deposits to an account by cash or 
[rtrif]paper[ltrif] check and perform other account 
transactions[rtrif], such as cash withdrawals[ltrif]. Point-of-sale 
terminals, machines that only dispense cash, night depositories, and 
lobby deposit boxes are not ATMs within the meaning of the 
definition, either because they do not accept deposits of cash or 
checks (e.g., point-of-sale terminals and cash dispensers) or 
because they only accept deposits (e.g., night depositories and 
lobby boxes) and cannot [rtrif]dispense cash and[ltrif] perform 
other transactions. A lobby deposit box or similar receptacle in 
which written payment orders or deposits may be placed is not an 
ATM. [rtrif]Finally, a remote deposit capture device is not an ATM 
because a natural person can deposit neither cash nor paper checks 
into an account using the device.[ltrif]
    2. A facility may be an ATM within this definition even if it is 
a branch under state or federal law, although an ATM is not a branch 
as that term is used in this regulation.

E. 229.2(d) Available for Withdrawal

    1. Under this definition, when funds become available for 
withdrawal, the funds may be put to all uses for which the customer 
may use actually and finally collected funds in the customer's 
account under the customer's account agreement with the bank. 
Examples of such uses include payment of checks drawn on the 
account, certification of checks, electronic payments, and cash 
withdrawals. Funds are available for these uses notwithstanding 
provisions of other law that may restrict the use of uncollected 
funds (e.g., 18 U.S.C. 1004; 12 U.S.C. 331).
    2. If a bank makes funds available to a customer for a specific 
purpose (such as paying checks that would otherwise overdraw the 
customer's account and be returned for insufficient funds) before 
the funds must be made available under the bank's policy or this 
regulation, it may nevertheless apply a hold consistent with this 
regulation to those funds for other purposes (such as cash 
withdrawals). For purposes of this regulation, funds are considered 
available for withdrawal even though they are being held by the bank 
to satisfy an obligation of the customer other than the customer's 
potential liability for the return of the check. For example, a bank 
does not violate its obligations under this subpart by holding funds 
to satisfy a garnishment, tax levy, or court order restricting 
disbursements from the account; or to satisfy the customer's 
liability arising from the certification of a check, sale of a 
cashier's or teller's check, guaranty or acceptance of a check, or 
similar transaction to be debited from the customer's account.

F. 229.2(e) Bank

    1. The EFA Act uses the term depository institution, which it 
defines by reference to section 19(b)(1)(A)(i) through (vi) of the 
Federal Reserve Act (12 U.S.C. 461(b)(1)(A)(i) through (vi)). This 
regulation uses the term bank, a term that conforms to the usage the 
Board has previously adopted in Regulation J [rtrif](12 CFR part 
210)[ltrif]. Bank is also used in Articles 4 and 4A of the Uniform 
Commercial Code.
    2. Bank is defined to include depository institutions, such as 
commercial banks, savings banks, savings and loan associations, and 
credit unions as defined in the EFA Act, and U.S. branches and 
agencies of foreign banks. For purposes of 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart B, the term does not include 
corporations organized under section 25A of the Federal Reserve Act, 
12 U.S.C. 611-631 (Edge corporations) or corporations having an 
agreement or undertaking with the Board under section 25 of the 
Federal Reserve Act, 12 U.S.C. 601-604a (agreement corporations). 
For purposes of [lsqbb]S[rsqbb][rtrif]s[ltrif]ubparts C and D, and 
in connection therewith, [lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart A, any 
Federal Reserve Bank, Federal Home Loan Bank, or any other person 
engaged in the business of banking is regarded as a bank. The phrase 
``any other person engaged in the business of banking'' is derived 
from U.C.C. 1-201[rtrif](b)[ltrif](4), and is intended to cover 
entities that handle checks for collection and payment, such as Edge 
and agreement corporations, commercial lending companies under 12 
U.S.C. 3101, certain industrial banks, and private bankers, so that 
virtually all checks will be covered by the same rules for forward 
collection and return, even though they may not be covered by the 
requirements of [lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart B. For the 
purposes of [lsqbb]S[rsqbb][rtrif]s[ltrif]ubparts C and D, and in 
connection therewith, [lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart A, the 
term also may include a state or a unit of general local government 
to the extent that it pays warrants or other drafts drawn directly 
on the state or local government itself, and the warrants or other 
drafts are sent to the state or local government for payment or 
collection.
    3. Unless otherwise specified, the term bank includes all of a 
bank's offices in the United States. The regulation does not cover 
foreign offices of U.S. banks.
    4. For purposes of subpart D and, in connection therewith, 
subpart A, the term bank also includes the Treasury of the United 
States and the United States Postal Service to the extent that they 
act as paying banks because the Check 21 Act includes these two 
entities in the definition of the term bank to the extent that they 
act as payors.

G. 229.2(f) Banking Day and (g) Business Day

    1. The EFA Act [rtrif]and the Check 21 Act[ltrif] 
define[lsqbb]s[rsqbb] business day as any day excluding Saturdays, 
Sundays, and legal holidays. Legal holiday, however, is not defined, 
and the variety of local holidays, together with the practice of 
some banks to close midweek, makes the EFA Act's definition 
difficult to apply. [lsqbb]The Board believes that 
t[rsqbb][rtrif]T[ltrif]wo kinds of business days are relevant. 
First, when determining the day when funds are deposited or when a 
bank must perform

[[Page 16929]]

certain actions (such as returning a check), the focus should be on 
a day that the bank is actually open for business. Second, when 
counting days for purposes of determining when funds must be 
available under the regulation[lsqbb]or when notice of nonpayment 
must be received by the depositary bank[rsqbb], there would be 
confusion and uncertainty in trying to follow the schedule of a 
particular bank, and there is less need to identify a day when a 
particular bank is open. Most banks that act as intermediaries 
(large correspondents and Federal Reserve Banks) follow the same 
holiday schedule. Accordingly, the regulation has two definitions: 
Business day generally follows the standard Federal Reserve Bank 
holiday schedule (which is followed by most large banks), and 
banking day is defined to mean that part of a business day on which 
a bank is open for substantially all of its banking activities.
    2. The definition of banking day corresponds to the definition 
of banking day in U.C.C. 4-104(a)(3), except that a banking day is 
defined in terms of a business day. Thus, if a bank is open on 
Saturday, Saturday might be a banking day for purposes of the 
U.C.C., but it would not be a banking day for purposes of Regulation 
CC because Saturday is never a business day under the regulation.
    3. The definition of banking day is phrased in terms of when 
``an office of a bank is open'' to indicate that a bank may observe 
a banking day on a per-branch basis. A deposit made at an ATM or 
off-premise facility (such as a remote depository or a lock box) is 
considered made at the branch holding the account into which the 
deposit is made for the purpose of determining the day of deposit. 
All other deposits are considered made at the branch at which the 
deposit is received. For example, under Sec.  229.19(a)(1), funds 
deposited at an ATM are considered deposited at the time they are 
received at the ATM. On a calendar day that is a banking day for the 
branch or other location of the depositary bank at which the account 
is maintained, a deposit received at an ATM before the ATM's cut-off 
hour is considered deposited on that banking day, and a deposit 
received at an ATM after the ATM's cut-off hour is considered 
deposited on the next banking day of the branch or other location 
where the account is maintained. On a calendar day that is not a 
banking day for the account-holding location, all ATM deposits are 
considered deposited on that location's next banking day. This rule 
for determining the day of deposit also would apply to a deposit to 
an off-premise facility, such as a night depository or lock box, 
which is considered deposited when removed from the facility and 
available for processing under Sec.  229.19(a)(3). If an unstaffed 
facility, such as a night depository or lock box, is on branch 
premises, the day of deposit is determined by the banking day at the 
branch at which the deposit is received, whether or not it is the 
branch at which the account is maintained.

H. 229.2(h) Cash

    1. Cash means U.S. coins and currency. The phrase in the EFA Act 
``including Federal Reserve notes'' has been deleted as unnecessary. 
(See 31 U.S.C. 5103.)

I. 229.2(i) Cashier's Check

    1. The regulation adds to the second item in the EFA Act's 
definition of cashier's check the phrase, ``on behalf of the bank as 
drawer,'' to clarify that the term cashier's check is intended to 
cover only checks that a bank draws on itself. The definition of 
cashier's check includes checks provided to a customer of the bank 
in connection with customer deposit account activity, such as 
account disbursements and interest payments. The definition also 
includes checks acquired from a bank by noncustomers for remittance 
purposes, such as certain loan disbursement checks. Cashier's checks 
provided to customers or others are often labeled as ``cashier's 
check,'' ``officer's check,'' or ``official check.'' The definition 
excludes checks that a bank draws on itself for other purposes, such 
as to pay employees and vendors, and checks issued by the bank in 
connection with a payment service, such as a payroll or a bill-
paying service. Cashier's checks generally are sold by banks to 
substitute the bank's credit for the customer's credit and thereby 
enhance the collectibility of the checks. A check issued in 
connection with a payment service generally is provided as a 
convenience to the customer rather than as a guarantee of the 
check's collectibility. In addition, such checks are often more 
difficult to distinguish from other types of checks than are 
cashier's checks as defined by this regulation.

J. 229.2(j) Certified Check

    1. The EFA Act defines a certified check as one to which a bank 
has certified that the drawer's signature is genuine and that the 
bank has set aside funds to pay the check. Under the Uniform 
Commercial Code, certification of a check means the bank's signed 
agreement that it will honor the check as presented (U.C.C. 3-409). 
The regulation defines certified check to include both the EFA Act's 
and U.C.C.'s definitions.

K. 229.2(k) Check

    1. Check is defined in section 602(7) of the EFA Act as a 
negotiable demand draft drawn on or payable through an office of a 
depository institution located in the United States, excluding 
noncash items. The regulation includes six categories of instruments 
within the definition of check. [rtrif]Check is defined in section 3 
of the Check 21 Act as including nonnegotiable demand drafts. 
Because these instruments are often handled as cash items in the 
forward collection process, for the purposes of subparts C and D, 
and in connection therewith, subpart A, the definition of check 
includes nonnegotiable demand drafts drawn on or payable through a 
bank, drawn on a Federal Reserve Bank or Federal Home Loan Bank, or 
drawn on the Treasury of the United States.[ltrif]
    2. The first category is negotiable demand drafts drawn on, or 
payable through or at, an office of a bank. As the definition of 
bank includes only offices located in the United States, this 
category is limited to checks drawn on, or payable through or at, a 
banking office located in the United States.
    3. The EFA Act [rtrif]and the Check 21 Act[ltrif] 
treat[lsqbb]s[rsqbb] drafts payable through a bank as checks, even 
though under the U.C.C. the payable-through bank is a collecting 
bank to make presentment and generally is not authorized to make 
payment (U.C.C. 4-106(a)). [lsqbb]The[rsqbb] [rtrif]Neither 
the[ltrif] EFA Act [rtrif]nor the Check 21 Act[ltrif] [lsqbb]does 
not[rsqbb] expressly address items that are payable at a bank. This 
regulation treats both payable-through and payable-at demand drafts 
as checks. [lsqbb]The Board believes that 
t[rsqbb][rtrif]T[ltrif]reating demand drafts payable at a bank as 
checks [lsqbb]will[rsqbb][rtrif]should[ltrif] not have a substantial 
effect on the operations of payable-at banks--by far the largest 
proportion of payable-at items are not negotiable demand drafts, but 
time items, such as commercial paper, bonds, notes, bankers' 
acceptances, and securities. These time items are not covered by the 
requirements of the EFA Act or this regulation. [lsqbb](The 
treatment of payable-through drafts is discussed in greater detail 
in connection with the definitions of local check and paying 
bank.)[rsqbb]
    4. The second category is checks drawn on Federal Reserve Banks 
and Federal Home Loan Banks. Principal and interest payments on 
federal debt instruments [lsqbb]often are[rsqbb] [rtrif]may 
be[ltrif] paid with checks drawn on a Federal Reserve Bank as fiscal 
agent of the United States[lsqbb], and these fiscal agency checks 
are indistinguishable from other checks drawn on Federal Reserve 
Banks[rsqbb]. (See 31 CFR part 355.) [lsqbb]Federal Reserve Bank 
checks also are used by some banks as substitutes for cashier's or 
teller's checks. Similarly, s[rsqbb][rtrif]S[ltrif]avings and loan 
associations [lsqbb]often[rsqbb][rtrif]may[ltrif] use checks drawn 
on Federal Home Loan Banks as teller's checks. The definition of 
check includes checks drawn on Federal Home Loan Banks and Federal 
Reserve Banks because in many cases they are the functional 
equivalent of Treasury checks or teller's checks.
    5. The third and fourth categories of instrument included in the 
definition of check refer to government checks. The EFA Act refers 
to checks drawn on the U.S. Treasury, even though these instruments 
are not drawn on or payable through an office of a depository 
institution, and checks drawn by state and local governments. The 
EFA Act also [lsqbb]gives the Board authority to 
define[rsqbb][rtrif]provides that[ltrif] functionally equivalent 
instruments [rtrif]may be defined in the regulation[ltrif] as 
depository checks.[lsqbb]\1\[rsqbb] [rtrif](See Section 602(11) of 
the EFA Act (12 U.S.C. 4001(11)).[ltrif] Thus, the EFA Act is 
intended to apply to instruments other than those that meet the 
strict definition of check in section 602(7) of the EFA Act. Checks 
and warrants drawn by states and local governments often are used 
for the purposes of making unemployment compensation payments and 
other payments that are important to the recipients. Consequently, 
the [lsqbb]Board has expressly defined[rsqbb][rtrif]Regulation CC 
defines[ltrif] check to include drafts drawn on the U.S. Treasury 
and drafts or warrants drawn by a state or a unit of general local 
government on itself.
    [lsqbb]\1\ Section 602(11) of the EFA Act (12 U.S.C. 4001(11)) 
defines ``depository check'' as ``any cashier's check, certified 
check, teller's check, and any other functionally equivalent 
instrument as determined by the Board.''[rsqbb]

[[Page 16930]]

    6. The fifth category of instrument included in the definition 
of check is U.S. Postal Service money orders. These instruments are 
defined as checks because they often are used as a substitute for 
checks by consumers, even though money orders are not negotiable 
under Postal Service regulations. [lsqbb]The Board has not 
provided[rsqbb][rtrif]Regulation CC does not provide[ltrif] specific 
rules for other types of money orders; these instruments generally 
are drawn on or payable through or payable at banks and are treated 
as checks on that basis.
    7. The sixth and final category of instrument included in the 
definition of check is traveler's checks drawn on or payable through 
or at a bank. Traveler's check is defined in paragraph 
[lsqbb](hh)[rsqbb] [rtrif](vv)[ltrif] [lsqbb]of this section[rsqbb].
    [lsqbb]8. Finally, for the purposes of Subparts C and D, and in 
connection therewith, Subpart A, the definition of check includes 
nonnegotiable demand drafts because these instruments are often 
handled as cash items in the forward collection process.[rsqbb]
    [lsqbb]9[rsqbb][rtrif]8[ltrif]. A substitute check as defined in 
Sec.  229.2[lsqbb](aaa)[rsqbb][rtrif](rr)[ltrif] is a check for 
purposes of Regulation CC and the U.C.C., even if that substitute 
check does not meet the requirements for legal equivalence set forth 
in Sec.  229.51(a).
    [lsqbb]10[rsqbb][rtrif]9[ltrif]. The definition of check does 
not include an instrument payable in a foreign currency (i.e., other 
than in United States money as defined in 31 U.S.C. 5101) or a 
credit card draft (i.e., a sales draft used by a merchant or a draft 
generated by a bank as a result of a cash advance), or an ACH debit 
transfer. The definition of check includes a check that a bank may 
supply to a customer as a means of accessing a credit line without 
the use of a credit card.

L. 229.2(l) [lsqbb]Reserved[rsqbb]

M. 229.2(m) [lsqbb]Check Processing Region[rsqbb]

    [lsqbb]1. The EFA Act defines this term as ``the geographic area 
served by a Federal Reserve bank check processing center or such 
larger area as the Board may prescribe by regulations.'' The Board 
has defined check processing region as the territory served by one 
of the Federal Reserve head offices, branches, or regional check 
processing centers. Appendix A includes a list of routing numbers 
arranged by Federal Reserve Bank office. The definition of check 
processing region is key to determining whether a check is 
considered local or nonlocal.[rsqbb][rtrif][Reserved][ltrif]

N. 229.2(n) [Reserved]

O. 229.2(o) Consumer Account

    1. Consumer account is defined as an account used primarily for 
personal, family, or household purposes. An account that does not 
meet the definition of consumer account is a nonconsumer account. A 
clearing account maintained at a bank directly by a brokerage firm 
is not a consumer account, even if the account is used to pay checks 
drawn by consumers using the funds in that account. The bank's 
relationship is with the brokerage firm, and the account is used by 
the brokerage firm to facilitate the clearing of its customers' 
checks. Because for purposes of Regulation CC the term account 
includes only deposit accounts, a consumer's revolving credit 
relationship or other line of credit with a bank is not a consumer 
account, even if the consumer draws on such credit lines by using a 
check. Both consumer and nonconsumer accounts are subject to the 
requirements of this regulation, including the requirement that 
funds be made available according to specific schedules and that the 
bank make specified disclosures of its availability policies. 
Section 229.18(b) (notices at branch locations) and Sec.  229.18(e) 
(notice of changes in policy) apply only to consumer accounts. 
Section 229.13(g)(2) (one-time exception notice) and Sec.  229.19(d) 
(use of calculated availability) apply only to nonconsumer accounts.

P. 229.2(p) Contractual Branch

    1. When one bank arranges for another bank to accept deposits on 
its behalf, the second bank is a contractual branch of the first 
bank. For further discussion of contractual branch deposits and 
related disclosures, see Sec.  [Sec.  229.2(s) and] 229.19(a) of the 
regulation and the commentary to Sec.  [Sec.  229.2(s),] 229.10(c), 
229.14(a), 229.16(a), 229.18(b), and 229.19(a).

Q. 229.2(q) [Reserved]

R. 229.2(r) [lsqbb]229.2(r) Local Check

    1. Local check is defined as a check payable by or at a local 
paying bank, or, in the case of nonbank payors, payable through a 
local paying bank. A check payable by a local bank but payable 
through a nonlocal bank is a local check. Conversely, a check 
payable through a local bank but payable by a nonlocal bank is a 
nonlocal check. Where two banks are named on a check and neither is 
designated as a payable-through bank, the check is considered 
payable by either bank and may be considered local or nonlocal 
depending on the bank to which it is sent for payment. Generally, 
the depositary bank may rely on the routing number to determine 
whether a check is local or nonlocal. Appendix A includes a list of 
routing numbers arranged by Federal Reserve Bank Office to assist 
persons in determining whether or not such a check is local. If, 
however, a check is payable by one bank but payable through another 
bank, the routing number appearing on the check will be that of the 
payable-through bank, not the paying bank. Many credit union share 
drafts and certain other checks payable by banks are payable through 
other banks. In such cases, the routing number cannot be relied on 
to determine whether the check is local or nonlocal. For payable-
through checks that meet the labeling requirements of Sec.  
229.36(e), the depositary bank may rely on the four-digit routing 
symbol of the paying bank that is printed on the face of the check 
as required by that section, e.g., in the title plate, but not on 
the first four digits of the payable-through bank's routing number 
printed in magnetic ink in the MICR line or in fractional form, to 
determine whether the check is local or nonlocal.[rsqbb] Depositary 
Bank
    1. The regulation uses the term depositary bank rather than the 
term receiving depository institution. Receiving depository 
institution is a term unique to the EFA Act, while depositary bank 
is the term used in Article 4 of the U.C.C. and Regulation J 
[rtrif](12 CFR part 210). The Check 21 Act uses the term depositary 
bank.[ltrif]
    2. A depositary bank includes the bank in which the check is 
first deposited. If a foreign office of a U.S. or foreign bank sends 
checks to its U.S. correspondent bank for forward collection, the 
U.S. correspondent is the depositary bank because foreign offices of 
banks are not included in the definition of bank.
    3. If a customer deposits a check in its account at a bank, the 
customer's bank is the depositary bank with respect to the check. 
For example, if a person deposits a check into an account at a 
nonproprietary ATM, the bank holding the account into which the 
check is deposited is the depositary bank even though another bank 
may service the nonproprietary ATM and send the check for 
collection. (Under Sec.  229.35 the depositary bank may agree with 
the bank servicing the nonproprietary ATM to have the servicing bank 
place its own indorsement on the check as the depositary bank. For 
the purposes of [lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C, the bank 
applying its indorsement as the depositary bank indorsement on the 
check is the depositary bank.)
    4. For purposes of [lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart B, a 
bank may act as both the depositary bank and the paying bank with 
respect to a check, if the check is payable by the bank in which it 
was deposited, or if the check is payable by a nonbank payor and 
payable through or at the bank in which it was deposited. A bank 
also is considered a depositary bank with respect to checks it 
receives as payee. For example, a bank is a depositary bank with 
respect to checks it receives for loan repayment, even though these 
checks are not deposited in an account at the bank. Because these 
checks would not be ``deposited to accounts,'' they would not be 
subject to the availability or disclosure requirements of 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart B.
    [rtrif]5. A bank is not a depositary bank with respect to a 
check if the bank receives the check for deposit but then rejects 
the check. For example, if a bank's customer submits a check for 
deposit into an ATM and the bank subsequently reviewed the item and 
determined not to accept the item for deposit, that bank is not a 
depositary bank with respect to the check it rejected. Accordingly, 
such a bank does not take on the liabilities of a depositary bank 
under this part.[ltrif]

[lsqbb]S. 229.2(s) Local Paying Bank

    1. ``Local paying bank'' is defined as a paying bank located in 
the same check-processing region as the branch, contractual branch, 
or proprietary ATM of the depositary bank. For example, a check 
deposited at a contractual branch would be deemed local or nonlocal 
based on the location of the contractual branch with respect to the 
location of the paying bank.
    Examples.
    a. If a check that is payable by a bank that is located in the 
same check processing region as the depositary bank is payable 
through a bank located in another check processing region, the check 
is considered local or nonlocal depending on the location of the 
bank by which it is payable even if the

[[Page 16931]]

check is sent to the nonlocal bank for collection.
    b. The location of the depositary bank is determined by the 
physical location of the branch or proprietary ATM at which a check 
is deposited, regardless of whether the deposit is made in person, 
by mail, or otherwise. For example, if a branch of the depositary 
bank located in one check-processing region sends a check that was 
deposited at that branch to the depositary bank's central facility 
in another check-processing region, and the central facility is in 
the same check-processing region as the paying bank, the check is 
still considered nonlocal. ( See the commentary to the definition of 
``paying bank.'')
    c. If a person deposits a check to an account by mailing or 
otherwise sending the check to a facility or office that is not a 
bank, the check is considered local or nonlocal depending on the 
location of the bank whose indorsement appears on the check as the 
depositary bank.[rsqbb]

[rtrif]S. 229.2(s) Electronic Collection Item

    1. Banks often enter into agreements under which a check may be 
transferred or presented by sending an electronic image of the check 
and electronic information related to the check (e.g., MICR-line 
information). The terms of the agreements may vary. If, however, an 
electronic collection item satisfies all the requirements set forth 
in Sec.  229.2(s), then the provisions of subpart C apply to the 
electronic collection item as if it were a check subject to that 
subpart.
    a. The agreement to receive an electronic collection item may be 
either bilateral or through a Federal Reserve Bank operating 
circular, clearinghouse rule, or other interbank agreement. (See UCC 
Sec.  4-110).
    b. The electronic image of the front and back of the original 
check or substitute check as well as electronic information related 
to the check must be sufficient to create a substitute check. 
Electronic information related to the check includes information 
contained in the MICR line of the check prior to truncation. Some 
banks' agreements to receive items electronically may not require an 
electronic image of the front and back of an original check. 
Electronic items received under these agreements would not be 
electronic collection items under this part.
    c. ANS X9.100-187 is the most prevalent industry standard for 
electronic images and information that will enable a bank to create 
a substitute check. Multiple standards may, however, exist that 
would enable a bank to create a substitute check from an electronic 
image and information. Accordingly, the parties may agree to send 
and receive checks as electronic images and information that conform 
to a different standard.
    d. Electronic collection items that contain images of the front 
and back of a substitute check also are electronic representations 
of a substitute check (see Sec.  229.2(hh)). Not all electronic 
representations of substitute checks, however, are electronic 
collection items. To be an electronic collection item, the 
electronic representation of a substitute check must satisfy the 
requirements for electronic collection items--it must contain 
sufficient information to create a substitute check and it must 
conform to ANS X9.100-187, unless the parties agree to a different 
standard.[ltrif]

T. 229.2(t) Electronic Payment

    1. Electronic payment is defined to mean a wire transfer as 
defined in Sec.  229.2[lsqbb](ll)[rsqbb][rtrif](bbb)[ltrif] or an 
ACH credit transfer [rtrif]as defined in Sec.  229.2(b)[ltrif]. The 
EFA Act requires that funds deposited by wire transfer be made 
available for withdrawal on the business day following deposit but 
expressly leaves the definition of the term wire transfer to the 
[lsqbb]Board[rsqbb][rtrif]regulation[ltrif]. Because ACH credit 
transfers [lsqbb]frequently involve important consumer payments, 
such as wages[rsqbb][rtrif]pose little risk of return to the 
depositary bank[ltrif], the regulation requires that funds deposited 
by ACH credit transfers be available for withdrawal on the business 
day following deposit.
    2. ACH debit transfers, even though they may be transmitted 
electronically, are not defined as electronic payments because the 
receiver of an ACH debit transfer has the right to return the 
transfer, which would reverse the credit given to the originator. 
Thus, ACH debit transfers are more like checks than wire transfers. 
Further, bank customers that receive funds by originating ACH debit 
transfers are primarily large corporations, which generally would be 
able to negotiate with their banks for prompt availability.
    3. A point-of-sale transaction would not be considered an 
electronic payment unless the transaction was effected by means of 
an ACH credit transfer or wire transfer.

[rtrif]U. 229.2(u) Electronic Presentment Point

    1. The term ``electronic presentment point'' means the 
electronic address that a paying bank has designated as the place to 
which electronic collection items be presented. This address may be 
either an e-mail address or other electronic address.[ltrif]

[rtrif]V. 229.2(v) Electronic Return

    1. Many paying banks have entered into agreements with returning 
banks, depositary banks, clearinghouses, or other parties to return 
checks electronically. For purposes of subpart C, the term 
``electronic return'' means an electronic image of and electronic 
information related to a check the paying bank determines not to pay 
and that is sufficient for a subsequent bank to create a substitute 
check (See Sec.  229.2(rr) and accompanying commentary). To be 
sufficient to create a substitute check, the electronic image must 
include an image of both the front and back of the check. The 
electronic information, typically contained in an electronic record 
accompanying the electronic image, must include information from the 
MICR line of the check at the time it was truncated. The electronic 
record may include information in addition to MICR-line related 
information.
    2. ANS X9.100-187 is the most prevalent industry standard for 
electronic images and information that will enable a subsequent bank 
to create a substitute check (i.e., in accordance with ANS X9.100-
140). Similar to electronic presentment, multiple standards may 
exist that would enable a bank to create a substitute check from an 
electronic image and information. Accordingly, the parties may agree 
to return checks as electronic images and information that conform 
to a different standard. For example, the depositary bank may agree 
to receive the electronic image and information sufficient for 
creating a substitute check in a .pdf, rather than in accordance 
with ANS X9.100-187.
    3. An electronic image and information related to a check the 
paying bank determines not to pay is subject to the provisions of 
subpart C only if the depositary bank has agreed to receive the 
electronic return in accordance with Sec.  229.32(a) (See Sec.  
229.32(a) and accompanying commentary).
    4. Electronic returns that contain images of the front and back 
of a substitute check also are electronic representations of a 
substitute check (See Sec.  229.2(hh)). Not all electronic 
representations of substitute checks, however, are electronic 
returns. To be an electronic return, the electronic representation 
of a substitute check must satisfy the requirements for electronic 
returns--it must contain sufficient information to create a 
substitute check and must conform to ANS X9.100-187.[ltrif]

[rtrif]W. 229.2(w) Electronic Return Point

    1. The term ``electronic return point'' means the e-mail address 
or other electronic address that a depositary bank has designated as 
the place to which electronic returns must be delivered.
    2. The electronic return point may be different from the 
electronic presentment point designated by a bank for presentment of 
electronic collection items.[ltrif]

X. 229.2(x) [Reserved]

Y. 229.2(y) Forward Collection

    1. Forward collection is defined to mean the process by which a 
bank sends a check to the paying bank for collection, including 
sending the check to an intermediary collecting bank for settlement, 
as distinguished from the process by which the check is returned 
unpaid. Noncash collections are not included in the term forward 
collection.

Z. 229.2(z) Good Faith

    1. This definition of good faith derives from U.C.C. 3-
103(a)(4).

AA. 229.2(aa) [Reserved]

BB. 229.2(bb) Interest Compensation

    1. This calculation of interest compensation derives from U.C.C. 
4A-506(b). (See Sec. Sec.  229.34[lsqbb](e)[rsqbb][rtrif](f)[ltrif] 
and 229.36[lsqbb](f)[rsqbb][rtrif](d)[ltrif].)

CC. 229.2(cc) [lsqbb]MICR Line[rsqbb] [rtrif]Magnetic ink character 
recognition line or MICR line[ltrif]

    1. Information in the MICR line of a check must be printed in 
accordance with ANS X9.13 for original checks and ANS X9.100-140 for 
substitute checks. These standards could vary the requirements for 
printing the MICR line, such as by indicating circumstances under 
which the use of magnetic ink is not required.

DD. 229.2(dd) Merger Transaction

    1. Merger transaction is a term used in 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubparts B and C in connection with

[[Page 16932]]

transition rules for merged banks. It encompasses mergers, 
consolidations, and purchase/assumption transactions of the type 
that usually must be approved under the Bank Merger Act (12 U.S.C. 
1828(c)) or similar statutes; it does not encompass acquisitions of 
a bank under the Bank Holding Company Act (12 U.S.C. 1842) where an 
acquired bank maintains its separate corporate existence.
    2. Regulation CC adopts a one-year transition period for banks 
that are party to a merger transaction during which the merged banks 
will continue to be treated as separate entities. (See Sec. Sec.  
229.19(g) and 229.40.)

EE. 229.2(ee) Noncash Item

    1. The EFA Act defines the term check to exclude noncash items, 
and defines noncash items to include checks to which another 
document is attached, checks accompanied by special instructions, or 
any similar item classified as a noncash item in the 
[lsqbb]Board's[rsqbb] regulation. To qualify as a noncash item, an 
item must be handled as such and may not be handled as a cash item 
by the depositary bank.
    2. The regulation's definition of noncash item also includes 
checks that consist of more than a single thickness of paper (except 
checks that qualify for handling by automated check processing 
equipment[lsqbb], e.g. those placed in carrier envelopes[rsqbb]) and 
checks that have not been preprinted or post-encoded in magnetic ink 
with the paying bank's routing number, as well as checks with 
documents attached or accompanied by special instructions. (In the 
context of this definition, paying bank refers to the paying bank as 
defined for purposes of [lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C.)
    3. A check that has been preprinted or post-encoded with a 
routing number that has been retired (e.g., because of a merger) for 
at least three years is a noncash item unless the current number is 
added for processing purposes [lsqbb]by placing the check in an 
encoded carrier envelope or adding a strip to the check[rsqbb].
    4. Checks that are accompanied by special instructions are also 
noncash items. For example, a person concerned about whether a check 
will be paid may request the depositary bank to send a check for 
collection as a noncash item with an instruction to the paying bank 
to notify the depositary bank promptly when the check is paid or 
dishonored.
    5. For purposes of forward collection, a copy of a check is 
neither a check nor a noncash item, but may be treated as either. 
For purposes of return, a copy is generally a notice in lieu of 
return. (See Sec. Sec.  229.30[lsqbb](f)[rsqbb][rtrif](e)[ltrif] and 
229.31[lsqbb](f)[rsqbb][rtrif](e)[ltrif].)

FF. 229.2(ff) [Reserved]

GG. 229.2(gg) Original Check

    1. The definition of original check distinguishes the first 
paper check signed or otherwise authorized by the drawer to effect a 
particular payment transaction from a substitute check or other 
paper or electronic representation that is derived from an original 
check or substitute check. There is only one original check for any 
particular payment transaction. However, multiple substitute checks 
could be created to represent that original check at various points 
in the check collection and return process.

HH. 229.2(hh) Paper or Electronic Representation of a Substitute Check

    1. Receipt of a paper or electronic representation of a 
substitute check does not trigger indemnity or expedited recredit 
rights, although the recipient nonetheless could have a warranty 
claim or a claim under other check law with respect to that document 
or the underlying payment transaction. A paper or electronic 
representation of a substitute check would include a representation 
of a substitute check that was drawn on an account, as well as a 
representation of a substitute traveler's check, credit card check, 
or other item that meets the substitute check definition. The 
following examples illustrate the scope of the definition.
    Examples.
    a. A bank receives electronic presentment of a substitute check 
that has been converted to electronic form and charges the 
customer's account for that electronic item. The periodic account 
statement that the bank provides to the customer includes 
information about the electronically-presented substitute check in a 
line-item list describing all the checks the bank charged to the 
customer's account during the previous month. The electronic file 
that the bank received for presentment and charged to the customer's 
account would be an electronic representation of a substitute check, 
and the line-item appearing on the customer's account statement 
would be a paper representation of a substitute check.
    b. A paying bank receives and settles for a substitute check and 
then realizes that its settlement was for the wrong amount. The 
paying bank sends an adjustment request to the presenting bank to 
correct the error. The adjustment request is not a paper or 
electronic representation of a substitute check under the definition 
because it is not being handled for collection or return as a check. 
Rather, it is a separate request that is related to a check. As a 
result, no substitute check warranty, indemnity, or expedited 
recredit rights attach to the adjustment.
    [rtrif]2. An electronic representation of a substitute check 
also may be an electronic collection item or an electronic return if 
the electronic representation of the substitute check otherwise 
satisfies their requirements (see Sec.  229.2(s) and (v)).
    Example.
    A bank receives electronic presentment of a substitute check 
that has been converted to electronic form. If the electronic file 
that the bank receives for presentment contains an electronic image 
of and information related to the substitute check that are 
sufficient for creating a substitute check and the electronic image 
and information conform to ANS X9.100-187, or another format to 
which the parties agree, that electronic file would be an electronic 
collection item in addition to an electronic representation of a 
substitute check.[ltrif]

II. 229.2(ii) Paying Bank

    1. The regulation uses this term in lieu of the EFA Act's 
``originating depository institution.'' [rtrif]The Check 21 Act also 
uses the term ``paying bank.''[ltrif] For purposes of all subparts 
of Regulation CC, the term paying bank includes the bank by which a 
check is payable, the payable-at bank to which a check is sent, or, 
if the check is payable by a nonbank payor, the bank through which 
the check is payable and to which it is sent for payment or 
collection. For purposes of subparts C and D, the term paying bank 
also includes the payable-through bank and the bank whose routing 
number appears on the check, regardless of whether the check is 
payable by a different bank, provided that the check is sent for 
payment or collection to the payable through bank or the bank whose 
routing number appears on the check.
    2. Under Sec. Sec.  229.30[rtrif](a)[ltrif] [lsqbb]and 
229.36(a)[rsqbb], a bank designated as a payable-through bank or 
payable-at bank and to which the check is sent for payment or 
collection is responsible for the expedited return of checks 
[lsqbb]and notice of nonpayment requirements 
of[rsqbb][rtrif]under[ltrif] [lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C. 
The payable-through or payable-at bank may contract with the payor 
with respect to its liability in discharging these responsibilities. 
[lsqbb]The Board believes that the EFA Act makes a clear connection 
between availability and the time it takes for checks to be cleared 
and returned.[rsqbb] Allowing the payable-through bank additional 
time to forward checks to the payor and await return or pay 
instructions from the payor would delay the return of these checks, 
increasing the risks to depositary banks. Subpart C places on 
payable-through and payable-at banks the requirements of expeditious 
return based on the time the payable-through or payable-at bank 
received the check for forward collection.
    3. If a check is sent for forward collection based on the 
routing number, the bank associated with the routing number is a 
paying bank for the purposes of 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubparts C and D requirements[lsqbb], 
including notice of nonpayment,[rsqbb] even if the check is not 
drawn by a customer of that bank or the check is fraudulent.
    4. The phrase ``and to which [lsqbb]the check[rsqbb] is sent for 
payment or collection'' includes sending not only the physical 
check, but information regarding the check under a truncation 
arrangement.
    5. Federal Reserve Banks and Federal Home Loan Banks are also 
paying banks under all subparts of the regulation with respect to 
checks payable by them, even though such banks are not defined as 
banks for purposes of [lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart B.
    6. In accordance with the Check 21 Act, for purposes of subpart 
D and, in connection therewith, subpart A, paying bank includes the 
Treasury of the United States or the United States Postal Service 
with respect to a check payable by that entity and sent to that 
entity for payment or collection, even though the Treasury and 
Postal Service are not defined as banks for purposes of subparts B 
and C. Because the Federal Reserve Banks act as fiscal agents for 
the Treasury and the U.S. Postal Service and in that capacity are 
designated as presentment locations for

[[Page 16933]]

Treasury checks and U.S. Postal Service money orders, a Treasury 
check or U.S. Postal Service money order presented to a Federal 
Reserve Bank is considered to be presented to the Treasury or U.S. 
Postal Service, respectively.

JJ. 229.2(jj) [Reserved]

KK. 229.2(kk) Proprietary ATM

    [lsqbb]1. All deposits at nonproprietary ATMs are treated as 
deposits of nonlocal checks, and deposits at proprietary ATMs 
generally are treated as deposits at banking offices. The Conference 
Report on the EFA Act indicates that the special availability rules 
for deposits received through nonproprietary ATMs are provided 
because ``nonproprietary ATMs today do not distinguish among check 
deposits or between check and cash deposits'' (H.R. Rep. No. 261, 
100th Cong., 1st Sess. at 179 (1987)). Thus, a deposit of any 
combination of cash and checks at a nonproprietary ATM may be 
treated as if it were a deposit of nonlocal checks, because the 
depositary bank does not know the makeup of the deposit and 
consequently is unable to place different holds on cash, local 
check, and nonlocal check deposits made at the ATM.[rsqbb]
    [rtrif]1.[ltrif][lsqbb]2.[rsqbb] A colloquy between Senators 
Proxmire and Dodd during the floor debate on the Competitive 
Equality Banking Act (133 Cong. Rec. S11289 (Aug. 4, 1987)) 
indicates that whether a bank operates the ATM is the primary 
criterion in determining whether the ATM is proprietary to that 
bank. Because a bank should be capable of ascertaining the 
composition of deposits made to an ATM operated by that bank, an 
exception to the availability schedules is not warranted for these 
deposits. If more than one bank meets the ``owns or operates'' 
criterion, the ATM is considered proprietary to the bank that 
operates it. For the purpose of this definition, the bank that 
operates an ATM is the bank that puts checks deposited into the ATM 
into the forward collection stream. An ATM owned by one or more 
banks, but operated by a nonbank servicer, is considered proprietary 
to the bank or banks that own it.
    [rtrif]2.[ltrif][lsqbb]3.[rsqbb] The EFA Act also includes 
location as a factor in determining whether an ATM that is either 
owned or operated by a bank is proprietary to that bank. The 
definition of proprietary ATM includes an ATM located on the 
premises of the bank, either inside the branch or on its outside 
wall, regardless of whether the ATM is owned or operated by that 
bank. Because the EFA Act also defines a proprietary ATM as one that 
is ``in close proximity'' to the bank, the regulation defines an ATM 
located within 50 feet of a bank to be proprietary to that bank 
unless it is identified as being owned or operated by another 
entity. The [lsqbb]Board believes that the[rsqbb] statutory 
proximity test was designed to apply to situations where it would 
appear to the depositor that the ATM is run by his or her bank, 
because of the proximity of the ATM to the bank. [lsqbb]The Board 
believes that a[rsqbb][rtrif]A[ltrif]n ATM located within 50 feet of 
a banking office would be presumed proprietary to that bank unless 
it is clearly identified as being owned or operated by another 
entity.

LL. 229.2(ll) Qualified Returned Check

    1. Subpart C requires the paying bank and returning bank(s) to 
return checks in an expeditious manner [rtrif]under certain 
circumstances[ltrif]. [lsqbb]The banks may meet this responsibility 
by returning a check to the depositary bank by the same general 
means used for forward collection of a check from the depositary 
bank to the paying bank. One[rsqbb][rtrif]While the primary[ltrif] 
way to speed the return process is to [rtrif]send the return 
electronically, a bank also could[ltrif] prepare the returned check 
for automated [rtrif]paper[ltrif] processing. [lsqbb]Returned checks 
can be automated by either the paying bank or a returning bank by 
placing the return in a carrier envelope or by placing a strip on 
the bottom of the return, and encoding the envelope or strip with 
the routing number of the depositary bank, the amount of the check, 
and a special return identifier.[rsqbb] Qualified returned checks 
are identified by placing a ``2'' in the case of an original check 
(or a ``5'' in the case of a substitute check) in position 44 of the 
qualified-return MICR line as a return identifier in accordance with 
American National Standard Specifications for Placement and Location 
of MICR Printing, X9.13 (hereinafter ``ANS X9.13'') for original 
checks or American National Standard Specifications for an Image 
Replacement Document--IRD, X9.100-140 (hereinafter ``ANS X9.100-
140'') for substitute checks. [rtrif](See Sec.  229.2(w) and 
accompanying commentary for a discussion of standards for electronic 
returns.)[ltrif]
    2. Generally, under the standard of care imposed by Sec.  
229.38, a paying [rtrif]bank[ltrif] or returning bank would be 
liable for any damages incurred due to misencoding of the routing 
number, the amount of the check, or return identifier on a qualified 
returned check unless the error was due to problems with the 
depositary bank's indorsement. (See also discussion of Sec.  
229.38(c).) A qualified returned check that contains an encoding 
error would still be a qualified returned check for purposes of the 
regulation.
    [lsqbb]3. A qualified returned check need not contain the 
elements of a check drawn on the depositary bank, such as the name 
of the depositary bank. Because indorsements and other information 
on carrier envelopes or strips will not appear on a returned check 
itself, banks will wish to retain carrier envelopes and/or microfilm 
or other records of carrier envelopes or strips with their check 
records.[rsqbb]

MM. 229.2(mm) Reconverting Bank

    1. A substitute check is ``created'' when and where a paper 
reproduction of an original check that meets the requirements of 
Sec.  229.2[lsqbb](pp)[rsqbb][rtrif](rr)[ltrif] is physically 
printed. A bank is a reconverting bank if it creates a substitute 
check directly or if another person by agreement creates a 
substitute check on the bank's behalf. A bank also is a reconverting 
bank if it is the first bank that receives a substitute check 
created by a nonbank and transfers, presents, or returns that 
substitute check or, in lieu thereof, the first paper or electronic 
representation of such substitute check.
    Examples.
    a. Bank A, by agreement, sends an [lsqbb]electronic check 
file[rsqbb] [rtrif]electronic image and information related to the 
paper check[ltrif] for collection to Bank B. Bank B chooses to use 
that file to print a substitute check that meets the requirements of 
Sec.  229.2[lsqbb](pp) [rsqbb][rtrif](rr)[ltrif]. Bank B is the 
reconverting bank as of the time it prints the substitute check.
    b. Company A, which is not a bank, by agreement receives check 
information electronically from Bank A. Bank A becomes the 
reconverting bank when Company A prints a substitute check on behalf 
of Bank A in accordance with that agreement.
    c. A depositary bank's customer, which is a nonbank business, 
receives a check for payment, truncates that original check, and 
creates a substitute check to deposit with its bank. The depositary 
bank receives that substitute check from its customer and is the 
first bank to handle the substitute check. The depositary bank 
becomes the reconverting bank as of the time that it transfers or 
presents the substitute check (or in lieu thereof the first paper or 
electronic representation of the substitute check) for forward 
collection.
    d. A bank is the payable-through bank for checks that are drawn 
on a nonbank payor, which is the bank's customer. When the customer 
decides not to pay a check that is payable through the bank, the 
customer creates a substitute check for purposes of return. The 
payable-through bank becomes the reconverting bank when it returns 
the substitute check (or in lieu thereof the first paper or 
electronic representation of the substitute check) to a returning 
bank or the depositary bank.
    e. A paying bank returns a substitute check to the depositary 
bank, which in turn gives that substitute check back to its nonbank 
customer. That customer then redeposits the substitute check for 
collection at a different bank. Because the substitute check was 
already transferred by a bank, the second depositary bank does not 
become a reconverting bank when it transfers or presents that 
substitute check for collection.
    2. In some cases there will be one or more banks between the 
truncating bank and the reconverting bank.
    Example.
    A depositary bank truncates the original check and sends an 
electronic representation of the original check for collection to an 
intermediary bank. The intermediary bank sends the electronic 
representation of the original check to the presenting bank, which 
creates a substitute check to present to the paying bank. The 
presenting bank is the reconverting bank.
    3. A check could move from electronic form to substitute check 
form several times during the collection and return process. It 
therefore is possible that there could be multiple substitute 
checks, and thus multiple reconverting banks, with respect to the 
same underlying payment.

NN. 229.2(nn) Remotely Created Check

    1. A check authorized by a consumer over the telephone that is 
not created by the paying bank and bears a legend on the signature 
line, such as ``Authorized by Drawer,'' is an example of a remotely 
created check. A check that bears the signature applied, or 
purported to be applied, by the person on whose account the check is 
drawn

[[Page 16934]]

is not a remotely created check. A typical forged check, such as a 
stolen personal check fraudulently signed by a person other than the 
drawer, is not covered by the definition of a remotely created 
check.
    2. The term signature as used in this definition has the meaning 
set forth at U.C.C. 3-401. The term ``applied by'' refers to the 
physical act of placing the signature on the check.
    3. The definition of a ``remotely created check'' differs from 
the definition of a ``remotely created consumer item'' under the 
U.C.C. A ``remotely created check'' may be drawn on an account held 
by a consumer, corporation, unincorporated company, partnership, 
government unit or instrumentality, trust, or any other entity or 
organization. A ``remotely created consumer item'' under the U.C.C., 
however, must be drawn on a consumer account.
    4. Under Regulation CC (12 CFR part 229), the term ``check'' 
includes a negotiable demand draft drawn on or payable through or at 
an office of a bank. In the case of a ``payable through'' or 
``payable at'' check, the signature of the person on whose account 
the check is drawn would include the signature of the payor 
institution or the signatures of the customers who are authorized to 
draw checks on that account, depending on the arrangements between 
the ``payable through'' or ``payable at'' bank, the payor 
institution, and the customers.
    5. The definition of a remotely created check includes a 
remotely created check that has been reconverted to a substitute 
check.

OO. 229.2(oo) Returning Bank

    1. Returning bank is defined to mean any bank (excluding the 
paying bank and the depositary bank) handling a returned check. A 
returning bank may or may not be a bank that handled the returned 
check in the forward collection process. A returning bank includes a 
bank that agrees to handle a returned check for expeditious return 
to the depositary bank under Sec.  229.31(a). A returning bank is 
also a collecting bank for the purpose of a collecting bank's duty 
to exercise ordinary care under U.C.C. 4-202(b) and is analogous to 
a collecting bank for purposes of final settlement. (See Commentary 
to Sec.  229.35(b).)

PP. 229.2(pp) Routing Number

    1. Each bank is assigned a routing number by an agent of the 
American Bankers Association. The routing number takes two forms--a 
fractional form and a nine-digit form. A paying bank is identified 
by both the fractional form routing number (which normally appears 
in the upper right hand corner of the check) and the nine-digit 
form. The nine-digit routing number of the paying bank generally is 
printed in magnetic ink near the bottom of the check (the MICR 
[lsqbb]strip[rsqbb][rtrif]line[ltrif]; see ANS[lsqbb]I[rsqbb] 
X9.13[lsqbb]-1983[rsqbb]). [rtrif]Where a check is payable by one 
bank but payable through another bank, the routing number appearing 
on the check is that of the payable through bank, not the payor 
bank. In the case of an electronic collection item, the routing 
number of the paying bank is contained in the electronic image of 
the check (in fractional form or nine-digit form) or in the 
electronic information related to the check (in nine-digit 
form).[ltrif] Subpart C requires depositary banks[rtrif],[ltrif] 
[lsqbb]and[rsqbb] subsequent collecting banks[rtrif], and returning 
banks[ltrif] to place their routing numbers in nine-digit form in 
their indorsements.

QQ. 229.2(qq) [Reserved]

RR. 229.2(rr) Substitute Check

    1. ``A paper reproduction of an original check'' could include a 
reproduction created directly from the original check or a 
reproduction of the original check that is created from some other 
source that contains an image of the original check, such as an 
electronic representation of an original check or substitute check, 
or a previous substitute check.
    2. Because a substitute check must be a piece of paper, an 
electronic file or electronic check image that has not yet been 
printed in accordance with the substitute check definition is not a 
substitute check.
    3. Because a substitute check must be a representation of a 
check, a paper reproduction of something that is not a check cannot 
be a substitute check. For example, a savings bond or a check drawn 
on a non-U.S. branch of a foreign bank cannot be reconverted to a 
substitute check.
    4. As described in Sec.  229.51(b) and the commentary thereto, a 
reconverting bank is required to ensure that a substitute check 
contains all indorsements applied by previous parties that handled 
the check in any form. Therefore, the image of the original check 
that appears on the back of a substitute check would include 
indorsements that were physically applied to the original check 
before an image of the original check was captured. An indorsement 
that was applied physically to the original check after an image of 
the original check was captured would be conveyed as an electronic 
indorsement (see paragraph 3 of the commentary to Sec.  229.35(a)). 
The back of the substitute check would contain a physical 
representation of any indorsements that were applied electronically 
to the check after an image of the check was captured but before 
creation of the substitute check.
    Example.
    Bank A, which is the depositary bank, captures an image of an 
original check, indorses it electronically and, by agreement, 
transmits to Bank B an electronic image of the check accompanied by 
the electronic indorsement. Bank B then creates a substitute check 
to send to Bank C. The back of the substitute check created by Bank 
B must contain a representation of the indorsement previously 
applied electronically by Bank A and Bank B's own indorsement. (For 
more information on indorsement requirements, see Sec.  229.35, 
appendix D, and the commentary thereto.)
    5. Some substitute checks will not be created directly from the 
original check, but rather will be created from a previous 
substitute check. The back of a subsequent substitute check will 
contain an image of the full length of the back of the previous 
substitute check. ANS X9.100-140 requires preservation of the full 
length of the back of the previous substitute check in order to 
preserve previous indorsements and reconverting bank 
identifications. By contrast, the front of a subsequent substitute 
check will not contain an image of the entire previous substitute 
check. Rather, the image field of the subsequent substitute check 
will contain the image of the front of the original check that 
appeared on the previous substitute check at the time the previous 
substitute check was converted to electronic form. The portions of 
the front of the subsequent substitute check other than the image 
field will contain information applied by the subsequent 
reconverting bank, such as its reconverting bank identification, the 
MICR line, the legal equivalence legend, and optional security 
information.
    Examples.
    a. The back of a subsequent substitute check would contain the 
following indorsements, all of which would be preserved through the 
image of the back of the previous substitute check: (1) The 
indorsements that were applied physically to the original check 
before an image of the original check was captured; (2) a physical 
representation of indorsements that were applied electronically to 
the original check after an image of the original check was captured 
but before creation of the first substitute check; and (3) 
indorsements that were applied physically to the previous substitute 
check. In addition, the reconverting bank for the subsequent 
substitute check must overlay onto the back of that substitute check 
a physical representation of any indorsements that were applied 
electronically after the previous substitute check was converted to 
electronic form but before creation of the subsequent substitute 
check.
    b. Because information could have been physically added to the 
image of the front of the original check that appeared on the 
previous substitute check, the original check image that appears on 
the front of a subsequent substitute check could contain information 
in addition to that which appeared on the original check at the time 
it was truncated.
    6. The MICR line applied to a substitute check must contain 
information in all fields of the MICR line that were encoded on the 
original check at any time before an image of the original check was 
captured. This includes all the MICR-line information that was 
preprinted on the original check, plus any additional information 
that was added to the MICR line before the image of the original 
check was captured (for example, the amount of the check). The 
information in each field of the substitute check's MICR line must 
be the same information as in the corresponding field of the MICR 
line of the original check, except as provided by ANS X9.100-140 
(unless the Board by rule or order determines that a different 
standard applies). Industry standards may not, however, vary the 
requirement that a substitute check at the time of its creation must 
bear a full-field MICR line.
    7. ANS X9.100-140 provides that a substitute check must have a 
``4'' in position 44 and that a qualified returned substitute check 
must have a ``4'' in position 44 of the forward-collection MICR line 
as well as a ``5'' in position 44 of the qualified return MICR line. 
The ``4'' and ``5'' indicate that the

[[Page 16935]]

document is a substitute check so that the size of the check image 
remains constant throughout the collection and return process, 
regardless of the number of substitute checks created that represent 
the same original check (see also Sec. Sec.  
229.30(a)[lsqbb](2)[rsqbb][rtrif](3)[ltrif] and 
229.31(a)[lsqbb](2)[rsqbb][rtrif](3)[ltrif] and the commentary 
thereto regarding requirements for qualified returned substitute 
checks). An original check generally has a blank position 44 for 
forward collection. Because a reconverting bank must encode position 
44 of a substitute check's forward collection MICR line with a 
``4,'' the reconverting bank must vary any character that appeared 
in position 44 of the forward-collection MICR line of the original 
check. A bank that misencodes or fails to encode position 44 at the 
time it attempts to create a substitute check has failed to create a 
substitute check. A bank that receives a properly-encoded substitute 
check may further encode that item but does so subject to the 
encoding warranties in Regulation CC and the U.C.C.
    8. A substitute check's MICR line could contain information in 
addition to the information required at the time the substitute 
check is created. For example, if the amount field of the original 
check was not encoded and the substitute check therefore did not, 
when created, have an encoded amount field, the MICR line of the 
substitute check later could be amount-encoded.
    9. A bank may receive a substitute check that contains a MICR-
line variation but nonetheless meets the MICR-line replication 
requirements of Sec.  229.2[lsqbb](aaa)(2)[rsqbb] 
[rtrif](rr)(2)[ltrif] because that variation is permitted by ANS 
X9.100-140. If such a substitute check contains a MICR-line error, a 
bank that receives it may, but is not required to, repair that 
error. Such a repair must be made in accordance with ANS X9.100-140 
for repairing a MICR line, which generally allows a bank to correct 
an error by applying a strip that may or may not contain information 
in all fields encoded on the check's MICR line. A bank's repair of a 
MICR-line error on a substitute check is subject to the encoding 
warranties in Regulation CC and the U.C.C.
    10. A substitute check must conform to all the generally 
applicable industry standards for substitute checks set forth in ANS 
X9.100-140, which incorporates other industry standards by 
reference. Thus, multiple substitute check images contained on the 
same page of an account statement are not substitute checks.

SS. 229.2(ss) Sufficient Copy and Copy

    1. A copy must be a paper reproduction of a check. An electronic 
image therefore is not a copy or a sufficient copy. However, if a 
customer has agreed to receive such information electronically, a 
bank that is required to provide an original check or sufficient 
copy may satisfy that requirement by providing an electronic image 
in accordance with Sec.  229.58 and the commentary thereto.
    2. A bank under Sec.  229.53(b)(3) may limit its liability for 
an indemnity claim and under Sec. Sec.  229.54(e)(2) and 
229.55(c)(2) may respond to an expedited recredit claim by providing 
the claimant with a copy of a check that accurately represents all 
of the information on the front and back of the original check as of 
the time the original check was truncated or that otherwise is 
sufficient to determine the validity of the claim against the bank.
    Examples.
    a. A copy of an original check that accurately represents all 
the information on the front and back of the original check as of 
the time of truncation would constitute a sufficient copy if that 
copy resolved the claim. For example, if resolution of the claim 
required accurate payment and indorsement information, an accurate 
copy of the front and back of a legible original check (including 
but not limited to a substitute check) would be a sufficient copy.
    b. A copy of the original check that does not accurately 
represent all the information on both the front and back of the 
original check also could be a sufficient copy if such copy 
contained all the information necessary to determine the validity of 
the relevant claim. For instance, if a consumer received a 
substitute check that contained a blurry image of a legible original 
check, the consumer might seek an expedited recredit because his or 
her account was charged for $1,000, but he or she believed that the 
check was written for only $100. If the amount that appeared on the 
front of the original check was legible, an accurate copy of only 
the front of the original check that showed the amount of the check 
would be sufficient to determine whether or not the consumer's claim 
regarding the amount of the check was valid.

TT. 229.2(tt) Teller's Check

    1. Teller's check is defined in the EFA Act to mean a check 
issued by a depository institution and drawn on another depository 
institution. The definition in the regulation includes not only 
checks drawn by a bank on another bank, but also checks payable 
through or at a bank. This would include checks drawn on a nonbank, 
as long as the check is payable through or at a bank. The definition 
does not include checks that are drawn by a nonbank on a nonbank 
even if payable through or at a bank. The definition includes checks 
provided to a customer of the bank in connection with customer 
deposit account activity, such as account disbursements and interest 
payments. The definition also includes checks acquired from a bank 
by a noncustomer for remittance purposes, such as certain loan 
disbursement checks. The definition excludes checks used by the bank 
to pay employees or vendors and checks issued by the bank in 
connection with a payment service, such as a payroll or a bill-
paying service. Teller's checks generally are sold by banks to 
substitute the bank's credit for the customer's credit and thereby 
enhance the collectibility of the checks. A check issued in 
connection with a payment service generally is provided as a 
convenience to the customer rather than as a guarantee of the 
check's collectibility. In addition, such checks are often more 
difficult to distinguish from other types of checks than are 
teller's checks as defined by this regulation.

UU. 229.2(uu) Transfer and Consideration

    1. Under Sec. Sec.  229.52 and 229.53, a bank is responsible for 
the warranties and indemnity when it transfers, presents, or returns 
a substitute check (or a paper or electronic representation thereof) 
for consideration. Drawers and other nonbank persons that receive 
checks from a bank are not transferees that receive consideration as 
those terms are defined in the U.C.C. However, the Check 21 Act 
clearly contemplates that such nonbank persons that receive 
substitute checks (or representations thereof) from a bank will 
receive the warranties and indemnity from all previous banks that 
handled the check. To ensure that these parties are covered by the 
substitute check warranties and indemnity in the manner contemplated 
by the Check 21 Act, Sec.  
229.2[lsqbb](ccc)[rsqbb][rtrif](uu)[ltrif] incorporates the U.C.C. 
definitions of the terms transfer and consideration by reference and 
[rtrif]for purposes of subpart D[ltrif] expands those definitions to 
cover a broader range of situations. Delivering a check to a nonbank 
that is acting on behalf of a bank (such as a third-party check 
processor or presentment point) is a transfer of the check to that 
bank. [rtrif]In subpart C, the terms transfer and consideration have 
the meaning that they have in the UCC.[ltrif]
    Examples.
    a. A paying bank pays a substitute check and then provides that 
paid substitute check (or a representation thereof) to a drawer with 
a periodic statement. Under the expanded definitions, the paying 
bank thereby transfers the substitute check (or representation 
thereof) to the drawer for consideration and makes the substitute 
check warranties described in Sec.  229.52. A drawer that suffers a 
loss due to receipt of a substitute check may have warranty, 
indemnity, and, if the drawer is a consumer, expedited recredit 
rights under the Check 21 Act and subpart D. A drawer that suffers a 
loss due to receipt of a paper or electronic representation of a 
substitute check would receive the substitute check warranties but 
would not have indemnity or expedited recredit rights.
    b. The expanded definitions also operate such that a paying bank 
that pays an original check (or a representation thereof) and then 
creates a substitute check to provide to the drawer with a periodic 
statement transfers the substitute check for consideration and 
thereby provides the warranties and indemnity.
    c. The expanded definitions ensure that a bank that receives a 
returned check in any form and then provides a substitute check to 
the depositor gives the substitute check warranties and indemnity to 
the depositor.
    d. The expanded definitions apply to substitute checks 
representing original checks that are not drawn on deposit accounts, 
such as checks used to access a credit card or a home equity line of 
credit.

VV. 229.2(vv) Traveler's Check

    1. The EFA Act and regulation require that traveler's checks be 
treated as cashier's, teller's, or certified checks when a new 
depositor opens an account. (See Sec.  229.13(a); 12 U.S.C. 
4003(a)(1)(C).) The EFA Act does not define traveler's check.
    2. One element of the definition states that a traveler's check 
is ``drawn on or payable through or at a bank.'' Sometimes 
traveler's checks that are not issued by banks do not

[[Page 16936]]

have any words on them identifying a bank as drawee or paying agent, 
but instead bear unique routing numbers with an 8000 prefix that 
identifies a bank as paying agent.
    3. Because a traveler's check is payable by, at, or through a 
bank, it is also a check for purposes of this regulation. When not 
subject to the next-day availability requirement for new accounts, a 
traveler's check should be treated as a [lsqbb]local or 
nonlocal[rsqbb] check[lsqbb]depending on the location of the paying 
bank[rsqbb] [rtrif]under Sec.  229.12[ltrif]. [lsqbb]The depositary 
bank may rely on the designation of the paying bank by the routing 
number to determine whether local or nonlocal treatment is 
required.[rsqbb]

WW. 229.2(ww) Truncate

    1. Truncate means to remove the original check from the forward 
collection or return process and to send in lieu of the original 
check either a substitute check or, by agreement, information 
relating to the original check. Truncation does not include removal 
of a substitute check from the check collection or return process.

XX. 229.2(xx) Truncating Bank

    1. A bank is a truncating bank if it truncates an original check 
or if it is the first bank to transfer, present, or return another 
form of an original check that was truncated by a person that is not 
a bank.
    Example.
    a. A bank's customer that is a nonbank business receives a check 
for payment and deposits either a substitute check or an electronic 
representation of the original check with its depositary bank 
instead of the original check. That depositary bank is the 
truncating bank when it transfers, presents, or returns the 
substitute check or electronic representation in lieu of the 
original check. That bank also would be the reconverting bank if it 
were the first bank to transfer, present, or return a substitute 
check that it received from (or created from the information given 
by) its nonbank customer [lsqbb](see Sec.  229.2 (yy) and the 
commentary thereto)[rsqbb].
    2. A truncating bank does not make the subpart D warranties and 
indemnity unless it also is the reconverting bank. Therefore, a bank 
that truncates the original check and sends an electronic file to a 
collecting bank does not provide subpart D protections to the 
recipient of that electronic item. However, a recipient of an 
electronic item may protect itself against losses associated with 
that item by agreement with the truncating bank.

YY. 229.2(yy) Uniform Commercial Code

    1. Uniform Commercial Code is defined as the version of the Code 
adopted by the individual states. For purposes of uniform citation, 
all citations to the U.C.C. in this part refer to the Official Text 
as approved by the American Law Institute and the National 
Conference of Commissioners on Uniform State Laws.

ZZ. 229.2(zz) [Reserved]

AAA. 229.2(aaa) Unit of General Local Government

    1. Unit of general local government is defined to include a 
city, county, parish, town, township, village, or other general 
purpose political subdivision of a state. The term does not include 
special purpose units, such as school districts, water districts, or 
Indian nations.

BBB. 229.2(bbb) Wire Transfer

    1. The EFA Act [lsqbb]delegates to the Board the authority to 
define[rsqbb] [rtrif]permits[ltrif] the term [rtrif]``[ltrif]wire 
transfer[lsqbb].[rsqbb][rtrif]'' to be defined by regulation.[ltrif] 
The regulation defines wire transfer as an unconditional order to a 
bank to pay a fixed or determinable amount of money to a 
beneficiary, upon receipt or on a day stated in the order, that is 
transmitted by electronic or other means over certain networks or on 
the books of banks and that is used primarily to transfer funds 
between [lsqbb]commercial[rsqbb] [rtrif]nonconsumer[ltrif] accounts. 
``Unconditional'' means that no condition, such as presentation of 
documents, must be met before the bank receiving the order is to 
make payment. A wire transfer may be transmitted by electronic or 
other means. ``Electronic means'' include computer-to-computer 
links, on-line terminals, [lsqbb]telegrams (including TWX, TELEX, or 
similar methods of communication),[rsqbb] telephone calls, or other 
similar methods. [rtrif]The[ltrif] Fedwire [rtrif]Funds 
Service[ltrif] (the Federal Reserve's wire transfer network), CHIPS 
(Clearing House Interbank Payments System, operated by 
[lsqbb]t[rsqbb][rtrif]T[ltrif]he [lsqbb]New York[rsqbb] Clearing 
House), and book transfers among banks or within one bank are 
covered by this definition. Credits for credit and debit card 
transactions are not wire transfers. The term wire transfer excludes 
electronic fund transfers as that term is defined by the Electronic 
Fund Transfer Act.

III. Administrative Liability and Enforcement [Reserved]

IV. Section 229.10--Next-Day Availability

A. Business Days and Banking Days

    1. This section, as well as other provisions of this subpart 
governing the availability of funds, provides that funds must be 
made available for withdrawal not later than a specified number of 
business days following the banking day on which the funds are 
deposited. Thus, a deposit is considered made only on a banking day, 
i.e., a day that the bank is open to the public for carrying on 
substantially all of its banking functions. For example, if a 
deposit is made at an ATM on a Saturday, Sunday, or other day on 
which the bank is closed to the public, the deposit is considered 
received on that bank's next banking day.
    2. Nevertheless, business days are used to determine the number 
of days following the banking day of deposit that funds must be 
available for withdrawal. For example, if a deposit of a 
[lsqbb]local[rsqbb] check were made on a Monday, the availability 
schedule [rtrif]generally[ltrif] requires that funds be available 
for withdrawal on the second business day after deposit. Therefore, 
funds must be made available on Wednesday regardless of whether the 
bank was closed on Tuesday for other than a standard legal holiday 
as specified in the definition of business day.

B. 229.10(a) Cash Deposits

    1. This paragraph implements the EFA Act's requirement for next-
day availability for cash deposits to accounts at a depositary bank 
``staffed by individuals employed by such 
institution.''[lsqbb]\2\[rsqbb] Under this paragraph, cash deposited 
in an account at a staffed teller station on a Monday must become 
available for withdrawal by the start of business on Tuesday. It 
must become available for withdrawal by the start of business on 
Wednesday if it is deposited by mail, at a proprietary ATM, or by 
other means other than at a staffed teller station.
    [rtrif]2. Nothing in the EFA Act or this regulation affects 
terms of account arrangements, such as negotiable order of 
withdrawal accounts, which may require prior notice of withdrawal. 
(See 12 CFR 204.2(e)(2).)[ltrif]
    [lsqbb]\2\ Nothing in the EFA Act or this regulation affects 
terms of account arrangements, such as negotiable order of 
withdrawal accounts, which may require prior notice of withdrawal. 
(See 12 CFR 204.2(e)(2).)[rsqbb]

C. 229.10(b) Electronic Payments

    1. The EFA Act provides next-day availability for funds received 
for deposit by wire transfer. The regulation uses the term 
electronic payment, rather than wire transfer, to include both wire 
transfers and ACH credit transfers under the next-day availability 
requirement. (See discussion of definitions of [lsqbb]automated 
clearinghouse[rsqbb] [rtrif]ACH credit transfer[ltrif], electronic 
payment, and wire transfer in Sec.  229.2.)
    2. The EFA Act requires that funds received by wire transfer be 
available for withdrawal not later than the business day following 
the day a wire transfer is received. This paragraph clarifies what 
constitutes receipt of an electronic payment. For the purposes of 
this paragraph, a bank receives an electronic payment when the bank 
receives both payment in finally collected funds and the payment 
instructions indicating the customer accounts to be credited and the 
amount to be credited to each account. For example, in the case of 
[rtrif]a[ltrif] Fedwire [rtrif]Funds transfer[ltrif], the bank 
receives finally collected funds at the time the payment is made. 
(See 12 CFR 210.31.) Finally collected funds generally are received 
for an ACH credit transfer when they are posted to the receiving 
bank's account on the settlement day. In certain cases, the bank 
receiving ACH credit payments will not receive the specific payment 
instructions indicating which accounts to credit until after 
settlement day. In these cases, the payments are not considered 
received until the information on the account and amount to be 
credited is received.
    3. This paragraph also establishes the extent to which an 
electronic payment is considered made. Thus, if a participant on a 
private network fails to settle and the receiving bank receives 
finally settled funds representing only a partial amount of the 
payment, it must make only the amount that it actually received 
available for withdrawal.
    4. The availability requirements of this regulation do not 
preempt or invalidate other rules, regulations, or agreements which 
require funds to be made available on a more prompt basis. For 
example, the next-day availability requirement for ACH credits in 
this section does not preempt ACH

[[Page 16937]]

association rules and Treasury regulations (31 CFR part 210), which 
provide that the proceeds of these credit payments be available to 
the recipient for withdrawal on the day the bank receives the funds.

D. 229.10(c) Certain Check Deposits

    1. The EFA Act generally requires that funds be made available 
on the business day following the banking day of deposit for 
Treasury checks, state and local government checks, cashier's 
checks, certified checks, teller's checks, and ``on us'' checks, 
under specified conditions. (Treasury checks are checks drawn on the 
Treasury of the United States and have a routing number beginning 
with the digits ``0000.'') This section also requires next-day 
availability for additional types of checks not addressed in the EFA 
Act. Checks drawn on a Federal Reserve Bank or a Federal Home Loan 
Bank and U.S. Postal Service money orders also must be made 
available on the first business day following the day of deposit 
under specified conditions. For the purposes of this section, all 
checks drawn on a Federal Reserve Bank or a Federal Home Loan Bank 
that contain in the MICR line a routing number that is listed in 
appendix A are subject to the next-day availability requirement if 
they are deposited in an account held by a payee of the check and in 
person to an employee of the depositary bank, regardless of the 
purposes for which the checks were issued. For all new accounts, 
even if the new account exception is not invoked, traveler's checks 
must be included in the $5,000 aggregation of checks deposited on 
any one banking day that are subject to the next-day availability 
requirement. (See Sec.  229.13(a).)
    2. Deposit in Account of Payee. One statutory condition to 
receipt of next-day availability of Treasury checks, state and local 
government checks, cashier's checks, certified checks, and teller's 
checks is that the check must be ``endorsed only by the person to 
whom it was issued.'' The EFA Act could be interpreted to include a 
check that has been indorsed in blank and deposited into an account 
of a third party that is not named as payee. [lsqbb]The Board 
believes that s[rsqbb][rtrif]S[ltrif]uch a check presents greater 
risks than a check deposited by the payee and that Congress did not 
intend to require next-day availability for such checks. The 
regulation, therefore, provides that funds must be available on the 
business day following deposit only if the check is deposited in an 
account held by a payee of the check. For the purposes of this 
section, payee does not include transferees other than named payees. 
The regulation also applies this condition to Postal Service money 
orders and checks drawn on Federal Reserve Banks and Federal Home 
Loan Banks.
    3. Deposits Made to an Employee of the Depositary Bank.
    a. In most cases, next-day availability of the proceeds of 
checks subject to this section is conditioned on the deposit of 
these checks in person to an employee of the depositary bank. If the 
deposit is not made to an employee of the depositary bank on the 
premises of such bank, the proceeds of the deposit must be made 
available for withdrawal by the start of business on the second 
business day after deposit, under [lsqbb]paragraph (c)(2) of this 
section[rsqbb][rtrif]Sec.  229.12[ltrif]. For example, second-day 
availability rather than next-day availability would be allowed for 
deposits of checks subject to this section made at a proprietary 
ATM, night depository, through the mail or a lock box, or at a 
teller station staffed by a person who is not an employee of the 
depositary bank. Second-day availability also may be allowed for 
deposits picked up by an employee of the depositary bank at the 
customer's premises; such deposits would be considered made upon 
receipt at the branch or other location of the depositary bank. 
Employees of a contractual branch would not be considered employees 
of the depositary bank for the purposes of this regulation, and 
deposits at contractual branches would be treated the same as 
deposits to a proprietary ATM for the purposes of this regulation. 
(See also, Commentary to Sec.  229.19(a).)
    b. In the case of Treasury checks, the EFA Act and regulation do 
not condition the receipt of next-day availability to deposits at 
staffed teller stations. Therefore, Treasury checks deposited at a 
proprietary ATM must be accorded next-day availability, if the check 
is deposited to an account of a payee of the check.
    4. ``On Us'' Checks. The EFA Act [lsqbb]and regulation[rsqbb] 
require[rtrif]s[ltrif] next-day availability for ``on us'' checks, 
i.e., checks deposited in a branch of the depositary bank and drawn 
on the same or another branch of the same bank, if both branches are 
located in the same state or [rtrif]geographical area served by a 
Federal Reserve Bank check processing center (``[ltrif]check 
processing region[rtrif]'')[ltrif]. [lsqbb]Thus, checks deposited in 
one branch of a bank and drawn on another branch of the same bank 
must receive next-day availability even if the branch on which the 
checks are drawn is located in another check processing region but 
in the same state as the branch in which the check is 
deposited[rsqbb]. [rtrif]As there is now only one check processing 
center, all ``on-us'' checks deposited in the U.S. must receive 
next-day availability.[ltrif] For the purposes of this requirement, 
deposits at facilities that are not located on the premises of a 
brick-and-mortar branch of the bank, such as off-premise ATMs and 
remote depositories, are not considered deposits made at branches of 
the depositary bank.
    5. [lsqbb]First $100[rsqbb][rtrif]The minimum amount[ltrif].
    a. The EFA Act and regulation also require that [lsqbb]up 
to[rsqbb] [rtrif]at least[ltrif] $100 [rtrif](``the minimum 
amount'')[ltrif] of the aggregate deposit by check or checks not 
subject to next-day availability on any one banking day be made 
available on the next business day. For example, if 
[lsqbb]$70[rsqbb][rtrif]less than the minimum amount[ltrif] were 
deposited in an account by check(s) on a Monday, the entire 
[lsqbb]$70[rsqbb][rtrif]amount of the deposit[ltrif] must be 
available for withdrawal at the start of business on Tuesday. If 
[lsqbb]$200[rsqbb][rtrif] more than the minimum amount[ltrif] were 
deposited by check(s) on a Monday, this section requires that 
[lsqbb]$100 of the funds[rsqbb] [rtrif]the minimum amount[ltrif] be 
available for withdrawal at the start of business on Tuesday. The 
portion of the customer's deposit to which the [lsqbb]$100[rsqbb] 
[rtrif]minimum amount[ltrif] must be applied is at the discretion of 
the depositary bank, as long as it is not applied to any checks 
subject to next-day availability. The [lsqbb]$100[rsqbb] next-day 
availability rule [rtrif]for the minimum amount[ltrif] does not 
apply to deposits at nonproprietary ATMs.
    b. The [lsqbb]$100[rsqbb][rtrif]minimum amount[ltrif] that must 
be made available under this rule is in addition to the amount that 
must be made available for withdrawal on the business day after 
deposit under other provisions of this section. For example, if a 
customer deposits a $1,000 Treasury check[lsqbb],[rsqbb] and a 
$1,000 [lsqbb]local[rsqbb]check [rtrif]not subject to paragraphs 
(c)(1)(i) through (vi)[ltrif] in its account on Monday, 
[lsqbb]$1,100 must be made available for withdrawal on Tuesday--
[rsqbb] the proceeds of the $1,000 Treasury check, as well as the 
[lsqbb]first $100[rsqbb][rtrif]minimum amount from[ltrif] 
[lsqbb]of[rsqbb] the [lsqbb]local[rsqbb][rtrif]other[ltrif] check 
[rtrif]must be made available for withdrawal on Tuesday[ltrif].
    c. A depositary bank may aggregate all [lsqbb]local and 
nonlocal[rsqbb] check deposits made by the customer on a given 
banking day for the purposes of the [lsqbb]$100[rsqbb][rtrif]minimum 
amount [ltrif] next-day availability rule. Thus, if a customer has 
two accounts at the depositary bank, and on a particular banking day 
makes deposits to each account [rtrif]that exceed the minimum 
amount[ltrif], [lsqbb]$100[rsqbb][rtrif]the minimum amount 
from[ltrif] [lsqbb]of[rsqbb] the total [rtrif]checks[ltrif] 
deposited to the two accounts must be made available on the business 
day after deposit. Banks may aggregate deposits to individual and 
joint accounts for the purposes of this provision.
    d. If the customer deposits a [lsqbb]$500 local[rsqbb] check 
[rtrif] not subject to paragraphs (c)(1)(i) through (vi) that 
exceeds the minimum amount[ltrif], and gets [lsqbb]$100[rsqbb] cash 
back [rtrif]in an amount equal to or greater than the minimum 
amount[ltrif] at the time of deposit, the bank need not make an 
additional [lsqbb]$100[rsqbb][rtrif]amount[ltrif] available for 
withdrawal on the following day. Similarly, if the customer 
depositing the [lsqbb]local[rsqbb] check has a negative book 
balance, or negative available balance in its account at the time of 
deposit, the [lsqbb]$100[rsqbb][rtrif]minimum amount[ltrif] that 
must be available on the next business day may be made available by 
applying the [lsqbb]$100[rsqbb][rtrif]minimum amount[ltrif] to the 
negative balance, rather than making the 
[lsqbb]$100[rsqbb][rtrif]minimum amount[ltrif] available for 
withdrawal by cash or check on the following day.
    6. Special Deposit Slips.
    a. Under the EFA Act, a depositary bank may require the use of a 
special deposit slip as a condition to providing next-day 
availability for certain types of checks. This condition was 
included in the EFA Act because many banks determine the 
availability of their customers' check deposits in an automated 
manner by reading the [lsqbb]MICR-encoded[rsqbb] routing number on 
the deposited checks. Using these procedures, a bank can determine 
whether a check is [lsqbb]a local or nonlocal check, a check[rsqbb] 
drawn on the Treasury, a Federal Reserve Bank, a Federal Home Loan 
Bank, or a branch of the depositary bank, or a U.S. Postal Service 
money order. Appendix A includes the routing numbers of certain 
categories of checks that are subject to next-day availability. The 
bank cannot require a special deposit slip for these checks.

[[Page 16938]]

    b. A bank cannot distinguish whether the check is a state or 
local government check, cashier's check, certified check, or 
teller's check by reading the [lsqbb]MICR-encoded[rsqbb] routing 
number, because these checks bear the same routing number as other 
checks drawn on the same bank that are not accorded next-day 
availability. Therefore, a bank may require a special deposit slip 
for these checks.
    c. The regulation specifies that if a bank decides to require 
the use of a special deposit slip (or a special deposit envelope in 
the case of a deposit at an ATM or other unstaffed facility) as a 
condition to granting next-day availability under paragraphs 
(c)(1)(iv) or (c)(1)(v) of this section [lsqbb]or second-day 
availability under paragraph (c)(2) of this section[rsqbb], and if 
the deposit slip that must be used is different from the bank's 
regular deposit slips, the bank must either provide the special 
slips to its customers or inform its customers how such slips may be 
obtained and make the slips reasonably available to the customers.
    d. A bank may meet this requirement by providing customers with 
an order form for the special deposit slips and allowing sufficient 
time for the customer to order and receive the slips before this 
condition is imposed. If a bank provides deposit slips in its 
branches for use by its customers, it also must provide the special 
deposit slips in the branches. If special deposit envelopes are 
required for deposits at an ATM, the bank must provide such 
envelopes at the ATM.
    e. Generally, a teller is not required to advise depositors of 
the availability of special deposit slips merely because checks 
requiring special deposit slips for next-day availability are 
deposited without such slips. If a bank provides the special deposit 
slips only upon the request of a depositor, however, the teller must 
advise the depositor of the availability of the special deposit 
slips, or the bank must post a notice advising customers that the 
slips are available upon request. Such notice need not be posted at 
each teller window, but the notice must be posted in a place where 
consumers seeking to make deposits are likely to see it before 
making their deposits. For example, the notice might be posted at 
the point where the line forms for teller service in the lobby. The 
notice is not required at any drive-through teller windows nor is it 
required at night depository locations, or at locations where 
consumer deposits are not accepted. If a bank prepares a deposit for 
a depositor, it must use a special deposit slip where appropriate. A 
bank may require the customer to segregate the checks subject to 
next-day availability for which special deposit slips could be 
required, and to indicate on a regular deposit slip that such checks 
are being deposited, if the bank so instructs its customers in its 
initial disclosure.

V. Section 229.11--[Reserved]

VI. Section 229.12--Availability Schedule

[lsqbb]A. 229.12(a) Effective Date

    1. The availability schedule set forth in this section 
supersedes the temporary schedule that was effective September 1, 
1988, through August 31, 1990.[rsqbb]
    A. 229.12[lsqbb](b)[rsqbb][rtrif](a)[ltrif] [lsqbb]Local Checks 
and Certain Other Checks[rsqbb][rtrif]In general.[ltrif]
    1. [lsqbb]Local[rsqbb][rtrif]Except as provided in Sec.  
229.10(c), Sec.  229.12(b), (c) and (d), and Sec.  229.13[ltrif] 
checks must be made available for withdrawal not later than the 
second business day following the banking day on which the checks 
were deposited. [rtrif]Thus, the proceeds of a check deposited on a 
Monday generally must be made available for withdrawal on 
Wednesday.[ltrif]
    [lsqbb]2. In addition, the proceeds of Treasury checks and U.S. 
Postal Service money orders not subject to next-day (or second-day) 
availability under Sec.  229.10(c), checks drawn on Federal Reserve 
Banks and Federal Home Loan Banks, checks drawn by a state or unit 
of general local government, cashier's checks, certified checks, and 
teller's checks not subject to next-day (or second-day) availability 
under Sec.  229.10(c) and payable in the same check processing 
region as the depositary bank, must be made available for withdrawal 
by the second business day following deposit.[rsqbb]
    [lsqbb]3[rsqbb][rtrif]2[ltrif]. Exceptions are made for 
withdrawals by cash or similar means[rtrif],[ltrif] 
[lsqbb]and[rsqbb] for deposits in banks located outside the 48 
contiguous states[rtrif], for checks deposited in a nonproprietary 
ATM, and for the reasons set forth in Sec.  229.13[ltrif]. 
[lsqbb]Thus, the proceeds of a local check deposited on a Monday 
generally must be made available for withdrawal on Wednesday.[rsqbb]
    [lsqbb]C. 229.12(c) Nonlocal Checks
    1. Nonlocal checks must be made available for withdrawal not 
later than the fifth business day following deposit, i.e., proceeds 
of a nonlocal check deposited on a Monday must be made available for 
withdrawal on the following Monday. In addition, a check described 
in Sec.  229.10(c) that does not meet the conditions for next-day 
availability (or second-day availability) is treated as a nonlocal 
check, if the check is drawn on or payable through or at a nonlocal 
paying bank. Adjustments are made to the schedule for withdrawals by 
cash or similar means and deposits in banks located outside the 48 
contiguous states.
    [lsqbb]2. Reduction in Schedules.
    a. Section 603(d)(1) of the EFA Act (12 U.S.C. 4002(d)(1)) 
requires the Board to reduce the statutory schedules for any 
category of checks where most of those checks would be returned in a 
shorter period of time than provided in the schedules. The conferees 
indicated that ``if the new system makes it possible for two-thirds 
of the items of a category of checks to meet this test in a shorter 
period of time, then the Federal Reserve must shorten the schedules 
accordingly.'' H.R. Rep. No. 261, 100th Cong., 1st Sess. at 179 
(1987).
    b. Reduced schedules are provided for certain nonlocal checks 
where significant improvements can be made to the EFA Act's 
schedules due to transportation arrangements or proximity between 
the check processing regions of the depositary bank and the paying 
bank, allowing for faster collection and return. Appendix B sets 
forth the specific reduction of schedules applicable to banks 
located in certain check processing regions.
    c. A reduction in schedules may apply even in those cases where 
the determination that the check is nonlocal cannot be made based on 
the routing number on the check. For example, a nonlocal credit 
union payable-through share draft may be subject to a reduction in 
schedules if the routing number of the payable-through bank that 
appears on the draft is included in appendix B, even though the 
determination that the payable-through share draft is nonlocal is 
based on the location of the credit union and not the routing number 
on the draft.[rsqbb]
    B. 229.12[lsqbb](d)[rsqbb][rtrif](b)[ltrif] Time Period 
Adjustment for Withdrawal by Cash or Similar Means
    1. The EFA Act provides an adjustment to the availability rules 
for cash withdrawals. Funds from [lsqbb]local and nonlocal[rsqbb] 
checks [rtrif](other than checks subject to Sec.  229.10(c))[ltrif] 
need not be available for cash withdrawal until 5 p.m. on the day 
specified in the schedule. At 5 p.m., $400 of the deposit must be 
made available for cash withdrawal[rtrif](the ``cash withdrawal 
amount'')[ltrif]. [lsqbb]This $400[rsqbb] [rtrif]The cash withdrawal 
amount[ltrif] is in addition to the [lsqbb]first $100[rsqbb][rtrif] 
minimum amount[ltrif] of a day's deposit [rtrif]under Sec.  
229.10(c)(1)(vii)[ltrif], which must be made available for 
withdrawal at the start of business on the first business day 
following the banking day of deposit. If the proceeds of 
[lsqbb]local and nonlocal[rsqbb] checks become available for 
withdrawal on the same business day, the [lsqbb]$400 withdrawal 
limitation applies to[rsqbb][rtrif]cash withdrawal amount is based 
on[ltrif] the aggregate amount of the funds that became available 
for withdrawal on that day. The remainder of the funds must be 
available for cash withdrawal at the start of business on the 
business day following the business day specified in the schedule.
    2. The EFA Act recognizes that the [lsqbb]$400[rsqbb][rtrif]cash 
withdrawal amount[ltrif] that must be provided on the day specified 
in the schedule may exceed a bank's daily ATM cash withdrawal limit, 
and explicitly provides that the EFA Act does not supersede the 
bank's policy in this regard. The [lsqbb]Board believes that 
the[rsqbb] rationale for accommodating a bank's ATM withdrawal limit 
also applies to other cash withdrawal limits established by that 
bank. Section 229.19(c)(4) of the regulation addresses the relation 
between a bank's cash withdrawal limit (for over-the-counter cash 
withdrawals as well as ATM cash withdrawals) and the requirements of 
this subpart.
    3. [lsqbb]The Board believes that the[rsqbb] Congress included 
this special cash withdrawal rule to provide a depositary bank with 
additional time to learn of the nonpayment of a check before it must 
make funds available to its customer. If a customer deposits a 
[lsqbb]local[rsqbb] check on a Monday, and that check is returned by 
the paying bank, the depositary bank may not receive the returned 
check until Thursday, the day after funds for a [lsqbb]local[rsqbb] 
check ordinarily must be made available for withdrawal. The intent 
of the special cash withdrawal rule is to minimize this risk to the 
depositary bank. For this rule to minimize the depositary bank's 
risk, it must apply not only to cash withdrawals, but also to 
withdrawals by other means that result in an irrevocable debit to 
the customer's account or commitment to pay by

[[Page 16939]]

the bank on the customer's behalf during the day. Thus, the cash 
withdrawal rule also includes withdrawals by electronic payment, 
issuance of a cashier's or teller's check, certification of a check, 
or other irrevocable commitment to pay, such as authorization of an 
on-line point-of-sale debit. The rule also would apply to checks 
presented over the counter for payment on the day of presentment by 
the depositor or another person. Such checks could not be dishonored 
for insufficient funds if an amount sufficient to cover the check 
had became available for cash withdrawal under this rule; however, 
payment of such checks would be subject to the bank's cut-off hour 
established under U.C.C. 4-108. The cash withdrawal rule does not 
apply to checks and other provisional debits presented to the bank 
for payment that the bank has the right to return.
    C. 229.12[lsqbb](e)[rsqbb][rtrif](c)[ltrif] Extension of 
Schedule for Certain Deposits in Alaska, Hawaii, Puerto Rico, and 
the U.S. Virgin Islands
    1. The EFA Act and regulation provide an extension of the 
availability schedules for check deposits at a branch of a bank if 
the branch is located in Alaska, Hawaii, Puerto Rico, or the U.S. 
Virgin Islands. The schedules for [lsqbb]local[rsqbb] checks 
[rtrif](other than those subject to next-day availability under 
Sec.  229.10(c))[ltrif][lsqbb], nonlocal checks (including nonlocal 
checks subject to the reduced schedules of appendix B),[rsqbb] and 
deposits at nonproprietary ATMs are extended by one business day for 
checks deposited to accounts in banks located in these jurisdictions 
that are drawn on or payable at or through a paying bank not located 
in the same jurisdiction as the depositary bank. For example, a 
check deposited in a bank in Hawaii and drawn on a San Francisco 
paying bank must be made available for withdrawal not later than the 
third business day following deposit. This extension does not apply 
to deposits that must be made available for withdrawal on the next 
business day.
    2. The Congress did not provide this extension of the schedules 
to checks drawn on a paying bank located in Alaska, Hawaii, Puerto 
Rico, or the U.S. Virgin Islands and deposited in an account at a 
depositary bank in the 48 contiguous states. Therefore, a check 
deposited in a San Francisco bank drawn on a Hawaii paying bank must 
be made available for withdrawal not later than the second rather 
than the third business day following deposit.
    D. 229.12[lsqbb](f)[rsqbb][rtrif](d)[ltrif] Deposits at 
Nonproprietary ATMs
    1. The EFA Act and regulation provide a special rule for 
deposits made at nonproprietary ATMs. This paragraph does not apply 
to deposits made at proprietary ATMs. All deposits at a 
nonproprietary ATM must be made available for withdrawal by the 
[lsqbb]fifth[rsqbb] [rtrif]fourth[ltrif] business day following the 
banking day of deposit. For example, a deposit made at a 
nonproprietary ATM on a Monday, including any deposit by cash or 
checks that would otherwise be subject to next-day (or second-day) 
availability, must be made available for withdrawal not later than 
[lsqbb]Monday of the following week[rsqbb][rtrif]Friday.[ltrif]
    [rtrif]2.[ltrif] The provisions of section 229.10(c)(1)(vii) 
[lsqbb]requiring a depositary bank to make up to $100 of an 
aggregate daily deposit[rsqbb] [rtrif]setting forth the minimum 
amount of a deposit that must be made[ltrif] available for 
withdrawal on the first business day after the banking day of 
deposit do not apply to deposits at a nonproprietary ATM.

VII. Section 229.13--Exceptions

A. Introduction

    1. While certain safeguard exceptions (such as those for new 
accounts and checks the bank has reasonable cause to believe are 
uncollectible) are established in the EFA Act, [lsqbb]the Congress 
gave the Board the discretion to determine whether certain other 
exceptions should be included in its regulations. 
Specifically,[rsqbb] the EFA Act [lsqbb]gives the Board the 
authority to establish[rsqbb][rtrif]permits other exceptions to be 
established by regulation, specifically[ltrif] exceptions to the 
schedules for large or redeposited checks and for accounts that have 
been repeatedly overdrawn. These exceptions apply to [lsqbb]local 
and nonlocal[rsqbb] checks subject to the general availability 
schedule in Sec.  229.12 as well as to checks that must otherwise be 
accorded next-day [lsqbb](or second-day)[rsqbb] availability under 
Sec.  229.10(c).
    2. Many checks will not be returned to the depositary bank by 
the time funds must be made available for withdrawal [lsqbb]under 
the next-day (or second-day), local and nonlocal schedules[rsqbb]. 
In order to reduce risk to depositary banks, [lsqbb]the Board has 
exercised its statutory authority to adopt[rsqbb][rtrif]Regulation 
CC contains[ltrif] these exceptions to the schedules in the 
regulation to allow the depositary bank to extend the time within 
which it is required to make funds available.
    [lsqbb]3. The EFA Act also gives the Board the authority to 
suspend the schedules for any classification of checks, if the 
schedules result in an unacceptable level of fraud losses. The Board 
will adopt regulations or issue orders to implement this statutory 
authority if and when circumstances requiring its implementation 
arise.[rsqbb]

B. 229.13(a) New Accounts

    1. Definition of New Account.
    a. The EFA Act provides an exception to the availability 
schedule for new accounts. An account is defined as a new account 
during the first 30 calendar days after the account is opened. An 
account is opened when the first deposit is made to the account. An 
account is not considered a new account, however, if each customer 
on the account has a transaction account relationship with the 
depositary bank, including a dormant account, that is at least 30 
calendar days old or if each customer has had an established 
transaction account with the depositary bank within the 30 calendar 
days prior to opening the second account.
    b. The following are examples of what constitutes, and does not 
constitute, a new account:
    i. If the customer has an established account with a bank and 
opens a second account with the bank, the second account is not 
subject to the new account exception.
    ii. If a customer's account were closed and another account 
opened as a successor to the original account (due, for example, to 
the theft of checks or a debit card used to access the original 
account), the successor account is not subject to the new account 
exception, assuming the previous account relationship is at least 30 
days old. Similarly, if a customer closes an established account and 
opens a separate account within 30 days, the new account is not 
subject to the new account exception.
    iii. If a customer has a savings deposit or other deposit that 
is not an account (as that term is defined in Sec.  229.2(a)) at the 
bank, and opens an account, the account is subject to the new 
account exception.
    iv. If a person that is authorized to sign on a corporate 
account (but has no other relationship with the bank) opens a 
personal account, the personal account is subject to the new account 
exception.
    v. If a customer has an established joint account at a bank, and 
subsequently opens an individual account with that bank, the 
individual account is not subject to the new account exception.
    vi. If two customers that each have an established individual 
account with the bank open a joint account, the joint account is not 
subject to the new account exception. If one of the customers on the 
account has no current or recent established account relationship 
with the bank, however, the joint account is subject to the new 
account exception, even if the other individual on the account has 
an established account relationship with the bank.
    2. Rules Applicable to New Accounts.
    a. During the new[rtrif]-[ltrif]account exception period, the 
[rtrif]general[ltrif] schedule[lsqbb]s[rsqbb] for [lsqbb]local and 
nonlocal[rsqbb] checks [rtrif]in Sec.  229.12[ltrif] 
do[rtrif]es[ltrif] not apply, and, unlike the other exceptions 
provided in this section, the regulation provides no maximum time 
frames within which the proceeds of these deposits must be made 
available for withdrawal. Maximum times within which funds must be 
available for withdrawal during the new account period are provided, 
however, for certain other deposits. Deposits received by cash and 
electronic payments must be made available for withdrawal in 
accordance with Sec.  229.10.
    b. Special rules also apply to deposits of Treasury checks, U.S. 
Postal Service money orders, checks drawn on Federal Reserve Banks 
and Federal Home Loan Banks, state and local government checks, 
cashier's checks, certified checks, teller's checks, and, for the 
purposes of the new account exception only, traveler's checks. The 
first $5,000 of funds deposited to a new account on any one banking 
day by these check deposits must be made available for withdrawal in 
accordance with Sec.  229.10(c)[lsqbb]. Thus, the first $5,000 of 
the proceeds of these check deposits must be made 
available[rsqbb][rtrif]; that is,[ltrif] on the first business day 
following deposit, if the deposit is made in person to an employee 
of the depositary bank and the other conditions of next-day 
availability are met. [lsqbb]Funds must be made available on the 
second business day after deposit for deposits that are not made 
over the counter, in accordance with Sec.  229.10(c)(2).[rsqbb] 
(Proceeds of Treasury check deposits must be made available on the 
first business day after deposit, even if the check is not deposited 
in person to an employee of the depositary

[[Page 16940]]

bank.) Funds in excess of the first $5,000 deposited by these types 
of checks on a banking day must be available for withdrawal not 
later than the ninth business day following the banking day of 
deposit. The requirements of Sec.  229.10(c)(1)(vi) and (vii) that 
``on us'' checks and the [lsqbb]first $100[rsqbb][rtrif]minimum 
amount[ltrif] of a day's deposit be made available for withdrawal on 
the next business day do not apply during the new account period.
    3. Representation by Customer. The depositary bank may rely on 
the representation of the customer that the customer has no 
established account relationship with the bank, and has not had any 
such account relationship within the past 30 days, to determine 
whether an account is subject to the new account exception.

C. 229.13(b) Large Deposits

    1. Under the large[rtrif]-[ltrif]deposit exception, a depositary 
bank may extend the hold placed on check deposits to the extent that 
the amount of the aggregate deposit on any banking day exceeds 
$5,000[rtrif](the ``large-deposit amount'')[ltrif]. This exception 
applies to [lsqbb]local and nonlocal[rsqbb] checks [rtrif]under 
Sec.  229.12[ltrif], as well as to checks that otherwise would be 
made available on the next [lsqbb](or second)[rsqbb] business day 
after the day of deposit under Sec.  229.10(c). Although [lsqbb]the 
first $5,000 of a day's deposit[rsqbb][rtrif]any amount under the 
large-deposit amount[ltrif] is subject to the availability otherwise 
provided for checks, the amount in excess of 
[lsqbb]$5,000[rsqbb][rtrif]the large-deposit threshold[ltrif] may be 
held for an additional period of time as provided in Sec.  
229.13(h). When the large[rtrif]-[ltrif]deposit exception is applied 
to deposits composed of a mix of checks that would otherwise be 
subject to differing availability schedules, the depositary bank has 
the discretion to choose the portion of the deposit to which it 
applies the exception. Deposits by cash or electronic payment are 
not subject to this exception for large deposits.
    2. The following example illustrates the operation of the 
large[rtrif]-[ltrif]deposit exception. If a customer deposits $2,000 
in cash and a $9,000 [lsqbb]local[rsqbb] check on a Monday 
[rtrif]that is not subject to next-day availability[ltrif], 
[lsqbb]$2,100 ([rsqbb] the proceeds of the cash deposit and 
[lsqbb]$100[rsqbb] [rtrif]the minimum amount under Sec.  
229.10(c)[ltrif] from the [lsqbb]local[rsqbb] check 
deposit[lsqbb])[rsqbb] must be made available for withdrawal on 
Tuesday. [lsqbb]An additional $4,900 of the proceeds of the local 
check[rsqbb] [rtrif]The amount under the large-deposit threshold 
less the minimum amount under Sec.  229.10(c)[ltrif] must be 
available for withdrawal on Wednesday in accordance with the 
[lsqbb]local[rsqbb] [rtrif]general[ltrif] schedule, and the 
remaining [lsqbb]$4,000[rsqbb][rtrif]amount over the large-deposit 
threshold[ltrif] may be held for an additional period of time under 
the large[rtrif]-[ltrif]deposit exception.
    3. Where a customer has multiple accounts with a depositary 
bank, the bank may apply the large[rtrif]-[ltrif]deposit exception 
to the aggregate deposits to all of the customer's accounts, even if 
the customer is not the sole holder of the accounts and not all of 
the holders of the customer's accounts are the same. Thus, a 
depositary bank may aggregate the deposits made to two individual 
accounts in the same name, to an individual and a joint account with 
one common name, or to two joint accounts with at least one common 
name for the purpose of applying the large[rtrif]-[ltrif]deposit 
exception. Aggregation of deposits to multiple accounts is permitted 
because [lsqbb]the Board believes that[rsqbb] the risk to the 
depositary bank associated with large deposits is similar regardless 
of how the deposits are allocated among the customer's accounts.

D. 229.13(c) Redeposited Checks

    1. The EFA Act [lsqbb]gives the Board the authority to 
promulgate[rsqbb][rtrif]provides that the regulation may 
include[ltrif] an exception to the schedule for checks that have 
been returned unpaid and redeposited. Section 229.13(c) provides 
such an exception for checks that have been returned unpaid and 
redeposited by the customer or the depositary bank. This exception 
applies to [lsqbb]local and nonlocal[rsqbb] checks [rtrif]subject to 
Sec.  229.12[ltrif], as well as to checks that would otherwise be 
made available on the next [lsqbb](or second)[rsqbb] business day 
after the day of deposit under Sec.  229.10(c).
    2. This exception addresses the increased risk to the depositary 
bank that checks that have been returned once will be uncollectible 
when they are presented to the paying bank a second time. [lsqbb]The 
Board, however, does not believe that t[rsqbb][rtrif]T[ltrif]his 
increased risk is [rtrif]not[ltrif] present for checks that have 
been returned due to a missing indorsement. Thus, the exception does 
not apply to checks returned unpaid due to missing indorsements and 
redeposited after the missing indorsement has been obtained, if the 
reason for return indicated on the check (see Sec.  229.30(d)) 
states that it was returned due to a missing indorsement. For the 
same reason, this exception does not apply to a check returned 
because it was postdated (future dated), if the reason for return 
indicated on the check states that it was returned because it was 
postdated, and if it is no longer postdated when redeposited.
    3. To determine when funds must be made available for 
withdrawal, the banking day on which the check is redeposited is 
considered to be the day of deposit. A depositary bank that made 
[lsqbb]$100[rsqbb] [rtrif]the minimum amount[ltrif] of a check 
available for withdrawal under Sec.  229.10(c)(1)(vii) can charge 
back the full amount of the check, including the 
[lsqbb]$100[rsqbb][rtrif]the minimum amount made available[ltrif], 
if the check is returned unpaid, and the [lsqbb]$100[rsqbb] 
[rtrif]minimum amount[ltrif] need not be made available again if the 
check is redeposited.

E. 229.13(d) Repeated Overdrafts

    1. The EFA Act [lsqbb]gives the Board the authority to 
establish[rsqbb][rtrif]provides that the regulation may 
include[ltrif] an exception for ``deposit accounts which have been 
overdrawn repeatedly.'' This paragraph provides two tests to 
determine what constitutes repeated overdrafts. Under the first 
test, a customer's accounts are considered repeatedly overdrawn if, 
on six banking days within the preceding six months, the available 
balance in any account held by the customer is negative, or the 
balance would have become negative if checks or other charges to the 
account had been paid, rather than returned. This test can be met 
based on separate occurrences (e.g., checks that are returned for 
insufficient funds on six different days), or based on one 
occurrence (e.g., a negative balance that remains on the customer's 
account for six banking days). If the bank dishonors a check that 
otherwise would have created a negative balance, however, the 
incident is considered an overdraft only on that day.
    2. The second test addresses substantial overdrafts. Such 
overdrafts increase the risk to the depositary bank of dealing with 
the repeated overdrafter. Under this test, a customer incurs 
repeated overdrafts if, on two banking days within the preceding six 
months, the available balance in any account held by the customer is 
negative in an amount of $5,000 or more, or would have become 
negative in an amount of $5,000 or more if checks or other charges 
to the account had been paid.
    3. The exception relates not only to overdrafts caused by checks 
drawn on the account, but also overdrafts caused by other debit 
charges (e.g. ACH debits, point-of-sale transactions, returned 
checks, account fees, etc.). If the potential debit is in excess of 
available funds, the exception applies regardless of whether the 
items were paid or returned unpaid.
    [rtrif]4. Under either test described above, the ``other charges 
to the account'' that would have created an overdraft had they been 
paid do not include attempted debit card transactions for which the 
depositary bank has declined the authorization request, because 
there is no transaction that has occurred.[ltrif]
    [rtrif]5.[ltrif] An overdraft resulting from an error on the 
part of the depositary bank, or from the imposition of overdraft 
charges for which the customer is entitled to a refund under 
Sec. Sec.  229.13(e) or 229.16(c), cannot be considered in 
determining whether the customer is a repeated overdrafter. The 
exception excludes accounts with overdraft lines of credit, unless 
the credit line has been exceeded or would have been exceeded if the 
checks or other charges to the account had been paid.
    [lsqbb]4.[rsqbb][rtrif]6.[ltrif]This exception applies to 
[lsqbb]local and nonlocal[rsqbb] checks [rtrif]subject to Sec.  
229.12[ltrif], as well as to checks that otherwise would be made 
available on the next [lsqbb](or second)[rsqbb] business day after 
the day of deposit under Sec.  229.10(c). When a bank places or 
extends a hold under this exception, it need not make the 
[lsqbb]first $100[rsqbb][rtrif]minimum amount[ltrif] of a deposit 
available for withdrawal on the next business day, as otherwise 
would be required by Sec.  229.10(c)(1)(vii).

F. 229.13(e) Reasonable Cause To Doubt Collectibility

    1. In the case of certain check deposits, if the bank has 
reasonable cause to believe the check is uncollectible, it may 
extend the time funds must be made available for withdrawal. This 
exception applies to [lsqbb]local and nonlocal[rsqbb] checks 
[rtrif]under Sec.  229.12[ltrif], as well as to checks that would 
otherwise be made available on the next [lsqbb](or second)[rsqbb] 
business day after the day of deposit under Sec.  229.10(c). When a 
bank places or extends a hold under this exception, it need not make

[[Page 16941]]

the [lsqbb]first $100[rsqbb][rtrif]minimum amount[ltrif] of a 
deposit available for withdrawal on the next business day, as 
otherwise would be required by Sec.  229.10(c)(1)(vii). If the 
reasonable[rtrif]-[ltrif]cause exception is invoked, the bank must 
include in the notice to its customer, required by Sec.  229.13(g), 
the reason that the bank believes that the check is uncollectible.
    2. The following are several examples of circumstances under 
which the reasonable[rtrif]-[ltrif]cause exception may be invoked:
    a. If a bank received a notice from the paying bank that a check 
was not paid and is being returned to the depositary bank, the 
depositary bank could place a hold on the check or extend a hold 
previously placed on that check, and notify the customer that the 
bank had received notice that the check is being returned. The 
exception could be invoked even if the notice were incomplete, if 
the bank had reasonable cause to believe that the notice applied to 
that particular check.
    b. The depositary bank may have received information from the 
paying bank, prior to the presentment of the check, that gives the 
bank reasonable cause to believe that the check is uncollectible. 
For example, the paying bank may have indicated that payment has 
been stopped on the check, or that the drawer's account does not 
currently have sufficient funds to honor the check. Such information 
may provide sufficient basis to invoke this exception. In these 
cases, the depositary bank could invoke the exception and disclose 
as the reason the exception is being invoked the fact that 
information from the paying bank indicates that the check may not be 
paid.
    c. The fact that a check is deposited more than six months after 
the date on the check (i.e.[rtrif],[ltrif] a stale check) is a 
reasonable indication that the check may be uncollectible, because 
under U.C.C. 4-404 a bank has no duty to its customer to pay a check 
that is more than six months old. Similarly, if a check being 
deposited is postdated (future dated), the bank may have a 
reasonable cause to believe the check is uncollectible, because the 
check may not be properly payable under U.C.C. 4-401. The bank, in 
its notice, should specify that the check is stale-dated or 
postdated.
    d. There are reasons that may cause a bank to believe that a 
check is uncollectible that are based on confidential information. 
For example, a bank could conclude that a check being deposited is 
uncollectible based on its reasonable belief that the depositor is 
engaging in kiting activity. Reasonable belief as to the insolvency 
or pending insolvency of the drawer of the check or the drawee bank 
and that the checks will not be paid also may justify invoking this 
exception. In these cases, the bank may indicate, as the reason it 
is invoking the exception, that the bank has confidential 
information that indicates that the check might not be paid.
    3. [lsqbb]The Board has included a[rsqbb][rtrif]Appendix C 
contains a model reasonable[rtrif]-[ltrif]cause exception notice as 
a model notice in appendix C (C-[lsqbb]13[rsqbb][rtrif]9[ltrif]). 
The [rtrif]commentary in appendix C to the[ltrif] model notice 
includes several reasons for which this exception may be invoked. 
The [lsqbb]Board does not intend to provide[rsqbb][rtrif]commentary 
list is not[ltrif] a comprehensive list of reasons for which this 
exception may be invoked; another reason that does not appear 
[rtrif]in the commentary to the[ltrif] [lsqbb]on[rsqbb] the model 
notice may be used as the basis for extending a hold, if the reason 
satisfies the conditions for invoking this exception. A depositary 
bank may invoke the reasonable[rtrif]-[ltrif]cause exception based 
on a combination of factors that give rise to a reasonable cause to 
doubt the collectibility of a check. In these cases, the bank should 
disclose the primary reasons for which the exception was invoked in 
accordance with paragraph (g) of this section.
    4. The regulation provides that the determination that a check 
is uncollectible shall not be based on a class of checks or persons. 
For example, a depositary bank cannot invoke this exception simply 
because [lsqbb]the check is drawn on a paying bank in a rural 
area[rsqbb][rtrif]a paying bank demands paper presentment[ltrif] and 
the depositary bank knows it will not have the opportunity to learn 
of nonpayment of that check before funds must be made available 
under the availability schedules. Similarly, a depositary bank 
cannot invoke the reasonable cause exception based on the race or 
national origin of the depositor.
    5. If a depositary bank invokes this exception with respect to a 
particular check and does not provide a written notice to the 
depositor at the time of deposit, the depositary bank may not assess 
any overdraft fee (such as an ``NSF'' charge) or charge interest for 
use of overdraft credit, if the check is paid by the paying bank and 
these charges would not have occurred had the exception not been 
invoked. A bank may assess an overdraft fee under these 
circumstances, however, if it provides notice to the customer, in 
the notice of exception required by paragraph (g) of this section, 
that the fee may be subject to refund, and refunds the charges upon 
the request of the customer. The notice must state that the customer 
may be entitled to a refund of any overdraft fees that are assessed 
if the check being held is paid, and indicate where such requests 
for a refund of overdraft fees should be directed.

G. 229.13(f) Emergency Conditions

    1. Certain emergency conditions may arise that delay the 
collection or return of checks, or delay the processing and updating 
of customer accounts. In the circumstances specified in this 
paragraph, the depositary bank may extend the holds that are placed 
on deposits of checks that are affected by such delays, if the bank 
exercises such diligence as the circumstances require. For example, 
if a bank learns that a check has been delayed in the process of 
collection due to [lsqbb]severe weather conditions[rsqbb] [rtrif]an 
interruption of computer facilities[ltrif] or other causes beyond 
its control, an emergency condition covered by this section may 
exist and the bank may place a hold on the check to reflect the 
delay. This exception applies to [lsqbb]local and nonlocal[rsqbb] 
checks [rtrif]subject to Sec.  229.12[ltrif], as well as 
[rtrif]to[ltrif] checks that would otherwise be made available on 
the next [lsqbb](or second)[rsqbb] business day after the day of 
deposit under Sec.  229.10(c). When a bank places or extends a hold 
under this exception, it need not make the [lsqbb]first 
$100[rsqbb][rtrif]minimum amount[ltrif] of a deposit available for 
withdrawal on the next business day, as otherwise would be required 
by Sec.  229.10(c)(1)(vii). In cases where the emergency[rtrif]-
[ltrif]conditions exception does not apply, as in the case of 
deposits of cash or electronic payments under Sec.  229.10 (a) and 
(b), the depositary bank may not be liable for a delay in making 
funds available for withdrawal if the delay is due to a bona fide 
error such as an unavoidable computer malfunction.

H. 229.13(g) Notice of Exception

    1. In general.
    a. If a depositary bank invokes any of the safeguard exceptions 
to the schedules listed above, other than the new[rtrif]-
[ltrif]account or emergency[rtrif]-[ltrif]conditions exception, and 
extends the hold on a deposit beyond the time periods permitted in 
Sec. Sec.  229.10(c) and 229.12, it must provide a notice to its 
customer. Except in the cases described in paragraphs (g)(2) and 
(g)(3) of this section, notices must be given each time an exception 
hold is invoked and must state [lsqbb]the[rsqbb] [rtrif]a number or 
code that identifies the[ltrif] customer's account 
[lsqbb]number[rsqbb], the date of deposit, [rtrif]the total amount 
of the deposit, the amount of the deposit that is being 
delayed,[ltrif] the reason the exception was invoked, and the time 
period within which funds will be available for withdrawal. For a 
customer that is not a consumer, a depositary bank satisfies the 
written-notice requirement by sending an electronic notice that 
displays the text and is in a form that the customer may keep, if 
the customer agrees to such means of notice. Information is in a 
form that the customer may keep if, for example, it can be 
downloaded or printed. For a customer who is a consumer, a 
depositary bank satisfies the written-notice requirement by sending 
an electronic notice in compliance with the requirements of the 
Electronic Signatures in Global and National Commerce Act (12 U.S.C. 
7001 et seq.), which include obtaining the consumer's affirmative 
consent to such means of notice.
    b. With respect to paragraph (g)(1), the requirement that the 
notice state the [lsqbb]time period within[rsqbb][rtrif]day 
on[ltrif] which the funds shall be made available may be satisfied 
[lsqbb]if the notice identifies the date the deposit is received and 
information sufficient to indicate when funds will be available and 
the amounts that will be available at those times. For 
example,[rsqbb] for a deposit involving more than one check, 
[rtrif]if[ltrif] [lsqbb]the bank need not provide a notice that 
discloses when funds from each individual check in the deposit will 
be available for withdrawal; instead,[rsqbb] the bank 
[lsqbb]may[rsqbb] provide[rtrif]s[ltrif] a total dollar amount for 
each of the [lsqbb]time periods when[rsqbb][rtrif]days on which 
the[ltrif] funds will be available[lsqbb], or provide the customer 
with an explanation of how to determine the amount of the deposit 
that will be held and when the funds will be available for 
deposit.[rsqbb] Appendix C (C-[lsqbb]12[rsqbb][rtrif]9[ltrif]) 
contains a model notice.
    c. For deposits made in person to an employee of the depositary 
bank, the notice generally must be given to the person making the 
deposit, i.e., the ``depositor[rtrif],[ltrif]''[lsqbb],[rsqbb] at 
the time of deposit. The depositor need not be the customer holding 
the account. For other deposits, such as deposits received at

[[Page 16942]]

an ATM, lobby deposit box, night depository, or through the mail, 
notice must be [lsqbb]mailed[rsqbb] [rtrif]sent[ltrif] to the 
customer not later than the close of the business day following the 
banking day on which the deposit was made.
    d. Notice to the customer also may be provided at a later time, 
if the facts upon which the determination to invoke the exception 
[rtrif]is made[ltrif] do not become known to the depositary bank 
until after notice would otherwise have to be given. In these cases, 
the bank must [lsqbb]mail[rsqbb] [rtrif]send[ltrif] the notice to 
the customer as soon as practicable, but not later than the business 
day following the day the facts become known. A bank is deemed to 
have knowledge when the facts are brought to the attention of the 
person or persons in the bank responsible for making the 
determination, or when the facts would have been brought to their 
attention if the bank had exercised due diligence.
    [rtrif]e. If the customer has agreed to accept notices 
electronically, the bank shall send the notice such that the bank 
may reasonably expect it to be received by the customer no later 
than the first business day following the day the facts become known 
to the depositary bank, or the deposit is made, whichever is 
later.[ltrif]
    [lsqbb]e[rsqbb][rtrif]f[ltrif]. In those cases described in 
paragraphs (g)(2) and (g)(3), the depositary bank need not provide a 
notice every time an exception hold is applied to a deposit. When 
paragraph (g)(2) or (g)(3) requires disclosure of the time period 
within which deposits subject to the exception generally will be 
available for withdrawal, the requirement may be satisfied if the 
one-time notice states when ``on us[lsqbb],[rsqbb]'' [lsqbb]local, 
and nonlocal[rsqbb] [rtrif]and other[ltrif] checks will be available 
for withdrawal if an exception is invoked.
    2. One-time exception notice.
    a. Under paragraph (g)(2), if a nonconsumer account (see 
Commentary to Sec.  229.2[lsqbb](n)[rsqbb][rtrif](o)[ltrif]) is 
subject to the large[rtrif]-[ltrif]deposit or redeposited[rtrif]-
[ltrif]check exception, the depositary bank may give its customer a 
single notice at or prior to the time notice must be provided under 
paragraph (g)(1). Notices provided under paragraph (g)(2) must 
contain the reason the exception may be invoked and the time period 
within which deposits subject to the exception will be available for 
withdrawal (see Model Notice C-[lsqbb]14[rsqbb][rtrif]10[ltrif]). A 
depositary bank may provide a one-time notice to a nonconsumer 
customer under paragraph (g)(2) only if each exception cited in the 
notice (the large deposit and/or the redeposited check exception) 
will be invoked for most check deposits to the customer's account to 
which the exception could apply. A one-time notice may state that 
the depositary bank will apply exception holds to certain subsets of 
deposits to which the large[rtrif]-[ltrif]deposit or 
redeposited[rtrif]-[ltrif]check exception may apply, and the notice 
should identify such subsets. For example, the depositary bank may 
apply the redeposited[rtrif]-[ltrif]check exception only to checks 
that were redeposited automatically by the depositary bank in 
accordance with an agreement with the customer, rather than to all 
redeposited checks. In lieu of sending the one-time notice, a 
depositary bank may send individual hold notices for each deposit 
subject to the large[rtrif]-[ltrif]deposit or redeposited[rtrif]-
[ltrif]check exception in accordance with Sec.  229.13(g)(1) (see 
Model Notice C-[lsqbb]12[rsqbb][rtrif]9[ltrif]).
    b. In the case of a deposit of multiple checks, the depositary 
bank has the discretion to place an exception hold on any 
combination of checks in excess of [lsqbb]$5,000[rsqbb][rtrif]the 
large-deposit threshold[ltrif]. The notice should enable a customer 
to determine the availability of the deposit in the case of a 
deposit of multiple checks [rtrif]subject to differing hold 
periods[ltrif]. [lsqbb]For example, if a customer deposits a $5,000 
local check and a $5,000 nonlocal check, under the large deposit 
exception, the depositary bank may make funds available in the 
amount of (1) $100 on the first business day after deposit, $4,900 
on the second business day after deposit (local check), and $5,000 
on the eleventh business day after deposit (nonlocal check with 6-
day exception hold), or (2) $100 on the first business day after 
deposit, $4,900 on the fifth business day after deposit (nonlocal 
check), and $5,000 on the seventh business day after deposit (local 
check with 5-day exception hold).[rsqbb] The notice 
[rtrif]also[ltrif] should reflect the bank's priorities in placing 
exception holds on next-day [lsqbb](or second-day), local, and 
nonlocal[rsqbb] [rtrif]and other[ltrif] checks.
    3. Notice of repeated[rtrif]-[ltrif]overdraft exception. Under 
paragraph (g)(3), if an account is subject to the repeated[rtrif]-
[ltrif]overdraft exception, the depositary bank may provide one 
notice to its customer for each time period during which the 
exception will apply. Notices sent pursuant to paragraph (g)(3) must 
state the customer's account [lsqbb]number[rsqbb] 
[rtrif]identifier[ltrif], the fact the exception was invoked under 
the repeated[rtrif]-[ltrif]overdraft exception, the time period 
within which deposits subject to the exception will be made 
available for withdrawal, and the time period during which the 
exception will apply (see Model Notice C-
[lsqbb]15[rsqbb][rtrif]11[ltrif]). A depositary bank may provide a 
one-time notice to a customer under paragraph (g)(3) only if the 
repeated[rtrif]-[ltrif]overdraft exception will be invoked for most 
check deposits to the customer's account.
    4. Emergency[rtrif]-[ltrif]conditions exception notice.
    a. If an account is subject to the emergency[rtrif]-
[ltrif]conditions exception under Sec.  229.13(f), the depositary 
bank must provide notice in a reasonable form within a reasonable 
time, depending on the circumstances. For example, a depositary bank 
may learn of a weather emergency or a power outage that affects the 
paying bank's operations. Under these circumstances, it likely would 
be reasonable for the depositary bank to provide an 
emergency[rtrif]-[ltrif]conditions exception notice in the same 
manner and within the same time as required for other exception 
notices. On the other hand, if a depositary bank experiences a 
weather or power outage emergency that affects its own operations, 
it may be reasonable for the depositary bank to provide a general 
notice to all depositors via postings [rtrif]on the depositary 
bank's website or through a directed e-mail[ltrif], at branches and 
ATMs, or through newspaper, television, or radio notices.
    b. If the depositary bank extends the hold placed on a deposit 
due to an emergency condition, the bank need not provide a notice if 
the funds would be available for withdrawal before the notice must 
be sent. For example, if on the last day of a hold period the 
depositary bank experiences a computer failure and customer accounts 
cannot be updated in a timely fashion to reflect the funds as 
available balances, notices are not required if the funds are made 
available before the notices must be sent.
    5. Record retention. A depositary bank must retain a record of 
each notice of a reasonable[rtrif]-[ltrif]cause exception for a 
period of two years, or such longer time as provided in the record 
retention requirements of Sec.  229.21. This record must contain a 
brief description of the facts on which the depositary bank based 
its judgment that there was reasonable cause to doubt the 
collectibility of a check. In many cases, [lsqbb]such as where the 
exception was invoked on the basis of a notice of nonpayment 
received,[rsqbb] the record requirement may be met by retaining a 
copy of the notice sent to the customer. In other cases, such as 
where the exception was invoked on the basis of confidential 
information, a further description to the facts, such as insolvency 
of drawer, should be included in the record.

I. 229.13(h) Availability of Deposits Subject to Exceptions

    1. If a depositary bank invokes any exception other than the 
new[rtrif]-[ltrif]account exception, the bank may extend the time 
within which funds must be made available under the schedule by a 
reasonable period of time. This provision establishes that an 
extension of up to one business day for ``on us'' 
checks[lsqbb],[rsqbb] [rtrif]and two[ltrif] [lsqbb]five[rsqbb] 
business days for [lsqbb]local checks, and six business days for 
nonlocal checks[rsqbb] [rtrif]all other checks[ltrif] [lsqbb]and 
checks deposited in a nonproprietary ATM[rsqbb] is reasonable. Under 
certain circumstances, however, a longer extension of the schedules 
may be reasonable. In these cases, the burden is placed on the 
depositary bank to establish that a longer period is reasonable.
    2. For example, assume a bank extended the hold on a 
[lsqbb]local[rsqbb] check deposit by [rtrif]two[ltrif] 
[lsqbb]five[rsqbb] business days based on its reasonable cause to 
believe that the check is uncollectible. If, on the day before the 
extended hold is scheduled to expire, the bank [lsqbb]receives a 
notification from the paying bank[rsqbb] [rtrif]learns[ltrif] that 
the check is being returned unpaid, the bank may determine that a 
longer hold is warranted[lsqbb], if it decides not to charge back 
the customer's account based on the notification[rsqbb]. If the bank 
decides to extend the hold, the bank must send a second notice, in 
accordance with paragraph (g) of this section, indicating the new 
date that the funds will be available for withdrawal.
    3. With respect to Treasury checks, U.S. Postal Service money 
orders, checks drawn on Federal Reserve Banks or Federal Home Loan 
Banks, state and local government checks, cashier's checks, 
certified checks, and teller's checks subject to the next-day 
[lsqbb](or second-day)[rsqbb] availability requirement,

[[Page 16943]]

the depositary bank may extend the time funds must be made available 
for withdrawal under the large[rtrif]-[ltrif]deposit, 
redeposited[rtrif]-[ltrif]check, repeated[rtrif]-[ltrif]overdraft, 
or reasonable[rtrif]-[ltrif]cause exception by a reasonable period 
beyond the delay that would have been permitted under the regulation 
had the checks not been subject to the next-day [lsqbb](or second-
day)[rsqbb] availability requirement. The additional hold is added 
to the [lsqbb]local or nonlocal[rsqbb] [rtrif]general[ltrif] 
schedule [lsqbb]that would apply based on the location of the paying 
bank[rsqbb] [rtrif]in Sec.  229.12[ltrif].
    4. One business day for ``on us'' checks [rtrif]and two[ltrif] 
[lsqbb], five[rsqbb] business days for [lsqbb]local checks, and six 
business days for nonlocal checks or checks deposited in a 
nonproprietary ATM[rsqbb] [rtrif]all other checks[ltrif], in 
addition to the time period provided in the schedule, should provide 
adequate time for [rtrif]a[ltrif][lsqbb]the[rsqbb] depositary bank 
[rtrif]that accepts electronic returns under Sec.  229.32(a)[ltrif] 
to learn of the nonpayment of virtually all checks that are 
returned. [lsqbb]For example, if a customer deposits a $7,000 
cashier's check drawn on a nonlocal bank, and the depositary bank 
applies the large deposit exception to that check, $5,000 must be 
available for withdrawal on the first business day after the day of 
deposit and the remaining $2,000 must be available for withdrawal on 
the eleventh business day following the day of deposit (six business 
days added to the five-day schedule for nonlocal checks), unless the 
depositary bank establishes that a longer hold is reasonable.[rsqbb]
    5. In the case of the application of the emergency conditions 
exception, the depositary bank may extend the hold placed on a check 
by not more than a reasonable period following the end of the 
emergency or the time funds must be available for withdrawal under 
Sec. Sec.  229.10(c) or 229.12, whichever is later.
    6. This provision does not apply to holds imposed under the 
new[rtrif]-[ltrif]account exception. Under that exception, the 
maximum time period within which funds must be made available for 
withdrawal is specified for deposits that generally must be accorded 
next-day availability under Sec.  229.10. This subpart does not 
specify the maximum time period within which the proceeds of 
[lsqbb]local and nonlocal[rsqbb] [rtrif]other[ltrif] checks must be 
made available for withdrawal during the new account period.

VIII. Section 229.14 Payment of Interest

A. 229.14(a) In General

    1. This section requires that a depositary bank begin accruing 
interest on interest-bearing accounts not later than the day on 
which the depositary bank receives credit for the funds 
deposited.[lsqbb]\3\[rsqbb] A depositary bank generally receives 
credit on checks [lsqbb]within one or two days[rsqbb] [rtrif]on the 
business day[ltrif] following deposit. A bank receives credit on a 
cash deposit, an electronic payment, and the deposit of a check that 
is drawn on the depositary bank itself on the day the cash, 
electronic payment, or check is received. In the case of a deposit 
at a nonproprietary ATM, credit generally is received on the day the 
bank that operates the ATM credits the depositary bank for the 
amount of the deposit. In the case of a deposit at a contractual 
branch, credit is received on the day the depositary bank receives 
credit for the amount of the deposit, which may be different from 
the day the contractual branch receives credit for the deposit.
    [lsqbb]\3\[rsqbb] [rtrif]2.[ltrif] This section implements 
section 606 of the EFA Act (12 U.S.C. 4005). The EFA Act keys the 
requirement to pay interest to the time the depositary bank receives 
provisional credit for a check. [lsqbb]Provisional credit is a term 
used in the U.C.C. that is derived from the Code's concept of 
provisional settlement. (See U.C.C. 4-214 and 4-215.)[rsqbb] 
Provisional credit is credit that is subject to charge-back if the 
check is returned unpaid; once the check is finally paid, the right 
to charge back expires and the provisional credit becomes final 
[rtrif](See U.C.C. 4-214 and 4-215)[ltrif]. Under 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C, a paying bank no longer has 
an automatic right to charge back credits given in settlement of a 
check, and the concept of provisional settlement is no longer useful 
and has been eliminated by the regulation. Accordingly, this section 
uses the term credit rather than provisional credit, and this 
section applies regardless of whether a credit would be provisional 
or final under the U.C.C. Credit does not include a bookkeeping 
entry (sometimes referred to as deferred credit) that does not 
represent funds actually available for the bank's use.
    [lsqbb]2[rsqbb][rtrif]3[ltrif]. Because account includes only 
transaction accounts, other interest-bearing accounts of the 
depositary bank, such as money market deposit accounts, savings 
deposits, and time deposits, are not subject to this requirement; 
however, a bank may accrue interest on such deposits in the same way 
that it accrues interest under this paragraph for simplicity of 
operation. The [lsqbb]Board intends the[rsqbb] term interest 
[lsqbb]to[rsqbb] refer[rtrif]s[ltrif] to payments to or for the 
account of any customer as compensation for the use of funds, but 
[lsqbb]to[rsqbb] exclude[rtrif]s[ltrif] the absorption of expenses 
incident to providing a normal banking function or a bank's 
forbearance from charging a fee in connection with such a service. 
[lsqbb](See 12 CFR 217.2(d).)[rsqbb] Thus, earnings credits often 
applied to corporate accounts are not interest payments for the 
purposes of this section.
    [lsqbb]3[rsqbb][rtrif]4[ltrif]. It may be difficult for a 
depositary bank to track which day [lsqbb]the depositary 
bank[rsqbb][rtrif]it[ltrif] receives credit for specific checks in 
order to accrue interest properly on the account to which the check 
is deposited. This difficulty may be pronounced if the bank uses 
different means of collecting checks based on the time of day the 
check is received, the dollar amount of the check, and/or the paying 
bank to which it must be sent. Thus, for the purpose of the interest 
accrual requirement, a bank may rely on an availability schedule 
from its Federal Reserve Bank[lsqbb], Federal Home Loan Bank,[rsqbb] 
or correspondent to determine when the depositary bank receives 
credit. If availability is delayed beyond that specified in the 
availability schedule, a bank may charge back interest erroneously 
accrued or paid on the basis of that schedule.
    [lsqbb]4[rsqbb][rtrif]5[ltrif]. This paragraph also permits a 
depositary bank to accrue interest on checks deposited to all of its 
interest-bearing accounts based on when the bank receives credit on 
all checks sent for payment or collection. For example, if a bank 
receives credit on 20 percent of the funds deposited in the bank by 
check as of the business day of deposit (e.g., ``on us'' checks), 70 
percent as of the business day following deposit, and 10 percent on 
the second business day following deposit, the bank can apply these 
percentages to determine the day interest must begin to accrue on 
check deposits to all interest-bearing accounts, regardless of when 
the bank received credit on the funds deposited in any particular 
account. Thus, a bank may begin accruing interest on a uniform basis 
for all interest-bearing accounts, without the need to track the 
type of check deposited to each account.
    [lsqbb]5[rsqbb][rtrif]6[ltrif]. This section is not intended to 
limit a policy of a depositary bank that provides that interest 
accrues only on balances that exceed a specified amount, or on the 
minimum balance maintained in the account during a given period, 
provided that the balance is determined based on the date that the 
depositary bank receives credit for the funds. This section also is 
not intended to limit any policy providing that interest accrues 
sooner than required by this paragraph.

B. 229.14(b) Special Rule for Credit Unions

    1. This provision implements a requirement in section 606(b) of 
the EFA Act, and provides an exemption from the payment-of-interest 
requirements for credit unions that do not begin to accrue interest 
or dividends on their customer accounts until a later date than the 
day the credit union receives credit for those deposits, including 
cash deposits. These credit unions are exempt from the payment-of-
interest requirements, as long as they provide notice of their 
interest accrual policies in accordance with Sec.  229.16(d). For 
example, if a credit union has a policy of computing interest on all 
deposits received by the 10th of the month from the first of that 
month, and on all deposits received after the 10th of the month from 
the first of the next month, that policy is not superseded by this 
regulation, if the credit union provides proper disclosure of this 
policy to its customers.
    2. The EFA Act limits this exemption to credit unions; other 
types of banks must comply with the payment-of-interest 
requirements. In addition, credit unions that compute interest from 
the day of deposit or day of credit should not change their existing 
practices in order to avoid compliance with the requirement that 
interest accrue from the day the credit union receives credit.

C. 229.14(c) Exception for Checks Returned Unpaid

    1. This provision is based on section 606(c) of the EFA Act (12 
U.S.C. 4005(c)) and provides that interest need not be paid on funds 
deposited in an interest-bearing account by check that has been 
returned unpaid, regardless of the reason for return.

IX. Section 229.15 General Disclosure Requirements

A. 229.15(a) Form of Disclosures [rtrif]and Notices[ltrif]

    1. This paragraph sets forth the general requirements for the 
disclosures [rtrif]and

[[Page 16944]]

notices[ltrif] required under [lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart 
B. All of the disclosures [rtrif]and notices[ltrif] must be given in 
a clear and conspicuous manner, must be in writing, and, in most 
cases, must be in a form the customer may keep. A disclosure 
[rtrif]or notice[ltrif] is in a form that the customer may keep if, 
for example, it can be downloaded or printed. For a customer that is 
not a consumer, a depositary bank satisfies the written-disclosure 
[rtrif]or notice[ltrif] requirement by sending an electronic 
disclosure [rtrif]or notice[ltrif] that displays the text and is in 
a form that the customer may keep, if the customer agrees to such 
means of disclosure [rtrif]or notice[ltrif]. For a customer who is a 
consumer, a depositary bank satisfies the written-[rtrif]disclosure 
or[ltrif] notice requirement by sending an electronic 
[rtrif]disclosure or[ltrif] notice in compliance with the 
requirements of the Electronic Signatures in Global and National 
Commerce Act (12 U.S.C. 7001 et seq.), which include obtaining the 
consumer's affirmative consent to such means of [rtrif]disclosure 
or[ltrif] notice. Disclosures posted at locations where employees 
accept consumer deposits, at ATMs, and on preprinted deposit slips 
need not be in a form that the customer may keep. Appendix C of the 
regulation contains model forms, clauses, and notices to assist 
banks in preparing disclosures.
    2. Disclosures concerning availability must be grouped together 
and may not contain any information that is not related to the 
disclosures required by this subpart. Therefore, banks may not 
intersperse the required disclosures with other account disclosures, 
and may not include other account information that is not related to 
their availability policy within the text of the required 
disclosures. Banks may, however, include information that is related 
to their availability policies. For example, a bank may inform its 
customers that, even when the bank has already made funds available 
for withdrawal, the customer is responsible for any problem with the 
deposit, such as the return of a deposited check. [rtrif]See Model 
Forms C1-C4.[ltrif]
    3. The regulation does not require that the disclosures be 
segregated from other account terms and conditions. For example, 
banks may include the disclosure of their specific availability 
policy in a booklet or pamphlet that sets out all of the terms and 
conditions of the bank's accounts. The required disclosures must, 
however, be grouped together and highlighted or identified in some 
manner, for example, by use of a separate heading for the 
disclosures, such as ``When Deposits are Available for Withdrawal.''
    4. A bank may, by agreement or at the consumer's request, 
provide any disclosure or notice required by subpart B in a language 
other than English, provided that the bank makes a complete 
disclosure available in English at the customer's request.

B. 229.15(b) [lsqbb]Uniform[rsqbb] Reference to Day of Availability

    1. This paragraph requires banks to disclose in a uniform manner 
when deposited funds will be available for withdrawal. Banks must 
disclose when deposited funds are available for withdrawal by 
stating the business day on which the customer may begin to withdraw 
funds [rtrif]in relation to the banking day on which the bank 
received the deposit[ltrif]. [lsqbb]The business day funds will be 
available must be disclosed as ``the -------- business day after'' 
the day of deposit, or substantially similar language.[rsqbb] The 
business day of availability is determined by counting the number of 
business days starting with the [lsqbb]business day following 
the[rsqbb] banking day on which the deposit is received, as 
determined under Sec.  229.19(a), and ending with the business day 
on which the customer may begin to withdraw funds. For example, a 
bank that [rtrif]makes electronic direct deposits available on the 
banking day they are received may describe the deposits as being 
available ``the same business day.'' A bank that makes check 
deposits available on the business day after the banking day they 
are received may describe the deposits as being available ``the next 
day.'' A bank that[ltrif] imposes delays of 
[lsqbb]four[rsqbb][rtrif]one[ltrif] intervening business 
day[lsqbb]s[rsqbb] [rtrif]between the banking day of receipt and the 
business day of availability[ltrif] for [lsqbb]nonlocal[rsqbb] 
checks must describe those checks as being available on ``the 
[lsqbb]fifth[rsqbb] [rtrif]second[ltrif] business day after'' the 
day of the deposit [rtrif]or ``2 business days'' after the day of 
the deposit[ltrif].

C. 229.15(c) Multiple Accounts and Multiple Account Holders

    1. This paragraph clarifies that banks need not provide multiple 
disclosures under the regulation. A single disclosure to a customer 
that holds multiple accounts, or a single disclosure to one of the 
account holders of a jointly held account, satisfies the disclosure 
requirements of the regulation.

D. 229.15(d) Dormant or Inactive Accounts

    1. This paragraph makes clear that banks need not provide 
disclosure of their specific availability policies to customers that 
hold accounts that are either dormant or inactive. The determination 
that certain accounts are dormant or inactive must be made by the 
bank. If a bank considers an account dormant or inactive for 
purposes other than this regulation and no longer provides 
statements and other mailings to an account for this reason, such an 
account is considered dormant or inactive for purposes of this 
regulation.

X. Section 229.16 Specific Availability Policy Disclosure

A. 229.16(a) General

    1. This section describes the information that must be disclosed 
by banks to comply with Sec. Sec.  229.17 and 229.18(d), which 
require that banks furnish notices of their specific policy 
regarding availability of deposited funds. The disclosure provided 
by a bank must reflect the availability policy followed by the bank 
in most cases, even though a bank may in some cases make funds 
available sooner or impose a longer delay.
    2. The disclosure must reflect the policy and practice of the 
bank regarding availability as to most accounts and most deposits 
into those accounts. In disclosing the availability policy that it 
follows in most cases, a bank may provide a single disclosure that 
reflects one policy to all its transaction account customers, even 
though some of its customers may receive faster availability than 
that reflected in the policy disclosure. Thus, a bank need not 
disclose to some customers that they receive faster availability 
than indicated in the disclosure. If, however, a bank has a policy 
of imposing delays in availability on any customers longer than 
those specified in its disclosure, those customers must receive 
disclosures that reflect the longer applicable availability periods. 
A bank may establish different availability policies for different 
groups of customers, such as customers in a particular geographic 
area or customers of a particular branch. For purposes of providing 
a specific availability policy, the bank may allocate customers 
among groups through good faith use of a reasonable method. A bank 
may also establish different availability policies for deposits at 
different locations, such as deposits at a contractual branch.
    3. A bank may disclose that funds are available for withdrawal 
on a given day notwithstanding the fact that the bank uses the funds 
to pay checks received before that day. For example, a bank may 
disclose that its policy is to make funds available from deposits of 
[lsqbb]local[rsqbb] checks on the second business day following the 
day of deposit, even though it may use the deposited funds to pay 
checks prior to the second business day; the funds used to pay 
checks in this example are not available for withdrawal until the 
second business day after deposit because the funds are not 
available for all uses until the second business day. (See the 
definition of available for withdrawal in Sec.  229.2(d).)

B. 229.16(b) Content of Specific Policy Disclosure

    1. This paragraph sets forth the items that must be included, as 
applicable, in a bank's specific availability policy disclosure. The 
information that must be disclosed by a particular bank will vary 
considerably depending upon the bank's availability policy. For 
example, a bank that makes deposited funds available for withdrawal 
on the business day following the day of deposit need simply 
disclose that deposited funds will be available for withdrawal on 
the first business day after the day of deposit, the bank's business 
days, and when deposits are considered received.
    2. On the other hand, a bank that has a policy of routinely 
delaying on a blanket basis the time when [rtrif]some[ltrif] 
deposited funds are available for withdrawal would have a more 
detailed disclosure. Such blanket hold policies might be for the 
maximum time allowed under [lsqbb]the federal law[rsqbb] [rtrif]this 
regulation[ltrif] or might be for shorter periods. These banks must 
disclose the types of deposits that will be subject to delays, how 
the customer can determine the type of deposit being made, and the 
day that funds from each type of deposit will be available for 
withdrawal.
    3. Some banks may have a combination of next-day availability 
and blanket delays. For example, a bank may provide next-day 
availability for all deposits except for one or two categories, such 
as deposits at nonproprietary ATMs and [lsqbb]nonlocal[rsqbb] 
personal checks over a specified dollar amount. The bank would 
describe the categories that are subject to delays in

[[Page 16945]]

availability and tell the customer when each category would be 
available for withdrawal, and state that other deposits will be 
available for withdrawal on the first business day after the day of 
deposit. Similarly, a bank that provides availability on the second 
business day for most of its deposits would need to identify the 
categories of deposits which, under the regulation, are subject to 
next-day availability and state that all other deposits will be 
available on the second business day.
    4. [lsqbb]Because many banks' availability policies may be 
complex, a bank must give a brief summary of its policy at the 
beginning of the disclosure. In addition, t[rsqbb][rtrif]T[ltrif]he 
bank must describe any circumstances when actual availability may be 
longer than the schedules disclosed. Such circumstances would arise, 
for example, when the bank invokes one of the exceptions set forth 
in Sec.  229.13 of the regulation, or when the bank delays or 
extends the time when deposited funds are available for withdrawal 
up to the time periods allowed by the regulation on a case-by-case 
basis. [lsqbb]Also, a bank that must make certain checks available 
faster under appendix B (reduction of schedules for certain nonlocal 
checks) must state that some check deposits will be available for 
withdrawal sooner because of special rules and that a list of the 
pertinent routing numbers is available upon request.[rsqbb]
    [lsqbb]5. Generally, a bank that distinguishes in its disclosure 
between local and nonlocal checks based on the routing number on the 
check must disclose to its customers that certain checks, such as 
some credit union payable-through drafts, will be treated as local 
or nonlocal based on the location of the bank by which they are 
payable (e.g., the credit union), and not on the basis of the 
location of the bank whose routing number appears on the check. A 
bank is not required to provide this disclosure, however, if it 
makes the proceeds of both local and nonlocal checks available for 
withdrawal within the time periods required for local checks in 
Sec. Sec.  229.12 and 229.13.[rsqbb]
    [lsqbb]6[rsqbb][rtrif]5[ltrif]. The business day cut-off time 
used by the bank must be disclosed and if some locations have 
different cut-off times the bank must note this in the disclosure 
and state the earliest time that might apply. A bank need not list 
all of the different cut-off times that might apply. If a bank does 
not have a cut-off time prior to its closing time, the bank need not 
disclose a cut-off time.
    [lsqbb]7[rsqbb][rtrif]6[ltrif]. A bank taking advantage of the 
extended time period for making deposits at nonproprietary ATMs 
available for withdrawal under Sec.  
229.12[lsqbb](f)[rsqbb][rtrif](d)[ltrif] must explain this in the 
initial disclosure. In addition, the bank must provide a list (on or 
with the initial disclosure) of either the bank's proprietary ATMs 
or those ATMs that are nonproprietary at which customers may make 
deposits. As an alternative to providing such a list, the bank may 
label all of its proprietary ATMs with the bank's name and state in 
the initial disclosure that this has been done. Similarly, a bank 
taking advantage of the cash withdrawal limitations of Sec.  229.12 
[lsqbb](d)[rsqbb][rtrif](b)[ltrif], or the provision in Sec.  
229.19(e) allowing holds to be placed on other deposits when a 
deposit is made or a check is cashed, must explain this in the 
initial disclosure.
    [lsqbb]8[rsqbb][rtrif]7[ltrif]. A bank that provides 
availability based on when the bank generally receives credit for 
deposited checks need not disclose the time when a check drawn on a 
specific bank will be available for withdrawal. Instead, the bank 
may disclose the categories of deposits that must be available on 
the first business day after the day of deposit (deposits subject to 
Sec.  229.10) and state the other categories of deposits and the 
time periods that will be applicable to those deposits. [lsqbb]For 
example, a bank might disclose the four-digit Federal Reserve 
routing symbol for local checks and indicate that such checks as 
well as certain nonlocal checks will be available for withdrawal on 
the first or second business day following the day of deposit, 
depending on the location of the particular bank on which the check 
is drawn, and disclose that funds from all other checks will be 
available on the second or third business day. The bank must also 
disclose that the customer may request a copy of the bank's detailed 
schedule that would enable the customer to determine the 
availability of any check and must provide such schedule upon 
request. A change in the bank's detailed schedule would not trigger 
the change in policy disclosure requirement of Sec.  
229.18(e).[rsqbb]

C. 229.16(c) Longer Delays on a Case-by-Case Basis

    1. Notice in specific policy disclosure.
    a. Banks that make deposited funds available for withdrawal 
sooner than required by the regulation--for example, providing their 
customers with immediate or next-day availability for deposited 
funds--and delay the time when funds are available for withdrawal 
only from time to time determined on a case-by-case basis, must 
provide notice of this in their specific availability policy 
disclosure. This paragraph outlines the requirements for that 
notice.
    b. In addition to stating what their specific availability 
policy is in most cases, banks that may delay or extend the time 
when deposits are available on a case-by-case basis must state that 
from time to time funds may be available for withdrawal later than 
the time periods in their specific policy disclosure, disclose the 
latest time that a customer may have to wait for deposited funds to 
be available for withdrawal when a case-by-case hold is placed, 
state that customers will be notified when availability of a deposit 
is delayed on a case-by-case basis, and advise customers to ask if 
they need to be sure of the availability of a particular deposit.
    c. A bank that imposes delays on a case-by-case basis is still 
subject to the availability requirements of this regulation. If the 
bank imposes a delay on a particular deposit that is not longer than 
the availability required by Sec.  229.12 for [lsqbb]local and 
nonlocal[rsqbb] checks, the reason for the delay need not be based 
on the exceptions provided in Sec.  229.13. If the delay exceeds the 
time periods permitted under Sec.  229.12, however, then it must be 
based on an exception provided in Sec.  229.13, and the bank must 
comply with the Sec.  229.13 notice requirements. A bank that 
imposes delays on a case-by-case basis may avail itself of the one-
time notice provisions in Sec.  229.13(g)(2) and (3) for deposits to 
which those provisions apply.
    2. Notice at time of case-by-case delay.
    a. In addition to including the disclosures required by 
paragraph (c)(1) of this section in their specific availability 
policy disclosure, banks that delay or extend the time period when 
funds are available for withdrawal on a case-by-case basis must give 
customers a [rtrif]written[ltrif] notice when availability of funds 
from a particular deposit will be delayed or extended beyond the 
time when deposited funds are generally available for withdrawal. 
The notice must state that a delay is being imposed and indicate 
when the funds will be available. In addition, the notice must 
include [lsqbb]the[rsqbb] [rtrif]a number or code that identifies 
the customer's[ltrif] account [lsqbb]number[rsqbb], the date of the 
deposit, [rtrif]the total amount of the deposit,[ltrif] 
[lsqbb]and[rsqbb] the amount of the deposit being delayed[rtrif], 
and the day the funds will be available for withdrawal.[ltrif]
    b. If notice of the delay was not given at the time the deposit 
was made and the bank assesses overdraft or returned check fees on 
accounts when a case-by-case hold has been placed, the case-by-case 
hold notice provided to the customer must include a notice 
concerning overdraft or returned check fees. The notice must state 
that the customer may be entitled to a refund of any overdraft or 
returned check fees that result from the deposited funds not being 
available if the check that was deposited was in fact paid by the 
payor bank, and explain how to request a refund of any fees. (See 
Sec.  229.16(c)(3).)
    c. The requirement that the case-by-case hold notice state the 
day that funds will be made available for withdrawal may be met by 
stating the date or the number of business days after deposit that 
the funds will be made available. This requirement is satisfied if 
the notice provides information sufficient to indicate when funds 
will be available and the amounts that will be available at those 
times. For example, for a deposit involving more than one check, the 
bank need not provide a notice that discloses when funds from each 
individual item in the deposit will be available for withdrawal. 
Instead, the bank may provide a total dollar amount for each of the 
time periods when funds will be available, or provide the customer 
with an explanation of how to determine the amount of the deposit 
that will be held and when the held funds will be available for 
withdrawal.
    d. For deposits made in person to an employee of the depositary 
bank, the notice generally must be given at the time of the deposit. 
The notice at the time of the deposit must be given to the person 
making the deposit, that is, the ``depositor.'' The depositor need 
not be the customer holding the account. For other deposits, such as 
deposits received at an ATM, lobby deposit box, night depository, 
through the mail, or by armored car, notice must be 
[lsqbb]mailed[rsqbb] [rtrif]sent[ltrif] to the customer not later 
than the close of the business day following the banking day on 
which the deposit was made. Notice to the customer also 
[lsqbb]may[rsqbb] [rtrif]must[ltrif] be [lsqbb]provided[rsqbb] 
[rtrif]sent[ltrif] not later than the close of the business day 
following the banking day on which the deposit was made if the 
decision to delay availability is made after the time of the 
deposit. [rtrif]If the

[[Page 16946]]

customer has agreed to accept notices electronically, the bank shall 
send the notice such that the bank may reasonably expect it to be 
received by the customer not later than the first business day 
following the banking day the deposit is made.[ltrif]
    3. Overdraft and returned check fees. If a depositary bank 
delays or extends the time when funds from a deposited check are 
available for withdrawal on a case-by-case basis and does not 
provide a written notice to its depositor at the time of deposit, 
the depositary bank may not assess any overdraft or returned check 
fees (such as an insufficient funds charge) or charge interest for 
use of an overdraft line of credit, if the deposited check is paid 
by the paying bank and these fees would not have occurred had the 
additional case-by-case delay not been imposed. A bank may assess an 
overdraft or returned check fee under these circumstances, however, 
if it provides notice to the customer in the notice required by 
paragraph (c)(2) of this section that the fee may be subject to 
refund, and refunds the fee upon the request of the customer when 
required to do so. The notice must state that the customer may be 
entitled to a refund of any overdraft or returned check fees that 
are assessed if the deposited check is paid, and indicate where such 
requests for a refund of overdraft fees should be directed. 
Paragraph (c)(3) applies when a bank provides a case-by-case notice 
in accordance with paragraph (c)(2) and does not apply if the bank 
has provided an exception hold notice in accordance with Sec.  
229.13.

D. 229.16(d) Credit Union Notice of Interest Payment Policy

    1. This paragraph sets forth the special disclosure requirement 
for credit unions that delay accrual of interest or dividends for 
all cash and check deposits beyond the date of receiving provisional 
credit for checks being deposited. (The interest payment requirement 
is set forth in Sec.  229.14(a).) Such credit unions are required to 
describe their policy with respect to accrual of interest or 
dividends on deposits in their specific availability policy 
disclosure.

XI. Section 229.17 Initial Disclosures

    A. This paragraph requires banks to provide a notice of their 
availability policy to all potential customers prior to opening an 
account. The requirement of a notice prior to opening an account 
requires banks to provide disclosures prior to accepting a deposit 
to open an account. Disclosures must be given at the time the bank 
accepts an initial deposit regardless of whether the bank has opened 
the account yet for the customer. If a bank, however, receives a 
written request by mail from a person asking that an account be 
opened and the request includes an initial deposit, the bank may 
open the account with the deposit, provided the bank 
[lsqbb]mails[rsqbb] [rtrif]sends[ltrif] the required disclosures to 
the customer not later than the business day following the banking 
day on which the bank receives the deposit. Similarly, if a bank 
receives a telephone request from a customer asking that an account 
be opened with a transfer from a separate account of the customer's 
at the bank, the disclosure may be mailed not later than the 
business day following the banking day of the request.

XII. Section 229.18 Additional Disclosure Requirements

A. 229.18(a) Deposit Slips

    1. This paragraph requires banks to include a notice on all 
preprinted deposit slips. The deposit slip notice need only state, 
somewhere on the front of the deposit slip, that deposits may not be 
available for immediate withdrawal. The notice is required only on 
preprinted deposit slips--those printed with the customer's account 
number and name and furnished by the bank in response to a 
customer's order to the bank. A bank need not include the notice on 
deposit slips that are not preprinted and supplied to the customer--
such as counter deposit slips--or on those special deposit slips 
provided to the customer under Sec.  229.10(c). A bank is not 
responsible for ensuring that the notice appear[rtrif]s[ltrif] on 
deposit slips that the customer does not obtain from or through the 
bank. [lsqbb]This paragraph applies to preprinted deposit slips 
furnished to customers on or after September 1, 1988.[rsqbb]
* * * * *

E. 229.18(e) Changes in Policy

    1. This paragraph requires banks to send notices to their 
customers when the banks change their availability policies with 
regard to consumer accounts. A notice may be given in any form as 
long as it is clear and conspicuous. If the bank gives notice of a 
change by sending the customer a complete new availability 
disclosure, the bank must direct the customer to the changed terms 
in the disclosure by use of a letter or insert, or by highlighting 
the changed terms in the disclosure.
    2. Generally, a bank must send a notice at least 30 calendar 
days before implementing any change in its availability policy. If 
the change results in faster availability of deposits[lsqbb]--for 
example, if the bank changes its availability for nonlocal checks 
from the fifth business day after deposit to the fourth business day 
after deposit--[rsqbb] the bank need not send advance notice. The 
bank must, however, send notice of the change no later than 30 
calendar days after the change is implemented. [lsqbb]A bank is not 
required to give a notice when there is a change in appendix B 
(reduction of schedules for certain nonlocal checks).[rsqbb]
    3. A bank that has provided its customers with a list of ATMs 
under Sec.  229.16(b)(5) shall provide its customers with an updated 
list of ATMs once a year if there are changes in the list of ATMs 
previously disclosed to the customers.

XIII. Section 229.19 Miscellaneous

A. 229.19(a) When Funds Are Considered Deposited

    1. The time funds must be made available for withdrawal under 
this subpart is determined by the day the deposit is made. This 
paragraph provides rules to determine the day funds are considered 
deposited in various circumstances.
    2. Staffed facilities and ATMs. Funds received at a staffed 
teller station or ATM are considered deposited when received by the 
teller or placed in the ATM. Funds received at a contractual branch 
are considered deposited when received by a teller at the 
contractual branch or deposited into a proprietary ATM of the 
contractual branch. (See also, Commentary to Sec.  229.10(c) on 
deposits made to an employee of the depositary bank.) Funds 
deposited to a deposit box in a bank lobby that is accessible to 
customers only during regular business hours generally are 
considered deposited when placed in the lobby box; a bank may, 
however, treat deposits to lobby boxes the same as deposits to night 
depositories (as provided in Sec.  229.19(a)(3)), provided a notice 
appears on the lobby box informing the customer when such funds will 
be considered deposited.
    3. Mail. Funds mailed to the depositary bank are considered 
deposited on the banking day they are received by the depositary 
bank. The funds are received by the depositary bank at the time the 
mail is delivered to the bank, even if it is initially delivered to 
a mail room, rather than the check processing area.
    4. Other facilities.
    a. In addition to deposits at staffed facilities, at ATMs, and 
by mail, funds may be deposited at a facility such as a night 
depository or a lock box. A night depository is a receptacle for 
receipt of deposits, typically used by corporate depositors when the 
branch is closed. Funds deposited at a night depository are 
considered deposited on the banking day the deposit is removed, and 
the contents of the deposit are accessible to the depositary bank 
for processing. For example, some businesses deposit their funds in 
a locked bag at the night depository late in the evening, and return 
to the bank the following day to open the bag. Other depositors may 
have an agreement with their bank that the deposit bag must be 
opened under the dual control of the bank and the depositor. In 
these cases, the funds are considered deposited when the customer 
returns to the bank and opens the deposit bag.
    b. A lock box is a post office box used by a corporation for the 
collection of bill payments or other check receipts. The depositary 
bank generally assumes the responsibility for collecting the mail 
from the lock box, processing the checks, and crediting the 
corporation for the amount of the deposit. Funds deposited through a 
lock box arrangement are considered deposited on the day the deposit 
is removed from the lock box and are accessible to the depositary 
bank for processing.
    5. Certain off-premise ATMs. A special provision is made for 
certain off-premise ATMs that are not serviced daily. Funds 
deposited at such an ATM are considered deposited on the day they 
are removed from the ATM, if the ATM is not serviced more than two 
times each week. This provision is intended to address the practices 
of some banks of servicing certain remote ATMs infrequently. If a 
depositary bank applies this provision with respect to an ATM, a 
notice must be posted at the ATM informing depositors that funds 
deposited at the ATM may not be considered deposited until a future 
day, in accordance with Sec.  229.18.

[[Page 16947]]

    6. Banking day of deposit.
    a. This paragraph also provides that a deposit received on a day 
that the depositary bank is closed, or after the bank's cut-off 
hour, may be considered made on the next banking day. Generally, for 
purposes of the availability schedules of this subpart, a bank may 
establish a cut-off hour of 2[rtrif]:00[ltrif] p.m. or later for 
receipt of deposits at its head office or branch offices. For 
receipt of deposits at ATMs, contractual branches, or other off-
premise facilities, such as night depositories or lock boxes, the 
depositary bank may establish a cut-off hour of 12 noon or later 
(either local time of the branch or other location of the depositary 
bank at which the account is maintained or local time of the ATM, 
contractual branch, or other off-premise facility). The depositary 
bank must use the same timing method for establishing the cut-off 
hour for all ATMs, contractual branches, and other off-premise 
facilities used by its customers. The choice of cut-off hour must be 
reflected in the bank's internal procedures, and the bank must 
inform its customers of the cut-off hour upon request. This earlier 
cut-off for ATM, contractual branch, or other off-premise deposits 
is intended to provide greater flexibility in the servicing of these 
facilities.
    b. Different cut-off hours may be established for different 
types of deposits. For example, a bank may establish a 
2[rtrif]:00[ltrif] p.m. cut-off for the receipt of check deposits, 
but a later cut-off for the receipt of wire transfers. Different 
cut-off hours also may be established for deposits received at 
different locations. For example, a different cut-off may be 
established for ATM deposits than for over-the-counter deposits, or 
for different teller stations at the same branch. With the exception 
of the 12[rtrif]:00[ltrif] noon cut-off for deposits at ATMs and 
off-premise facilities, no cut-off hour for receipt of deposits for 
purposes of this subpart can be established earlier than 
2[rtrif]:00[ltrif] p.m.
    c. A bank is not required to remain open until 
2[rtrif]:00[ltrif] p.m. If a bank closes before 2[rtrif]:00[ltrif] 
p.m., deposits received after the closing may be considered 
deposited on the next banking day. Further, as Sec.  229.2(f) 
defines the term banking day as the portion of a business day on 
which a bank is open to the public for substantially all of its 
banking functions, a day, or a portion of a day, is not necessarily 
a banking day merely because the bank is open for only limited 
functions, such as keeping drive-in or walk-up teller windows open, 
when the rest of the bank is closed to the public. For example, a 
banking office that usually provides a full range of banking 
services may close at 12[rtrif]:00[ltrif] noon but leave a drive-in 
teller window open for the limited purpose of receiving deposits and 
making cash withdrawals. Under those circumstances, the bank is 
considered closed and may consider deposits received after 
12[rtrif]:00[ltrif] noon as having been received on the next banking 
day. The fact that a bank may reopen for substantially all of its 
banking functions after 2[rtrif]:00[ltrif] p.m., or that it 
continues its back office operations throughout the day, would not 
affect this result. A bank may not, however, close individual teller 
stations and reopen them for next-day's business before 
2[rtrif]:00[ltrif] p.m. during a banking day.

B. 229.19(b) Availability at Start of Business Day

    1. If funds must be made available for withdrawal on a business 
day [rtrif]under subpart B[ltrif], the funds must be available for 
withdrawal by the later of 9[rtrif]:00[ltrif] a.m. or the time the 
depositary bank's teller facilities, including ATMs, are available 
for customer account withdrawals, except under the special rule for 
cash withdrawals set forth in Sec.  
229.12[lsqbb](d)[rsqbb][rtrif](b)[ltrif]. Thus, if a bank has no 
ATMs and its branch facilities are available for customer 
transactions beginning at 10[rtrif]:00[ltrif] a.m., funds must be 
available for customer withdrawal beginning at 10[rtrif]:00[ltrif] 
a.m. If the bank has ATMs that are available 24 hours a day, rather 
than establishing 12:01 a.m. as the start of the business day, this 
paragraph sets 9[rtrif]:00[ltrif] a.m. as the start of the day with 
respect to ATM withdrawals. The Board believes that this rule 
provides banks with sufficient time to update their accounting 
systems to reflect the available funds in customer accounts for that 
day.
    2. The start of business is determined by the local time of the 
branch or other location of the depositary bank at which the account 
is maintained. For example, if funds in a customer's account at a 
west coast bank are first made available for withdrawal at the start 
of business on a given day, and the customer attempts to withdraw 
the funds at an east coast ATM, the depositary bank is not required 
to make the funds available until 9[rtrif]:00[ltrif] a.m. 
[lsqbb]west coast time[rsqbb] (12[rtrif]:00[ltrif] noon [lsqbb]east 
coast[rsqbb] [rtrif]Eastern[ltrif] time).

C. 229.19(c) Effect on Policies of Depositary Bank

    1. This subpart establishes the maximum hold that may be placed 
on customer deposits. A depositary bank may provide availability to 
its customers in a shorter time than prescribed in this subpart. A 
depositary bank also may adopt different funds availability policies 
for different segments of its customer base, as long as each policy 
meets the schedules in the regulation. For example, a bank may 
differentiate between its corporate and consumer customers, or may 
adopt different policies for its consumer customers based on whether 
a customer has an overdraft line of credit associated with the 
account.
    2. This regulation does not affect a depositary bank's right to 
accept or reject a check for deposit, to charge back the customer's 
account based on a returned check or notice of nonpayment, or to 
claim a refund for any credit provided to the customer. For example, 
even if a check is returned or a notice of nonpayment is received 
after the time by which funds must be made available for withdrawal 
in accordance with this regulation, the depositary bank may charge 
back the customer's account for the full amount of the check. 
[lsqbb](See Sec.  229.33(d) and Commentary.)[rsqbb]
    3. Nothing in the regulation requires a depositary bank to have 
facilities open for customers to make withdrawals at specified times 
or on specified days. For example, even though the special cash 
withdrawal rule set forth in Sec.  
229.12[lsqbb](d)[rsqbb][rtrif](b)[ltrif] states that a bank must 
make [lsqbb]up to $400 available for cash 
withdrawals[rsqbb][rtrif]the cash withdrawal amount available[ltrif] 
no later than 5[rtrif]:00[ltrif] p.m. on specific business days, if 
a bank does not participate in an ATM system and does not have any 
teller windows open at or after 5[rtrif]:00[ltrif] p.m., the bank 
need not join an ATM system or keep offices open. In this case, the 
bank complies with this rule if the funds that are required to be 
available for cash withdrawal at 5[rtrif]:00[ltrif] p.m. on a 
particular day are available for withdrawal at the start of business 
on the following day. Similarly, if a depositary bank is closed for 
customer transactions, including ATMs, on a day funds must be made 
available for withdrawal, the regulation does not require the bank 
to open.
    4. The special cash withdrawal rule in the EFA Act recognizes 
that the [lsqbb]$400[rsqbb][rtrif]the cash withdrawal amount[ltrif] 
that must be made available for cash withdrawal by 
5[rtrif]:00[ltrif] p.m. on the day specified in the schedule may 
exceed a bank's daily ATM cash withdrawal limit and explicitly 
provides that the EFA Act does not supersede a bank's policy in this 
regard. As a result, if a bank has a policy of limiting 
[rtrif]daily[ltrif] cash withdrawals from automated teller machines 
to [lsqbb]$250 per day[rsqbb][rtrif]less than the cash withdrawal 
amount[ltrif], the regulation would not require that the bank 
dispense [lsqbb]$400 of the proceeds of the customer's 
deposit[rsqbb][rtrif]the full amount[ltrif] that must be made 
available for cash withdrawal on that day.
    5. Even though the EFA Act clearly provides that the bank's ATM 
withdrawal limit is not superseded by the federal availability rules 
on the day funds must first be made available, the EFA Act does not 
specifically permit banks to limit cash withdrawals at ATMs on 
subsequent days when the entire amount of the deposit must be made 
available for withdrawal. The Board believes that the rationale 
behind the EFA Act's provision that a bank's ATM withdrawal limit is 
not superseded by the requirement that funds be made available for 
cash withdrawal applies on subsequent days. Nothing in the 
regulation prohibits a depositary bank from establishing ATM cash 
withdrawal limits that vary among customers of the bank, as long as 
the limit is not dependent on the length of time funds have been in 
the customer's account (provided that the permissible hold has 
expired).
    6. Some small banks, particularly credit unions, due to lack of 
secure facilities, keep no cash on their premises and hence offer no 
cash withdrawal capability to their customers. Other banks limit the 
amount of cash on their premises due to bonding requirements or cost 
factors, and consequently reserve the right to limit the amount of 
cash each customer can withdraw over-the-counter on a given day. For 
example, some banks require advance notice for large cash 
withdrawals in order to limit the amount of cash needed to be 
maintained on hand at any time.
    7. Nothing in the regulation is intended to prohibit a bank from 
limiting the amount of cash that may be withdrawn at a staffed 
teller station if the bank has a policy limiting the amount of cash 
that may be withdrawn, and if that policy is applied equally to all 
customers of the bank, is based on security,

[[Page 16948]]

operating, or bonding requirements, and is not dependent on the 
length of time the funds have been in the customer's account (as 
long as the permissible hold has expired). The regulation, however, 
does not authorize such policies if they are otherwise prohibited by 
statutory, regulatory, or common law.

D. 229.19(d) Use of Calculated Availability

    1. A depositary bank may provide availability to its nonconsumer 
accounts on a calculated availability basis. Under calculated 
availability, a specified percentage of funds from check deposits 
may be made available to the customer on the next business day, with 
the remaining percentage deferred until [rtrif]the[ltrif] subsequent 
day[lsqbb]s[rsqbb]. The determination of the percentage of deposited 
funds that will be made available each day is based on the 
customer's typical deposit mix as determined by a sample of the 
customer's deposits. Use of calculated availability is permitted 
only if, on average, the availability terms that result from the 
sample are equivalent to or more prompt than the requirements of 
this subpart.

E. 229.19(e) Holds on Other Funds

    1. Section 607(d) of the EFA Act (12 U.S.C. 4006(d)) provides 
that once funds are available for withdrawal under the EFA Act, such 
funds shall not be frozen solely due to the subsequent deposit of 
additional checks that are not yet available for withdrawal. This 
provision of the EFA Act is designed to prevent evasion of the EFA 
Act's availability requirements.
    2. This paragraph clarifies that if a customer deposits a check 
in an account (as defined in Sec.  229.2(a)), the bank may not place 
a hold on any of the customer's funds so that the funds that are 
held exceed the amount of the check deposited or the total amount of 
funds held are not made available for withdrawal within the times 
required in this subpart. For example, if a bank places a hold on 
funds in a customer's non[rtrif]-[ltrif]transaction account, rather 
than a transaction account, for deposits made to the customer's 
transaction account, the bank may place such a hold only to the 
extent that the funds held do not exceed the amount of the deposit 
and the length of the hold does not exceed the time periods 
permitted by this regulation.
    3. These restrictions also apply to holds placed on funds in a 
customer's account (as defined in Sec.  229.2(a)) if a customer 
cashes a check at a bank (other than a check drawn on that bank) 
over the counter. The regulation does not prohibit holds that may be 
placed on other funds of the customer for checks cashed over the 
counter, to the extent that the transaction does not involve a 
deposit to an account. [rtrif]When a customer cashes a check over 
the counter and the bank places a hold on an account of the 
customer, the bank must give whatever notice would have been 
required under Sec. Sec.  229.13 or 229.16 had the check been 
deposited in the account.[ltrif] A bank may not, however, place a 
hold on any account when an ``on us'' check is cashed over the 
counter. ``On us'' checks are considered finally paid when cashed 
(see U.C.C. 4-215(a)(1)). [lsqbb]When a customer cashes a check over 
the counter and the bank places a hold on an account of the 
customer, the bank must give whatever notice would have been 
required under Sec. Sec.  229.13 or 229.16 had the check been 
deposited in the account.[rsqbb]

F. 229.19(f) Employee Training and Compliance

    1. The EFA Act requires banks to take such actions as may be 
necessary to inform fully each employee that performs duties subject 
to the EFA Act of the requirements of the EFA Act, and to establish 
and maintain procedures reasonably designed to 
[lsqbb]assure[rsqbb][rtrif]ensure[ltrif] and monitor employee 
compliance with such requirements.
    2. This paragraph requires a bank to establish procedures to 
ensure compliance with these requirements and provide these 
procedures to the employees responsible for carrying them out.

G. 229.19(g) Effect of Merger Transaction

    1. After banks merge, there is often a period of adjustment 
before their operations are consolidated. This paragraph 
accommodates this adjustment period by allowing merged banks to be 
treated as separate banks for purposes of this subpart for a period 
of up to one year after consummation of the merger transaction, 
except that a customer of any bank that is a party to the 
transaction that has an established account with that bank may not 
be treated as a new[rtrif]-[ltrif]account holder for any other party 
to the transaction for purposes of the new[rtrif]-[ltrif]account 
exception of Sec.  229.13(a), and a deposit in any branch of the 
merged bank is considered deposited in the bank for purposes of the 
availability schedules in accordance with Sec.  229.19(a).
    2. This rule affects the status of the combined entity in 
several areas. For example, this rule would affect when an ATM is a 
proprietary ATM (Sec.  229.2[lsqbb](aa)[rsqbb][rtrif](kk)[ltrif] and 
Sec.  229.12[lsqbb](b)[rsqbb][rtrif](d)[ltrif]) and when a check is 
considered drawn on a branch of the depositary bank (Sec.  
229.10(c)(1)(vi)).
    3. Merger transaction is defined in Sec.  
229.2[lsqbb](t)[rsqbb][rtrif](dd)[ltrif].

XIV. Section 229.20 Relation to State Law

A. 229.20(a) In General

    1. Several states have enacted laws that govern when banks in 
those states must make funds available to their customers. The EFA 
Act provides that any state law in effect on September 1, 1989, that 
provides that funds be made available in a shorter period of time 
than provided in this regulation, will supersede the time periods in 
the EFA Act and the regulation. [lsqbb]The Conference Report on the 
EFA Act clarifies this provision by stating that any state law 
enacted on or before September 1, 1989, may supersede federal law to 
the extent that the law relates to the time funds must be made 
available for withdrawal. H.R. Rep. No. 261, 100th Cong. 1st Sess. 
at 182 (1987).[rsqbb]
    2. Thus, if a state had wished to adopt a law governing funds 
availability, it had to have made that law effective on or before 
September 1, 1989. Laws adopted after that date do not supersede 
federal law, even if they provide for shorter availability periods 
than are provided under federal law. If a state that had a law 
governing funds availability in effect before September 1, 1989, 
amended its law after that date, the amendment would not supersede 
Federal law, but an amendment deleting a state requirement would be 
effective.
    3. If a state provides for a shorter hold for a certain category 
of checks than is provided for under Federal law, that state 
requirement will supersede the federal provision. [lsqbb]For 
example, most state laws base some hold periods on whether the check 
being deposited is drawn on an in-state or out-of-state bank. If a 
state contains more than one check processing region, the state's 
hold period for in-state checks may be shorter than the Federal 
maximum hold period for nonlocal checks. Thus, the state schedule 
would supersede the Federal schedule to the extent that it applies 
to in-state, nonlocal checks.
    4.[rsqbb] The EFA Act also provides that any state law that 
provides for availability in a shorter period of time than required 
by Federal law is applicable to all federally insured institutions 
in that state, including federally chartered institutions. If a 
state law provides shorter availability only for deposits in 
accounts in certain categories of banks, such as commercial banks, 
the superseding state law continues to apply only to those 
categories of banks, rather than to all federally insured banks in 
the state.

B. 229.20(b) Preemption of Inconsistent Law

    1. This paragraph reflects the statutory provision that other 
provisions of state law that are inconsistent with federal law are 
preempted. Preemption does not require a determination by the Board 
to be effective.

C. 229.20(c) Standards for Preemption

    1. This section describes the standards [lsqbb]the Board uses 
in[rsqbb][rtrif]for[ltrif] making determinations on whether federal 
law will preempt state laws governing funds availability. A 
provision of state law is considered inconsistent with federal law 
if it permits a depositary bank to make funds available to a 
customer in a longer period of time than the maximum period 
permitted by the EFA Act and this regulation. For example, a state 
law that permits a hold of [lsqbb]four[rsqbb][rtrif]three[ltrif] 
business days or longer for [lsqbb]local[rsqbb] checks permits a 
hold that is longer than that permitted under the EFA Act and this 
regulation, and therefore is inconsistent and preempted. State 
availability schedules that provide for availability in a shorter 
period of time than required under Regulation CC supersede the 
federal schedule.
    2. Under a state law, some categories of deposits could be 
available for withdrawal sooner or later than the time required by 
this subpart, depending on the composition of the deposit. For 
example, the EFA Act and this regulation (Sec.  229.10(c)(1)(vii)) 
require next-day availability for [lsqbb]the first 
$100[rsqbb][rtrif]a minimum amount[ltrif] of the aggregate deposit 
of [lsqbb]local or nonlocal[rsqbb] checks on any day, and a state 
law could require next-day availability for any check of 
[lsqbb]$100[rsqbb][rtrif]the minimum amount under Sec.  
229.10(c)[ltrif] or less that is deposited. Under the EFA Act and 
this regulation, if [rtrif]on a given day[ltrif] either one 
[lsqbb]$150[rsqbb] check [rtrif]that is greater than the minimum 
amount or three checks that are

[[Page 16949]]

each less than the minimum amount, but that combined are more than 
the minimum amount, are deposited[ltrif][lsqbb]or three $50 checks 
are deposited on a given day[rsqbb], [lsqbb]$100[rsqbb] [rtrif]the 
minimum amount under Sec.  229.10(c)[ltrif] must be made available 
for withdrawal on the next business day, and 
[lsqbb]$50[rsqbb][rtrif]the remaining amount[ltrif] must be made 
available in accordance with the [lsqbb]local or nonlocal[rsqbb] 
[rtrif]general[ltrif] schedule. Under the state law, however, the 
two deposits would be subject to different availability rules. In 
the first case, none of the proceeds of the deposit would be subject 
to next-day availability; in the second case, the entire proceeds of 
the deposit would be subject to next-day availability. In this 
example, because the state law would, in some situations, permit a 
hold longer than the maximum permitted by the EFA Act, this 
provision of state law is inconsistent and preempted in its 
entirety.
    3. In addition to the differences between state and federal 
availability schedules, a number of state laws contain exceptions to 
the state availability schedules that are different from those 
provided under the EFA Act and this regulation. The state exceptions 
continue to apply only in those cases where the state schedule is 
shorter than or equal to the federal schedule, and then only up to 
the limit permitted by the Regulation CC schedule. Where a deposit 
is subject to a state exception under a state schedule that is not 
preempted by Regulation CC and is also subject to a federal 
exception, the hold on the deposit cannot exceed the hold 
permissible under the federal exception in accordance with 
Regulation CC. In such cases, only one exception notice is required, 
in accordance with Sec.  229.13(g). This notice need only include 
the applicable federal exception as the reason the exception was 
invoked. For those categories of checks for which the state schedule 
is preempted by the federal schedule, only the federal exceptions 
may be used.
    4. State laws that provide maximum availability periods for 
categories of deposits that are not covered by the EFA Act would not 
be preempted. Thus, state funds availability laws that apply to 
funds in time and savings deposits are not affected by the EFA Act 
or this regulation. In addition, the availability schedules of 
several states apply to ``items'' deposited to an account. The term 
items may encompass [rtrif]types of[ltrif] deposits [lsqbb], such as 
nonnegotiable instruments,[rsqbb] that are not subject to the 
Regulation CC availability schedules. Deposits that are not covered 
by Regulation CC continue to be subject to the state availability 
schedules. State laws that provide maximum availability periods for 
categories of institutions that are not covered by the EFA Act also 
would not be preempted. For example, a state law that governs money 
market mutual funds would not be affected by the EFA Act or this 
regulation.
    5. Generally, state rules governing the disclosure or notice of 
availability policies applicable to accounts also are preempted, if 
they are different from the federal rules. Nevertheless, a state law 
requiring disclosure of funds availability policies that apply to 
deposits other than ``accounts,'' such as savings or time deposits, 
are not inconsistent with the EFA Act and this subpart. Banks in 
these states would have to follow the state disclosure rules for 
these deposits.

D. 229.20(d) Preemption Determinations

    1. The Board may issue preemption determinations upon the 
request of an interested party in a state. The determinations will 
relate only to the provisions of 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubparts A and B; generally the Board 
will not issue individual preemption determinations regarding the 
relation of state U.C.C. provisions to the requirements of 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C [rtrif]or D[ltrif].

E. 229.20(e) Procedures for Preemption Determinations

    1. This provision sets forth the information that must be 
included in a request by an interested party for a preemption 
determination [lsqbb]by the Board[rsqbb].

XV. Section 229.21 Civil Liability

A. 229.21(a) Civil Liability

    1. This paragraph sets forth the statutory penalties for failure 
to comply with the requirements of this subpart. These penalties 
apply to provisions of state law that supersede provisions of this 
regulation, such as requirements that funds deposited in accounts at 
banks be made available more promptly than required by this 
regulation, but they do not apply to other provisions of state law. 
(See Commentary to Sec.  229.20.)

B. 229.21(b) Class Action Awards

    1. This paragraph sets forth the provision in the EFA Act 
concerning the factors that should be considered by the court in 
establishing the amount of a class action award.

C. 229.21(c) Bona Fide Errors

    1. A bank is shielded from liability under this section for a 
violation of a requirement of this subpart if it can demonstrate, by 
a preponderance of the evidence, that the violation resulted from a 
bona fide error and that it maintains procedures designed to avoid 
such errors. For example, a bank may make a bona fide error if it 
fails to give next-day availability on a check drawn on the Treasury 
because the bank's computer system malfunctions in a way that 
prevents the bank from updating its customer's account[lsqbb]; or if 
it fails to identify whether a payable-through check is a local or 
nonlocal check despite procedures designed to make this 
determination accurately[rsqbb].

D. 229.21(d) Jurisdiction

    1. The EFA Act confers subject matter jurisdiction on courts of 
competent jurisdiction and provides a time limit for civil actions 
for violations of this subpart.

E. 229.21(e) Reliance on Board Rulings

    1. This provision shields banks from civil liability if they act 
in good faith in reliance on any rule, regulation, model form, 
notice, or clause (if the disclosure actually corresponds to the 
bank's availability policy), or interpretation of the Board, even if 
it were subsequently determined to be invalid. Banks may rely on 
this Commentary, which is issued as an official Board 
interpretation, as well as on the regulation itself.
    [rtrif]2. This provision does not shield a bank from civil 
liability if the bank relies on earlier versions of the model forms 
(i.e., those not currently in appendix C) after [lsqbb]date that is 
12 months after the effective date of the rule[rsqbb].[ltrif]

F. 229.21(f) Exclusions

    1. This provision clarifies that liability under this section 
does not apply to violations of the requirements of 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C [rtrif]or D[ltrif] of this 
regulation, or to actions for wrongful dishonor of a check by a 
paying bank's customer.

G. 229.21(g) Record Retention

    1. Banks must keep records to show compliance with the 
requirements of this subpart for at least two years. This record 
retention period is extended in the case of civil actions and 
enforcement proceedings. Generally, a bank is not required to retain 
records showing that it actually has given disclosures or notices 
required by this subpart to each customer, but it must retain 
evidence demonstrating that its procedures reasonably ensure the 
customers' receipt of the required disclosures and notices. A bank 
must, however, retain a copy of each notice provided pursuant to its 
use of the reasonable[rtrif]-[ltrif]cause exception under Sec.  
229.13(g) as well as a brief description of the facts giving rise to 
the availability of that exception.

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

A. 229.30(a) Return of Checks

    1. This section requires a paying bank (which, for purposes of 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C, may include a payable-
through and payable-at bank; see [lsqbb]Sec.  229.2(z)[rsqbb] 
[rtrif]Sec.  229.2(ii)[ltrif]) that determines not to pay a check to 
return the check expeditiously. [lsqbb]Generally, a check[rsqbb] 
[rtrif]A returned check, including the original check, substitute 
check, and electronic return,[ltrif] is returned expeditiously if 
[lsqbb]the return process is as fast as the forward collection 
process. This paragraph provides two standards for expeditious 
return, the ``two-day/four-day'' test, and the ``forward 
collection'' test[rsqbb][rtrif]paying bank sends the return such 
that the depositary bank normally would receive the returned check 
no later than 4 p.m. (local time of the depositary bank) two 
business days after presentment to the paying bank. See Sec.  
229.30(b) and commentary thereto for the exceptions to this general 
rule. If the paying bank need not return the check expeditiously 
under Sec.  229.30(a), the paying bank, nonetheless, must return the 
check within its deadlines under the Uniform Commercial Code, 
Regulation J (12 CFR part 210) or Sec.  229.36(d)(2), or Sec.  
229.30(c) for returning the item or notice (See Sec.  229.30(a)(4) 
and accompanying commentary).[ltrif]
    [lsqbb]2. Under the ``two-day/four-day'' test, if a check is 
returned such that it would normally be received by the depositary 
bank two business days after presentment where both the paying and 
depositary banks are located in the same check processing region or 
four business days after presentment where the paying and depositary 
banks are not located in the same check processing region, the check 
is considered returned expeditiously. In certain limited cases,

[[Page 16950]]

however, these times are shorter than the time it would normally 
take a forward collection check deposited in the paying bank and 
payable by the depositary bank to be collected. Therefore, the Board 
has included a ``forward collection'' test, whereby a check is 
nonetheless considered to be returned expeditiously if the paying 
bank uses transportation methods and banks for return comparable to 
those used for forward collection checks, even if the check is not 
received by the depositary banks within the two-day or four-day 
period.
    3. Two-day/four-day test.
    a. Under the first test, a paying bank must return the check so 
that the check would normally be received by the depositary bank 
within specified times, depending on whether or not the paying and 
depositary banks are located in the same check processing region.
    b. Where both banks are located in the same check processing 
region, a check is returned expeditiously if it is returned to the 
depositary bank by 4 p.m. (local time of the depositary bank) of the 
second business day after the banking day on which the check was 
presented to the paying bank. For example, a check presented on 
Monday to a paying bank must be returned to a depositary bank 
located in the same check processing region by 4 p.m. on Wednesday. 
For a paying bank that is located in a different check processing 
region than the depositary bank, the deadline to complete return is 
4 p.m. (local time of the depositary bank) of the fourth business 
day after the banking day on which the check was presented to the 
paying bank. For example, a check presented to such a paying bank on 
Monday must be returned to the depositary bank by 4 p.m. on Friday.
    c. This two-day/four-day test does not necessarily require 
actual receipt of the check by the depositary bank within these 
times. Rather, the paying bank must send the check so that the check 
would normally be received by the depositary bank within the 
specified time. Thus, the paying bank is not responsible for 
unforeseeable delays in the return of the check, such as 
transportation delays.[rsqbb]
    [lsqbb]d[rsqbb][rtrif]2[ltrif]. [lsqbb]Often, returned checks 
will be delivered to the depositary bank together with forward 
collection checks.[rsqbb] Where the last day on which a check could 
be delivered to a depositary bank under [lsqbb]this two-day/four-day 
test[rsqbb] Sec.  229.30(a) is not a banking day for the depositary 
bank, [lsqbb]a returning bank might not schedule delivery of forward 
collection checks to the depositary bank on that day. 
Further,[rsqbb] the depositary bank may not process checks on that 
day. Consequently, if the last day of the time limit business day 
following the banking day after which the check was presented is not 
a banking day for the depositary bank, the check electronic return 
may be delivered to the depositary bank sent such that it is 
received by the depositary bank before the close of the depositary 
bank's next banking day and the return will still be considered 
expeditious. [lsqbb]Ordinarily, this extension of time will allow 
the returned checks to be delivered with the next shipment of 
forward collection checks destined for the depositary bank.[rsqbb]
    [lsqbb]e. The times specified in this two-day/four-day test are 
based on estimated forward-collection times, but take into account 
the particular difficulties that may be encountered in handling 
checks. It is anticipated that the normal process of forward 
collection of a check coupled with these return requirements will 
result in the return of checks before the proceeds of local and 
nonlocal checks, other than those covered by section 229.10(c), must 
be made available for withdrawal.[rsqbb]
    [rtrif]3. In order to satisfy its expeditious return 
requirement, a paying bank may return either an electronic return or 
a paper check.[ltrif]
    [lsqbb]f.[rsqbb] [rtrif]4.[ltrif] [lsqbb]Under this two-day/
four-day test, no[rsqbb] [rtrif]No[ltrif] particular 
[lsqbb]means[rsqbb][rtrif]path[ltrif] of returning checks is 
required, thus providing flexibility to paying banks in selecting 
[lsqbb]means[rsqbb][rtrif]the path[ltrif] of return. The Board 
anticipates that paying banks will often use returning banks (see 
Sec.  229.31) as their agents to return checks to depositary banks. 
A paying bank may rely on the availability schedule of the returning 
bank it uses in determining whether the returned check would 
``normally'' be returned within the required time [lsqbb]under this 
two-day/four-day test[rsqbb], unless the paying bank has reason to 
believe that these schedules do not reflect the actual time for 
return of a check.
    [lsqbb]4. Forward collection test.
    a. Under the second, ``forward collection,'' test, a paying bank 
returns a check expeditiously if it returns a check by means as 
swift as the means similarly situated banks would use for the 
forward collection of a check drawn on the depositary bank.
    b. Generally, the paying bank would satisfy the ``forward 
collection'' test if it uses a transportation method and collection 
path for return comparable to that used for forward collection, 
provided that the returning bank selected to process the return 
agrees to handle the returned check under the standards for 
expeditious return for returning banks under Sec.  229.31(a). This 
test allows many paying banks a simple means of expeditious return 
of checks and takes into account the longer time for return that 
will be required by banks that do not have ready access to direct 
courier transportation.
    c. The paying bank's normal method of sending a check for 
forward collection would not be expeditious, however, if it is 
materially slower than that of other banks of similar size and with 
similar check handling activity in its community.
    d. Under the ``forward collection'' test, a paying bank must 
handle, route, and transport a returned check in a manner designed 
to be at least as fast as a similarly situated bank would collect a 
forward collection check (1) of similar amount, (2) drawn on the 
depositary bank, and (3) received for deposit by a branch of the 
paying bank or a similarly situated bank by noon on the banking day 
following the banking day of presentment of the returned check.
    e. This test refers to similarly situated banks to indicate a 
general community standard. In the case of a paying bank (other than 
a Federal Reserve Bank), a similarly situated bank is a bank of 
similar asset size, in the same community, and with similar check 
handling activity as the paying bank. (See Sec.  229.2(ee).) A 
paying bank has similar check handling activity to other banks that 
handle similar volumes of checks for collection.
    f. Under the forward collection test, banks that use means of 
handling returned checks that are less efficient than the means used 
by similarly situated banks must improve their procedures. On the 
other hand, a bank with highly efficient means of collecting checks 
drawn on a particular bank, such as a direct presentment of checks 
to a bank in a remote community, is not required to use that means 
for returned checks, i.e. direct return, if similarly situated banks 
do not present checks directly to that depositary bank.[rsqbb]
    5. Examples.
    [rtrif]a. The depositary bank has agreed to accept electronic 
returns directly from a paying bank. If a check is presented to that 
paying bank on Monday, the paying bank must send the returned check 
such that the depositary bank normally would receive the returned 
check by 4 p.m. (local time of the depositary bank) on Wednesday.
    b. The depositary bank has not agreed to accept electronic 
returns directly from the paying bank, but has agreed to accept 
electronic returns from Returning Bank A, which holds itself as 
willing to accept electronic returns directly or indirectly from the 
paying bank and has agreed to handle returns expeditiously under 
Sec.  229.31(a). If a check is presented to the paying bank on 
Monday, the paying bank must send the returned check such that the 
depositary bank normally would receive the returned check by 4:00 
p.m. (local time of the depositary bank) on Wednesday. The paying 
bank may rely on Returning Bank A's schedules for sending returned 
checks in determining whether the depositary bank normally would 
receive the returned check by 4 p.m. on Wednesday.
    c. The depositary bank has not agreed to accept electronic 
returns directly from the paying bank, but has agreed to accept 
electronic returns from Returning Bank A, which holds itself as 
willing to accept electronic returns directly or indirectly from the 
paying bank and has agreed to handle returns expeditiously under 
Sec.  229.31(a). Returning Bank A, however, does not have an 
agreement with the paying bank to accept returns; rather Returning 
Bank B has agreed to accept returns from the paying bank and to 
handle such returns expeditiously. Returning Bank A has agreed to 
accept returns from Returning Bank B. If a check is presented to the 
paying bank on Monday, the paying bank must send the returned check 
such that the depositary bank normally would receive the returned 
check by 4 p.m. (local time of the depositary bank) on Wednesday.
    d. The depositary bank and paying bank are members of the same 
clearinghouse, through which both have agreed to accept electronic 
returns. If a check is presented to that paying bank on Monday, the 
paying bank must send an electronic return such that the depositary 
bank normally would receive the returned check by 4 p.m. (local time 
of the depositary bank) on Wednesday.

[[Page 16951]]

    e. In each example, the paying bank must send the returned check 
such that the depositary bank normally would receive the check by 4 
p.m. (local time of the depositary bank) on Wednesday. The paying 
bank may satisfy its obligation by sending either an electronic 
return or a paper check by such time. Additionally, if the paying 
bank sends the returned check in a manner such that the depositary 
bank normally would receive the returned check by 4 p.m. on 
Wednesday, but the depositary bank does not receive the returned 
check by that time due to an operational difficulty of the 
depositary bank or returning bank, the paying bank has satisfied its 
expeditious return requirement.[ltrif]
    [lsqbb]If a check is presented to a paying bank on Monday and 
the depositary bank and the paying bank are participants in the same 
clearinghouse and the depositary bank has agreed to receive returns 
electronically through the clearinghouse, the paying bank should 
arrange to have the returned check received by the depositary bank 
by Wednesday. This would be the same day the paying bank would 
deliver a forward collection check to the depositary bank if the 
paying bank received the deposit by noon on Tuesday.[rsqbb]
    [lsqbb]b. i. If a check is presented to a paying bank on Monday 
and the paying bank would normally collect checks drawn on the 
depositary bank by sending them to a correspondent or a Federal 
Reserve Bank by courier, the paying bank could send the returned 
check to its correspondent or Federal Reserve Bank, provided that 
the correspondent has agreed to handle returned checks expeditiously 
under Sec.  229.31(a). (All Federal Reserve Banks agree to handle 
returned checks expeditiously.)
    ii. The paying bank must deliver the returned check to the 
correspondent or Federal Reserve Bank by the correspondent's or 
Federal Reserve Bank's appropriate cut-off hour. The appropriate 
cut-off hour is the cut-off hour for returned checks that 
corresponds to the cut-off hour for forward collection checks drawn 
on the depositary bank that would normally be used by the paying 
bank or a similarly situated bank. A returned check cut-off hour 
corresponds to a forward collection cut-off hour if it provides for 
the same or faster availability for checks destined for the same 
depositary banks.
    iii. In this example, delivery to the correspondent or a Federal 
Reserve Bank by the appropriate cut-off hour satisfies the paying 
bank's duty, even if use of the correspondent or Federal Reserve 
Bank is not the most expeditious means of returning the check. Thus, 
a paying bank may send a local returned check to a correspondent 
instead of a Federal Reserve Bank, even if the correspondent then 
sends the returned check to a Federal Reserve Bank the following day 
as a qualified returned check. Where the paying bank delivers 
forward collection checks by courier to the correspondent or the 
Federal Reserve Bank, mailing returned checks to the correspondent 
or Federal Reserve Bank would not satisfy the forward collection 
test.
    iv. If a paying bank ordinarily mails its forward collection 
checks to its correspondent or Federal Reserve Bank in order to 
avoid the costs of a courier delivery, but similarly situated banks 
use a courier to deliver forward collection checks to their 
correspondent or Federal Reserve Bank, the paying bank must send its 
returned checks by courier to meet the forward collection test.
    c. If a paying bank normally sends its forward collection checks 
directly to the depositary bank, which is located in another 
community, but similarly situated banks send forward collection 
checks drawn on the depositary bank to a correspondent or a Federal 
Reserve Bank, the paying bank would not have to send returned checks 
directly to the depositary bank, but could send them to a 
correspondent or a Federal Reserve Bank.
    d. The dollar amount of the returned check has a bearing on how 
it must be returned. If the paying bank and similarly situated banks 
present large-dollar checks drawn on the depositary bank directly to 
the depositary bank, but use a Federal Reserve Bank or a 
correspondent to collect small-dollar checks, generally the paying 
bank would be required to send its large-dollar returns directly to 
the depositary bank (or through a returning bank, if the checks are 
returned as quickly), but could use a Federal Reserve Bank or a 
correspondent for its small-dollar returns.[rsqbb]
    6. Choice of returning bank.
    In meeting the requirements of [lsqbb]the forward collection 
test[rsqbb] [rtrif]Sec.  229.30(a)[ltrif], the paying bank is 
responsible for its own actions, but not for those of the depositary 
bank or returning banks. (This is analogous to the responsibility of 
collecting banks under U.C.C. 4-202(c).) For example, if the paying 
bank starts the return of the check in a timely manner but return is 
delayed by a returning bank [lsqbb](including delay to create a 
qualified returned check)[rsqbb], generally the paying bank has met 
its [rtrif]expeditious return[ltrif] requirement[lsqbb]s[rsqbb]. 
(See Sec.  229.38.) If, however, the paying bank selects a returning 
bank that the paying bank should know is not capable of meeting its 
return requirements, the paying bank will not have met its 
obligation of exercising ordinary care in selecting intermediaries 
to return the check. [lsqbb]The paying bank is free to use a method 
of return, other than its method of forward collection, as long as 
the alternate method results in delivery of the returned check to 
the depositary bank as quickly as the forward collection of a check 
drawn on the depositary bank or, where the returning bank takes a 
day to create a qualified returned check under Sec.  229.31(a), one 
day later than the forward collection time.[rsqbb] If a paying bank 
returns a check on its banking day of receipt without settling for 
the check, as permitted under U.C.C. 4-302(a), and receives 
settlement for the returned check from a returning bank, it must 
promptly pay the amount of the check to the collecting bank from 
which it received the check.
    [lsqbb]7. Qualified returned checks. Although paying banks may 
wish to prepare qualified returned checks because they will be 
handled at a lower cost by returning banks, the one business day 
extension provided to returning banks is not available to paying 
banks because of the longer time that a paying bank has to dispatch 
the check. Normally, paying banks will be able to convert a check to 
a qualified returned check at any time after the determination is 
made to return the check until late in the day following 
presentment, while a returning bank may receive returned checks late 
on one day and be expected to dispatch them early the next morning. 
A check that is converted to a qualified returned check must be 
encoded in accordance with ANS X9.13 for original checks or ANS 
X9.100-140 for substitute checks.[rsqbb]
    [lsqbb]8[rsqbb][rtrif]7[ltrif]. Routing of returned checks.
    a. [lsqbb]In effect, under either test, 
t[lsqbb][rtrif]T[ltrif]he paying bank acts as an agent or subagent 
of the depositary bank in selecting a means of return. Under Sec.  
229.30(a), a paying bank is authorized to route the returned 
check[rtrif], including an electronic return,[ltrif] in a variety of 
ways:
    i. It may send the returned check directly to the depositary 
bank by courier or other means of delivery[lsqbb],[rsqbb] [rtrif]or 
it may send the electronic return directly to the depositary bank if 
the depositary bank has agreed to accept electronic returns from the 
paying bank, thereby[ltrif] bypassing returning banks; or
    ii. It may send the returned check [rtrif]or electronic 
return[ltrif] to any returning bank agreeing to handle the returned 
check [rtrif]or electronic return[ltrif] for expeditious return to 
the depositary bank under Sec.  229.31(a), regardless of whether or 
not the returning bank handled the check for forward collection. 
[rtrif]In determining whether a depositary bank has agreed to accept 
an electronic return from a returning bank, a paying bank may rely 
on a returning bank's published list of depositary banks to which it 
delivers electronic returns.[ltrif]
    b. If the paying bank elects to return the check directly to the 
depositary bank, it is not necessarily required to return the check 
to the branch of first deposit. The check may be returned to the 
depositary bank at any [rtrif]physical[ltrif] location permitted 
under [lsqbb]Sec.  229.32(a)[rsqbb] [rtrif]Sec.  229.32(b). If the 
paying bank elects to send an electronic return directly to the 
depositary bank, it must send the electronic return to the 
electronic return point designated by the depositary bank[ltrif].
    9. Midnight deadline.
    a. Except for the extension permitted by Sec.  229.30(c), 
discussed below, this section does not relieve a paying bank from 
the requirement for timely return (i.e., midnight deadline) under 
U.C.C. 4-301 and 4-302, which continue to apply. Under U.C.C. 4-302, 
a paying bank is ``accountable'' for the amount of a demand item, 
other than a documentary draft, if it does not pay or return the 
item or send notice of dishonor by its midnight deadline. Under 
U.C.C. 3-418(c) and 4-215(a), late return constitutes payment and 
would be final in favor of a holder in due course or a person who 
has in good faith changed his position in reliance on the payment. 
Thus, retaining this requirement gives the paying bank an additional 
incentive to make a prompt return.
    b. The expeditious return requirement applies to a paying bank 
that determines not to pay a check. This requirement applies to a 
payable-through or a payable-at bank that is defined as a paying 
bank (see [lsqbb]Sec.  229.2(z)[rsqbb][rtrif]Sec.  229.2(ii)[ltrif]) 
and that returns

[[Page 16952]]

a check. This requirement begins when the payable-through or 
payable-at bank receives the check during forward collection, not 
when the payor returns the check to the payable-through or payable-
at bank. Nevertheless, a check sent for payment or collection to a 
payable-through or payable-at bank is not considered to be drawn on 
that bank for purposes of the midnight deadline provision of U.C.C. 
4-301. (See discussion of [lsqbb]Sec.  229.36(a)[rsqbb][rtrif]Sec.  
229.30(a)(5)[ltrif].)
    c. The liability section of this subpart (Sec.  229.38) provides 
that a paying bank is not subject to both ``accountability'' for 
missing the midnight deadline under the U.C.C. and liability for 
missing the timeliness requirements of this regulation. Also, a 
paying bank is not responsible for failure to make expeditious 
return to a party that has breached a presentment warranty under 
U.C.C. 4-208[rtrif].[ltrif][lsqbb], notwithstanding that the paying 
bank has returned the check. (See Commentary to Sec.  
229.33(a).)[rsqbb]
    10. U.C.C. provisions affected. This paragraph directly affects 
the following provisions of the U.C.C., and may affect other 
sections or provisions:
    a. Section 4-301(d), in that instead of returning a check 
through a clearinghouse or to the presenting bank, a paying bank may 
send a returned check to the depositary bank or to a returning bank.
    b. Section 4-301(a), in that time limits specified in that 
section may be affected by the additional requirement to make an 
expeditious return and in that settlement for returned checks is 
made under Sec.  229.31(c), not by revocation of settlement.
    [rtrif]11. Payable-through and payable at checks
    a. For purposes of subpart C, the regulation defines a payable-
through and or payable-at bank (which could be designated the 
collectible-through or collectible-at bank) as a paying bank. The 
requirements of Sec.  229.30(a) are imposed on a payable-through or 
payable-at bank and are based on the time of receipt of the forward 
collection check by the payable-through or payable-at bank. This 
provision is intended to speed the return of checks that are payable 
through or at a bank to the depositary bank.[ltrif]
    B. 229.30(b) [lsqbb]Unidentifiable Depositary 
Bank[rsqbb][rtrif]Exceptions to Expeditious Return of Checks[ltrif]
    1. [rtrif]This paragraph sets forth the circumstances under 
which a paying bank is not required to return the check to the 
depositary bank in accordance with Sec.  229.30(a).[ltrif]
    [rtrif]2. The depositary bank has not agreed to accept 
electronic returns from the paying bank.
    a. In the circumstances where a depositary bank has not agreed 
to accept electronic returns from the paying bank under Sec.  
229.32(a), the paying bank should send a paper return directly to 
the depositary bank or send an electronic return to a returning 
bank, which would then be required to send a paper return to the 
depositary bank.
    b. Example. The depositary bank has agreed to accept electronic 
returns from Returning Bank A. Returning Bank A does not hold itself 
out as accepting electronic returns from either the paying bank or 
other returning banks. Under these facts, the depositary bank has 
not agreed to accept electronic returns from the paying bank under 
Sec.  229.32(a), and therefore the paying bank need not send the 
returned check expeditiously to the depositary bank. The paying 
bank, however, must comply with any deadlines under the Uniform 
Commercial Code, Regulation J (12 CFR part 210), or Sec.  
229.30(c).[ltrif]
    3. Depositary bank without accounts
    a. Subpart B of this regulation applies only to ``checks'' 
deposited in transaction ``accounts.'' Thus, a depositary bank with 
only time or savings accounts need not comply with the availability 
requirements of subpart B. Collecting banks may not have an 
electronic connection with these banks as paying banks because no 
checks are drawn on them. Consequently, the costs of using expedited 
means to deliver returned checks directly to such a depositary bank 
may not be justified. Thus, the expeditious-return requirement of 
Sec.  229.30(a) does not apply to checks being returned to banks 
that do not hold accounts. The paying bank's midnight deadline in 
U.C.C. 4-301 and 4-302 [lsqbb]and[rsqbb][rtrif],[ltrif] Sec.  210.12 
of Regulation J (12 CFR 210.12)[rtrif], and the extension in Sec.  
229.30(c)[ltrif] would continue to apply to these checks. Returning 
banks also would be required to act on such checks within their 
midnight deadline. Further, in order to avoid complicating the 
process of returning checks generally, banks without accounts are 
required to use the standard indorsement, and their checks are 
returned by returning banks and paid for by the depositary bank 
under the same rules as checks deposited in other banks, with the 
exception of the expeditious-return requirements of Sec. Sec.  
229.30(a) and 229.31(a).
    b. The expeditious-return requirement applies to a check 
deposited in a bank that is not a depository institution. Federal 
Reserve Banks, Federal Home Loan Banks, private bankers, and 
possibly certain industrial banks are not depository institutions 
within the meaning of the EFA Act, and therefore are not subject to 
the expedited availability and disclosure requirements of subpart B. 
These banks do, however, maintain accounts as defined in Sec.  
229.2(a), and a paying bank returning a check to one of these banks 
would be required to return the check to the depositary bank, in 
accordance with the expeditious-return requirement.
    4. Unidentifiable depositary bank
    a. For most checks presented electronically, the depositary 
bank's indorsement will accompany the electronic image and 
information related to the check, either as an addenda record or 
within the image of the check.[ltrif] In some cases, a paying bank 
will be unable to identify the depositary bank through the use of 
ordinary care and good faith. The Board expects that these cases 
will be unusual as skilled return [lsqbb]clerks[rsqbb] [rtrif]staff 
generally[ltrif] will readily identify the depositary bank from the 
depositary bank indorsement required under Sec.  229.35 and appendix 
D. [rtrif]For example, a paying bank would be unable to identify the 
depositary bank if the depositary bank's indorsement is in neither 
an addenda record nor within the image of the check. A paying bank, 
however, would not be ``unable'' to identify the depositary bank 
merely because the depositary bank's indorsement is not attached as 
an addenda record, and therefore requires the paying bank to 
retrieve the image.[ltrif]
    [rtrif]b.[ltrif] In cases where the paying bank is unable to 
identify the depositary bank, the paying bank may, in accordance 
with Sec.  229.30(a), send the returned check to a returning bank 
that agrees to handle the returned check for expeditious return to 
the depositary bank under Sec.  229.31(a). The returning bank may be 
better able to identify the depositary bank.
    [lsqbb]2.[rsqbb][rtrif]c.[ltrif] In the alternative, the paying 
bank may send the check back up the path used for forward collection 
of the check. The presenting bank and prior collecting banks 
normally will be able to trace the collection path of the check 
through the use of their internal records in conjunction with the 
indorsements on the returned check. In these limited cases, the 
paying bank may send such a returned check to any bank that handled 
the check for forward collection, even if that bank does not agree 
to handle the returned check for expeditious return to the 
depositary bank under Sec.  229.31(a). [rtrif]The return of a check 
to a bank that handled the check for forward collection is 
consistent with Sec.  229.35(b), which requires a bank handling a 
check to take up the check if it is has not been paid.[ltrif]
    [rtrif]d. If the paying bank has an agreement to send electronic 
returns to a bank that handled the check for forward collection, the 
paying bank may send an electronic return to that bank.[ltrif] A 
paying bank returning a check under this paragraph [to a bank that 
has not agreed to handle the check expeditiously] must advise that 
bank that it is unable to identify the depositary bank. This advice 
must be conspicuous, such as a stamp on each check for which the 
depositary bank is unknown if such checks are commingled with other 
returned checks, or, if such checks are sent in a separate cash 
letter, by one notice on the cash letter. [rtrif]In the case of an 
electronic return, the advice requirement may be satisfied by the 
paying bank inserting the routing number of the bank to which it is 
sending the return where the paying bank otherwise would have 
inserted the routing number of the depositary bank.[ltrif] This 
information will warn the bank that this check will require special 
research and handling in accordance with Sec.  229.31(b). The 
returned check may not be prepared [lsqbb]for automated[rsqbb] 
[rtrif]as a qualified[ltrif] return. [lsqbb]The return of a check to 
a bank that handled the check for forward collection is consistent 
with Sec.  229.35(b), which requires a bank handling a check to take 
up the check it is has not been paid.[rsqbb]
    [lsqbb]3.[rsqbb][rtrif]e.[ltrif] The sending of a check to a 
bank that handled the check for forward collection under this 
paragraph is not subject to the requirements for expeditious return 
by the paying bank. [lsqbb]Often, the paying bank will not have 
courier or other expeditious means of transportation to the 
collecting or presenting bank.[rsqbb] [rtrif]Because the paying bank 
is unable to identify the depositary bank, the paying bank will not 
know whether the

[[Page 16953]]

depositary bank has agreed to accept an electronic return from the 
paying bank under Sec.  229.32(a). Moreover, returning the check 
through the forward collection chain may require handling by more 
banks, and thus may take more time.[ltrif] Although the lack of a 
requirement of expeditious return will create risks for the 
depositary bank, in many cases the inability to identify the 
depositary bank will be due to the depositary bank's, or a 
collecting bank's, failure to use the indorsement required by Sec.  
229.35(a) and appendix D. If the depositary bank failed to use the 
proper indorsement, it should bear the risks of less than 
expeditious return. Similarly, where the inability to identify the 
depositary bank is due to indorsements or other information placed 
on the back of the check by the depositary bank's customer or other 
prior indorser, the depositary bank should bear the risk that it 
cannot charge a returned check back to that customer. Where the 
inability to identify the depositary bank is due to subsequent 
indorsements of collecting banks, these collecting banks may be 
liable for a loss incurred by the depositary bank due to less than 
expeditious return of a check; those banks therefore have an 
incentive to return checks sent to them under this paragraph 
quickly.
    [lsqbb]4.[rsqbb][rtrif]f.[ltrif] This paragraph does not relieve 
a paying bank from the liability for the lack of expeditious return 
in cases where the paying bank is itself responsible for the 
inability to identify the depositary bank, such as when the paying 
bank's customer has used a check with printing or other material on 
the back in the area reserved for the depositary bank's indorsement, 
making the indorsement unreadable. (See Sec.  229.38(d).)
    [lsqbb]5.[rsqbb][rtrif]g.[ltrif] A paying bank's return under 
this paragraph is also subject to its midnight deadline under U.C.C. 
4-301, Regulation J (if the check is returned through a Federal 
Reserve Bank), and the exception provided in Sec.  229.30(c). A 
paying bank also may send a check to a prior collecting bank to make 
a claim against that bank under Sec.  229.35(b) where the depositary 
bank is insolvent or in other cases as provided in Sec.  229.35(b). 
Finally, a paying bank may make a claim against a prior collecting 
bank based on a breach of warranty under U.C.C. 4-208.

C. 229.30(c) Extension of Deadline

    1. This paragraph permits extension of the deadlines [rtrif]in 
the U.C.C., Regulation J (12 CFR part 210) and Sec.  229.36(d)(3) of 
this part[ltrif] for returning a check for which the paying bank 
previously has settled (generally midnight of the banking day 
following the banking day on which the check is received by the 
paying bank) and for returning a check without settling for it 
(generally midnight of the banking day on which the check is 
received by the paying bank, or such other time provided by Sec.  
210.9 of Regulation J (12 CFR part 210) or Sec.  
229.36[lsqbb](f)(2)[rsqbb][rtrif](d)(3)[ltrif] of this part)[lsqbb], 
but not of the duty of expeditious return, in two 
circumstances:[rsqbb][rtrif]if the paying bank returns the check 
using a means of delivery such that the depositary bank would 
ordinarily receive the return within the timeframe specified in 
Sec.  229.30(a).[ltrif]
    [rtrif]2. If a paying bank sends an electronic return, the 
paying bank's midnight (or other applicable) deadline is extended to 
the time it dispatches the electronic return so long as the 
depositary bank would ordinarily receive the electronic return by 4 
p.m. (local time of the depositary bank) on the second business day 
following the banking day on which the paying bank received the 
check. A paying bank may rely on its returning bank's electronic 
return delivery schedules in determining when the depositary bank 
would ordinarily receive an electronic return.[ltrif]
    [lsqbb]a[rsqbb][rtrif]3[ltrif]. A paying bank may have a courier 
that leaves after midnight (or after any other applicable deadline) 
to deliver its forward-collection checks. This paragraph removes the 
constraint of the midnight deadline for returned checks if the 
returned check [lsqbb]reaches the receiving bank on or before the 
receiving bank's next banking day following the otherwise applicable 
deadline by the earlier of the close of that banking day or a cutoff 
hour of 2 p.m. or later set by the receiving bank under U.C.C. 4-
108[rsqbb][rtrif]would ordinarily reach the depositary bank by 4 
p.m. (local time of the depositary bank) on the second business day 
following the banking day on which the paying bank received the 
check. A paying bank may rely on its returning bank's delivery 
schedules in determining when the depositary bank would ordinarily 
receive the returned check[ltrif]. [lsqbb]The extension also applies 
if the check reaches the bank to which it is sent later than the 
time described in the previous sentence if highly expeditious means 
of transportation are used. For example, a West Coast paying bank 
may use this further extension to ship a returned check by air 
courier directly to an East Coast returning bank even if the check 
arrives after the returning bank's cutoff hour. This paragraph 
applies to the extension of all midnight deadlines except Saturday 
midnight deadlines (see paragraph C.1.b. below).[rsqbb]
    [lsqbb]b. A paying bank may observe a banking day, as defined in 
the applicable U.C.C., on a Saturday, which is not a business day 
and therefore not a banking day under Regulation CC. In such a case, 
the U.C.C. deadline for returning checks received and settled for on 
Friday, or for returning checks received on Saturday without 
settling for them, might require the bank to return the checks by 
midnight Saturday. However, the bank may not have couriers leaving 
on Saturday to carry returned checks, and even if it did, the 
returning or depositary bank to which the returned checks were sent 
might not be open until Sunday night or Monday morning to receive 
and process the checks. This paragraph extends the midnight deadline 
if the returned checks reach the returning bank by a cut-off hour 
(usually on Sunday night or Monday morning) that permits processing 
during its next processing cycle or reach the depositary bank by the 
cut-off hour on its next banking day following the Saturday midnight 
deadline. This paragraph applies exclusively to the extension of 
Saturday midnight deadlines.[rsqbb]
    [lsqbb]2[rsqbb][rtrif]4[ltrif]. The time limits that are 
extended [lsqbb]in each case[rsqbb] are the paying bank's midnight 
deadline for returning a check for which it has already settled and 
the paying bank's deadline for returning a check without settling 
for it in U.C.C. 4-301 and 4-302, Sec. Sec.  210.9 and 210.12 of 
Regulation J (12 CFR 210.9 and 210.12), and Sec.  
229.36[lsqbb](f)(2)[rsqbb][rtrif](d)(3)[ltrif] of this part. As 
these extensions are designed to speed [lsqbb](Sec.  229.30(c)(1)), 
or at least not slow (Sec.  229.30(c)(2)),[rsqbb] the overall return 
of checks, no modification or extension of the expeditious return 
requirements in Sec.  229.30(a) is required.
    [lsqbb]3[lsqbb][rtrif]5[ltrif]. The paying bank satisfies its 
midnight or other return deadline by dispatching returned checks to 
another bank by courier, including a courier under contract with the 
paying bank, prior to expiration of the deadline.
    [lsqbb]4[rsqbb][rtrif]6[ltrif]. This paragraph directly affects 
U.C.C. 4-301 and 4-302 and Sec. Sec.  210.9 and 210.12 of Regulation 
J (12 CFR 210.9 and 210.12) to the extent that this paragraph 
applies by its terms, and may affect other provisions.

D. 229.30(d) Identification of Returned Check

    1. The reason for the return must be clearly indicated. A check 
is identified as a returned check if the front of that check 
indicates the reason for return, even though it does not 
specifically state that the check is a returned check. [lsqbb]A 
reason such as ``Refer to Maker'' is permissible in appropriate 
cases.[rsqbb] [rtrif]``Refer to Maker'' is an instruction to the 
recipient of the returned check and not a reason for return. 
Therefore, ``Refer to Maker'' is insufficient as a reason for 
return. ``Refer to Maker'' may be used in addition to the reason for 
return.[ltrif] If the returned check is a substitute check, 
[rtrif]the requirement to place[ltrif] the reason for return 
[rtrif]information such that it is retained on any subsequent 
substitute check could be met by placing the information (1) in the 
location on the front of the substitute check that is specified by 
ANS X9.100-140 or (2)[ltrif] [lsqbb]must be placed[rsqbb] within the 
image of the original check that appears on the front of the 
substitute check so that the information is retained on any 
subsequent substitute check. If the paying bank places the returned 
check in a carrier envelope, the carrier envelope should indicate 
that it is a returned check but need not repeat the reason for 
return stated on the check if it in fact appears on the check.

[lsqbb]F. 229.30(f)[rsqbb][rtrif]E. 229.30(e)[ltrif] Notice in Lieu of 
Return

    [rtrif]1. A notice in lieu of return may be used by a bank 
handling a returned check that has been lost or destroyed, including 
when the original returned check has been charged back as lost or 
destroyed as provided in Sec.  229.35(b). 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) and does not have sufficient information to create a 
substitute check. For example, a bank may have an image of both 
sides of the check, but the image may be insufficient, or may not be 
in the proper format, to create a substitute check. A bank using a 
notice in lieu of return gives a warranty under Sec.  
229.34(e)(1)(iv) that the [lsqbb]original[rsqbb] check has not been 
and will not be returned.[ltrif]
    [lsqbb]1[rsqbb][rtrif]2[ltrif]. A check that is lost or 
otherwise unavailable for return may be returned by sending a 
legible copy of both sides of the

[[Page 16954]]

check or, if such a copy is not available to the paying bank, a 
written notice of nonpayment containing the information specified in 
[lsqbb]Sec.  229.33(b)[rsqbb][rtrif]Sec.  229.30(e)(2)[ltrif]. The 
copy or written notice must clearly indicate it is a notice in lieu 
of return [lsqbb]and must be handled in the same manner as other 
returned checks[rsqbb]. [rtrif]Notice by a legible facsimile or 
electronic transmission of the image of both sides of the check may 
satisfy the requirements for a notice in lieu of return. If no image 
of both sides of the check is available, the notice may be sent by 
other means, but not[ltrif] [lsqbb]Notice[rsqbb] by 
telephone[lsqbb], telegraph,[rsqbb] or other 
[lsqbb]electronic[rsqbb] [rtrif]oral[ltrif] 
transmission[lsqbb],other than a legible facsimile or similar image 
transmission of both sides of the check, does not satisfy the 
requirements for a notice in lieu of return[rsqbb]. The requirement 
for a writing and the indication that the notice is a substitute for 
the returned check is necessary so that the returning and depositary 
banks are informed that the notice carries value. [lsqbb]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. A notice in lieu of 
return may be used by a bank handling a returned check that has been 
lost or destroyed, including when the original returned check has 
been charged back as lost or destroyed as provided in Sec.  
229.35(b). A bank using a notice in lieu of return gives a warranty 
under Sec.  229.34(a)(4) that the original check has not been and 
will not be returned.[rsqbb]
    [lsqbb]2[rsqbb][rtrif]3[ltrif]. The requirement of this 
paragraph supersedes the requirement of U.C.C. 4-301(a) as to the 
form and information required of a notice of dishonor or nonpayment. 
Reference in the regulation and this commentary to a returned check 
includes a notice in lieu of return unless the context indicates 
otherwise.
    [lsqbb]3[rsqbb][rtrif]4[ltrif]. The notice in lieu of return is 
subject to the provisions of Sec.  229.30 and is treated like a 
returned check for settlement purposes. [lsqbb]If the original check 
is over $2,500, the notice of nonpayment under Sec.  229.33 is still 
required, but may be satisfied by the notice in lieu of return if 
the notice in lieu meets the time and information requirements of 
Sec.  229.33.[rsqbb]
    [lsqbb]4[rsqbb][rtrif]5[ltrif]. If not all of the information 
required by [lsqbb]Sec.  229.33(b)[rsqbb] [rtrif]Sec.  
229.30(e)(2)[ltrif] is available, the paying bank may make a claim 
against any prior bank handling the check as provided in Sec.  
229.35(b).
    [rtrif]6. Content of notices
    a. This paragraph provides that the notice must contain, if 
available, specified items of information that would enable a 
depositary bank to identify the check to which the notice relates.
    b. If the paying bank cannot identify the depositary bank from 
the check itself, the paying bank should treat the notice in lieu as 
if it were a returned check for which the paying bank cannot 
identify the depositary bank (see Sec.  229.30(b)(2) and 
accompanying commentary).
    c. If a bank is uncertain as to the accuracy of an item of 
information, it nevertheless must identify the item of information, 
but a bank may make this identification by setting the item off with 
question marks, asterisks, or other symbols designated for this 
purpose by generally applicable industry standards.[ltrif]

[lsqbb]G. 229.30(g)[rsqbb][rtrif]F. 229.30(f)[ltrif] Reliance on 
Routing Number

    1. Although Sec.  229.35 and appendix D require that the 
depositary bank indorsement contain its nine-digit routing number, 
it is possible that a returned check will bear the routing number of 
the depositary bank in fractional, nine-digit, or other form. This 
paragraph permits a paying bank to rely on the routing number of the 
depositary bank as it appears on the check (in the depositary bank's 
indorsement) [rtrif]or in the electronic image or information 
included in the electronic collection item[ltrif] when it is 
received by the paying bank.
    2. If there are inconsistent routing numbers, the paying bank 
may rely on any routing number designating the depositary bank. The 
paying bank is not required to resolve the inconsistency prior to 
processing the check. The paying bank remains subject to the 
requirement to act in good faith and use ordinary care under Sec.  
229.38(a).

XVII. Section 229.31 Returning Bank's Responsibility for Return of 
Checks

A. 229.31(a) Return of Checks

    1. The standards for return of checks established by this 
section are similar to those for paying banks in Sec.  229.30(a). 
This section requires a returning bank to [lsqbb]return a returned 
check expeditiously if it agrees to handle the returned check for 
expeditious return under this paragraph[rsqbb] [rtrif]send a 
returned check expeditiously if the returning bank has agreed to do 
so[ltrif]. In effect, the returning bank is an agent or subagent of 
the paying bank and a subagent of the depositary bank for the 
purposes of returning the check. [rtrif]A returning bank may satisfy 
its expeditious return requirement by returning either an electronic 
return or returned check within the timeframe. The exceptions to 
this requirement are set out in Sec.  229.31(b).[ltrif]
    2. A returning bank agrees to [lsqbb]handle a returned check for 
expeditious return[rsqbb][rtrif]return checks expeditiously[ltrif] 
to the depositary bank if it:
    a. Publishes or distributes availability schedules for the 
return of [rtrif]electronic returns or[ltrif] returned checks and 
accepts the [rtrif]electronic return or[ltrif] returned check for 
return;
    [lsqbb]b. Handles a returned check for return that it did not 
handle for forward collection;[rsqbb] or
    [lsqbb]c[rsqbb][rtrif]b[ltrif]. Otherwise agrees to handle a 
returned check for expeditious return.
    [rtrif]3. A returning bank may agree to handle only certain 
types of returns expeditiously. For example, a returning bank may 
agree to handle electronic returns expeditiously, while not agreeing 
to handle returned checks expeditiously.
    4. If a returning bank has not agreed to return checks 
expeditiously, the returning bank has no expeditious return 
requirement with respect to the check. Therefore, a paying bank will 
not satisfy its expeditious return requirement by sending a returned 
check to that returning bank that has not agreed to return checks 
expeditiously.
    5. The returning bank's return of a check under this paragraph 
is subject to the midnight deadline under U.C.C. 4-202(b). (See 
definition of returning bank in Sec.  229.2(mm)).
    6. In the case of electronic returns, a returning bank agrees to 
handle the electronic return expeditiously if the returning bank has 
an agreement with the paying bank for accepting electronic returns, 
and handling such returns expeditiously, and the returning bank 
accepts the electronic return.[ltrif]
    [lsqbb]3[rsqbb][rtrif]7[ltrif]. [lsqbb]Two-day/four-day 
test.[rsqbb] As in the case of a paying bank, a returning bank's 
return of a returned check is expeditious if it [lsqbb]meets either 
of two tests. Under the ``two-day/four-day'' test, the check must be 
returned so that it[rsqbb] [rtrif]is sent in a manner such that 
it[ltrif] would normally be received by the depositary bank by 4 
p.m. [lsqbb]either[rsqbb] [rtrif](local time of the depositary 
bank)[ltrif] two [lsqbb]or four[rsqbb] business days after the check 
was presented to the paying bank[lsqbb], depending on whether or not 
the paying bank is located in the same check processing region as 
the depositary bank[rsqbb]. [lsqbb]This is the same test as the two-
day/four-day test applicable to paying banks. (See Commentary to 
Sec.  229.30(a).)[rsqbb] While a returning bank will not have first 
hand knowledge of the day on which a check was presented to the 
paying bank, returning banks may, by agreement, allocate with paying 
banks liability for late return based on the delays caused by each. 
[lsqbb]In effect, the two-day/four day test protects all paying and 
returning banks that return checks from claims that they failed to 
return a check expeditiously, where the check is returned within the 
specified time following presentment to the paying bank, or a later 
time as would result from unforeseen delays.[rsqbb]
    [lsqbb]4. Forward collection test.
    a. The ``forward collection'' test is similar to the forward 
collection test for paying banks. Under this test, a returning bank 
must handle a returned check in the same manner that a similarly 
situated collecting bank would handle a check of similar size drawn 
on the depositary bank for forward collection. A similarly situated 
bank is a bank (other than a Federal Reserve Bank) that is of 
similar asset size and check handling activity in the same 
community. A bank has similar check handling activity if it handles 
a similar volume of checks for forward collection as the forward 
collection volume of the returning bank.
    b. Under the forward collection test, a returning bank must 
accept returned checks, including both qualified and other returned 
checks (``raw returns''), at approximately the same times and 
process them according to the same general schedules as checks 
handled for forward collection. Thus, a returning bank generally 
must process even raw returns on an overnight basis, unless its time 
limit is extended by one day to convert a raw return to a qualified 
returned check.[rsqbb]
    [lsqbb]5[rsqbb][rtrif]8[ltrif]. Cut-off hours. A returning bank 
may establish earlier cut-off hours for receipt of returned checks 
than for receipt of forward collection checks, but the cut-off hour 
for

[[Page 16955]]

returned checks may not be earlier than 2 p.m. [rtrif](local time of 
the returning bank).[ltrif] The returning bank also may set 
different sorting requirements for returned checks than those 
applicable to other checks. Thus, a returning bank may allow itself 
more processing time for returns than for forward collection checks. 
[lsqbb]All returned checks received by a cut-off hour for returned 
checks must be processed and dispatched by the returning bank by the 
time that it would dispatch forward collection checks received at a 
corresponding forward collection cut-off hour that provides for the 
same or faster availability for checks destined for the same 
depositary banks.[rsqbb]
    [lsqbb]6. Examples.
    a. If a returning bank receives a returned check by its cut-off 
hour for returned checks on Monday and the depositary bank and the 
returning bank are participants in the same clearinghouse, the 
returning bank should arrange to have the returned check received by 
the depositary bank by Tuesday. This would be the same day that it 
would deliver a forward collection check drawn on the depositary 
bank and received by the returning bank at a corresponding forward 
collection cut-off hour on Monday.
    b. i. If a returning bank receives a returned check, and the 
returning bank normally would collect a forward collection check 
drawn on the depositary bank by sending the forward collection check 
to a correspondent or a Federal Reserve Bank by courier, the 
returning bank could send the returned check in the same manner if 
the correspondent has agreed to handle returned checks expeditiously 
under Sec.  229.31(a). The returning bank would have to deliver the 
check by the correspondent's or Federal Reserve Bank's cut-off hour 
for returned checks that corresponds to its cut-off hour for forward 
collection checks drawn on the depositary bank. A returning bank may 
take a day to convert a check to a qualified returned check. Where 
the forward collection checks are delivered by courier, mailing the 
returned checks would not meet the duty established by this section 
for returning banks.
    ii. A returning bank must return a check to the depositary bank 
by courier or other means as fast as a courier, if similarly 
situated returning banks use couriers to deliver their forward 
collection checks to the depositary bank.
    iii. For some depositary banks, no community practice exists as 
to delivery of checks. For example, a credit union whose customers 
use payable-through drafts normally does not have checks presented 
to it because the drafts are normally sent to the payable-through 
bank for collection. In these circumstances, the community standard 
is established by taking into account the dollar volume of the 
checks being sent to the depositary bank and the location of the 
depositary bank, and determining whether similarly situated banks 
normally would deliver forward collection checks to the depositary 
bank, taking into account the particular risks associated with 
returned checks. Where the community standard does not require 
courier delivery, other means of delivery, including mail, are 
acceptable.[rsqbb]
    [lsqbb]7[rsqbb][rtrif]9[ltrif]. Qualified returned checks.
    a. The expeditious return requirement for a returning bank in 
this regulation is more stringent in many cases than the duty of a 
collecting bank to exercise ordinary care under U.C.C. 4-202 in 
returning a check. [lsqbb]A returning bank is under a duty to act as 
expeditiously in returning a check as it would in the forward 
collection of a check. Notwithstanding its duty of expeditious 
return, its midnight deadline under U.C.C. 4-202 and Sec.  210.12(a) 
of Regulation J (12 CFR 210.12(a)), under the forward collection 
test, a returning bank may take an extra day to qualify a returned 
check.[rsqbb] A qualified returned check will be handled by 
subsequent returning banks more efficiently than a raw return. 
[lsqbb]This paragraph gives a returning bank an extra business day 
beyond the time that would otherwise be required to return the 
returned check to convert a returned check to a qualified returned 
check.[rsqbb] The qualified returned check must include the routing 
number of the depositary bank, the amount of the check, and a return 
identifier encoded on the check in magnetic ink. A check that is 
converted to a qualified returned check must be encoded in 
accordance with ANS X9.13 for original checks or ANS X9.100-140 for 
substitute checks.
    [lsqbb]b. If the returning bank is sending the returned check 
directly to the depositary bank, this extra day is not available 
because preparing a qualified returned check will not expedite 
handling by other banks.[rsqbb] If the returning bank makes an 
encoding error in creating a qualified returned check, it may be 
liable under Sec.  229.38 for losses caused by any negligence or 
under Sec.  229.34(c)(3) for breach of an encoding warranty. 
[lsqbb]The returning bank would not lose the one-day extension 
available to it for creating a qualified returned check because of 
an encoding error.[rsqbb]
    [lsqbb]8[rsqbb][rtrif]10[ltrif]. Routing of returned check.
    a. Under Sec.  229.31(a), the returning bank is authorized to 
route the returned check in a variety of ways:
    i. It may send [rtrif]an electronic return if the depositary 
bank has agreed to accept an electronic return from the returning 
bank or it may send[ltrif] the returned check directly to the 
depositary bank by courier or other [lsqbb]expeditious[rsqbb] means 
of delivery; [lsqbb]or[rsqbb]
    ii. [rtrif]It may send an electronic return to any other 
returning bank that has agreed to accept an electronic return from 
the returning bank; or
    iii.[ltrif] It may send the returned check to any returning bank 
agreeing to handle the returned check for expeditious return to the 
depositary bank under this section regardless of whether or not the 
returning bank handled the check for forward collection.
    b. If the returning bank elects to send the returned check 
directly to the depositary bank, it is not required to send the 
check to the branch of the depositary bank that first handled the 
check. The returned check may be sent to the depositary bank at any 
location permitted under Sec.  229.32(b). [rtrif]If the returning 
bank elects to send the electronic return directly to the depositary 
bank, it must send the electronic return to the electronic return 
point designated by the depositary bank[ltrif].
    [lsqbb]9[rsqbb][rtrif]11[ltrif]. Responsibilities of returning 
bank. In meeting the requirements of this section, the returning 
bank is responsible for its own actions, but not those of the paying 
bank, other returning banks, or the depositary bank. (See U.C.C. 4-
202(c) regarding the responsibility of collecting banks.) For 
example, if the paying bank has delayed the start of the return 
process, but the returning bank acts in a timely manner, the 
returning bank may satisfy the requirements of this section even if 
the delayed return results in a loss to the depositary bank. (See 
Sec.  229.38.) A returning bank must handle a notice in lieu of 
return [lsqbb]as[rsqbb] expeditiously [lsqbb]as a returned 
check[rsqbb].
    [lsqbb]10[rsqbb][rtrif]12[ltrif]. U.C.C. sections affected. This 
paragraph directly affects the following provisions of the U.C.C., 
and may affect other sections or provisions:
    a. Section 4-202(b), in that time limits required by that 
section may be affected by the additional requirement to make an 
expeditious return.
    b. Section 4-214(a), in that settlement for returned checks is 
made under Sec.  229.31(c) and not by charge-back of provisional 
credit, and in that the time limits may be affected by the 
additional requirement to make an expeditious return.

B. 229.31(b) [lsqbb]Unidentifiable Depositary 
Bank[rsqbb][rtrif]Exceptions to Expeditious Return of Checks[ltrif]

    1. This section is similar to Sec.  229.30(b), but applies to 
returning banks instead of paying banks. [lsqbb]In some cases a 
returning bank will be unable to identify the depositary bank with 
respect to a check.[rsqbb] [rtrif]In general, in circumstances where 
the paying bank is not subject to the expeditious return requirement 
(see Sec.  229.30(b)), the returning bank may not receive the 
returned check in a timeframe that enables it to return the check to 
the depositary bank by the second business day following the banking 
day on which the check was presented to the paying bank. Moreover, 
the same circumstances that make expeditious return of a check 
difficult for a paying bank also are likely to make expeditious 
return of a check difficult for a returning bank.[ltrif]
    [rtrif]2. Depositary bank has not agreed to accept electronic 
returns under Sec.  229.32(a).
    a. A returning bank is not subject to the expeditious return 
requirement in Sec.  229.31(a) with respect to a check if the 
depositary bank has not agreed to accept an electronic return from 
the paying bank under Sec.  229.32(a), in which case the paying bank 
is not required to return the check expeditiously under Sec.  
229.30(a). If a depositary bank has not agreed to accept electronic 
returns, a returning bank is unlikely to be able to return a paper 
check to the depositary bank in an expeditious manner.
    3. Unidentifiable depositary banks
    a.[ltrif] Returning banks agreeing to handle checks for return 
to depositary banks under Sec.  229.31(a) are expected to be expert 
in identifying depositary bank indorsements. In the limited cases 
where the returning bank cannot identify the depositary bank, 
[rtrif]if[ltrif] the returning bank [rtrif]did not handle the check 
for forward collection, it[ltrif] may send the returned check to 
[lsqbb]a returning bank that agrees to handle the returned check for

[[Page 16956]]

expeditious return under Sec.  229.31(a), or it may send the 
returned check to a[rsqbb][rtrif]any collecting[ltrif] bank that 
handled the returned check for forward collection[rtrif].[ltrif] 
[lsqbb], even if that bank does not agree to handle the check 
expeditiously under section 229.31(a).
    2.[rsqbb] If[rtrif], on the other hand,[ltrif] the returning 
bank itself handled the check for forward collection, it may send 
the returned check to a collecting bank that was prior to it in the 
forward-collection process, which will be better able to identify 
the depositary bank. If there are no prior collecting banks, the 
returning bank must research the collection of the check and 
identify the depositary bank.
    [rtrif]b.[ltrif] As in the case of paying banks under Sec.  
229.30(b), a returning bank[lsqbb]'s sending of a check to a bank 
that handled the check for forward collection under Sec.  
229.31(b)[rsqbb] [rtrif]that cannot identify the depositary 
bank[ltrif] is not subject to the expeditious return requirements of 
Sec.  229.31(a).
    [lsqbb]3. The returning bank's return of a check under this 
paragraph is subject to the midnight deadline under U.C.C. 4-202(b). 
(See definition of returning bank in Sec.  229.2(cc).)[rsqbb]
    [lsqbb]4. Where a returning bank receives a check that it does 
not agree to handle expeditiously under Sec.  229.31(a), such as a 
check sent to it under Sec.  229.30(b), but the returning bank is 
able to identify the depositary bank, the returning bank must 
thereafter return the check expeditiously to the depositary bank. 
The returning bank returns a check expeditiously under this 
paragraph if it returns the check by the same means it would use to 
return a check drawn on it to the depositary bank or by other 
reasonably prompt means[rsqbb].
    [lsqbb]5[rsqbb][rtrif]c[ltrif]. As in the case of a paying bank 
returning a check under Sec.  229.30(b)), a returning bank returning 
a check under [lsqbb]this paragraph[rsqbb][rtrif]Sec.  
229.30(b)(2)[ltrif] to a bank that has not agreed to handle the 
check expeditiously must advise that bank that it is unable to 
identify the depositary bank. This advice must be conspicuous, such 
as a stamp on [lsqbb]each check for which the depositary bank is 
unknown if such checks are commingled with other returned checks, 
or, if such checks are sent in a separate cash letter, by one[rsqbb] 
[rtrif]the check or a[ltrif] notice on the cash letter. [lsqbb]The 
returned check may not be prepared for automated return.[rsqbb] 
[rtrif]In the case of an electronic return, the advice requirement 
may be satisfied by the returning bank inserting the routing number 
of the bank to which it is sending the return where the returning 
bank otherwise would have inserted the routing number of the 
depositary bank.[ltrif]
    [rtrif]3. Depositary banks without accounts
    a. Section 229.31(b)(3) is similar to Sec.  229.30(b)(3) and 
relieves the returning bank of its obligation to make expeditious 
return to a depositary bank that does not maintain any accounts. 
(See the commentary to Sec.  229.30(b).[ltrif]

C. 229.31(c) Settlement

    1. Under the U.C.C., a collecting bank receives settlement for a 
check [lsqbb]when it[rsqbb][rtrif]by midnight of the banking day on 
which the check[ltrif] is presented to the paying bank. The paying 
bank may recover the settlement when the paying bank returns the 
check to the presenting bank. Under this regulation, however, the 
paying bank may return the check directly to the depositary bank or 
through returning banks that did not handle the check for forward 
collection. On these more efficient return paths, the paying bank 
does not recover the settlement made to the presenting bank. Thus, 
this paragraph requires the returning bank to settle for a returned 
check (either with the paying bank or another returning bank) in the 
same way that it would settle for a similar check for forward 
collection. To achieve uniformity, this paragraph applies even if 
the returning bank handled the check for forward collection.
    2. Any returning bank, including one that handled the check for 
forward collection, may provide availability for returned checks 
pursuant to an availability schedule as it does for forward 
collection checks. These settlements by returning banks, as well as 
settlements between banks made during the forward collection of a 
check, are considered final when made subject to any deferment of 
availability. (See [lsqbb]Sec.  229.36(d)[rsqbb][rtrif]Sec.  
229.36(c)[ltrif] and Commentary to Sec.  229.35(b).)
    3. A returning bank may vary the settlement method it uses by 
agreement with paying banks or other returning banks. Special rules 
apply in the case of insolvency of banks. (See Sec.  229.39.) If 
payment cannot be obtained from a depositary or returning bank 
because of its insolvency or otherwise, recovery can be had by 
returning, paying, and collecting banks from prior banks on this 
basis of the liability of prior banks under Sec.  229.35(b).
    4. This paragraph affects U.C.C. 4-214(a) in that a paying or 
collecting bank does not ordinarily have a right to charge back 
against the bank from which it received the returned check, although 
it is entitled to settlement if it returns the returned check to 
that bank, and may affect other sections or provisions. Under 
[lsqbb]Sec.  229.36(d)[rsqbb][rtrif]Sec.  229.36(c)[ltrif], a bank 
collecting a check remains liable to prior collecting banks and the 
depositary bank's customer under the U.C.C.

D. 229.31(d) Charges

    1. This paragraph permits any returning bank, even one that 
handled the check for forward collection, to impose a fee on the 
paying bank or other returning bank for its service in handling a 
returned check. Where a claim is made under Sec.  229.35(b), the 
bank on which the claim is made is not authorized by this paragraph 
to impose a charge for taking up a check. This paragraph preempts 
state laws to the extent that these laws prevent returning banks 
from charging fees for handling returned checks.

[lsqbb]F. 229.31(f)[rsqbb][rtrif]E. 229.31(e)[ltrif] Notice in Lieu of 
Return

    1. This paragraph is similar to [lsqbb]Sec.  229.30(f)[rsqbb] 
[rtrif]Sec.  229.30(e)[ltrif] and authorizes a returning bank to 
originate a notice in lieu of return if the returned check is 
unavailable for return. Notice in lieu of return is permitted only 
when a bank does not have and cannot obtain possession of the check 
[rtrif]([ltrif]or must retain possession of the check for 
protest[rtrif]) and does not have sufficient information to create a 
substitute check[ltrif]. [lsqbb]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.[rsqbb] 
(See the Commentary to [lsqbb]Sec.  229.30(f)[rsqbb][rtrif]Sec.  
229.30(e)[ltrif].)

[lsqbb]G. 229.31(g)[rsqbb] [rtrif]F. 229.31(f)[ltrif] Reliance on 
Routing Number

    1. This paragraph is similar to [lsqbb]Sec.  
229.30(g)[rsqbb][rtrif]Sec.  229.30(f)[ltrif] and permits a 
returning bank to rely on routing numbers appearing on a returned 
check such as routing numbers in the depositary bank's 
indorsement[rtrif],[ltrif] [lsqbb]or[rsqbb] on qualified returned 
checks[rtrif], or in the electronic image or information included in 
the electronic return when it is received by the returning 
bank[ltrif]. (See the Commentary to [lsqbb]Sec.  
229.30(g)[rsqbb][rtrif]Sec.  229.30(f)[ltrif].)

XVIII. Section 229.32 Depositary Bank's Responsibility for Returned 
Checks

[rtrif]A. 229.32(a) Acceptance of Electronic Returns

    1. A paying bank and a returning bank must satisfy the 
expeditious return requirements under Sec. Sec.  229.30(a) and 
229.31(a) only if the depositary bank has agreed to accept an 
electronic return from the paying bank. This section sets forth the 
circumstances under which a depositary bank has agreed to accept an 
electronic return from the paying bank for purposes of subpart C, 
and therefore the circumstances under which the paying bank and 
returning banks have a duty to return the check expeditiously.
    2. There are three different ways a depositary bank can agree to 
accept electronic returns from the paying bank for purposes of 
subpart C:
    a. First, a depositary bank may have a direct contractual 
relationship with the paying bank under which it has agreed to 
accept electronic returns directly from the paying bank.
    b. Second, a depositary bank may have a direct contractual 
relationship with a returning bank under which the depositary bank 
accepts electronic returns directly from the returning bank. In 
turn, that returning bank must hold itself out as willing to accept 
electronic returns directly or indirectly from the paying bank and 
agrees to return checks expeditiously. For example, the returning 
bank may hold itself out as willing to enter into a direct 
contractual relationship with the paying bank to accept electronic 
returns or returned checks for expeditious return to the depositary 
bank. Alternatively, that returning bank may hold itself out as 
willing to accept electronic returns from other returning banks that 
accept electronic returns from the paying bank. A depositary bank is 
deemed to have agreed to accept electronic returns under Sec.  
229.32(a)(1)(ii) if the returning bank holds itself out as willing 
to accept electronic returns directly or indirectly from the paying 
bank, notwithstanding the fact that the paying bank has no actual 
agreement with the returning bank to send electronic returns.
    c. Third, a depositary bank may have otherwise agreed with the 
paying bank to accept electronic returns. For example, the

[[Page 16957]]

depositary bank and paying bank may both be members of the same 
clearing house, under the rules of which the depositary bank has 
agreed to accept electronic returns from the paying bank.
    d. The paying bank or returning bank must deliver the electronic 
return to the electronic location designated by the depositary bank. 
Accordingly, regardless of the means by which a depositary bank 
agrees to accept electronic returns from the paying bank, the 
depositary bank's agreement with the paying bank or returning bank 
must designate an electronic return point.
    3. A returning bank holds itself out as willing to accept 
electronic returns from a paying bank by publishing information 
about its generally available electronic return service, including 
how to enroll in the returning bank's electronic return service and 
fees for the service. For example, a returning bank may publish on 
its Web site electronic return service set-up guides for a paying 
bank to complete.
    4. This section also sets forth when a depositary bank receives 
an electronic return. A depositary bank ``receives'' an electronic 
return when that electronic return is delivered to the electronic 
return point designated by the bank or when the electronic return is 
otherwise made available for retrieval or review in accordance with 
an agreement between the depositary bank and the delivering paying 
bank or returning bank. For example, if a depositary bank designates 
an e-mail address as its electronic return point, the depositary 
bank has received the electronic return when it is delivered to that 
e-mail address. In contrast, if the depositary bank has an 
arrangement with a returning bank whereby the returning bank sends 
the electronic return to its storage device and then provides the 
depositary bank with access to the storage device for retrieving 
electronic returns, the electronic return is received by the 
depositary bank when the returning bank makes the electronic return 
available for the depositary bank to retrieve or review from the 
storage device in accordance with the agreement between the 
returning bank and the depositary bank.[ltrif]

[lsqbb]A. 229.32(a)[rsqbb][rtrif]B. 229.32(b)[ltrif] Acceptance of 
[rtrif]Paper[ltrif] Returned Checks

    1. [lsqbb]This regulation seeks to encourage direct returns by 
paying and returning banks and may result in a number of banks 
sending checks to depositary banks with no preexisting arrangements 
as to where the returned checks should be delivered.[rsqbb] This 
paragraph states where the depositary bank is required to accept 
returned [rtrif]paper[ltrif] checks [lsqbb]and written notices of 
nonpayment under Sec.  229.33[rsqbb]. (These locations differ from 
locations at which a depositary bank [rtrif]may accept electronic 
returns[ltrif][lsqbb]or must accept electronic notices[rsqbb].) It 
is derived from U.C.C. 3-111, which specifies that presentment for 
payment may be made at the place specified in the instrument or, if 
there is none, at the place of business of the party to pay. In the 
case of returned checks, the depositary bank does not print the 
check and can only specify the place of ``payment'' of the returned 
check in its indorsement.
    2. The paragraph specifies four locations at which the 
depositary bank must accept returned [rtrif]paper[ltrif] checks:
    a. The depositary bank must accept returned [rtrif]paper[ltrif] 
checks at any location at which it requests presentment of forward 
collection checks[rtrif],[ltrif] such as a processing center. A 
depositary bank does not request presentment of forward collection 
checks at a branch of the bank merely by paying checks presented 
over the counter.
    b. i. If the depositary bank indorsement states the name and 
address of the depositary bank, it must accept returned 
[rtrif]paper[ltrif] checks at the branch, head office, or other 
location, such as a processing center, indicated by the address. If 
the address is too general to identify a particular location, then 
the depositary bank must accept returned checks at any branch or 
head office consistent with the address. If, for example, the 
address is ``New York, New York,'' each branch in New York City must 
accept returned [rtrif]paper[ltrif] checks. [rtrif]Accordingly, a 
depositary bank may limit the locations at which it must accept 
returned paper checks by specifying a branch or head office in its 
indorsement.[ltrif]
    ii. If no address appears in the depositary bank's indorsement, 
the depositary bank must accept returned [rtrif]paper[ltrif] checks 
at any branch or head office associated with the depositary bank's 
routing number. The offices associated with the routing number of a 
bank are found in American Bankers Association Key to Routing 
Numbers, published by an agent of the American Bankers Association, 
which lists a city and state address for each routing number.
    [lsqbb]iii. The depositary bank must accept returned checks at 
the address in its indorsement and at an address associated with its 
routing number in the indorsement if the written address in the 
indorsement and the address associated with the routing number in 
the indorsement are not in the same check processing region. Under 
Sec. Sec.  229.30(g) and 229.31(g), a paying or returning bank may 
rely on the depositary bank's routing number in its indorsement in 
handling returned checks and is not required to send returned checks 
to an address in the depositary bank's indorsement that is not in 
the same check processing region as the address associated with the 
routing number in the indorsement.[rsqbb]
    [lsqbb]iv[rsqbb][rtrif]iii[ltrif]. If no routing number or 
address appears in its indorsement, the depositary bank must accept 
a returned [rtrif]paper[ltrif] check at any branch or head office of 
the bank. The indorsement requirement of Sec.  229.35 and appendix D 
requires that the indorsement contain a routing number, a name, and 
a location. Consequently, this provision, as well as paragraph 
(a)(2)(ii) of this section, only applies where the depositary bank 
has failed to comply with the indorsement requirement.
    3. For ease of processing, a depositary bank may require that 
returning [rtrif]banks[ltrif] or paying banks returning checks to it 
separate returned checks from forward collection checks being 
presented.
    4. Under [lsqbb]Sec.  229.33(d)[rsqbb][rtrif]Sec.  
229.32(f)[ltrif], a depositary bank receiving a returned check 
[lsqbb]or notice of nonpayment[rsqbb] must send notice to its 
customer by its midnight deadline or within a longer reasonable 
time.

[lsqbb]B. 229.32(b)[rsqbb][rtrif]C. 229.32(c)[ltrif] Payment

    1. As discussed in the commentary to Sec.  229.31(c), under this 
regulation a paying [rtrif]bank[ltrif] or returning bank does not 
obtain credit for a returned check by charge-back but by, in effect, 
[lsqbb]presenting[rsqbb] [rtrif]``presenting''[ltrif] the returned 
check to the depositary bank. This paragraph imposes an obligation 
to ``pay'' a returned check that is similar to the obligation to pay 
a forward collection check by a paying bank, except that the 
depositary bank may not return a returned check for which it is the 
depositary bank. Also, certain means of payment, such as remittance 
drafts, may be used only with the agreement of the 
[lsqbb]returning[rsqbb] bank [rtrif]``presenting'' the returned 
check[ltrif].
    2. The depositary bank must pay for a returned check by the 
close of the banking day on which it received the returned check. 
The day on which a returned check is received is determined pursuant 
to U.C.C. 4-108, which permits the bank to establish a cut-off hour, 
generally not earlier than 2 p.m., and treat checks received after 
that hour as being received on the next banking day. If the 
depositary bank is unable to make payment to a returning 
[rtrif]bank[ltrif] or paying bank on the banking day that it 
receives the returned check, because the returning 
[rtrif]bank[ltrif] or paying bank is closed for a holiday or because 
the time when the depositary bank received the check is after the 
close of Fedwire, e.g., west coast banks with late cut-off hours, 
payment may be made on the next banking day of the bank receiving 
payment.
    3. Payment must be made so that the funds are available for use 
by the bank returning the check to the depositary bank on the day 
the check is received by the depositary bank. For example, a 
depositary bank meets this requirement if it sends a wire transfer 
of funds to the returning [rtrif]bank[ltrif] or paying bank on the 
day it receives the returned check, even if the returning 
[rtrif]bank[ltrif] or paying bank has closed for the day. A wire 
transfer should indicate the purpose of the payment.
    4. The depositary bank may use a net settlement arrangement to 
settle for a returned check. Banks with net settlement agreements 
could net the appropriate credits and debits for returned checks 
with the accounting entries for forward collection checks if they so 
desired. If, for purposes of establishing additional controls or for 
other reasons, the banks involved desired a separate settlement for 
returned checks, a separate net settlement agreement could be 
established.
    5. The bank sending the returned check to the depositary bank 
may agree to accept payment at a later date if, for example, it does 
not believe that the amount of the returned check or checks warrants 
the costs of same-day payment. Thus, a returning [rtrif]bank[ltrif] 
or paying bank may agree to accept payment through an ACH credit or 
debit transfer that settles the day after the returned check is 
received instead of a wire transfer that settles on the same day.
    6. This paragraph and this subpart do not affect the depositary 
bank's right to recover

[[Page 16958]]

a provisional settlement with its nonbank customer for a check that 
is returned. (See also Sec. Sec.  229.19(c)(2)(ii), 
[lsqbb]229.33(d)[rsqbb][rtrif]229.32(f)[ltrif] and 229.35(b).)

[lsqbb]C. 229.32(c)[lsqbb][rtrif]D. 229.32(d)[ltrif] Misrouted Returned 
Checks

    1. This paragraph permits a bank receiving a check on the basis 
that it is the depositary bank to send the misrouted returned check 
to the correct depositary bank, if it can identify the correct 
depositary bank, either directly or through a returning bank 
agreeing to handle the check expeditiously under [lsqbb]Sec.  
229.30(a)[rsqbb][rtrif]Sec.  229.31(a)[ltrif]. In these cases, the 
bank receiving the check is acting as a returning bank. 
Alternatively, the bank receiving the misrouted returned check must 
send the check back to the bank from which it was received. In 
either case the bank to which the returned check was misrouted could 
receive settlement for the check. The depositary bank would be 
required to pay for the returned check under [lsqbb]Sec.  
229.32(b)[rsqbb][rtrif]Sec.  229.32(c)[ltrif], and any other bank to 
which the check is sent under this paragraph would be required to 
settle for the check as a returning bank under Sec.  229.31(c). If 
the check was originally received ``free,'' that is, without a 
charge for the check, the bank incorrectly receiving the check would 
have to return the check, without a charge, to the bank from which 
it came. The bank to which the returned check was misrouted is 
required to act promptly but is not required to meet the expeditious 
return requirements of Sec.  229.31(a); however, it must act within 
its midnight deadline. This paragraph does not affect a bank's 
duties under Sec.  229.35(b).

[lsqbb]D. 229.32(d)[rsqbb][rtrif]E. 229.32(e)[ltrif] Charges

    1. This paragraph prohibits a depositary bank from charging the 
equivalent of a presentment fee for returned checks. A returning 
bank, however, may charge a fee for handling returned checks. If the 
returning bank receives a mixed cash letter of returned checks, 
which includes some checks for which the returning bank also is the 
depositary bank, the fee may be applied to all the returned checks 
in the cash letter. In the case of a sorted cash letter containing 
only returned checks for which the returning bank is the depositary 
bank, however, no fee may be charged.

[rtrif]F. 229.32(f) Notification to Customer

    1. This paragraph requires a depositary bank to notify its 
customer of nonpayment upon receipt of a returned check. Notice also 
must be given if a depositary bank receives a notice of recovery 
under Sec.  229.35(b). A bank that chooses to provide the notice 
required by Sec.  229.32(f) in writing may send the notice by e-mail 
or facsimile if the bank sends the notice to the e-mail address or 
facsimile number specified by the customer for that purpose. The 
notice to the customer required under this paragraph also may 
satisfy the notice requirement of Sec.  229.13(g) if the depositary 
bank invokes the reasonable-cause exception of Sec.  229.13(e) due 
to learning of nonpayment, provided the notice meets all the 
requirements of Sec.  229.13(g).[ltrif]

[rtrif]XIX. Section 229.33 Electronic returns and collection items

A. 229.33(a) Checks under this subpart

    1. If a depositary bank has agreed to accept an electronic 
return, that electronic return is subject to the provisions of this 
subpart as if it were a returned check. For example, a depositary 
bank that receives an electronic return must notify its customer by 
midnight of the banking day following the banking day on which it 
received the electronic return, or within a longer reasonable time. 
(See Sec.  229.32(f)).
    2. Similarly, if a bank has agreed to accept an electronic 
collection item from another bank (either under the same-day 
settlement provisions of Sec.  229.36(d) or otherwise), the 
electronic collection item is subject to the provisions of this 
subpart as it were a check. For example, if a paying bank receives 
presentment of an electronic collection item, it is subject to the 
expeditious return requirements of this subpart, provided the 
depositary bank has agreed to accept electronic returns from the 
paying bank under Sec.  229.32(a).[ltrif]

XX. Section 229.34 Warranties

    [rtrif]A. Transfer and presentment warranties with respect to an 
electronic collection item and electronic return.
    1. Paragraph (a) sets forth the warranties that a bank makes 
when transferring an electronic collection item or electronic return 
and receives settlement or other consideration for it. Electronic 
collection items and electronic returns are treated as checks 
subject to the provisions of subpart C, and therefore the warranties 
in Sec.  229.34(a) are in addition to any warranties a bank makes 
under paragraphs (b), (c), or (d).
    2. The first warranty in Sec.  229.34(a) relates to the 
requirements for substitute checks. A bank that transfers an 
electronic collection item or electronic return warrants that the 
electronic image accurately represents all of the information on the 
front and back of the original check as of the time the original 
check was truncated and that the electronic information contains a 
record of all MICR-line information required for a substitute check 
under Sec.  229.2(rr) of this part and the amount of the check. This 
paragraph provides a bank that creates a substitute check from an 
electronic collection item or electronic return with a warranty 
claim against the bank that transferred the electronic collection 
item or electronic return to it or any prior transferor of the 
electronic collection item or electronic return.
    3. A bank that transfers an electronic collection item or an 
electronic return also warrants that no person will receive a 
transfer, return of, or otherwise be charged for, an electronic 
collection item, an electronic return, the original check, a 
substitute check, or a paper or electronic representation of a 
substitute check such that the person will be asked to make payment 
based on a check it has already paid. A bank that transfers an 
electronic collection item or electronic return that is an 
electronic representation of a substitute check also makes the 
warranties and indemnity in Sec. Sec.  229.52 and 229.53.[ltrif]

[lsqbb]C. 229.34(c)[rsqbb][rtrif]B. 229.34(b)[ltrif] Warranty of 
Settlement Amount, Encoding, and Offset

    1. Paragraph [lsqbb](c)[rsqbb][rtrif](b)[ltrif](1) provides that 
a bank that presents and receives settlement for checks warrants to 
the paying bank that the settlement it demands (e.g., as noted on 
the cash letter) equals the total amount of the checks it presents. 
This paragraph gives the paying bank a warranty claim against the 
presenting bank for the amount of any excess settlement made on the 
basis of the amount demanded, plus expenses. If the amount demanded 
is understated, a paying bank discharges its settlement obligation 
under U.C.C. 4-301 by paying the amount demanded, but remains liable 
for the amount by which the demand is understated; the presenting 
bank is nevertheless liable for expenses in resolving the 
adjustment.
    2. When checks or returned checks are transferred to a 
collecting [rtrif]bank[ltrif], returning [rtrif]bank[ltrif], or 
depositary bank, the transferor bank is not required to demand 
settlement, as is required upon presentment to the paying bank. 
However, often the checks or returned checks will be accompanied by 
information (such as a cash letter listing) that will indicate the 
total of the checks or returned checks. Paragraph 
[lsqbb](c)[rsqbb][rtrif](b)[ltrif](2) provides that if the 
transferor bank includes information indicating the total amount of 
checks or returned checks transferred, it warrants that the 
information is correct (i.e., equals the actual total of the items).
    3. Paragraph [lsqbb](c)[rsqbb][rtrif](b)[ltrif](3) provides that 
a bank that presents or transfers a check or returned check warrants 
the accuracy of [lsqbb]the magnetic ink encoding that was placed on 
the item[rsqbb] [rtrif]information encoded on the item in magnetic 
ink or provided electronically[ltrif] after issue, and that exists 
at the time of presentment or transfer, to any bank that 
subsequently handles the check or returned check. Under U.C.C. 4-
209(a), only the encoder (or the encoder and the depositary bank, if 
the encoder is a customer of the depositary bank) warrants the 
encoding accuracy, thus any claims on the warranty must be directed 
to the encoder. Paragraph [lsqbb](c)[rsqbb][rtrif](b)[ltrif](3) 
expands on the U.C.C. by providing that all banks that transfer or 
present a check or returned check make the encoding warranty. In 
addition, under the U.C.C., the encoder makes the warranty to 
subsequent collecting banks and the paying bank, while paragraph 
[lsqbb](c)[rsqbb][rtrif](b)[ltrif](3) provides that the warranty is 
made to banks in the return chain as well. Paragraph 
[lsqbb](c)[rsqbb][rtrif](b)[ltrif](3) applies to all MICR-line 
encoding on a substitute check [rtrif]and, in the case of an 
electronic collection item or electronic return, to the electronic 
information related to a check [ltrif].
    4. A paying bank that settles for an overstated cash letter 
because of a misencoded check may make a warranty claim against the 
presenting bank under paragraph 
[lsqbb](c)[rsqbb][rtrif](b)[ltrif](1) (which would require the 
paying bank to show that the check was part of the overstated cash 
letter) or an encoding warranty claim under paragraph 
[lsqbb](c)[rsqbb][rtrif](b)[ltrif](3) against the presenting bank or 
any preceding bank that handled the misencoded check.
    5. Paragraph [lsqbb](c)[rsqbb][rtrif](b)[ltrif](4) provides that 
a paying bank or a depositary bank may set

[[Page 16959]]

off excess settlement paid to another bank against settlement owed 
to that bank for checks presented or returned checks received (for 
which it is the depositary bank) subsequent to the excess 
settlement.
    [lsqbb]D. 229.34(d)[rsqbb][rtrif]C. 229.34(c)[ltrif] Transfer 
and Presentment Warranties [rtrif]With Respect to a Remotely Created 
Check[ltrif]
    1. A bank that transfers or presents a remotely created check 
and receives a settlement or other consideration warrants that the 
person on whose account the check is drawn authorized the issuance 
of the check in the amount stated on the check and to the payee 
stated on the check. The warranties are given only by banks and only 
to subsequent banks in the collection chain. The warranties 
ultimately shift liability for the loss created by an unauthorized 
remotely created check to the depositary bank. The depositary bank 
cannot assert the transfer and presentment warranties against a 
depositor. However, a depositary bank may, by agreement, allocate 
liability for such an item to the depositor and also may have a 
claim under other laws against that person.
    2. The transfer and presentment warranties for remotely created 
checks supplement the Federal Trade Commission's Telemarketing Sales 
Rule, which requires telemarketers that submit checks for payment to 
obtain the customer's ``express verifiable authorization'' (the 
authorization may be either in writing or tape recorded and must be 
made available upon request to the customer's bank). 16 CFR 
310.3(a)(3). The transfer and presentment warranties shift liability 
to the depositary bank only when the remotely created check is 
unauthorized, and would not apply when the customer initially 
authorizes a check but then experiences ``buyer's remorse'' and 
subsequently tries to revoke the authorization by asserting a claim 
against the paying bank under U.C.C. 4-401. If the depositary bank 
suspects ``buyer's remorse,'' it may obtain from its customer the 
express verifiable authorization of the check by the paying bank's 
customer, required under the Federal Trade Commission's 
Telemarketing Sales Rule, and use that authorization as a defense to 
the warranty claim.
    3. The scope of the transfer and presentment warranties for 
remotely created checks differs from that of the corresponding 
U.C.C. warranty provisions in two respects. The U.C.C. warranties 
differ from the [lsqbb]Sec.  229.34(d)[rsqbb][rtrif]Sec.  
229.34(c)[ltrif] warranties in that [lsqbb]they[rsqbb][rtrif]the 
U.C.C. warranties[ltrif] are given by any person, including a 
nonbank depositor, that transfers a remotely created check and not 
just to a bank, as is the case under [lsqbb]Sec.  
229.34(d)[rsqbb][rtrif]Sec.  229.34(c)[ltrif]. In addition, the 
U.C.C. warranties state that the person on whose account the item is 
drawn authorized the issuance of the item in the amount for which 
the item is drawn. The [lsqbb]Sec.  229.34(d)[rsqbb][rtrif]Sec.  
229.34(c)[ltrif] warranties specifically cover the amount as well as 
the payee stated on the check. Neither the U.C.C. 
warranties[lsqbb],[rsqbb] nor the [lsqbb]Sec.  
229.34(d)[rsqbb][rtrif]Sec.  229.34(c)[ltrif] warranties apply to 
the date stated on the remotely created check.
    4. A bank making the [lsqbb]Sec.  229.34(d)[rsqbb][rtrif]Sec.  
229.34(c)[ltrif] warranties may defend a claim asserting violation 
of the warranties by proving that the customer of the paying bank is 
precluded by U.C.C. 4-406 from making a claim against the paying 
bank. This may be the case, for example, if the customer failed to 
discover the unauthorized remotely created check in a timely manner.
    5. The transfer and presentment warranties for a remotely 
created check apply to a remotely created check that has been 
reconverted to a substitute check[rtrif], to an electronic 
collection item derived from a remotely created check, and to an 
electronic image and information transferred as an electronic 
collection item derived from a remotely created check.[ltrif]

[lsqbb]A. 229.34(a)[rsqbb][rtrif]D. 229.34(d)[ltrif] Warranty of 
Returned Check

    1. This paragraph includes warranties that a returned check, 
including a notice in lieu of return [rtrif]and electronic 
return[ltrif], was returned by the paying bank, or in the case of a 
check payable by a bank and payable through another bank, the bank 
by which the check is payable, within the deadline under the U.C.C. 
(subject to any claims or defenses under the U.C.C., such as breach 
of a presentment warranty)[lsqbb], Regulation J (12 CFR part 
210),[rsqbb] or Sec.  229.30(c); that the paying or returning bank 
is authorized to return the check; that the returned check has not 
been materially altered; and that, in the case of a notice in lieu 
of return, the [lsqbb]original[rsqbb] check has not been and will 
not be returned for payment. (See the Commentary to [lsqbb]Sec.  
229.30(f)[rsqbb] [rtrif]Sec.  229.30(e)[ltrif].) [rtrif]``Check'' 
includes the original check, a substitute check, an electronic 
return, and notice in lieu of return.[ltrif] The warranty does not 
include a warranty that the bank complied with the expeditious 
return requirements of Sec. Sec.  229.30(a) and 229.31(a). These 
warranties do not apply to checks drawn on the United States 
Treasury, to U.S. Postal Service money orders, or to checks drawn on 
a state or a unit of general local government that are not payable 
through or at a bank. (See Sec.  229.42.)

[rtrif]E. 229.34(e) Electronic image and information transferred as an 
electronic collection item or electronic return

    1. Paragraph (e) sets forth the warranties that a bank makes 
when transferring an electronic image and related information as if 
it were an electronic collection item or electronic return. These 
warranties are the same warranties made for electronic collection 
items and electronic returns throughout Sec.  229.34 and carry the 
same conditions, such as the requirement for receiving settlement or 
other consideration where applicable. Applying the Sec.  229.34 
warranties to all images and related information transferred as if 
they were electronic collection items or electronic returns protects 
a transferee bank in the event it creates a substitute check from an 
electronic image and related information that does not represent an 
item that existed in paper (i.e., an electronically created item).
    2. As a practical matter, a bank receiving an electronically 
created image and related information generally cannot distinguish 
the image and related information from an image and related 
information that derived from a paper check. In turn, the bank 
receiving the electronically created image and related information 
may produce a paper item that is indistinguishable from a substitute 
check (although the item is not a substitute check because the item 
never existed in paper). Therefore, a bank that transfers the paper 
item may be liable for a breach of the substitute check warranties. 
The warranties in Sec.  229.34(e) enable a bank that receives a 
nonconforming substitute check to pass back liability to the bank 
from which it received the electronic image and related information, 
notwithstanding the fact that the image and information did not 
derive from a paper check.[ltrif]

[lsqbb]B. 229.34(b) Warranty of Notice of Nonpayment

    1. This paragraph provides for warranties for notices of 
nonpayment. This warranty does not include a warranty that the 
notice is accurate and timely under Sec.  229.33. The requirements 
of Sec.  229.33 that are not covered by the warranty are subject to 
the liability provisions of Sec.  229.38. These warranties are 
designed to give the depositary bank more confidence in relying on 
notices of nonpayment. This paragraph imposes liability on a paying 
bank that gives notice of nonpayment and then subsequently returns 
the check. (See Commentary on Sec.  229.33(a).)[rsqbb]

[lsqbb]E. 229.34(d)[rsqbb][rtrif]F. 229.34(f)[ltrif] Damages

    1. This paragraph adopts for the warranties in Sec.  229.34 (a), 
(b), [lsqbb]and[rsqbb] (c)[rtrif], (d) and (e)[ltrif] the damages 
provided in U.C.C. 4-207(c) and 4A-506(b). (See definition of 
interest compensation in [lsqbb]Sec.  229.2(oo)[rsqbb][rtrif]Sec.  
229.2(bb)[ltrif].)

[lsqbb]F. 229.34(e)[rsqbb][rtrif]G. 229.34(g)[ltrif] Tender of Defense

    1. This paragraph adopts for this regulation the vouching-in 
provisions of U.C.C. 3-119.

[lsqbb]G. 229.34(f)[rsqbb][rtrif]H. 229.34(h)[ltrif] Notice of Claim

    1. This paragraph adopts the notice provisions of U.C.C. 
sections 4-207(d) and 4-208(e). The time limit set forth in this 
paragraph applies to notices of claims for warranty breaches only. 
As provided in Sec.  229.38(g), all actions under this section must 
be brought within one year after the date of the occurrence of the 
violation involved.

XXI. Section 229.35 Indorsements

A. 229.35(a) Indorsement Standards

    1. This section and appendix D require banks to use a standard 
form of indorsement when indorsing checks during the forward 
collection and return process. The standard provides for 
indorsements by all collecting and returning banks, plus a unique 
standard for depositary bank indorsements. It is designed to 
facilitate the identification of the depositary bank and the prompt 
return of checks. The regulation places a duty on banks to ensure 
that their indorsements can be interpreted by any person. The 
indorsement standard specifies the information each indorsement must 
contain and its location and ink color[rtrif], if applied to a paper 
check[ltrif].
    2. Banks generally apply indorsements to a paper check in one of 
two ways: (1) Banks

[[Page 16960]]

print or ``spray'' indorsements onto a check when the check is 
processed through the banks' automated check sorters (regardless of 
whether the checks are original checks or substitute checks), and 
(2) reconverting banks print or ``overlay'' previously applied 
electronic indorsements and their own indorsements and 
identifications onto a substitute check at the time that the 
substitute check is created. If a subsequent substitute check is 
created in the course of collection or return, that substitute check 
will contain, in its image of the back of the previous substitute 
check, reproductions of indorsements that were sprayed or overlaid 
onto the previous item. For purposes of the indorsement standard set 
forth in appendix D, a reproduction of a previously applied sprayed 
or overlaid indorsement contained within an image of a check does 
not constitute ``an indorsement that previously was applied 
electronically.'' To accommodate these two indorsement scenarios, 
the appendix includes two indorsement location specifications: one 
standard applies to banks spraying indorsements onto existing paper 
original checks and substitute checks, and another applies to 
reconverting banks overlaying indorsements that previously were 
applied electronically and their own indorsements onto substitute 
checks at the time the substitute checks are created.
    3. A bank might use check processing equipment that captures an 
image of a check prior to spraying an indorsement onto that 
[rtrif]check[ltrif] [lsqbb]item[rsqbb]. If the bank truncates that 
[rtrif]check[ltrif] [lsqbb]item[rsqbb], it should ensure that it 
also applies an indorsement to the item electronically [rtrif]in 
accordance with ANS X9.100-187, unless the parties otherwise 
agree[ltrif]. A reconverting bank satisfies its obligation to 
preserve all previously applied indorsements by overlaying a bank's 
indorsement that previously was applied electronically onto a 
substitute check that the reconverting bank creates.
    4. The location of an indorsement applied to an original paper 
check in accordance with appendix D may shift if that check is 
truncated and later reconverted to a substitute check. If an 
indorsement applied to the original check in accordance with 
appendix D is overwritten by a subsequent indorsement applied to the 
substitute check in accordance with appendix D, then one or both of 
those indorsements could be rendered illegible. As explained in 
Sec.  229.38(d) and the commentary thereto, a reconverting bank is 
liable for losses associated with indorsements that are rendered 
illegible as a result of check substitution.
    5. To ensure that indorsements can be easily read and would 
remain legible after an image of a check is captured, the standard 
requires all indorsements applied to original checks and substitute 
checks to be printed in black ink [lsqbb]as of January 1, 
2006[rsqbb].
    6. The standard requires the depositary bank's indorsement to 
include (1) its nine-digit routing number set off by an arrow at 
each end of the routing number and, if the depositary bank is a 
reconverting bank with respect to the check, an asterisk outside the 
arrow at each end of the routing number to identify the bank as a 
reconverting bank; (2) the indorsement date; and (3) if the 
indorsement is applied physically, name or location information. The 
standard also permits but does not require the indorsement to 
include other identifying information. The standard requires a 
collecting bank's or returning bank's indorsement to include only 
(1) the bank's nine digit routing number (without arrows) and, if 
the collecting bank or returning bank is a reconverting bank with 
respect to the check, an asterisk at each end of the number to 
identify the bank as a reconverting bank, (2) the indorsement date, 
and (3) an optional trace or sequence number. [rtrif]The information 
required to be included in the depositary bank's indorsement of an 
electronic collection item, and the information that may be 
included, is the same as set forth above. The formatting of the 
information, however, should be in accordance with ANS X9.100-
187.[ltrif]
    7. Depositary banks should not include information that can be 
confused with required information. For example, a nine-digit zip 
code could be confused with the nine-digit routing number.
    8. A depositary bank may want to include an address in its 
indorsement in order to limit the number of locations at which it 
must receive returned checks. [lsqbb]In instances where this address 
is not consistent with the routing number in the indorsement, the 
depositary bank is required to receive returned checks at a branch 
or head office consistent with the routing number.[rsqbb] Banks 
should note, however, that Sec.  229.32 requires a depositary bank 
to receive returned checks at the location(s) at which it receives 
forward-collection checks[lsqbb].[rsqbb] [rtrif]as well as the other 
locations enumerated in Sec.  229.32(b) (see Sec.  229.32(b) and 
accompanying commentary). If a depositary bank includes an e-mail 
address or other electronic address for delivery of electronic 
returns, and has agreed to accept electronic returns from the paying 
bank or returning bank, the paying bank or returning bank may send 
electronic returns to such address.[ltrif]
    9. In addition to indorsing a substitute check in accordance 
with appendix D, a reconverting bank must identify itself and the 
truncating bank by applying its routing number and the routing 
number of the truncating bank to the front of the check in 
accordance with appendix D and ANS X9.100-140. Further, if the 
reconverting bank is the paying bank, [rtrif]or a bank that rejected 
a check submitted for deposit,[ltrif] it also must identify itself 
by applying its routing number to the back of the check in 
accordance with appendix D. In these instances, the reconverting 
bank and truncating bank routing numbers are for identification 
purposes only and are not indorsements or acceptances.
    10. Under the U.C.C., a specific guarantee of prior indorsement 
is not necessary. (See U.C.C. 4-207(a) and 4-208(a).) Use of 
guarantee language in indorsements, such as ``P.E.G.'' (``prior 
endorsements guaranteed''), may result in reducing the type size 
used in bank indorsements, thereby making them more difficult to 
read. Use of this language may make it more difficult for other 
banks to identify the depositary bank. Subsequent collecting bank 
indorsements may not include this language.
    11. If the bank maintaining the account into which a check is 
deposited agrees with another bank (a correspondent, ATM operator, 
or lock box operator) to have the other bank accept returns 
[lsqbb]and notices of nonpayment[rsqbb] for the bank of account, the 
indorsement placed on the check as the depositary bank indorsement 
may be the indorsement of the bank that acts as correspondent, ATM 
operator, or lock box operator as provided in paragraph (d) of this 
section.
    12. The backs of [lsqbb]many[rsqbb][rtrif]some[ltrif] checks 
bear pre-printed information or blacked out areas for various 
reasons. For example, some checks are printed with a carbon band 
across the back that allows the transfer of information from the 
check to a ledger with one writing. Also, contracts or loan 
agreements are printed on certain checks. Other checks that are 
mailed to recipients may contain areas on the back that are blacked 
out so that they may not be read through the mailer. On the deposit 
side, the payee of the check may place its indorsement or 
information identifying the drawer of the check in the area 
specified for the depositary bank indorsement, thus making the 
depositary bank indorsement unreadable.
    13. The indorsement standard does not prohibit the use of a 
carbon band or other printed or written matter on the backs of 
checks and does not require banks to avoid placing their 
indorsements in these areas. Nevertheless, checks will be handled 
more efficiently if depositary banks design indorsement stamps so 
that the nine-digit routing number avoids the carbon band area. 
Indorsing parties other than banks, e.g., corporations, will benefit 
from the faster return of checks if they protect the identifiability 
and legibility of the depositary bank indorsement by staying clear 
of the area reserved for the depositary bank indorsement.
    14. Section 229.38(d) allocates responsibility for loss 
resulting from a delay in return of a check due to indorsements that 
are unreadable because of material on the back of the check. The 
depositary bank is responsible for a loss resulting from a delay in 
return caused by the condition of the check arising after its 
issuance until its acceptance by the depositary bank that made the 
depositary bank's indorsement illegible. The paying bank is 
responsible for loss resulting from a delay in return caused by 
indorsements that are not readable because of other material on the 
back of the check at the time that it was issued. Depositary and 
paying banks may shift these risks to their customers by agreement.
    15. The standard does not require the paying bank to indorse the 
check; however, if a paying bank does indorse a check that is 
returned, it should follow the indorsement standard for collecting 
banks and returning banks. The standard requires collecting and 
returning banks to indorse the check for tracing purposes. With 
respect to the identification of a paying bank that is also a 
reconverting bank, see the commentary to Sec.  229.51(b)(2).

[[Page 16961]]

B. 229.35(b) Liability of Bank Handling Check

    1. When a check is sent for forward collection, the collection 
process results in a chain of indorsements extending from the 
depositary bank through any subsequent collecting banks to the 
paying bank. This section extends the indorsement chain through the 
paying bank to the returning banks, and would permit each bank to 
recover from any prior indorser if the claimant bank does not 
receive payment for the check from a subsequent bank in the 
collection or return chain. For example, if a returning bank 
returned a check to an insolvent depositary bank, and did not 
receive the full amount of the check from the failed bank, the 
returning bank could obtain the unrecovered amount of the check from 
any bank prior to it in the collection and return chain including 
the paying bank. Because each bank in the collection and return 
chain could recover from a prior bank, any loss would fall on the 
first collecting bank that received the check from the depositary 
bank. To avoid circuity of actions, the returning bank could recover 
directly from the first collecting bank. Under the U.C.C., the first 
collecting bank might ultimately recover from the depositary bank's 
customer or from the other parties on the check.
    2. Where a check is returned through the same banks used for the 
forward collection of the check, priority during the forward 
collection process controls over priority in the return process for 
the purpose of determining prior and subsequent banks under this 
regulation.
    3. Where a returning bank is insolvent and fails to pay the 
paying bank or a prior returning bank for a returned check, Sec.  
229.39(a) requires the receiver of the failed bank to return the 
check to the bank that transferred the check to the failed bank. 
That bank then either could continue the return to the depositary 
bank or recover based on this paragraph. Where the paying bank is 
insolvent, and fails to pay the collecting bank, the collecting bank 
also could recover from a prior collecting bank under this 
paragraph, and the bank from which it recovered could in turn 
recover from its prior collecting bank until the loss settled on the 
depositary bank (which could recover from its customer).
    4. A bank is not required to make a claim against an insolvent 
bank before exercising its right to recovery under this paragraph. 
Recovery may be made by charge-back or by other means. This right of 
recovery also is permitted even where nonpayment of the check is the 
result of the claiming bank's negligence such as failure to make 
expeditious return, but the claiming bank remains liable for its 
negligence under Sec.  229.38.
    5. This liability is imposed on a bank handling a check for 
collection or return regardless of whether the bank's indorsement 
appears on the check. Notice must be sent under this paragraph to a 
prior bank from which recovery is sought reasonably promptly after a 
bank learns that it did not receive payment from another bank, and 
learns the identity of the prior bank. Written notice reasonably 
identifying the check and the basis for recovery is sufficient if 
the check is not available. Receipt of notice by the bank against 
which the claim is made is not a precondition to recovery by charge-
back or other means; however, a bank may be liable for negligence 
for failure to provide timely notice. A paying or returning bank 
also may recover from a prior collecting bank as provided in 
Sec. Sec.  229.30(b) and 229.31(b) [rtrif](in those cases where the 
paying bank or returning bank is unable to identify the depositary 
bank)[ltrif]. This provision is not a substitute for a paying or 
returning bank making expeditious return under Sec. Sec.  229.30(a) 
or 229.31[lsqbb](b)[rsqbb][rtrif](a)[ltrif]. This paragraph does not 
affect a paying bank's accountability for a check under U.C.C. 4-
215(a) and 4-302. Nor does this paragraph affect a collecting bank's 
accountability under U.C.C. 4-213 and 4-215(d). A collecting bank 
becomes accountable upon receipt of final settlement as provided in 
the foregoing U.C.C. sections. The term final settlement in 
Sec. Sec.  229.31(c), [lsqbb]229.32 
(b)[rsqbb][rtrif]229.32(c)[ltrif], and [lsqbb]229.36 
(d)[rsqbb][rtrif]229.36(c)[ltrif]is intended to be consistent with 
the use of the term final settlement in the U.C.C. (e.g., U.C.C. 4-
213, 4-214, and 4-215). (See also Sec.  
229.2[lsqbb](oo)[rsqbb][rtrif](bb)[ltrif] and Commentary.)
    6. This paragraph also provides that a bank may have the rights 
of a holder based on the handling of the check for collection or 
return. A bank may become a holder or a holder in due course 
regardless of whether prior banks have complied with the indorsement 
standard in Sec.  229.35(a) and appendix D.
    7. This paragraph affects the following provisions of the 
U.C.C., and may affect other provisions:
    a. Section 4-214(a), in that the right to recovery is not based 
on provisional settlement, and recovery may be had from any prior 
bank. Section 4-214(a) would continue to permit a depositary bank to 
recover a provisional settlement from its customer. (See 
[lsqbb]Sec.  229.33(d)[rsqbb][rtrif]Sec.  229.32(f)[ltrif].)
    b. Section 3-415 and related provisions (such as section 3-503), 
in that such provisions would not apply as between banks, or as 
between the depositary bank and its customer.

C. 229.35(c) Indorsement by Bank

    1. This section protects the rights of a customer depositing a 
check in a bank without requiring the words ``pay any bank,'' as 
required by the U.C.C. (See U.C.C. 4-201(b).) Use of this language 
in a depositary bank's indorsement will make it more difficult for 
other banks to identify the depositary bank. The indorsement 
standard in appendix D prohibits such material in subsequent 
collecting bank indorsements. The existence of a bank indorsement 
provides notice of the restrictive indorsement without any 
additional words.

D. 229.35(d) Indorsement for Depositary Bank

    1. This section permits a depositary bank to arrange with 
another bank to indorse checks. This practice may occur when a 
correspondent indorses for a respondent, or when the bank servicing 
an ATM or lock box indorses for the bank maintaining the account in 
which the check is deposited--i.e., the depositary bank. If the 
indorsing bank applies the depositary bank's indorsement, checks 
will be returned to the depositary bank. If the indorsing bank does 
not apply the depositary bank's indorsement, by agreement with the 
depositary bank it may apply its own indorsement as the depositary 
bank indorsement. In that case, the depositary bank's own 
indorsement on the check (if any) should avoid the location reserved 
for the depositary bank. The actual depositary bank remains 
responsible for the availability and other requirements of 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart B, but the bank indorsing as 
depositary bank is considered the depositary bank for purposes of 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C. The check will be 
returned[lsqbb], and notice of nonpayment will be given,[rsqbb] to 
the bank indorsing as depositary bank.
    2. Because the depositary bank for 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart B purposes will desire prompt 
notice of nonpayment, its arrangement with the indorsing bank should 
provide for prompt notice of nonpayment. The bank indorsing as 
depositary bank may require the depositary bank to agree to take up 
the check if the check is not paid even if the depositary bank's 
indorsement does not appear on the check and it did not handle the 
check. The arrangement between the banks may constitute an agreement 
varying the effect of provisions of 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C under Sec.  229.37.

XXII. Section 229.36 Presentment and Issuance of Checks

[lsqbb]A. 229.36(a) Payable Through and Payable at Checks

    1. For purposes of Subpart C, the regulation defines a payable-
through or payable-at bank (which could be designated the 
collectible-through or collectible-at bank) as a paying bank. The 
requirements of Sec.  229.30(a) and the notice of nonpayment 
requirements of Sec.  229.33 are imposed on a payable-through or 
payable-at bank and are based on the time of receipt of the forward 
collection check by the payable-through or payable-at bank. This 
provision is intended to speed the return of checks that are payable 
through or at a bank to the depositary bank.[rsqbb]

[rtrif]A. 229.36(a) Receipt of Electronic Collection Items

    1. This paragraph sets forth the circumstances under which a 
paying bank has agreed to accept an electronic collection item from 
the presenting bank for purposes of subpart C. There are two 
different ways a paying bank can agree to accept an electronic 
collection item from the presenting bank for purposes of subpart C:
    a. First, a paying bank may have a direct contractual 
relationship with the presenting bank under which it has agreed to 
accept electronic collection items directly from the presenting 
bank.
    b. Second, a paying bank may have otherwise agreed with the 
presenting bank to accept electronic collection items. For example, 
the presenting bank and paying bank may both be members of the same 
clearing house, under the rules of which the paying bank has agreed 
to accept electronic collection items from the presenting bank.
    2. The presenting bank must deliver the electronic collection 
item to the electronic

[[Page 16962]]

location designated by the paying bank. Accordingly, regardless of 
the means by which a paying bank agrees to accept electronic 
collection items from the presenting bank, the paying bank's 
agreement with the presenting bank must designate an electronic 
presentment point.
    3. This paragraph also sets forth when a paying bank receives an 
electronic collection item. A bank ``receives'' an electronic 
collection item when that item is delivered to the electronic 
presentment point designated by the bank or when the electronic 
collection item is otherwise made available for retrieval or review 
in accordance with an agreement between the paying bank and the 
presenting bank. For example, if a paying bank designates an 
Internet protocol (IP) address as its electronic presentment point, 
the paying bank has received the electronic collection item when it 
is delivered to that address. In contrast, if the paying bank has an 
arrangement with a presenting bank whereby the presenting bank sends 
the electronic collection item to its storage device and then 
provides the paying bank with access to the storage device for 
retrieving electronic collection items, the electronic collection 
item is received by the paying bank when the presenting bank makes 
the electronic collection item available for the paying bank to 
retrieve or review from storage device in accordance with the 
agreement between the presenting bank and the paying bank.[ltrif]

B. 229.36(b) [lsqbb]Receipt at Bank Office or Processing 
Center[rsqbb][rtrif]Receipt of paper checks.[ltrif]

    [lsqbb]1. This paragraph seeks to facilitate efficient 
presentment of checks to promote early return [lsqbb]or notice of 
nonpayment[rsqbb] to the depositary bank and clarifies the law as to 
the effect of presentment by routing number. This paragraph differs 
from Sec.  229.32(a) because presentment of checks differs from 
delivery of returned checks.[rsqbb]
    [lsqbb]2[rsqbb][rtrif]1[ltrif]. The paragraph specifies four 
locations at which the paying bank must accept presentment of 
[rtrif]paper[ltrif] checks. Where the check is payable through a 
bank and the check is sent to that bank, the payable-through bank is 
the paying bank for purposes of this subpart, regardless of whether 
the paying bank must present the check to another bank or to a 
nonbank payor for payment.
    a. Delivery of checks may be made, and presentment is considered 
to occur, at a location (including a processing center) requested by 
the paying bank. [lsqbb]This is the way most checks are presented by 
banks today.[rsqbb] This provision adopts the common law rule of a 
number of legal decisions that the processing center acts as the 
agent of the paying bank to accept presentment and to begin the time 
for processing of the check. (See also U.C.C. 4-204(c).) If a bank 
designates different locations for the presentment of forward 
collection checks bearing different routing numbers, for purposes of 
this paragraph it requests presentment of checks bearing a 
particular routing number only at the location designated for 
receipt of forward collection checks bearing that routing number.
    [lsqbb]d[rsqbb][rtrif]b[ltrif]. If the check specifies the name 
and address of a branch or head office, or other location (such as a 
processing center), the check may be delivered by delivery to that 
office or other location. If the address is too general to identify 
a particular office, delivery may be made at any office consistent 
with the address. For example, if the address is ``San Francisco, 
California,'' each office in San Francisco must accept presentment. 
The designation of an address on the check generally is in the 
control of the paying bank.
    [lsqbb]b[rsqbb][rtrif]c[ltrif]. i. Delivery may be made at an 
office of the bank associated with the routing number on the check. 
The office associated with the routing number of a bank is found in 
American Bankers Association Key to Routing Numbers, published by an 
agent of the American Bankers Association, which lists a city and 
state address for each routing number. Checks generally are handled 
by collecting banks on the basis of the nine-digit routing number 
encoded in magnetic ink (or on the basis of the fractional form 
routing number if the magnetic ink characters are obliterated) on 
the check, rather than the printed name or address. [rtrif]In the 
case of a substitute check derived from an electronic collection 
item, delivery may be made at an office of the bank associated with 
the routing number in the electronic image of or electronic 
information related to the check.[ltrif] The definition of a paying 
bank in [lsqbb]Sec.  229.2(z)[rsqbb][rtrif]Sec.  229.2(ii)[ltrif] 
includes a bank designated by routing number, whether or not there 
is a name on the check, and whether or not any name is consistent 
with the routing number. Where a check is payable by one bank, but 
payable through another, the routing number is that of the payable-
through bank, not that of the payor bank. As the payor bank has 
selected the payable-through bank as the point through which 
presentment is to be made, it is proper to treat the payable-through 
bank as the paying bank for purposes of this section.
    ii. There is no requirement in the regulation that the name and 
address on the check agree with the address associated with the 
routing number on the check. A bank generally may control the use of 
its routing number, just as it does the use of its name. The address 
associated with the routing number may be a processing center.
    iii. In some cases, a paying bank may have several offices in 
the city associated with the routing number. In such case, it would 
not be reasonable or efficient to require the presenting bank to 
sort the checks by more specific branch addresses that might be 
printed on the checks, and to deliver the checks to each branch. A 
collecting bank normally would deliver all checks to one location. 
In cases where checks are delivered to a branch other than the 
branch on which they may be drawn, computer and courier 
communication among branches should permit the paying bank to 
determine quickly whether to pay the check.
    [lsqbb]c[rsqbb][rtrif]d[ltrif]. If the check specifies the name 
of the paying bank but no address, the bank must accept delivery at 
any office. Where delivery is made by a person other than a bank, or 
where the routing number is not readable, delivery will be made 
based on the name and address of the paying bank on the check. If 
there is no address, delivery may be made at any office of the 
paying bank. This provision is consistent with U.C.C. 3-111, which 
states that presentment for payment may be made at the place 
specified in the instrument, or, if there is none, at the place of 
business of the party to pay. Thus, there is a trade-off for a 
paying bank between specifying a particular address on a check to 
limit locations of delivery, and simply stating the name of the bank 
to encourage wider currency for the check.
    3. This paragraph may affect U.C.C. 3-111 to the extent that the 
U.C.C. requires presentment to occur at a place specified in the 
instrument.
    C. [lsqbb][Reserved]

D. 229.36(d)[rsqbb][rtrif]229.36(c)[ltrif] Liability of Bank During 
Forward Collection

    1. This paragraph makes settlement between banks during forward 
collection final when made, subject to any deferment of credit, just 
as settlements between banks during the return of checks are final. 
In addition, this paragraph clarifies that this change does not 
affect the liability scheme under U.C.C. 4-201 during forward 
collection of a check. That U.C.C. section provides that, unless a 
contrary intent clearly appears, a bank is an agent or subagent of 
the owner of a check, but that Article 4 of the U.C.C. applies even 
though a bank may have purchased an item and is the owner of it. 
This paragraph preserves the liability of a collecting bank to prior 
collecting banks and the depositary bank's customer for negligence 
during the forward collection of a check under the U.C.C., even 
though this paragraph provides that settlement between banks during 
forward collection is final rather than provisional. Settlement by a 
paying bank is not considered to be final payment for the purposes 
of U.C.C. 4-215(a)(2) or (3), because a paying bank has the right to 
recover settlement from a returning or depositary bank to which it 
returns a check under this subpart. Other provisions of the U.C.C. 
not superseded by this subpart, such as section 4-202, also continue 
to apply to the forward collection of a check and may apply to the 
return of a check. (See definition of returning bank in [lsqbb]Sec.  
229.2(cc)[rsqbb][rtrif]Sec.  229.2(oo)[ltrif].)

[lsqbb]E. 229.36(e) Issuance of Payable Through Checks

    1. If a bank arranges for checks payable by it to be payable 
through another bank, it must require its customers to use checks 
that contain conspicuously on their face the name, and location, and 
first four digits of the nine-digit routing number of the bank by 
which the check is payable and the legend ``payable through'' 
followed by the name of the payable-through bank. The first four 
digits of the nine-digit routing number and the location of the bank 
by which the check is payable must be associated with the same check 
processing region. (This section does not affect Sec.  229.36(b).) 
The required information is deemed conspicuous if it is printed in a 
type size not smaller than six-point type and if it is contained in 
the title plate, which is located in the lower left quadrant of the 
check. The required information may be conspicuous if it is located 
elsewhere on the check.

[[Page 16963]]

    2. If a payable-through check does not meet the requirements of 
this paragraph, the bank by which the check is payable may be liable 
to the depositary bank or others as provided in Sec.  229.38. For 
example, a bank by which a payable-through check is payable could be 
liable to a depositary bank that suffers a loss, such as lost 
interest or liability under Subpart B, that would not have occurred 
had the check met the requirements of this paragraph. Similarly, a 
bank may be liable under Sec.  229.38 if a check payable by it that 
is not payable through another bank is labeled as provided in this 
section. For example, a bank that holds checking accounts and 
processes checks at a central location but has widely-dispersed 
branches may be liable under this section if it labels all of its 
checks as ``payable through'' a single branch and includes the name, 
address, and four-digit routing symbol of another branch. These 
checks would not be payable through another bank and should not be 
labeled as payable-through checks. (All of a bank's offices within 
the United States are considered part of the same bank; see Sec.  
229.2(e).) In this example, the bank by which the checks are payable 
could be liable to a depositary bank that suffers a loss, such as 
lost interest or liability under Subpart B, due to the mislabeled 
check. The bank by which the check is payable may be liable for 
additional damages if it fails to act in good faith.[rsqbb]

[lsqbb]F. 229.36(f)[rsqbb][rtrif]D. 229.36(d)[ltrif] Same-Day 
Settlement

    1. This paragraph provides that, under certain conditions, a 
paying bank must settle with a presenting bank for a check on the 
same day the check is presented in order to avail itself of the 
ability to return the check on its next banking day under U.C.C. 4-
301 and 4-302. This paragraph does not apply to checks presented for 
immediate payment over the counter. Settling for a check under this 
paragraph does not constitute final payment of the check under the 
U.C.C. This paragraph does not supersede or limit the rules 
governing collection and return of checks through Federal Reserve 
Banks that are contained in Subpart A of Regulation J (12 CFR part 
210).
    2. Presentment requirements.
    a. Location and time.
    i. For presented checks to qualify for mandatory same-day 
settlement, information accompanying the checks must indicate that 
presentment is being made under this paragraph--e.g. ``these checks 
are being presented for same-day settlement''--and must include a 
demand for payment of the total amount of the checks together with 
appropriate payment instructions in order to enable the paying bank 
to discharge its settlement responsibilities under this paragraph. 
In addition, the check or checks must be presented at a location 
designated by the paying bank for receipt of checks for same-day 
settlement by 8:00 a.m. local time of that location. [lsqbb]The 
designated presentment location must be a location at which the 
paying bank would be considered to have received a check under Sec.  
229.36(b). The paying bank may not designate a location solely for 
presentment of checks subject to settlement under this paragraph; by 
designating a location for the purposes of Sec.  229.36(f), the 
paying bank agrees to accept checks at that location for purposes of 
Sec.  229.36(b).[rsqbb]
    [rtrif]ii. Electronic presentment. A paying bank may require 
that checks presented for same-day settlement under this paragraph 
be presented as electronic collection items to a designated 
electronic presentment point. If a paying bank so requires, the 
presenting bank must present checks for same-day settlement as 
electronic collection items, and may not present paper checks to 
physical locations for receiving same-day settlement under this 
section. An electronic collection item presented for same-day 
settlement is subject to the provisions of this subpart as if it 
were a check (See Sec.  229.33). Therefore, references to checks in 
this subpart include electronic collection items presented under 
Sec.  229.36(d).
    iii. A paying bank may designate a presentment location for 
paper checks, but the designated presentment location must be a 
location at which the paying bank would be considered to have 
received a check under Sec.  229.36(b). If the paying bank does not 
designate any presentment location, it must accept presentment for 
same-day settlement at any location identified in Sec.  229.36(b), 
i.e., at an address of the bank associated with the routing number 
on the check, at any branch or head office if the bank is identified 
on the check by name without address, or at a branch, head office, 
or other location consistent with the name and address of the bank 
on the check if the bank is identified on the check by name and 
address. With the exception of receiving electronic collection 
items, the paying bank may not designate a location solely for 
presentment of checks subject to settlement under this paragraph; by 
designating a location for the purposes of Sec.  229.36(d), the 
paying bank agrees to accept checks at that location for the 
purposes of Sec.  229.36(b).[ltrif]
    [lsqbb]ii. The designated presentment location also must be 
within the check processing region consistent with the nine-digit 
routing number encoded in magnetic ink on the check. A paying bank 
that uses more than one routing number associated with a single 
check processing region may designate, for purposes of this 
paragraph, one or more locations in that check processing region at 
which checks will be accepted, but the paying bank must accept any 
checks with a routing number associated with that check processing 
region at each designated location. A paying bank may designate a 
presentment location for traveler's checks with an 8000-series 
routing number anywhere in the country because these traveler's 
checks are not associated with any check processing region. The 
paying bank, however, must accept at that presentment location any 
other checks for which it is paying bank that have a routing number 
consistent with the check processing region of that location.[rsqbb]
    [lsqbb]iii If the paying bank does not designate a presentment 
location, it must accept presentment for same-day settlement at any 
location identified in Sec.  229.36(b), i.e., at an address of the 
bank associated with the routing number on the check, at any branch 
or head office if the bank is identified on the check by name 
without address, or at a branch, head office, or other location 
consistent with the name and address of the bank on the check if the 
bank is identified on the check by name and address.[rsqbb] 
[rtrif]iv.[ltrif] A paying bank and a presenting bank may agree that 
checks will be accepted for same-day settlement at an alternative 
location (e.g., at an intercept processor located in a different 
check processing region) or that the cut-off time for same-day 
settlement be earlier or later than 8:00 a.m. local time.
    [lsqbb]iv[rsqbb][rtrif]v[ltrif]. In the case of a check payable 
through a bank but payable by another bank, this paragraph does not 
authorize direct presentment to the bank by which the check is 
payable. The requirements of same-day settlement under this 
paragraph would apply to a payable-through or payable-at bank to 
which the check is sent for payment or collection.
    b. Reasonable delivery requirements. A check is considered 
presented when it is delivered to and payment is demanded at a 
location specified in paragraph 
[lsqbb](f)(1)[rsqbb][rtrif](d)(1)[ltrif]. Ordinarily, a presenting 
bank will find it necessary to contact the paying bank to determine 
the appropriate presentment location and any delivery instructions. 
Further, because presentment might not take place during the paying 
bank's banking day, a paying bank may establish reasonable delivery 
requirements to safeguard the checks presented, such as use of a 
night depository. If a presenting bank fails to follow reasonable 
delivery requirements established by the paying bank, it runs the 
risk that it will not have presented the checks. However, if no 
reasonable delivery requirements are established or if the paying 
bank does not make provisions for accepting delivery of checks 
during its non-business hours, leaving the checks at the presentment 
location constitutes effective presentment.
    c. Sorting of checks. A paying bank may require that checks 
presented to it for same-day settlement be sorted separately from 
other forward collection checks it receives as a collecting bank or 
returned checks it receives as a returning or depositary bank. For 
example, if a bank provides correspondent check collection services 
and receives unsorted checks from a respondent bank that include 
checks for which it is the paying bank and that would otherwise meet 
the requirements for same-day settlement under this section, the 
collecting bank need not make settlement in accordance with 
paragraph [lsqbb](f)(2)[rsqbb][rtrif](d)(3)[ltrif]. If the 
collecting bank receives sorted checks from its respondent bank, 
consisting only of checks for which the collecting bank is the 
paying bank and that meet the requirements for same-day settlement 
under this paragraph, the collecting bank may not charge a fee for 
handling those checks and must make settlement in accordance with 
this paragraph.
    3. Settlement
    a. If a bank presents a check in accordance with the time and 
location requirements for presentment under paragraph 
[lsqbb](f)(1)[rsqbb][rtrif](d)(1)[ltrif], the paying bank either 
must settle for the check on the business day it receives the check 
without charging a presentment fee or return the check prior to

[[Page 16964]]

the time for settlement. (This return deadline is subject to 
extension under Sec.  229.30(c).) The settlement must be in the form 
of a credit to an account designated by the presenting bank at a 
Federal Reserve Bank (e.g., a Fedwire transfer). The presenting bank 
may agree with the paying bank to accept settlement in another form 
(e.g., credit to an account of the presenting bank at the paying 
bank or debit to an account of the paying bank at the presenting 
bank). The settlement must occur by the close of Fedwire on the 
business day the check is received by the paying bank. Under the 
provisions of Sec.  229.34(c), a settlement owed to a presenting 
bank may be set off by adjustments for previous settlements with the 
presenting bank. (See also Sec.  229.39(d).)
    b. Checks that are presented after the 8 a.m. (local time 
[rtrif]of the paying bank[ltrif]) presentment deadline for same-day 
settlement and before the paying bank's cut-off hour are treated as 
if they were presented under other applicable law and settled for or 
returned accordingly. However, for purposes of settlement only, the 
presenting bank may require the paying bank to treat such checks as 
presented for same-day settlement on the next business day in lieu 
of accepting settlement by cash or other means on the business day 
the checks are presented to the paying bank. Checks presented after 
the paying bank's cut-off hour or on non-business days, but 
otherwise in accordance with this paragraph, are considered 
presented for same-day settlement on the next business day.
    4. Closed Paying Bank
    a. There may be certain business days that are not banking days 
for the paying bank. Some paying banks may continue to settle for 
checks presented on these days (e.g., by opening their back office 
operations or by using an intercept processor). In other cases, a 
paying bank may be unable to settle for checks presented on a day it 
is closed.
    If the paying bank closes on a business day and checks are 
presented to the paying bank in accordance with paragraph 
[lsqbb](f)(1)[rsqbb][rtrif](d)(1)[ltrif], the paying bank is 
accountable for the checks unless it settles for or returns the 
checks by the close of Fedwire on its next banking day. In addition, 
checks presented on a business day on which the paying bank is 
closed are considered received on the paying bank's next banking day 
for purposes of the U.C.C. midnight deadline (U.C.C. 4-301 and 4-
302) and this regulation's expeditious return [and notice of 
nonpayment] provisions.
    b. If the paying bank is closed on a business day voluntarily, 
the paying bank must pay interest compensation, as defined in 
[lsqbb]Sec.  229.2(oo)[rsqbb][rtrif]Sec.  229.2(bb)[ltrif], to the 
presenting bank for the value of the float associated with the check 
from the day of the voluntary closing until the day of settlement. 
Interest compensation is not required in the case of an involuntary 
closing on a business day, such as a closing required by state law. 
In addition, if the paying bank is closed on a business day due to 
emergency conditions, settlement delays and interest compensation 
may be excused under Sec.  229.38(e) or U.C.C. 4-109(b).
    5. Good faith. Under Sec.  229.38(a), both presenting banks and 
paying banks are held to a standard of good faith, defined in 
[lsqbb]Sec.  229.2(nn)[rsqbb][rtrif]Sec.  229.2(z)[ltrif] to mean 
honesty in fact and the observance of reasonable commercial 
standards of fair dealing. For example, designating a presentment 
location or changing presentment locations for the primary purpose 
of discouraging banks from presenting checks for same-day settlement 
might not be considered good faith on the part of the paying bank. 
Similarly, presenting a large volume of checks without prior notice 
could be viewed as not meeting reasonable commercial standards of 
fair dealing and therefore may not constitute presentment in good 
faith. In addition, if banks, in the general course of business, 
regularly agree to certain practices related to same-day settlement, 
it might not be considered consistent with reasonable commercial 
standards of fair dealing, and therefore might not be considered 
good faith, for a bank to refuse to agree to those practices if 
agreeing would not cause it harm.
    6. U.C.C. sections affected. This paragraph directly affects the 
following provisions of the U.C.C. and may affect other sections or 
provisions:
    a. Section 4-204(b)(1), in that a presenting bank may not send a 
check for same-day settlement directly to the paying bank, if the 
paying bank designates a different location in accordance with 
paragraph [lsqbb](f)(1)[rsqbb][rtrif](d)(1)[ltrif].
    b. Section 4-213(a), in that the medium of settlement for checks 
presented under this paragraph is limited to a credit to an account 
at a Federal Reserve Bank and that, for checks presented after the 
deadline for same-day settlement and before the paying bank's cut-
off hour, the presenting bank may require settlement on the next 
business day in accordance with this paragraph rather than accept 
settlement on the business day of presentment by cash.
    c. Section 4-301(a), in that, to preserve the ability to 
exercise deferred posting, the time limit specified in that section 
for settlement or return by a paying bank on the banking day a check 
is received is superseded by the requirement to settle for checks 
presented under this paragraph by the close of Fedwire.
    d. Section 4-302(a), in that, to avoid accountability, the time 
limit specified in that section for settlement or return by a paying 
bank on the banking day a check is received is superseded by the 
requirement to settle for checks presented under this paragraph by 
the close of Fedwire.

XXIII. Section 229.37 Variations by Agreement

    A. This section is similar to U.C.C. 4-103, and permits 
consistent treatment of agreements varying Article 4 or Subpart C, 
given the substantial interrelationship of the two documents. To 
achieve consistency, the official comment to U.C.C. 4-103(a) (which 
in turn follows U.C.C. 1-201(3)) should be followed in construing 
this section. For example, as stated in Official Comment 2 to 
section 4-103, owners of items and other interested parties are not 
affected by agreements under this section unless they are parties to 
the agreement or are bound by adoption, ratification, estoppel, or 
the like. In particular, agreements varying this subpart that delay 
the return of a check beyond the times required by this subpart may 
result in liability under Sec.  229.38 to entities not party to the 
agreement.
    B. The Board has not followed U.C.C. 4-103(b), which permits 
Federal Reserve regulations and operating letters, clearinghouse 
rules, and the like to apply to parties that have not specifically 
assented. Nevertheless, this section does not affect the status of 
such agreements under the U.C.C.
    C. The following are examples of situations where variation by 
agreement is permissible, subject to the limitations of this 
section:
    [rtrif]1. A depositary bank may agree with a paying bank or a 
returning bank to accept electronic returns even when the item is 
available for return. (See Sec.  229.32(a).)[ltrif]
    [lsqbb]1[rsqbb][rtrif]2[ltrif]. A depositary bank may authorize 
another bank to apply the other bank's indorsement to a check as the 
depositary bank. (See Sec.  229.35(d).)
    [lsqbb]2[rsqbb][rtrif]3[ltrif]. A depositary bank may authorize 
returning banks to commingle qualified returned checks with forward 
collection checks. (See [lsqbb]Sec.  229.32(a)[rsqbb][rtrif]Sec.  
229.32(b)[ltrif].)
    [lsqbb]3[rsqbb][rtrif]4[ltrif]. A depositary bank may limit its 
liability to its customer in connection with the late return of a 
deposited check where the lateness is caused by markings on the 
check by the depositary bank's customer or prior indorser in the 
area of the depositary bank indorsement. (See Sec.  229.38(d).)
    [lsqbb]4[rsqbb][rtrif]5[ltrif]. A paying bank may require its 
customer to assume the paying bank's liability for delayed or 
missent checks where the delay or missending is caused by markings 
placed on the check by the paying bank's customer that obscured a 
properly placed indorsement of the depositary bank. (See Sec.  
229.38(d).)
    [lsqbb]5[rsqbb][rtrif]6[ltrif]. A collecting or paying bank may 
agree to accept forward collection checks without the indorsement of 
a prior collecting bank. (See Sec.  229.35(a).)
    [lsqbb]6[rsqbb][rtrif]7[ltrif]. A bank may agree to accept 
returned checks without the indorsement of a prior bank. (See Sec.  
229.35(a).)
    [lsqbb]7. A presenting bank may agree with a paying bank to 
present checks for same-day settlement at a location that is not in 
the check processing region consistent with the routing number on 
the checks. (See Sec.  229.36(f)(1)(i).)[rsqbb]
    8. A presenting bank may agree with a paying bank to present 
checks for same-day settlement by a deadline earlier or later than 
8:00 a.m. (See [lsqbb]Sec.  229.36(f)(1)(ii)[rsqbb][rtrif]Sec.  
229.36(d)(1)(ii)[ltrif].)
    9. A presenting bank and a paying bank may agree that 
presentment takes place when the paying bank receives an 
[lsqbb]electronic transmission of information describing the check 
rather than upon delivery of the physical check[rsqbb] 
[rtrif]electronic collection item[ltrif]. (See Sec.  
229.36[lsqbb](b)[rsqbb][rtrif](a)[ltrif].)
    [lsqbb]10. A depositary bank may agree with a paying or 
returning bank to accept an image or other notice in lieu of a 
returned check even when the check is available for return under 
this part. Except to the extent that other parties interested in the 
check assent to or are bound by the variation of the notice-in-lieu 
provisions of this part, banks entering into such an agreement may 
be responsible

[[Page 16965]]

under this part or other applicable law to other interested parties 
for any losses caused by the handling of a returned check under the 
agreement. (See Sec. Sec.  229.30(f), 229.31(f), 229.38(a).)[rsqbb]
    D. The Board expects to review the types of variation by 
agreement that develop under this section and will consider whether 
it is necessary to limit certain variations.

XXIV. Section 229.38 Liability

    A. 229.38(a) Standard of care; liability; measure of damages
    1. The standard of care established by this section applies to 
any bank covered by the requirements of 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C of the regulation. Thus, the 
standard of care applies to a paying bank under Sec. Sec.  229.30 
[lsqbb]and 229.33[rsqbb], to a returning bank under Sec.  229.31, to 
a depositary bank under Sec. Sec.  229.32 [lsqbb]and 229.33[rsqbb], 
to a bank erroneously receiving a returned check [lsqbb]or written 
notice of nonpayment[rsqbb] as depositary bank under Sec.  
229.32(d), and to a bank indorsing a check under Sec.  229.35. The 
standard of care is similar to the standard imposed by U.C.C. 1-203 
and 4-103(a) and includes a duty to act in good faith, as defined in 
[lsqbb]Sec.  229.2(nn)[rsqbb][rtrif]Sec.  229.2(z)[ltrif] of this 
regulation.
    2. A bank not meeting this standard of care is liable to the 
depositary bank, the depositary bank's customer, the owner of the 
check, or another party to the check. The depositary bank's customer 
is usually a depositor of a check in the depositary bank (but see 
Sec.  229.35(d)). The measure of damages provided in this section 
(loss incurred up to amount of check, less amount of loss party 
would have incurred even if bank had exercised ordinary care) is 
based on U.C.C. 4-103(e) (amount of the item reduced by an amount 
that could not have been realized by the exercise of ordinary care), 
as limited by 4-202(c) (bank is liable only for its own negligence 
and not for actions of subsequent banks in chain of collection). 
This subpart does not absolve a collecting bank of liability to 
prior collecting banks under U.C.C. 4-201.
    3. Under this measure of damages, a depositary bank or other 
person must show that the damage incurred results from the 
negligence proved. For example, the depositary bank may not simply 
claim that its customer will not accept a charge-back of a returned 
check, but must prove that it could not charge back when it received 
the returned check and could have charged back if no negligence had 
occurred, and must first attempt to collect from its customer. (See 
Marcoux v. Van Wyk, 572 F.2d 651 (8th Cir. 1978); Appliance Buyers 
Credit Corp. v. Prospect Nat'l Bank, 708 F.2d 290 (7th Cir. 1983).) 
Generally, a paying or returning bank's liability would not be 
reduced because the depositary bank did not place a hold on its 
customer's deposit before it learned of nonpayment of the check.
    4. This paragraph also states that it does not affect a paying 
bank's liability to its customer. Under U.C.C. 4-402, for example, a 
paying bank is liable to its customer for wrongful dishonor, which 
is different from failure to exercise ordinary care and has a 
different measure of damages.

B. 229.38(b) Paying Bank's Failure To Make Timely Return

    1. Section 229.30(a) imposes requirements on the paying bank for 
expeditious return of a check and leaves in place the U.C.C. 
deadlines (as they may be modified by Sec.  229.30(c)), which may 
allow return at a different time. This paragraph clarifies that the 
paying bank could be liable for failure to meet either standard, but 
not for failure to meet both. The regulation intends to preserve the 
paying bank's accountability for missing its midnight or other 
deadline under the U.C.C., (e.g., sections 4-215 and 4-302), 
provisions that are not incorporated in this regulation, but may be 
useful in establishing the time of final payment by the paying bank.

C. 229.38(c) Comparative Negligence

    1. This paragraph establishes a ``pure'' comparative negligence 
standard for liability under [lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C 
of this regulation. This comparative negligence rule may have 
particular application where a paying or returning bank delays in 
returning a check because of difficulty in identifying the 
depositary bank. Some examples will illustrate liability in such 
cases. In each example, it is assumed that the returned check is 
received by the depositary bank after it has made funds available to 
its customer, that it may no longer recover the funds from its 
customer, and that the inability to recover the funds from the 
customer is due to a delay in returning the check contrary to the 
standards established by Sec. Sec.  229.30(a) or 229.31(a).
    2. Examples.
    a. If a depositary bank fails to use the indorsement required by 
this regulation, and this failure is caused by a failure to exercise 
ordinary care, and if a paying or returning bank is delayed in 
returning the check because additional time is required to identify 
the depositary bank or find its routing number, the paying or 
returning bank's liability to the depositary bank would be reduced 
or eliminated.
    b. If the depositary bank uses the standard indorsement, but 
that indorsement is obscured by a subsequent collecting bank's 
indorsement, and a paying or returning bank is delayed in returning 
the check because additional time was required to identify the 
depositary bank or find its routing number, the paying or returning 
bank may not be liable to the depositary bank because the delay was 
not due to its negligence. Nonetheless, the collecting bank may be 
liable to the depositary bank to the extent that its negligence in 
indorsing the check caused the paying or returning bank's delay.
    c. If a depositary bank accepts a check that has printing, a 
carbon band, or other material on the back of the check that existed 
at the time the check was issued, and the depositary bank's 
indorsement is obscured by the printing, carbon band, or other 
material, and a paying or returning bank is delayed in returning the 
check because additional time was required to identify the 
depositary bank, the returning bank may not be liable to the 
depositary bank because the delay was not due to its negligence. 
Nonetheless, the paying bank may be liable to the depositary bank to 
the extent that the printing, carbon band, or other material caused 
the delay.

D. 229.38(d) Responsibility for Certain Aspects of Checks

    1. Responsibility for back of check. The indorsement standard in 
Sec.  229.35 is most effective if the back of the check remains 
clear of other matter that may obscure bank indorsements. Because 
bank indorsements are usually applied by automated equipment, it is 
not possible to avoid pre-existing matter on the back of the check. 
For example, bank indorsements are not required to avoid a carbon 
band or printed, stamped, or written terms or notations on the back 
of the check. Accordingly, this provision places responsibility on 
the paying bank, depositary bank, or reconverting bank, as 
appropriate, for keeping the back of the check clear for bank 
indorsements during forward collection and return.
    2. ANS X9.100-140 provides that an image of an original check 
must be reduced in size when placed on the first substitute check 
associated with that original check. (The image thereafter would be 
constant in size on any subsequent substitute check that might be 
created.) Because of this size reduction, the location of an 
indorsement, particularly a depositary bank indorsement, applied to 
an original paper check likely will change when the first 
reconverting bank creates a substitute check that contains that 
indorsement within the image of the original paper check. If the 
indorsement was applied to the original paper check in accordance 
with appendix D's location requirements for indorsements applied to 
existing paper checks, and if the size reduction of the image causes 
the placement of the indorsement to no longer be consistent with the 
appendix's requirements, then the reconverting bank bears the 
liability for any loss that results from the shift in the placement 
of the indorsement. Such a loss could result either because the 
original indorsement applied in accordance with appendix D is 
rendered illegible by a subsequent indorsement that later is applied 
to the substitute check in accordance with appendix D, or because 
the subsequent bank cannot apply its indorsement to the substitute 
check legibly in accordance with appendix D as a result of the shift 
in the previous indorsement.
    Example.
    In accordance with appendix D's specifications, a depositary 
bank sprays its indorsement onto a business-sized original check 
between 3.0 inches from the leading edge of the check and 1.5 inches 
from the trailing edge of the check. The check's conversion to 
electronic form and subsequent reconversion to paper form causes the 
location of the depositary bank indorsement, now contained within 
the image of the original check, to change such that it is less than 
3.0 inches from the leading edge of the substitute check. In 
accordance with appendix D's specifications, a subsequent collecting 
bank sprays its indorsement onto the substitute check between the 
leading edge of the check and 3.0 inches from the leading edge of 
the check and the indorsement happens to be on top of the shifted 
depositary bank indorsement. If the check is returned unpaid and the 
return is not expeditious because of the illegibility of the 
depositary bank indorsement, and the

[[Page 16966]]

depositary bank incurs a loss that it would not have incurred had 
the return been expeditious, the reconverting bank bears the 
liability for that loss.
    [lsqbb]3. Responsibility for payable-through checks.
    a. This paragraph provides that the bank by which a payable-
through check is payable is liable for damages under paragraph (a) 
of this section to the extent that the check is not returned through 
the payable-through bank as quickly as would have been necessary to 
meet the requirements of Sec.  229.30(a)(1) (the 2-day/4-day test) 
had the bank by which it is payable received the check as paying 
bank on the day the payable-through bank received it. The location 
of the bank by which a check is payable for purposes of the 2-day/4-
day test may be determined from the location or the first four 
digits of the routing number of the bank by which the check is 
payable. This information should be stated on the check. (See Sec.  
229.36(e) and accompanying Commentary.) Responsibility under 
paragraph (d)(2) does not include responsibility for the time 
required for the forward collection of a check to the payable-
through bank.
    b. Generally, liability under paragraph (d)(2) will be limited 
in amount. Under Sec.  229.33(a), a paying bank that returns a check 
in the amount of $2,500 or more must provide notice of nonpayment to 
the depositary bank by 4:00 p.m. on the second business day 
following the banking day on which the check is presented to the 
paying bank. Even if a payable-through check in the amount of $2,500 
or more is not returned through the payable-through bank as quickly 
as would have been required had the check been received by the bank 
by which it is payable, the depositary bank should not suffer 
damages unless it has not received timely notice of nonpayment. 
Thus, ordinarily the bank by which a payable-through check is 
payable would be liable under paragraph (a) only for checks in 
amounts up to $2,500, and the paying bank would be responsible for 
notice of nonpayment for checks in the amount of $2,500 or 
more.[rsqbb]
    [lsqbb]4[rsqbb][rtrif]3[ltrif]. Responsibility under 
paragraph[lsqbb]s[rsqbb] (d)(1) [lsqbb]and (d)(2)[rsqbb] is treated 
as negligence for comparative negligence purposes, and the 
contribution to damages under paragraph[lsqbb]s[rsqbb] (d)(1) 
[lsqbb]and (d)(2)[rsqbb] is treated in the same way as the degree of 
negligence under paragraph (c) of this section.

E. 229.38(e) Timeliness of Action

    1. This paragraph excuses certain delays. It adopts the standard 
of U.C.C. 4-109(b).

F. 229.38(f) Exclusion

    1. This paragraph provides that the civil liability and class 
action provisions, particularly the punitive damage provisions of 
sections 611(a) and (b), and the bona fide error provision of 611(c) 
of the EFA Act (12 U.S.C. 4010(a), (b), and (c)) do not apply to 
regulatory provisions adopted to improve the efficiency of the 
payments mechanism. Allowing punitive damages for delays in the 
return of checks where no actual damages are incurred would only 
encourage litigation and provide little or no benefit to the check 
collection system. In view of the provisions of paragraph (a), which 
incorporate traditional bank collection standards based on 
negligence, the provision on bona fide error is not included in 
[lsqbb]S[rsqbb][rtrif]s[ltrif]ubpart C.

G. 229.38(g) Jurisdiction

    1. The EFA Act confers subject matter jurisdiction on courts of 
competent jurisdiction and provides a time limit for civil actions 
for violations of this subpart.

H. 229.38(h) Reliance on Board Rulings

    1. This provision shields banks from civil liability if they act 
in good faith in reliance on any rule, regulation, or interpretation 
of the Board, even if it were subsequently determined to be invalid. 
Banks may rely on the Commentary to this regulation, which is issued 
as an official Board interpretation, as well as on the regulation 
itself.

XXV. Section 229.39 Insolvency of Bank

A. Introduction

    1. These provisions cover situations where a bank becomes 
insolvent during collection or return and are derived from U.C.C. 4-
216. They are intended to apply to all banks.

B. 229.39(a) Duty of Receiver

    1. This paragraph requires a receiver of a closed bank to return 
a check to the prior bank if it does not pay for the check. This 
permits the prior bank, as holder, to pursue its claims against the 
closed bank or prior indorsers on the check.

C. 229.39(b) Preference Against Paying or Depositary Bank

    1. This paragraph gives a bank a preferred claim against a 
closed paying bank that finally pays a check without settling for it 
or a closed depositary bank that becomes obligated to pay a returned 
check without settling for it. If the bank with a preferred claim 
under this paragraph recovers from a prior bank or other party to 
the check, the prior bank or other party to the check is subrogated 
to the preferred claim.

D. 229.39(c) Preference Against Paying, Collecting, or Depositary Bank

    1. This paragraph gives a bank a preferred claim against a 
closed collecting, paying, or returning bank that receives 
settlement but does not settle for a check. (See Commentary to Sec.  
229.35(b) for discussion of prior and subsequent banks.) As in the 
case of Sec.  229.39(b), if the bank with a preferred claim under 
this paragraph recovers from a prior bank or other party to the 
check, the prior bank or other party to the check is subrogated to 
the preferred claim.

E. 229.39(d) Preference Against Presenting Bank

    1. This paragraph gives a paying bank a preferred claim against 
a closed presenting bank in the event that the presenting bank 
breaches an amount or encoding warranty as provided in Sec.  
229.34(c)(1) or (3) and does not reimburse the paying bank for 
adjustments for a settlement made by the paying bank in excess of 
the value of the checks presented. This preference is intended to 
have the effect of a perfected security interest and is intended to 
put the paying bank in the position of a secured creditor for 
purposes of the receivership provisions of the Federal Deposit 
Insurance Act and similar provisions of state law.

F. 229.39(e) Finality of Settlement

    1. This paragraph provides that insolvency does not interfere 
with the finality of a settlement, such as a settlement by a paying 
bank that becomes final by expiration of the midnight deadline.

XXVI. Section 229.40 Effect on Merger Transaction

    A. When banks merge, there is normally a period of adjustment 
required before their operations are consolidated. To allow for this 
adjustment period, the regulation provides that the merged banks may 
be treated as separate banks for a period of up to one year after 
the consummation of the transaction. The term merger transaction is 
defined in [lsqbb]Sec.  229.2(t)[rsqbb][rtrif]Sec.  
229.2(dd)[ltrif]. This rule affects the status of the combined 
entity in a number of areas in this subpart. For example:
    1. The paying bank's responsibility for expeditious return 
(Sec.  229.30).
    2. The returning bank's responsibility for expeditious return 
(Sec.  229.31).
    [lsqbb]3. Whether a returning bank is entitled to an extra day 
to qualify a return that will be delivered directly to a depositary 
bank that has merged with the returning bank (Sec.  
229.31(a)).[rsqbb]
    [lsqbb]4[rsqbb][rtrif]3[ltrif]. Where the depositary bank must 
accept returned checks [lsqbb](Sec.  229.32(a))[rsqbb] [rtrif]Sec.  
229.32(b)[ltrif].
    [lsqbb]5. Where the depositary bank must accept notice of 
nonpayment (Sec.  229.33(c)).[rsqbb]
    [lsqbb]6[rsqbb][rtrif]4[ltrif]. Where a paying bank must accept 
presentment of checks (Sec.  229.36(b)).

XXVII. Section 229.41 Relation to State Law

    A. This section specifies that state law relating to the 
collection of checks is preempted only to the extent that it is 
inconsistent with this regulation. Thus, this regulation is not a 
complete replacement for state laws relating to the collection or 
return of checks.

XXVIII. Section 229.42 Exclusions

    A. Checks drawn on the United States Treasury, U.S. Postal 
Service money orders, and checks drawn on states and units of 
general local government that are presented directly to the state or 
unit of general local government and that are not payable through or 
at a bank are excluded from the coverage of the expeditious-
return[lsqbb], notice-of-nonpayment,[rsqbb] and same-day settlement 
requirements of subpart C of this part. Other provisions of this 
subpart continue to apply to the checks. This exclusion does not 
apply to checks drawn by the U.S. government on banks.

XXIX. Section 229.43 Checks Payable in Guam, American Samoa, and 
the Northern Mariana Islands

* * * * *

B. 229.43(b) Rules Applicable to Pacific Island Checks

    1. When a bank handles a Pacific island check as if it were a 
check as defined in Sec.  229.2(k), the bank is subject to certain 
provisions of Regulation CC, as provided in

[[Page 16967]]

this section. Because the Pacific island bank is not a bank as 
defined in Sec.  229.2(e), it is not a paying bank as defined in 
[lsqbb]Sec.  229.2(z)[rsqbb][rtrif]Sec.  229.2(ii)[ltrif] (unless 
otherwise noted in this section). Pacific island banks are not 
subject to the provisions of Regulation CC.
    2. A bank may agree to handle a Pacific island check as a 
returned check under Sec.  229.31 and may convert the returned 
Pacific island check to a qualified returned check. The returning 
bank is not, however, subject to the expeditious-return requirements 
of Sec.  229.31. The returning bank may receive the Pacific island 
check directly from a Pacific island bank or from another returning 
bank. As a Pacific island bank is not a paying bank under Regulation 
CC, Sec.  229.31(c) does not apply to a returning bank settling with 
the Pacific island bank.
    3. A depositary bank that handles a Pacific island check is not 
subject to the provisions of subpart B of Regulation CC, including 
the availability, notice, and interest accrual requirements, with 
respect to that check. If, however, a bank accepts a Pacific island 
check for deposit (or otherwise accepts the check as transferee) and 
collects the Pacific island check in the same manner as other 
checks, the bank is subject to the provisions of Sec.  229.32, 
including the provisions regarding time and manner of settlement for 
returned checks in [lsqbb]Sec.  229.32(b)[rsqbb][rtrif]Sec.  
229.32(c)[ltrif], in the event the Pacific island check is returned 
by a returning bank. If the depositary bank receives the returned 
Pacific island check directly from the Pacific island bank, however, 
the provisions of [lsqbb]Sec.  229.32(b)[rsqbb][rtrif]Sec.  
229.32(c)[ltrif] do not apply, because the Pacific island bank is 
not a paying bank under Regulation CC. [lsqbb]The depositary bank is 
not subject to the notice of nonpayment provisions in Sec.  229.33 
for Pacific island checks.[rsqbb]
    4. Banks that handle Pacific island checks in the same manner as 
other checks are subject to the indorsement provisions of Sec.  
229.35. Section 229.35(c) eliminates the need for the restrictive 
indorsement ``pay any bank.'' For purposes of Sec.  229.35(c), the 
Pacific island bank is deemed to be a bank.
    5. Pacific island checks will often be intermingled with other 
checks in a single cash letter. Therefore, a bank that handles 
Pacific island checks in the same manner as other checks is subject 
to the transfer warranty provision in Sec.  229.34(c)(2) regarding 
accurate cash letter totals and the encoding warranty in Sec.  
229.34(c)(3). [rtrif]Similarly, a bank that handles Pacific island 
checks in the same manner as other checks may transfer electronic 
collection items, electronic returns, or electronic images and 
related electronic information as if they were electronic collection 
items or electronic returns derived from Pacific island checks. 
Accordingly, a bank makes the warranties in Sec. Sec.  229.34(a) and 
(e) with respect to Pacific island checks.[ltrif] A bank that acts 
as a returning bank for a Pacific island check is not subject to the 
warranties in Sec.  229.34[lsqbb](a)[rsqbb][rtrif](e)[ltrif]. 
Similarly, because the Pacific island bank is not a ``bank'' or a 
``paying bank'' under Regulation CC, Sec.  229.34 [lsqbb](b), 
(c)(1), and (c)(4)[rsqbb] [rtrif](b)(1), (b)(4), and (c)[ltrif] do 
not apply. For the same reason, the provisions of Sec.  229.36 
governing paying bank responsibilities such as place of receipt and 
same-day settlement do not apply to checks presented to a Pacific 
island bank, and the liability provisions applicable to paying banks 
in Sec.  229.38 do not apply to Pacific island banks. Section 
229.36[lsqbb](d)[rsqbb] [rtrif](c)[ltrif], regarding finality of 
settlement between banks during forward collection, applies to banks 
that handle Pacific island checks in the same manner as other 
checks, as do the liability provisions of Sec.  229.38, to the 
extent the banks are subject to the requirements of Regulation CC as 
provided in this section, and Sec. Sec.  229.37 and 229.39 through 
229.42.

XXX. Sec.  229.51 General Provisions Governing Substitute Checks

A. 229.51(a) Legal Equivalence

    1. Section 229.51(a) states that a substitute check for which a 
bank has provided the substitute check warranties is the legal 
equivalent of the original check for all purposes and all persons if 
it meets the accuracy and legend requirements. Where the law (or a 
contract) requires production of the original check, production of a 
legally equivalent substitute check would satisfy that requirement. 
A person that receives a substitute check cannot be assessed costs 
associated with the creation of the substitute check, absent 
agreement to the contrary.
    Examples.
    a. A presenting bank presents a substitute check that meets the 
legal equivalence requirements to a paying bank. The paying bank 
cannot refuse presentment of the substitute check on the basis that 
it is a substitute check, because the substitute check is the legal 
equivalent of the original check.
    b. A depositor's account agreement with a bank provides that the 
depositor is entitled to receive original cancelled checks back with 
his or her periodic account statement. The bank may honor that 
agreement by providing original checks, substitute checks, or a 
combination thereof. However, a bank may not honor such an agreement 
by providing something other than an original check or a substitute 
check.
    c. A mortgage company argues that a consumer missed a monthly 
mortgage payment that the consumer believes she made. A legally 
equivalent substitute check concerning that mortgage payment could 
be used in the same manner as the original check to prove the 
payment.
    2. A person other than a bank that creates a substitute check 
could transfer, present, or return that check only by agreement 
unless and until a bank provided the substitute check warranties.
    3. To be the legal equivalent of the original check, a 
substitute check must accurately represent all the information on 
the front and back of the check as of the time the original check 
was truncated. An accurate representation of information that was 
illegible on the original check would satisfy this requirement. The 
payment instructions placed on the check by, or as authorized by, 
the drawer, such as the amount of the check, the payee, and the 
drawer's signature, must be accurately represented, because that 
information is an essential element of a negotiable instrument. 
Other information that must be accurately represented includes (1) 
the information identifying the drawer and the paying bank that is 
preprinted on the check, including the MICR line; and (2) other 
information placed on the check prior to the time an image of the 
check is captured, such as any required identification written on 
the front of the check and any indorsements applied to the back of 
the check. A substitute check need not capture other characteristics 
of the check, such as watermarks, microprinting, or other physical 
security features that cannot survive the imaging process or 
decorative images, in order to meet the accuracy requirement. 
Conversely, some security features that are latent on the original 
check might become visible as a result of the check imaging process. 
For example, the original check might have a faint representation of 
the word ``void'' that will appear more clearly on a photocopied or 
electronic image of the check. Provided the inclusion of the clearer 
version of the word on the image used to create a substitute check 
did not obscure the required information listed above, a substitute 
check that contained such information could be the legal equivalent 
of an original check under Sec.  229.51(a). However, if a person 
suffered a loss due to receipt of such a substitute check instead of 
the original check, that person could have an indemnity claim under 
Sec.  229.53 and, in the case of a consumer, an expedited recredit 
claim under Sec.  229.54.
    4. To be the legal equivalent of the original check, a 
substitute check must bear the legal equivalence legend described in 
Sec.  229.51(a)(2). A bank may not vary the language of the legal 
equivalence legend and must place the legend on the substitute check 
as specified by generally applicable industry standards for 
substitute checks contained in ANS X9.100-140.5. In some cases, the 
original check used to create a substitute check could be forged or 
otherwise fraudulent. A substitute check created from a fraudulent 
original check would have the same status under Regulation CC and 
the U.C.C. as the original fraudulent check. For example, a 
substitute check of a fraudulent original check would not be 
properly payable under U.C.C. 4-401 and would be subject to the 
transfer and presentment warranties in U.C.C. 4-207 and 4-208.
    5. In some cases, the original check used to create a substitute 
check could be forged or otherwise fraudulent. A substitute check 
created from a fraudulent original check would have the same status 
under Regulation CC and the U.C.C. as the original fraudulent check. 
For example, a substitute check of a fraudulent original check would 
not be properly payable under U.C.C. 4-401 and would be subject to 
the transfer and presentment warranties in U.C.C. 4-207 and 4-208.

B. 229.51(b) Reconverting-Bank Duties

    1. As discussed in more detail in appendix D and the commentary 
to section 229.35, a reconverting bank must indorse (or, if it is a 
paying bank with respect to the check, identify itself on) the back 
of a substitute check in a manner that preserves all indorsements 
applied, whether physically or

[[Page 16968]]

electronically, by persons that previously handled the check in any 
form for forward collection or return. Indorsements applied 
physically to the original check before an image of the check was 
captured would be preserved through the image of the back of the 
original check that a substitute check must contain. Indorsements 
applied physically to the original check after an image of the 
original check was captured would be conveyed as electronic 
indorsements (see paragraph 3 of the commentary to section 
229.35(a)). If indorsements were applied electronically after an 
image of the original check was captured or were applied 
electronically after a previous substitute check was converted to 
electronic form, the reconverting bank must apply those indorsements 
physically to the substitute check. A reconverting bank is not 
responsible for obtaining indorsements that persons that previously 
handled the check should have applied but did not apply.
    2. A reconverting bank also must identify itself as such on the 
front and back of the substitute check and must preserve on the back 
of the substitute check the identifications of any previous 
reconverting banks in accordance with appendix D. The presence on 
the back of a substitute check of indorsements that were applied by 
previous reconverting banks and identified with asterisks in 
accordance with appendix D would satisfy the requirement that the 
reconverting bank preserve the identification of previous 
reconverting banks. As discussed in more detail in the commentary to 
section 229.35, the reconverting-bank and truncating-bank routing 
numbers on the front of a substitute check and, if the reconverting 
bank is the paying bank [rtrif]or a bank that rejected a check 
submitted for deposit[ltrif], the reconverting bank's routing number 
on the back of a substitute check are for identification only and 
are not indorsements or acceptances.
    3. The reconverting bank must place the routing number of the 
truncating bank surrounded by brackets on the front of the 
substitute check in accordance with appendix D and ANS X9.100-140.
    Example
    A bank's customer, which is a nonbank business, receives checks 
for payment and by agreement deposits substitute checks instead of 
the original checks with its depositary bank. The depositary bank is 
the reconverting bank with respect to the substitute checks and the 
truncating bank with respect to the original checks. In accordance 
with appendix D and with ANS X9.100-140, the bank must therefore be 
identified on the front of the substitute checks as a reconverting 
bank and as the truncating bank, and on the back of the substitute 
checks as the depositary bank and a reconverting bank.

C. 229.51(c) Applicable Law

    1. A substitute check that meets the requirements for legal 
equivalence set forth in this section is subject to any provision of 
federal or state law that applies to original checks, except to the 
extent such provision is inconsistent with the Check 21 Act or 
subpart D. A legally equivalent substitute check is subject to all 
laws that are not preempted by the Check 21 Act in the same manner 
and to the same extent as is an original check. Thus, any person 
could satisfy a law that requires production of an original check by 
producing a substitute check that is derived from the relevant 
original check and that meets the legal equivalence requirements of 
Sec.  229.51(a).
    2. A law is not inconsistent with the Check 21 Act or subpart D 
merely because it allows for the recovery of a greater amount of 
damages.
    Example.
    A drawer that suffers a loss with respect to a substitute check 
that was improperly charged to its account and for which the drawer 
has an indemnity claim but not a warranty claim would be limited 
under the Check 21 Act to recovery of the amount of the substitute 
check plus interest and expenses. However, if the drawer also 
suffered damages that were proximately caused because the bank 
wrongfully dishonored subsequently presented checks as a result of 
the improper substitute check charge, the drawer could recover those 
losses under U.C.C. 4-402.

XXXI. Sec.  229.52 Substitute Check Warranties

A. 229.52(a) Warranty Content and Provision

    1. The responsibility for providing the substitute check 
warranties begins with the reconverting bank. In the case of a 
substitute check created by a bank, the reconverting bank starts the 
flow of warranties when it transfers, presents, or returns a 
substitute check for which it receives consideration [rtrif]or when 
it rejects a check submitted for deposit and returns to its customer 
a substitute check[ltrif]. A bank that receives a substitute check 
created by a nonbank starts the flow of warranties when it 
transfers, presents, or returns for consideration either the 
substitute check it received or an electronic or paper 
representation of that substitute check. [rtrif]A bank that 
transfers and receives consideration for an electronic collection 
item or electronic return that is an electronic representation of a 
substitute check also makes the warranties.[ltrif]
    [rtrif]2.[ltrif] To ensure that warranty protections flow all 
the way through to the ultimate recipient of a substitute check or 
paper or electronic representation thereof, any subsequent bank that 
transfers, presents, or returns for consideration either the 
substitute check or a paper or electronic representation of the 
substitute check is responsible to subsequent transferees for the 
warranties. Any warranty recipient could bring a claim for a breach 
of a substitute check warranty if it received either the actual 
substitute check or a paper or electronic representation of a 
substitute check.
    [lsqbb]2.[rsqbb] [rtrif]3.[ltrif] The substitute check 
warranties and indemnity are not given under Sec. Sec.  229.52 and 
229.53 by a bank that truncates the original check and by agreement 
transfers the original check electronically to a subsequent bank for 
consideration. However, parties may, by agreement, allocate 
liabilities associated with the exchange of electronic check 
information.
    Example.
    A bank that receives check information electronically and uses 
it to create substitute checks is the reconverting bank and, when it 
transfers, presents, or returns that substitute check, becomes the 
first warrantor. However, that bank may protect itself by including 
in its agreement with the sending bank provisions that specify the 
sending bank's warranties and responsibilities to the receiving 
bank, particularly with respect to the accuracy of the check image 
and check data transmitted under the agreement.
    [lsqbb]3[rsqbb][rtrif]4[ltrif]. A bank need not affirmatively 
make the warranties because they attach automatically when a bank 
transfers, presents, or returns the substitute check (or a 
representation thereof) for which it receives consideration. Because 
a substitute check transferred, presented, or returned for 
consideration is warranted to be the legal equivalent of the 
original check and thereby subject to existing laws as if it were 
the original check, all U.C.C. and other Regulation CC warranties 
that apply to the original check also apply to the substitute check.
    [lsqbb]4[rsqbb][rtrif]5[ltrif]. The legal equivalence warranty 
by definition must be linked to a particular substitute check. When 
an original check is truncated, the check may move from electronic 
form to substitute check form and then back again, such that there 
would be multiple substitute checks associated with one original 
check. When a check changes form multiple times in the collection or 
return process, the first reconverting bank and subsequent banks 
that transfer, present, or return the first substitute check (or a 
paper or electronic representation of the first substitute check) 
warrant the legal equivalence of only the first substitute check. If 
a bank receives an electronic representation of a substitute check 
and uses that representation to create a second substitute check, 
the second reconverting bank and subsequent transferees of the 
second substitute check (or a representation thereof) warrant the 
legal equivalence of both the first and second substitute checks. A 
reconverting bank would not be liable for a warranty breach under 
Sec.  229.52 if the legal equivalence defect is the fault of a 
subsequent bank that handled the substitute check, either as a 
substitute check or in other paper or electronic form.
    [lsqbb]5[rsqbb][rtrif]6[ltrif]. The warranty in Sec.  
229.52(a)[lsqbb](2)[rsqbb][rtrif](1)(ii)[ltrif], which addresses 
multiple payment requests for the same check, is not linked to a 
particular substitute check but rather is given by each bank 
handling the substitute check, an electronic representation of a 
substitute check, or a subsequent substitute check created from an 
electronic representation of a substitute check. All banks that 
transfer, present, or return a substitute check (or a paper or 
electronic representation thereof) therefore provide the warranty 
regardless of whether the ultimate demand for double payment is 
based on the original check, the substitute check, or some other 
electronic or paper representation of the substitute or original 
check, and regardless of the order in which the duplicative payment 
requests occur. This warranty is given by the banks that transfer, 
present, or return a substitute check even if the demand for 
duplicative payment results from a fraudulent substitute check about 
which the warranting bank had no knowledge.

[[Page 16969]]

    Example.
    A nonbank depositor truncates a check and in lieu thereof sends 
an electronic version of that check to both Bank A and Bank B. Bank 
A and Bank B each uses the check information that it received 
electronically to create a substitute check, which it presents to 
Bank C for payment. Bank A and Bank B each is a reconverting bank 
that made the substitute check warranties when it presented a 
substitute check to and received payment from Bank C. Bank C could 
pursue a warranty claim for the loss it suffered as a result of the 
duplicative payment against either Bank A or Bank B.
    [rtrif]7. A bank that rejects a check for deposit and instead of 
the original check provides its customer with a substitute check 
makes the warranties in Sec.  229.52(a)(1). As noted in the 
commentary to Sec.  229. 2(uu), the Check 21 Act contemplates that 
nonbank persons that receive substitute checks (or representations 
thereof) from a bank will receive warranties and indemnities with 
respect to the checks. A reconverting bank that provides a 
substitute check to its depositor after it has rejected the check 
for deposit may not have received consideration for the substitute 
check. In order to prevent banks from being able to transfer a check 
the bank truncated and then reconverted without providing substitute 
check warranties, the regulation provides that a bank that rejects a 
check for deposit but provides its customer with a substitute check 
makes the warranties set forth in Sec.  229.52(a)(1) regardless of 
whether the bank received consideration.
    Example.
    A bank's customer submits a check at an ATM that captures an 
image of the check and sends the image electronically to the bank. 
After reviewing the item, the bank rejects the item submitted for 
deposit. Instead of providing the original check to its customer, 
the bank provides a substitute check to its customer. This bank is 
the reconverting bank with respect to the substitute check and makes 
the warranties described in Sec.  229.52(a)(1) regardless of whether 
the bank previously extended credit to its customer. (See commentary 
to Sec.  229.2(uu).)[ltrif]

B. 229.52(b) Warranty Recipients

    1. A reconverting bank makes the warranties to the person to 
which it transfers, presents, or returns the substitute check for 
consideration and to any subsequent recipient that receives either 
the substitute check or a paper or electronic representation derived 
from the substitute check. These subsequent recipients could include 
a subsequent collecting or returning bank, the depositary bank, the 
drawer, the drawee, the payee, the depositor, and any indorser. The 
paying bank would be included as a warranty recipient, for example 
because it would be the drawee of a check or a transferee of a check 
that is payable through it.
    2. The warranties flow with the substitute check to persons that 
receive a substitute check or a paper or electronic representation 
of a substitute check. The warranties do not flow to a person that 
receives only the original check or a representation of an original 
check that was not derived from a substitute check. However, a 
person that initially handled only the original check could become a 
warranty recipient if that person later receives a returned 
substitute check or a paper or electronic representation of a 
substitute check that was derived from that original check.
    [rtrif]3. A reconverting bank also makes the warranties to a 
person to whom the bank transfers a substitute check that the bank 
has rejected for deposit regardless of whether the bank received 
consideration.[ltrif]

XXXII. Sec.  229.53 Substitute Check Indemnity

A. 229.53(a) Scope of Indemnity

    1. Each bank that for consideration transfers, presents, or 
returns a substitute check or a paper or electronic representation 
of a substitute check is responsible for providing the substitute 
check indemnity. [rtrif]A bank that transfers and receives 
consideration for an electronic collection item or electronic return 
that is an electronic representation of a substitute check also is 
responsible for providing the indemnity.[ltrif]
    [rtrif]2.[ltrif]The indemnity covers losses due to any 
subsequent recipient's receipt of the substitute check instead of 
the original check. The indemnity therefore covers the loss caused 
by receipt of the substitute check as well as the loss that a bank 
incurs because it pays an indemnity to another person. A bank that 
pays an indemnity would in turn have an indemnity claim regardless 
of whether it received the substitute check or a paper or electronic 
representation of the substitute check The indemnity would not apply 
to a person that handled only the original check or a paper or 
electronic version of the original check that was not derived from a 
substitute check.
    [rtrif]3. A reconverting bank also provides the substitute check 
indemnity to a person to whom the bank transfers a substitute check 
that the bank has rejected for deposit regardless of whether the 
bank providing the indemnity has received consideration.[ltrif]
    Examples.
    a. A paying bank makes payment based on a substitute check that 
was derived from a fraudulent original cashier's check. The amount 
and other characteristics of the original cashier's check are such 
that, had the original check been presented instead, the paying bank 
would have inspected the original check for security features. The 
paying bank's fraud detection procedures were designed to detect the 
fraud in question and allow the bank to return the fraudulent check 
in a timely manner. However, the security features that the bank 
would have inspected were security features that did not survive the 
imaging process (see the commentary to Sec.  229.51(a)). Under these 
circumstances, the paying bank could assert an indemnity claim 
against the bank that presented the substitute check.
    b. By contrast with the previous examples, the indemnity would 
not apply if the characteristics of the presented substitute check 
were such that the bank's security policies and procedures would not 
have detected the fraud even if the original had been presented. For 
example, if the check was under the threshold amount at which the 
bank subjects an item to its fraud detection procedures, the bank 
would not have inspected the item for security features regardless 
of the form of the item and accordingly would have suffered a loss 
even if it had received the original check.
    c. A paying bank makes an erroneous payment based on an 
electronic representation of a substitute check because the 
electronic cash letter accompanying the electronic item included the 
wrong amount to be charged. The paying bank would not have an 
indemnity claim associated with that payment because its loss did 
not result from receipt of an actual substitute check instead of the 
original check. However, the paying bank could protect itself from 
such losses through its agreement with the bank that sent the check 
to it electronically and may have rights under other law.
    d. A drawer has agreed with its bank that the drawer will not 
receive paid checks with periodic account statements. The drawer 
requested a copy of a paid check in order to prove payment and 
received a photocopy of a substitute check. The photocopy that the 
bank provided in response to this request was illegible, such that 
the drawer could not prove payment. Any loss that the drawer 
suffered as a result of receiving the blurry check image would not 
trigger an indemnity claim because the loss was not caused by the 
receipt of a substitute check. The drawer may, however, still have a 
warranty claim if he received a copy of a substitute check, and may 
also have rights under the U.C.C.

B. 229.53(b) Indemnity Amount

    1. If a recipient of a substitute check is making an indemnity 
claim because a bank has breached one of the substitute check 
warranties, the recipient can recover any losses proximately caused 
by that warranty breach.
    Examples.
    a. A drawer discovers that its account has been charged for two 
different substitute checks that were provided to the drawer and 
that were associated with the same original check. As a result of 
this duplicative charge, the paying bank dishonored several 
subsequently-presented checks that it otherwise would have paid and 
charged the drawer returned check fees. The payees of the returned 
checks also charged the drawer returned check fees. The drawer would 
have a warranty claim against any of the warranting banks, including 
its bank, for breach of the warranty described in Sec.  
229.52(a)[lsqbb](2)[rsqbb][rtrif](1)(ii)[ltrif]. The drawer also 
could assert an indemnity claim. Because there is only one original 
check for any payment transaction, if the collecting and presenting 
bank had collected the original check instead of using a substitute 
check the bank would have been asked to make only one payment. The 
drawer could assert its warranty and indemnity claims against the 
paying bank, because that is the bank with which the drawer has a 
customer relationship and the drawer has received an indemnity from 
that bank. The drawer could recover from the indemnifying bank the 
amount of the erroneous charge, as well as the amount of the 
returned check fees charged by both the paying bank and the payees 
of the returned checks. If the drawer's account were an interest-
bearing account, the drawer also could recover any interest lost on 
the erroneously debited amount and the

[[Page 16970]]

erroneous returned check fees. The drawer also could recover its 
expenditures for representation in connection with the claim. 
Finally, the drawer could recover any other losses that were 
proximately caused by the warranty breach.
    b. In the example above, the paying bank that received the 
duplicate substitute checks also would have a warranty claim against 
the previous transferor(s) of those substitute checks and could seek 
an indemnity from that bank (or either of those banks). The 
indemnifying bank would be responsible for compensating the paying 
bank for all the losses proximately caused by the warranty breach, 
including representation expenses and other costs incurred by the 
paying bank in settling the drawer's claim.
    2. If the recipient of the substitute check does not have a 
substitute check warranty claim with respect to the substitute 
check, the amount of the loss the recipient may recover under Sec.  
229.53 is limited to the amount of the substitute check, plus 
interest and expenses. However, the indemnified person might be 
entitled to additional damages under some other provision of law.
    Examples.
    a. A drawer received a substitute check that met all the legal 
equivalence requirements and for which the drawer was only charged 
once, but the drawer believed that the underlying original check was 
a forgery. If the drawer suffered a loss because it could not prove 
the forgery based on the substitute check, for example because 
proving the forgery required analysis of pen pressure that could be 
determined only from the original check, the drawer would have an 
indemnity claim. However, the drawer would not have a substitute 
check warranty claim because the substitute check was the legal 
equivalent of the original check and no person was asked to pay the 
substitute check more than once. In that case, the amount of the 
drawer's indemnity under Sec.  229.53 would be limited to the amount 
of the substitute check, plus interest and expenses. However, the 
drawer could attempt to recover additional losses, if any, under 
other law.
    b. As described more fully in the commentary to Sec.  229.53(a) 
regarding the scope of the indemnity, a paying bank could have an 
indemnity claim if it paid a legally equivalent substitute check 
that was created from a fraudulent cashier's check that the paying 
bank's fraud detection procedures would have caught and that the 
bank would have returned by its midnight deadline had it received 
the original check. However, if the substitute check was not subject 
to a warranty claim (because it met the legal equivalence 
requirements and there was only one payment request) the paying 
bank's indemnity would be limited to the amount of the substitute 
check plus interest and expenses.
    3. The amount of an indemnity would be reduced in proportion to 
the amount of any amount loss attributable to the indemnified 
person's negligence or bad faith. This comparative negligence 
standard is intended to allocate liability in the same manner as the 
comparative negligence provision of Sec.  229.38(c).
    4. An indemnifying bank may limit the losses for which it is 
responsible under Sec.  229.53 by producing the original check or a 
sufficient copy. However, production of the original check or a 
sufficient copy does not absolve the indemnifying bank from 
liability claims relating to a warranty the bank has provided under 
Sec.  229.52 or any other law, including but not limited to subpart 
C of this part or the U.C.C.

C. 229.53(c) Subrogation of Rights

    1. A bank that pays an indemnity claim is subrogated to the 
rights of the person it indemnified, to the extent of the indemnity 
it provided, so that it may attempt to recover that amount from 
another person based on an indemnity, warranty, or other claim. The 
person that the bank indemnified must comply with reasonable 
requests from the indemnifying bank for assistance with respect to 
the subrogated claim.
    Example.
    A paying bank indemnifies a drawer for a substitute check that 
the drawer alleged was a forgery that would have been detected had 
the original check instead been presented. The bank that provided 
the indemnity could pursue its own indemnity claim against the bank 
that presented the substitute check, could attempt to recover from 
the forger, or could pursue any claim that it might have under other 
law. The bank also could request from the drawer any information 
that the drawer might possess regarding the possible identity of the 
forger.

XXXIII. Sec.  229.54 Expedited Recredit for Consumers

A. 229.54(a) Circumstances Giving Rise to a Claim

    1. A consumer may make a claim for expedited recredit under this 
section only for a substitute check that he or she has received and 
for which the bank charged his or her deposit account. As a result, 
checks used to access loans, such as credit card checks or home 
equity line of credit checks, that are reconverted to substitute 
checks would not give rise to an expedited recredit claim, unless 
such a check was returned unpaid and the bank charged the consumer's 
deposit account for the amount of the returned check. In addition, a 
consumer who received only a statement that contained images of 
multiple substitute checks per page would not be entitled to make an 
expedited recredit claim, although he or she could seek redress 
under other provisions of law, such as Sec.  229.52 or U.C.C. 4-401. 
However, a consumer who originally received only a statement 
containing images of multiple substitute checks per page but later 
received a substitute check, such as in response to a request for a 
copy of a check shown in the statement, could bring a claim if the 
other expedited recredit criteria were met. Although a consumer must 
at some point have received a substitute check to make an expedited 
recredit claim, the consumer need not be in possession of the 
substitute check at the time he or she submits the claim.
    2. A consumer must in good faith assert that the bank improperly 
charged the consumer's account for the substitute check or that the 
consumer has a warranty claim for the substitute check (or both). 
The warranty in question could be a substitute-check warranty 
described in Sec.  229.52 or any other warranty that a bank provides 
with respect to a check under other law. A consumer could, for 
example, have a warranty claim under Sec.  
229.34[lsqbb](b)[rsqbb][rtrif](a) or (d)[ltrif], which contains 
returned-check warranties that are made to the owner of the check.
* * * * *

XXXVIII. Appendix C--Model Availability-Policy Disclosures, 
Clauses, and Notices; and Model Substitute-Check-Policy Disclosure 
and Notices

A. Introduction

    1. Appendix C contains model disclosures, clauses, and notices 
that may be used by banks to meet their disclosure and notice 
responsibilities under the regulation. Banks using the models 
(except models C-[lsqbb]22[rsqbb][rtrif]18[ltrif] through C-
[lsqbb]25[rsqbb][rtrif]21[ltrif]) properly will be deemed in 
compliance with the regulation's disclosure requirements.
    2. Information that must be inserted by a bank using the models 
is (italicized) within parentheses in the text of the models. 
Optional information[rtrif], and information the inclusion of which 
is dependent on a bank's policies and practices,[ltrif] is enclosed 
in brackets.
    3. Banks may make certain changes to the format or content of 
the models, including deleting material that is inapplicable, 
without losing the EFA Act's protection from liability for banks 
that use the forms properly. For example, if a bank does not have a 
cutoff hour prior to its closing time, or if a bank does not take 
advantage of the section 229.13 exceptions, it may delete the 
references to those provisions. Changes to the models may not be so 
extensive as to affect the substance, clarity, or meaningful 
sequence of the models. Acceptable changes include, for example--
    a. Using ``customer'' and ``bank'' instead of pronouns
    b. Changing the typeface or size[rtrif], although a materially 
smaller size may not meet the clear and conspicuous standard of 
section 229.15(a)[ltrif]
    c. Incorporating certain state-law plain-English requirements
    [rtrif]4. a. Although banks are not required to use a certain 
paper size for their disclosures and notices, model funds-
availability disclosures C-1, C-2, C-3A, C-3B, C-4A, and C-4B and 
notices C-9, C-10, C-11, C-12A, and C-12B are designed to be 
provided to customers on an 8\1/2\ x 11 inch sheet of paper. In 
addition, the following formatting techniques ensure that the 
information is readable:
    i. A readable font style and font size
    ii. Sufficient spacing between lines of the text
    iii. Adequate spacing between paragraphs, as appropriate
    iv. Sufficient white space and margins above, below and to the 
sides of the text
    v. Sufficient contrast between the text and the background, such 
as black text on white paper
    b. While the regulation does not require banks to use the above 
formatting techniques in presenting the information in these 
disclosures and notices, banks are encouraged to consider these 
techniques

[[Page 16971]]

when deciding how to disclose information. A bank that provides a 
disclosure or notice electronically to a customer comports with the 
models' formatting techniques by providing a disclosure or notice in 
a file format, such as the .pdf file format, that electronically 
represents an 8\1/2\ x 11 inch sheet of paper with black text and a 
white background.[ltrif]
    [rtrif]5[ltrif][lsqbb]4[rsqbb]. Shorter time periods for 
availability may always be substituted for time periods used in the 
models.
    [rtrif]6[ltrif][lsqbb]5[rsqbb]. Banks may also add related 
information. For example, a bank may [lsqbb]indicate that although 
funds have been made available to a customer and the customer has 
withdrawn them, the customer is still responsible for problems with 
the deposit, such as checks that were deposited being returned 
unpaid. Or a bank could[rsqbb] include a telephone number to be used 
if a customer has an inquiry regarding a deposit.
    [rtrif]7[ltrif][lsqbb]6[rsqbb]. Banks are cautioned against 
using the models without reviewing their own policies and practices, 
as well as state and federal laws [rtrif]and regulations[ltrif] 
regarding the time periods for availability of specific types of 
checks. A bank using the models will be in compliance with the EFA 
Act and the regulation only if the bank's disclosures correspond to 
its availability policy.
    [lsqbb]7. Banks that have used earlier versions of the models 
(such as those models that gave Social Security benefits and payroll 
payments as examples of preauthorized credits available the day 
after deposit, or that did not address the cash-withdrawal 
limitation) are protected from civil liability under section 
229.21(e). Banks are encouraged, however, to use current versions of 
the models when reordering or reprinting supplies.[rsqbb]

B. Model Availability-Policy and Substitute-Check-Policy Disclosures, 
Models C-1 through C-5[lsqbb]A[rsqbb]

    1. Models C-1 Through C-5[lsqbb]A[rsqbb] Generally
    a. Models C-1 through C-[lsqbb]5A[rsqbb][rtrif]4B[ltrif] are 
models for the availability-policy disclosures described in section 
229.16 and [rtrif]model C-5 is a model for the[ltrif] substitute-
check-policy disclosure described in section 229.57. The 
[rtrif]funds-availability[ltrif] models accommodate a variety of 
availability policies, ranging from next-day availability to holds 
to statutory limits on all deposits. Model[rtrif]s[ltrif] C-
3[rtrif]A and C-3B[ltrif] reflect[lsqbb]s[rsqbb] the additional 
disclosures discussed in section 229.16(b) and (c) for banks that 
have a policy of extending availability times on a case-by-case 
basis. [rtrif]All of the funds-availability models indicate that a 
bank's policy may provide that although funds have been made 
available to a customer and the customer has withdrawn them, the 
customer is still responsible for problems with the deposit, such as 
checks that were deposited being returned unpaid. (See Sec.  
229.19(c)(2) of the regulation.)[ltrif]
    b. As already noted, there are several places in the forms where 
information must be inserted. This information includes the bank's 
cutoff times [rtrif]and[ltrif][lsqbb],[rsqbb] limitations relating 
to next-day availability[lsqbb], and the first four digits of 
routing numbers for local banks[rsqbb]. In disclosing when funds 
will be available for withdrawal, [rtrif] a bank that makes funds 
available on the business day the deposit was received may describe 
the funds as being available ``the same business day.'' A bank that 
makes funds available on a business day after the business day of 
receipt[ltrif] [lsqbb]the bank[rsqbb] must insert [lsqbb]the[rsqbb] 
[rtrif]a cardinal number (1, 2, etc.),[ltrif] ordinal number (such 
as first, second, etc.)[rtrif], or the word ``next'' to 
describe[ltrif] [lsqbb]of[rsqbb] the business day after deposit that 
the funds will become available.
    c. Models C-1 through C-[lsqbb]5A generally do not reflect any 
optional provisions of the regulation, or those that apply only to 
certain banks[rsqbb] [rtrif]4B reflect some information the 
inclusion of which depends on a bank's policies and practices, such 
as placing a hold on funds already on deposit when it cashes a check 
for a customer or makes funds immediately available to a customer 
(see Sec.  229.19(e) of the regulation), and requiring special 
deposit slips as a condition for next-day availability for deposits 
of certain types of checks (see Sec.  229.10(c)(2)). This 
information in the model availability-policy disclosures is placed 
within brackets to indicate that whether a bank should include the 
text in its availability-policy disclosure is dependent on the 
bank's funds-availability policies and practices. Additionally, 
certain other provisions of the regulation that apply only to 
certain banks are reflected[ltrif] [lsqbb]Instead, disclosures for 
these provisions are included[rsqbb] in model[lsqbb]s C-6 through C-
11A[rsqbb] [rtrif]clauses C-6, C-7, and C-8[ltrif]. A bank using one 
of the model availability-policy disclosures should also consider 
whether it must incorporate one or more of [lsqbb]models C-6 through 
C-11A.[rsqbb] [rtrif]these model clauses. A bank for which one or 
more of these clauses is applicable would append the clause(s) to 
the end of its availability-policy disclosure.[ltrif]
    d. While section 229.10(b) of the regulation requires next-day 
availability for electronic payments, Treasury regulations (31 CFR 
210) and ACH association rules require that preauthorized credits 
(direct deposits) be made available on the day the bank receives the 
funds. Models C-1 through [lsqbb]C-5[rsqbb] [rtrif]C-4B[ltrif] 
reflect these rules. Wire transfers [lsqbb], however,[rsqbb] 
[rtrif]and cash deposits[ltrif] are not governed by Treasury or ACH 
rules, but banks generally make funds from [lsqbb]wire 
transfers[rsqbb] [rtrif]these types of deposits[ltrif] available on 
the day received or on the business day following receipt. Banks 
should ensure that their disclosures reflect the availability given 
in most cases for [lsqbb]wire transfers.[rsqbb] [rtrif]these types 
of deposits. A bank that makes the proceeds of cash deposits or wire 
transfers available for withdrawal on the banking day they are 
received may specify in its disclosure that these types of deposits 
are available ``the same business day'' notwithstanding that the 
funds were not available at the opening of business on that day. 
Models C-1 through C-3B indicate that funds from these types of 
deposits will be available on the day received. A bank that uses one 
of these models should modify its disclosure to indicate that funds 
from cash deposits and wire transfers will be available on the next 
day if that reflects the bank's practice. In contrast, models C-4A 
and C-4B indicate that funds from cash deposits and wire transfers 
will be available on the business day following receipt. A bank that 
uses one of these models but that makes funds from cash deposits and 
wire transfers available the same day they are received--i.e., a 
bank that places holds to statutory limits only on check deposits--
may modify the forms accordingly to reflect the bank's 
practice.[ltrif]
    2. Model C-1, Next-Day Availability. A bank may use this model 
when its policy is to make funds from all [rtrif]check[ltrif] 
deposits available [lsqbb]on the first[rsqbb] [rtrif]by the 
next[ltrif] business day after a deposit is made. This model may 
also be used by banks that provide [lsqbb]immediate 
availability[rsqbb] [rtrif]same-day for check deposits[ltrif] by 
substituting the [lsqbb]word ``immediately''[rsqbb] [rtrif]phrase 
``the same business day''[ltrif] in place of [lsqbb]on the first 
business day after the day we receive your deposit.''[rsqbb] 
[rtrif]``the next business day.''[ltrif]
    3. Model C-2, Next-Day Availability and Section 229.13. 
Exceptions. A bank may use this model when its policy is to make 
funds from all [rtrif]check[ltrif] deposits available to its 
customers [lsqbb]on the first[rsqbb] [rtrif]by the next[ltrif] 
business day after the deposit is made, and to reserve the right to 
invoke the new-account and other exceptions in section 229.13. In 
disclosing that a longer delay may apply, a bank may disclose when 
funds will generally be available based on when the funds would be 
available if the deposit were of [rtrif]checks other than next-day-
availability checks[ltrif] [lsqbb]a nonlocal check[rsqbb].
    4. Model[rtrif]s[ltrif] C-3[rtrif]A[ltrif], Next-Day 
Availability, Case-by-Case Holds to Statutory Limits [rtrif]on Check 
Deposits Without Cash-Withdrawal Limitation[ltrif], and Section 
229.13 Exceptions[rtrif]; and C-3B, Next-Day Availability, Case-by-
Case Holds to Statutory Limits on Check Deposits With Cash-
Withdrawal Limitation, and Section 229.13 Exceptions[ltrif]
    a. A bank may use [lsqbb]this model[rsqbb] [rtrif]these 
models[ltrif] when its policy, in most cases, is to make funds from 
all types of deposits available [rtrif]by[ltrif] the day after the 
deposit is made, but to delay availability on some 
[rtrif]check[ltrif] deposits on a case-by-case basis up to the 
maximum time periods allowed under the regulation. A bank using 
[lsqbb]this model[rsqbb] [rtrif]these models[ltrif] also reserves 
the right to invoke the exceptions listed in section 229.13. 
[lsqbb]A bank using this model also reserves the right to invoke the 
exceptions listed in section 229.13.[rsqbb] In disclosing that a 
longer delay may apply, a bank may disclose when funds will 
generally be available based on when the funds would be available if 
the deposit were of [rtrif]checks other than next-day-availability 
checks[ltrif] [lsqbb]a nonlocal check[rsqbb].
    [rtrif]b. Model availability-policy disclosure C-3A may be used 
by a bank that, when it delays availability of a check deposit on a 
case-by-case basis, does not impose the cash-withdrawal limitation 
permitted by section 229.12(b), whereas model availability-policy 
disclosure C-3B may be used by a bank that does impose this 
limitation when it delays availability on a case-by-case basis.
    c. Models C-3A and C-3B include in brackets language related to 
check cashing, immediate availability, and holds on other

[[Page 16972]]

funds. A bank that bases its disclosure on model C-3A or C-3B would 
include this bracketed text in its disclosure only if the text 
corresponds to the bank's policy and practice. A bank that has such 
a policy, and that therefore includes this text in its disclosure, 
would include the text in the location indicated by the model. A 
bank that bases its availability-policy disclosure on model 
disclosure C-3A or C-3B and whose availability policy necessitates 
incorporation of one or more of the appendix's model clauses (C-9, 
C-11, or C-11A) would append those model clauses to the end of the 
second page of model C-3A or C-3B.[ltrif]
    5. Model[rtrif]s[ltrif] C-4[rtrif]A[ltrif], Holds to Statutory 
Limits on All Deposits [rtrif]Without Cash-Withdrawal Limitation; 
and C-4B, Holds to Statutory Limits on All Deposits With Cash-
Withdrawal Limitation[ltrif]
    [rtrif]a.[ltrif] A bank may use [lsqbb]this model[rsqbb] 
[rtrif]these models[ltrif] when its policy is to [lsqbb]impose 
delays to the full extent[rsqbb] [rtrif]delay availability as[ltrif] 
allowed under section 229.12 and to reserve the right to invoke the 
section 229.13 exceptions. In disclosing that a longer delay may 
apply, a bank may disclose when funds will generally be available 
based on when the funds would be available if the deposit were of 
[rtrif]checks other than next-day-availability[ltrif] [lsqbb]a 
nonlocal check[rsqbb].
    [rtrif]b. Model availability-policy disclosure C-4A may be used 
by a bank that delays availability as allowed under section 229.12 
but does not impose the cash-withdrawal limitation permitted by 
section 229.12(b), whereas model availability-policy disclosure C-4B 
may be used by a bank that delays availability as allowed under 
section 229.12 and does impose the cash-withdrawal limitation 
permitted by section 229.12(b).
    c. Models C-4A and C-4B include in brackets language related to 
check cashing, immediate availability, and holds on other funds. A 
bank that bases its disclosure on model C-4A or C-4B would include 
this bracketed text in its disclosure only if the text corresponds 
to the bank's policy and practice. A bank that has such a policy and 
that therefore includes this text in its disclosure would include 
the text in the location indicated by the model. A bank that bases 
its availability-policy disclosure on model disclosure C-4A or C-4B 
and whose availability policy necessitates incorporation of one or 
more of the appendix's model clauses (C-9, C-11, or C-11A) would 
append those model clauses to the end of the second page of model C-
4A or C-4B.[ltrif] [lsqbb]Model C-4 uses a chart to show the bank's 
availability policy for local and nonlocal checks, and model C-5 
uses a narrative description.
    6. Model C-5A bank may use this form when its policy is to 
impose delays to the full extent allowed by section 229.12 and to 
reserve the right to invoke the section 229.13 exceptions. In 
disclosing that a longer delay may apply, a bank may disclose when 
funds will generally be available based on when the funds would be 
available if the deposit were of a nonlocal check.[rsqbb]
    7. Model C-5[lsqbb]A[rsqbb][rtrif], Substitute-Check-Policy 
Disclosure[ltrif] A bank may use this form when it is providing the 
disclosure to its consumers required by section 229.57 explaining 
that a substitute check is the legal equivalent of an original check 
and the circumstances under which the consumer may make a claim for 
expedited recredit.

C. Model Clauses, Models C-6 through C-[lsqbb]11A[rsqbb][rtrif]8[ltrif]

    1. Models C-6 through C-[lsqbb]11A[rsqbb][rtrif]8[ltrif]. 
Generally. Certain clauses like those in the models must be 
incorporated into a bank's availability-policy disclosure under 
certain circumstances. The commentary to each clause indicates when 
a clause similar to the model clause is required. [rtrif]A bank for 
which one or more of these clauses is applicable would append the 
clause(s) to the end of its availability-policy disclosure.[ltrif]
    [lsqbb]2. Model C-6, Holds on Other Funds (Check Cashing)
    A bank that reserves the right to place a hold on funds already 
on deposit when it cashes a check for a customer, as addressed in 
section 229.19(e), must incorporate this type of clause in its 
availability-policy disclosure.
    3. Model C-7, Holds on Other Funds (Other Account)
    A bank that reserves the right to place a hold on funds in an 
account of the customer other than the account into which the 
deposit is made, as addressed in section 229.19(e), must incorporate 
this type of clause in its availability-policy disclosure.
    4. Model C-8, Appendix B Availability (Nonlocal Checks)
    A bank in a check-processing region where the availability 
schedules for certain nonlocal checks have been reduced, as 
described in appendix B of Regulation CC, must incorporate this type 
of clause in its availability-policy disclosure. Banks using model 
C-5 may insert this clause at the conclusion of the discussion 
titled ``Nonlocal Checks.''
    5.[rsqbb] [rtrif]2.[ltrif] Model C-
[lsqbb]9[rsqbb][rtrif]6[ltrif], Automated Teller Machine Deposits 
(Extended Holds). A bank that reserves the right to delay 
availability of deposits at nonproprietary ATMs until the 
[rtrif]fourth[ltrif][lsqbb]fifth[rsqbb] business day following the 
date of deposit, as permitted by section 
229.12([rtrif]b[ltrif][lsqbb]f[rsqbb]), must incorporate this type 
of clause in its availability-policy disclosure. A bank must choose 
among the alternative language based on how it chooses to 
differentiate between proprietary and nonproprietary ATMs, as 
required under section 229.16(b)(5).
    [lsqbb]6. Model C-10, Cash-Withdrawal Limitation
    A bank that imposes cash-withdrawal limitations under section 
229.12 must incorporate this type of clause in its availability-
policy disclosure. Banks reserving the right to impose the cash-
withdrawal limitation and using model C-3 should disclose that funds 
may not be available until the sixth (rather than fifth) business 
day in the first paragraph under the heading ``Longer Delays May 
Apply.''[rsqbb]
    [rtrif]3[ltrif][lsqbb]7[rsqbb]. Model C-
[lsqbb]11[rsqbb][rtrif]7[ltrif], Credit Union Interest-Payment 
Policy. A credit union subject to the notice requirement of section 
229.14(b)(2) must incorporate this type of clause in its 
availability-policy disclosure. This model clause is only an example 
of a hypothetical policy. Credit unions may follow any policy for 
accrual provided the method of accruing interest is the same for 
cash and check deposits.
    [rtrif]4[ltrif][lsqbb]8[rsqbb]. Model C-
[lsqbb]11A[rsqbb][rtrif]8[ltrif], Availability of Funds Deposited at 
Other Locations. A clause similar to model C-
[lsqbb]11A[rsqbb][rtrif]8[ltrif] should be used if a bank bases the 
availability of funds on the location where the funds are deposited 
[lsqbb](for example, at a contractual or other branch located in a 
different check-processing region). Similarly, a clause similar to 
model C-[lsqbb]11A[rsqbb][rtrif]8[ltrif] should be used if a bank 
distinguishes between local and nonlocal checks (for example, a bank 
using model availability-policy disclosure C-4[rtrif]A[ltrif] and C-
[lsqbb]5[rsqbb][rtrif]4B[ltrif]), and accepts deposits in more than 
one check-processing region[rsqbb].

D. Model Notices, Models C-[lsqbb]12[rsqbb][rtrif]9[ltrif] through C-
[lsqbb]25[rsqbb][rtrif]21[ltrif]

    1. Model Notices C-[lsqbb]12[rsqbb][rtrif]9[ltrif] through C-
[lsqbb]25[rsqbb][rtrif]21[ltrif] Generally. Models C-
[lsqbb]12[rsqbb][rtrif]9[ltrif] through C-
[lsqbb]25[rsqbb][rtrif]21[ltrif] provide models for the various 
notices required by the regulation. A bank that cashes a check and 
places a hold on funds in an account of the customer (see section 
229.19(e)) should modify the model hold notice accordingly. For 
example, the bank could replace the word ``deposit'' with the word 
``transaction'' and could add the phrase ``or cashed'' after the 
word ``deposited.''
    2. Model C-[lsqbb]12[rsqbb][rtrif]9[ltrif], Exception[lsqbb]-
[rsqbb] [rtrif]or Reasonable-Cause[ltrif] Hold Notice.
    [rtrif]a. i.[ltrif] This model satisfies the written notice 
required under section 229.13(g) when a bank places a hold based on 
a section 229.13 exception[rtrif], including the reasonable-cause 
exception. The model notice includes a location, indicated by 
``(reason for hold),'' in which the bank must insert the reason for 
placing the hold. The bulleted list below contains examples of 
reasons a bank may place a hold that could be inserted into the 
notice:
    (1) A check you deposited was previously returned unpaid.
    (2) You have overdrawn your account repeatedly in the last six 
months.
    (3) The checks you deposited on this day exceeded $5,000.
    (4) There is an emergency, such as a failure of computer or 
communications equipment.
    (5) We believe a check you deposited will not be paid, because 
(e.g., a reason from paragraph b).
    ii.[ltrif]If a hold is being placed on more than one check in a 
deposit, each check need not be described, but if different reasons 
apply, each reason must be indicated. A bank may use the actual date 
when funds will be available for withdrawal rather than the number 
of the business day following the day of deposit. A bank [lsqbb]must 
incorporate in the notice[rsqbb][rtrif]may use[ltrif] the material 
set out in brackets if it imposes overdraft or returned-check fees 
after invoking the reasonable-cause exception under section 
229.13(e).
    [lsqbb]3. Model C-13,[rsqbb][rtrif]b.[ltrif] Reasonable-Cause 
Hold Notice. [lsqbb]This[rsqbb][rtrif]i. Model[ltrif] notice 
[rtrif]C-9 also[ltrif] satisfies the written notice required under 
section 229.13(g) when a bank invokes the reasonable-cause exception 
under section 229.13(e). The [lsqbb]notice provides the bank with a 
list of[rsqbb] [rtrif]model notice includes a location, indicated by 
``(reason for hold),'' in which the bank would

[[Page 16973]]

insert the[ltrif] specific reason[lsqbb]s that may be given[rsqbb] 
for invoking the exception. [lsqbb]If a hold is being placed on more 
than one check in a deposit, each check must be described 
separately, and if different reasons apply, each reason must be 
indicated. A bank may disclose its reason for doubting 
collectibility by checking the appropriate reason on the model. If 
the ``Other'' category is checked, the reason must be given.[rsqbb] 
[rtrif]The list below provides examples of reasons that a bank could 
insert into the notice as its reason for doubting collectability:
    (1) We received notice that the check is being returned unpaid.
    (2) We have confidential information that indicates that the 
check may not be paid.
    (3) The check is drawn on an account with repeated overdrafts.
    (4) We are unable to verify a signature on the back of the 
check.
    (5) Some information on the check is not consistent with other 
information on the check.
    (6) There are apparent alterations on the check.
    (7) The routing number of the paying bank is not a current 
routing number.
    (8) The check is postdated.
    (9) The check has a stale date, that is, it was written too long 
ago and is expired.
    (10) We have been notified that the check has been lost or 
damaged in collection.
    ii. The above list is not intended to be comprehensive; another 
reason that does not appear in the list may be inserted in place of 
(``reason for hold'') provided the reason satisfies the conditions 
for invoking the reasonable cause exception.
    iii. If a hold is being placed on more than one check in a 
deposit, each check should be described separately, and if different 
reasons apply, each reason should be indicated.[ltrif] A bank may 
use the actual date when funds will be available for withdrawal 
rather than the number of the business day following the day of 
deposit. A bank [lsqbb]must incorporate in the 
notice[rsqbb][rtrif]may use[ltrif] the material set out in brackets 
if it imposes overdraft or returned-check fees after invoking the 
reasonable-cause exception under section 229.13(e).
    [lsqbb]4[rsqbb][rtrif]3[ltrif]. Model C-
[lsqbb]14[rsqbb][rtrif]10[ltrif], One-Time Notice for Large-Deposit 
and Redeposited-Check Exception Holds. This model satisfies the 
notice requirements of section 229.13(g)(2) concerning nonconsumer 
accounts.
    [lsqbb]5[rsqbb][rtrif]4[ltrif]. Model C-
[lsqbb]15[rsqbb][rtrif]11[ltrif], One-Time Notice for Repeated-
Overdraft Exception Hold. This model satisfies the notice 
requirements of section 229.13(g)(3).
    [lsqbb]6[rsqbb][rtrif]5[ltrif]. Model[rtrif]s[ltrif] C-
[lsqbb]16[rsqbb][rtrif]12A[ltrif], Case-by-Case Hold Notice 
[rtrif]Without Cash-Withdrawal Limitation; and C-
[lsqbb]16B[rsqbb][rtrif]12B[ltrif], Case-by-Case Hold Notice With 
Cash-Withdrawal Limitation.[ltrif] [lsqbb]This model[rsqbb] 
[rtrif]These models[ltrif] satisfies the notice required under 
section 229.16(c)(2) when a bank with a case-by-case hold policy 
imposes a hold on a deposit. [rtrif]Model case-by-case hold notice 
C-12A may be used by a bank that imposes a case-by-case hold, but 
does not have a policy of imposing the cash-withdrawal limitation 
permitted by section 229.12(b), whereas model notice C-12B may be 
used by a bank that imposes such a hold and does have such a policy.
    Section 229.16(c)(2)[ltrif] [lsqbb]This notice[rsqbb] does not 
require a statement of the specific reason for the hold, as is the 
case when a section 229.13 exception hold is placed. A bank may 
specify the actual date when funds will be available for withdrawal 
rather than the number of the business day following the day of 
deposit when funds will be available. A bank must incorporate in the 
notice the material set out in brackets if it imposes overdraft fees 
after invoking a case-by-case hold.
    [lsqbb]7[rsqbb][rtrif]6[ltrif]. Model C-
[lsqbb]17[rsqbb][rtrif]13[ltrif], Notice at Locations Where 
Employees Accept Consumer Deposits[rtrif];[ltrif][lsqbb],[rsqbb] and 
Model C-[lsqbb]18[rsqbb][rtrif]14[ltrif], Notice at Locations Where 
Employees Accept Consumer Deposits (Case-by-Case Holds)
    [rtrif]a.[ltrif] These models satisfy the notice requirement of 
section 229.18(b). Model C-[lsqbb]17[rsqbb][rtrif]13[ltrif] reflects 
an availability policy of holds to statutory limits on all deposits, 
and model C-[lsqbb]18[rsqbb][rtrif]14[ltrif] reflects a case-by-case 
availability policy.
    [rtrif]b. i. Model C-13 indicates that funds from cash deposits 
and wire transfers will be available on the business day following 
receipt. A bank that uses this model but that makes funds from these 
types of deposits available the same day they are received--i.e., a 
bank that places holds to statutory limits only on check deposits--
may modify the form accordingly to reflect the bank's practice. In 
contrast, model C-14 indicates that funds from cash deposits and 
wire transfers will be available on the day received. A bank that 
uses this model should modify its disclosure to indicate that funds 
from these types of deposits will be available on the next day if 
that reflects the bank's practice. A bank should ensure that its 
notice reflects the availability given in most cases for these types 
of deposits.
    ii. A bank that imposes cash-withdrawal limitations under 
section 229.12(b) should indicate that funds will generally be 
available by the third, rather than second, business day after the 
day of deposit, by replacing ``(number)'' in the lower-right-hand 
box of the tables in the models with ``third'' (rather than 
second).[ltrif]
    [lsqbb]8[rsqbb][rtrif]7[ltrif]. Model C-
[lsqbb]19[rsqbb][rtrif]15[ltrif], Notice at Automated Teller 
Machines[rtrif].[ltrif] This model satisfies the ATM notice 
requirement of section 229.18(c)(1).
    [lsqbb]9[rsqbb][rtrif]8[ltrif]. Model C-
[lsqbb]20[rsqbb][rtrif]16[ltrif], Notice at Automated Teller 
Machines (Delayed Receipt)[rtrif].[ltrif] This model satisfies the 
ATM notice requirement of section 229.18(c)(2) when receipt of 
deposits at off-premises ATMs is delayed under section 229.19(a)(4). 
It is based on collection of deposits once a week. If collections 
occur more or less frequently, the description of when deposits are 
received must be adjusted accordingly.
    [lsqbb]10[rsqbb][rtrif]9[ltrif]. Model C-
[lsqbb]21[rsqbb][rtrif]22[ltrif], Deposit-Slip Notice[rtrif].[ltrif] 
This model satisfies the notice requirements of section 229.18(a) 
for deposit slips.
    [lsqbb]11[rsqbb][rtrif]10[ltrif]. Models C-
[lsqbb]22[rsqbb][rtrif]18[ltrif] Through C-
[lsqbb]25[rsqbb][rtrif]21[ltrif] Generally[rtrif].[ltrif] Models C-
[lsqbb]22[rsqbb][rtrif]18[ltrif] through C-
[lsqbb]25[rsqbb][rtrif]21[ltrif] provide models for the various 
notices required when a consumer who receives substitute checks 
makes an expedited recredit claim under section 229.54 for a loss 
related to a substitute check. The Check 21 Act does not provide 
banks that use these models with a safe harbor. However, the Board 
has published these models to aid banks' efforts to comply with 
section 229.54(e).
    [lsqbb]12[rsqbb][rtrif]11[ltrif]. Model C-
[lsqbb]22[rsqbb][rtrif]18[ltrif], Valid-Claim Refund 
Notice[rtrif].[ltrif] A bank may use this model when crediting the 
entire amount or the remaining amount of a consumer's expedited-
recredit claim after determining that the consumer's claim is valid. 
This notice could be used when the bank provides the consumer a full 
recredit based on a valid-claim determination within ten days of the 
receipt of the consumer's claim or when the bank recredits the 
remaining amount of a consumer's expedited-recredit claim by the 
45th calendar day after receiving the consumer's claim, as required 
under section 229.54(e)(1).
    [lsqbb]13[rsqbb][rtrif]12[ltrif]. Model C-
[lsqbb]23[rsqbb][rtrif]19[ltrif], Provisional-Refund 
Notice[rtrif].[ltrif] A bank may use this model when providing a 
full or partial expedited recredit to a consumer pending further 
investigation of the consumer's claim, as required under section 
229.54(e)(1).
    [lsqbb]14[rsqbb][rtrif]13[ltrif]. Model C-
[lsqbb]24[rsqbb][rtrif]20[ltrif], Denial Notice[rtrif].[ltrif] A 
bank may use this model when denying a claim for an expedited 
recredit under section 229.54(e)(2).
    [lsqbb]15[rsqbb][rtrif]14[ltrif]. Model C-
[lsqbb]25[rsqbb][rtrif]21[ltrif], Reversal Notice[rtrif].[ltrif] A 
bank may use this model when reversing an expedited recredit that 
was credited to a consumer's account under section 229.54(e)(3).

    37. Revise Appendix F to Part 229 to read as follows:

[rtrif]Appendix F to Part 229--Official Board Interpretations; 
Preemption Determinations

Uniform Commercial Code, Section 4-213(5)

    1. State provision that may supersede Regulation CC
    Section 4-213(5) of the Uniform Commercial Code (``U.C.C.'') 
provides that money deposited in a bank is available for withdrawal 
as of right at the opening of business of the banking day after 
deposit. Although the language ``deposited in a bank'' is unclear, 
arguably it is broader than the language ``made in person to an 
employee of the depositary bank,'' which conditions the next-day 
availability of cash under Regulation CC (Sec.  229.10(a)(1)). Under 
Regulation CC, deposits of cash that are not made in person to an 
employee of the depositary bank must be made available by the second 
business day after the banking day of deposit (Sec.  229.10(a)(2)). 
Therefore, this provision of the U.C.C. may call for the 
availability of certain cash deposits in a shorter time than 
provided in Regulation CC. To the extent that section 4-213(5) of 
the U.C.C. requires certain cash deposits in a shorter time than 
provided in Regulation CC, that section supersedes Regulation CC.
    2. State provision superseded by Regulation CC
    Section 4-213(5) of the U.C.C., however, is subject to Section 
4-103(1), which provides,

[[Page 16974]]

in part, that ``the effect of the provisions of this Article may be 
varied by agreement * * *.'' The Regulation CC funds availability 
requirements may not be varied by agreement. Therefore, a depositary 
bank may agree to extend availability beyond the requirement of 
section 4-213(5), but may not agree with its customer under section 
4-103(1) of the Code to extend availability beyond the time periods 
provided in Sec.  229.10(a) of Regulation CC.
    Other preemption determinations
    California
    California has three separate sets of regulations establishing 
maximum availability schedules, all adopted pursuant to California 
Financial Code section 866.5 (which requires the banking 
commissioners to promulgate regulations establishing a reasonable 
period of time within which a depository institution must make 
deposited funds available to customers) and California Commercial 
Code section 4-213(4)(a), that were in effect on or before September 
1, 1989. The regulations applicable to commercial banks and branches 
of foreign banks (collectively, banks) located in California (Cal. 
Admin. Code tit. 10, Sec. Sec.  10.190401-10.190402) were 
promulgated by the superintendent of banks. The regulations 
applicable to savings banks and savings and loan associations 
(collectively, savings institutions) (Cal. Admin. Code tit. 10, 
Sec. Sec.  106.200-106.202) were promulgated by the savings and loan 
commissioner. The regulations applicable to industrial loan 
companies (Cal. Admin. Code tit. 10, Sec.  40.101) were promulgated 
by the Commissioner of Corporations. California Financial Code 
section 867 also establishes availability periods for funds 
deposited by cashier's check, certified check, teller's check, or 
depository check under certain circumstances. Finally, California 
Financial Code section 866.2 establishes disclosure requirements.
    1. Funds availability periods
    A. Banks and savings institutions.
    The regulations applicable to California banks and savings 
institutions provide that a depositary bank shall make funds 
deposited into a deposit account available for withdrawal as 
provided in Regulation CC, subject to the following:
    Cashier's checks, teller's checks, certified checks, or 
depository checks. Section 867 of the California Financial Code 
requires depository institutions to make funds deposited by 
cashier's check, teller's check, certified check, or depository 
check available for withdrawal on the second business day following 
deposit, if certain conditions are met. The Regulation CC next-day 
availability requirement for cashier's checks and teller's checks 
applies only to those checks issued to a customer of the bank or 
acquired from the bank for remittance purposes. To the extent that 
the state's second-day availability requirement applies to cashier's 
and teller's checks issued to a non-customer of the bank for other 
than remittance purposes, the state two-day requirement provides for 
holds of the same number of days as the federal schedules and 
therefore supersedes the federal schedules if the California 
regulations do not allow the funds to be made available later in the 
day than does Regulation CC.
    Checks drawn on in-state bank with a different four-digit 
routing symbol. California regulations require banks (not including 
savings institutions) to provide fourth business day availability of 
funds deposited into a bank with a four-digit routing symbol of 1210 
(``1210 bank'') by a check drawn on an in-state bank with a four-
digit routing symbol of 1220 (``1220 bank''). Similarly, a 1220 bank 
that receives a check drawn on a 1210, in-state bank may make the 
funds available for withdrawal by the fourth business day after the 
day of deposit. Regulation CC, however, provides that checks must be 
made available for withdrawal by the second business day after the 
banking day of deposit. Because California's regulations permit 
depositary banks to make funds available within a longer period of 
time than the federal schedules, California's regulations are 
superseded by the EFA Act and subpart B of Regulation CC.
    Paying bank. The California regulation uses the term paying bank 
when describing the institution on which these checks are drawn, but 
does not define paying bank or bank. Regulation CC's definitions of 
paying bank and bank include savings institutions and credit unions 
as well as commercial banks and branches of foreign banks. However, 
because the California regulation makes separate provisions for 
checks drawn on savings institutions and credit unions, the Board 
concludes that the term paying bank, as used in the California 
regulation, includes only commercial banks and foreign bank 
branches.
    Exceptions to the availability schedules. Under the state 
preemption standards of Regulation CC (see Sec.  229.20(c) and 
accompanying Commentary), for deposits subject to the state 
availability schedules, a state exception may be used to extend the 
state availability schedule up to the federal availability schedule. 
Once the deposit is held up to the federal availability schedule 
limit under a state exception, the depositary bank may further 
extend the hold under any federal exception that can be applied to 
the deposit. If no state exceptions exist, then no exceptions holds 
may be placed on deposits covered by state schedules. Thus, to the 
extent that California law provides for exceptions to the California 
schedules that supersede Regulation CC, those exceptions may be 
applied in order to extend the state availability schedules up to 
the federal availability schedules or such later time as is 
permitted by a federal exception.
    B. Industrial loan companies.
    Section 229.2(e)(1)(i) of Regulation CC, the term bank includes 
an insured bank as defined in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813). That Act defines bank to include any 
State bank (12 U.S.C. 1813(a)(1)(A)) and, in turn, defines State 
bank to include an industrial bank or similar depository institution 
that receives deposits and is incorporated under the laws of any 
state (12 U.S.C. 1813(a)(2)). The California regulations applicable 
to industrial loan companies set forth a funds availability schedule 
that does not incorporate the periods set forth in Regulation CC. 
Accordingly, the following preemption determination sets forth the 
provisions of state law that supersede federal law and those that 
are preempted by it.
    Check of $100 or less. California regulations require industrial 
loan companies to give next-day availability to a check of $100 or 
less. Therefore, the California provision supersedes the Regulation 
CC provision if on a single banking day multiple checks, each under 
$100, are deposited.
    U.S. Treasury, state and local government checks. California 
regulations require industrial loan companies to give next-day 
availability to items drawn by the State of California or any of its 
departments, agencies, or political subdivisions. Regulation CC 
conditions next-day availability on receipt of the deposit at a 
staffed teller station or use of a special deposit slip. Therefore, 
California law supersedes the federal law in that the state law does 
not condition next-day availability on receipt at a staffed teller 
station or use of a special deposit slip.
    On-us checks. California regulations require industrial loan 
companies to provide second business day availability to checks 
drawn on the depositary bank. Regulation CC requires next-day 
availability for checks deposited in a branch of the depositary bank 
and drawn on the same or another branch of the same bank. Thus, 
generally, the Regulation CC rule for availability of on-us checks 
preempts the California regulations. To the extent, however, that an 
on-us check is deposited at an off-premises ATM or another facility 
of the depositary bank that is not considered a branch under federal 
law, the state regulation supersedes the Regulation CC availability 
requirements.
    Cashier's checks, teller's checks, certified checks, or 
depository checks. Section 867 of the California Financial Code 
requires depository institutions to make funds deposited by 
cashier's check, teller's check, certified check, or depository 
check available for withdrawal on the second business day following 
deposit, if certain conditions are met. The Regulation CC next-day 
availability requirement for cashier's checks and teller's checks 
applies only to those checks issued to a customer of the bank or 
acquired from the bank for remittance purposes. To the extent that 
the state second-day availability requirement applies to cashier's 
and teller's checks issued to a non-customer of the bank for other 
than remittance purposes, the state two-day requirement provides for 
holds of the same number of days as the federal schedules and 
therefore supersedes the federal local and nonlocal schedules if the 
California regulations do not allow the funds to be made available 
later in the day than does Regulation CC.
    In-state and out-of-state checks. California regulations require 
industrial loan companies to make funds deposited by a check drawn 
on a depository institution in California available no later than 
the sixth business day after deposit. Industrial loan companies are 
required to make funds deposited by a check drawn on a depository 
institution outside of California available no later than the 
twelfth business day after deposit. Regulation CC, however, 
generally requires depositary banks to make funds deposited by a 
check drawn on any depository bank available no later

[[Page 16975]]

than the second business day after deposit. Accordingly, 
California's regulation permitting longer holds by industrial loan 
companies is preempted by Regulation CC.
    Exceptions to the availability schedules. California regulations 
provide exceptions to the state availability schedules applicable to 
industrial loan companies for large deposits, new accounts, repeated 
overdrafters, doubtful collectibility, foreign items, and emergency 
conditions. In all cases where the federal availability schedule 
preempts the state schedule, only the federal exceptions will apply. 
For deposits that are covered by the state's availability schedule 
(e.g., cashier's or teller's checks that are not deposited with a 
special deposit slip or at a staff teller station and on-us checks 
deposited at an off-premises ATM or another facility of the 
depositary bank that is not considered a branch under federal law), 
the state exceptions may be used to extend the state availability 
schedule up to the federal availability schedule. Once the deposit 
is held up to the federal availability limit under a state 
exception, the depositary bank may further extend the hold under any 
federal exception that can be applied to the deposit. Any time a 
depositary bank invokes an exception to extend a hold beyond the 
time periods otherwise permitted by law, it must give notice of the 
extended hold to its customer in accordance with Sec.  229.13(g) of 
Regulation CC.
    2. Disclosures
    California law (Cal. Fin. Code Sec.  866.2) requires depository 
institutions to provide written disclosures of their general 
availability policies to potential customers prior to opening any 
deposit account. The law also requires that preprinted deposit slips 
and ATM deposit envelopes contain a conspicuous summary of the 
general policy. Finally, the law requires depository institutions to 
provide specific notice of the time the customer may withdraw funds 
deposited by check or similar instrument into a deposit account if 
the funds are not available for immediate withdrawal.
    Section 229.20(c)(2) of Regulation CC provides that 
inconsistency may exist when a state law provides for disclosures 
concerning funds availability relating to accounts. California 
Financial Code Sec.  866.2 requires disclosures that differ from 
those required by Regulation CC and, therefore, is preempted to the 
extent that it applies to accounts as defined in Regulation CC. 
Thus, the state law continues to apply to savings accounts and other 
accounts not governed by Regulation CC disclosure requirements.
    The Department of Savings and Loan regulations provide that for 
those non-transaction accounts covered by state law but not by 
federal law, disclosures in accordance with Regulation CC will be 
deemed to comply with the state law disclosure requirements. To the 
extent that the Department of Savings and Loan regulations permit 
reliance on Regulation CC disclosures for transaction accounts and 
to the extent the state regulations survive the preemption of 
California Financial Code Sec.  866.2, they are not preempted by, 
nor do they supersede, the federal law. The state law continues to 
apply to savings accounts and other non-transaction accounts not 
governed by Regulation CC disclosure requirements.
    3. Other general provisions
    Accounts. The California funds availability laws and regulations 
apply to accounts as defined by Regulation CC as well as savings 
accounts, as defined in the Board's Regulation D (12 CFR 204.2(d)), 
negotiable order of withdrawal draft accounts, share draft accounts 
and other share accounts (other than time accounts). (California 
Financial Code section 886(b)) The funds availability schedules in 
Regulation CC apply only to accounts as defined in Regulation CC, 
which generally consist of transaction accounts. The California 
funds availability regulations continue to apply to deposits in 
savings and other accounts (such as accounts in which the account-
holder is another bank) that are not accounts under Regulation CC. 
Under Sec.  229.19(e) of Regulation CC (Holds on other funds), 
however, the federal availability schedules may apply to savings, 
time, and other accounts not defined as accounts under Regulation CC 
in certain circumstances.
    Business day/banking day. The definitions of business day and 
banking day in the California regulations are preempted by the 
Regulation CC definition of those terms. Thus, for determining 
whether the permissible hold under the California schedules 
supersedes the Regulation CC schedule, deposits are considered made 
on the specified number of business days following the banking day 
of deposit.
    Availability at start of day. The California regulations do not 
specify when during the day funds must be made available for 
withdrawal. Section 229.19(b) of Regulation CC provides that funds 
must be made available at the start of the business day. In those 
cases where federal and state law provide for holds for the same 
number of days, to the extent that the California regulations allow 
funds to be made available later in the day than does Regulation CC, 
the federal law would preempt state law.
    Checks. The California law applies to any Item (California 
Financial Code section 866.5 and California Commercial Code section 
4213(4)(a)). The California Commercial Code defines item to mean any 
instrument for the payment of money even though it is not negotiable 
* * * (Cal. Com. Code section 4104(g)). This term is broader in 
scope than the definition of check in the Act and Regulation CC. All 
of the regulations, however, define the term item to include checks, 
negotiable orders of withdrawal, share drafts, warrants, and money 
orders. As limited by the state regulations, the state law applies 
only to instruments that are also checks as defined in Sec.  
229.2(k) of Regulation CC.
    Illinois
    Section 4-213(5) of the U.C.C. as adopted in Illinois (Illinois 
Revised Statutes Chapter 26, paragraph 4-213(5), enacted July 26, 
1988) provides that funds from deposits must be available in 
accordance with the provisions of the federal Expedited Funds 
Availability Act (Title VI of the Competitive Equality Banking Act 
of 1987) and the regulations promulgated by the Federal Reserve 
Board for the implementation of that Act. Therefore, Section 4-
213(5) of the Illinois law does not supersede Regulation CC; and, 
because this provision of Illinois law does not permit funds to be 
made available for withdrawal in a longer period of time than 
required under the Act and Regulation, it is not preempted by 
Regulation CC.
    Maine
    Maine's funds availability (Title 9-B MRSA section 241(5), 
adopted in 1985) requires Maine financial institutions to make funds 
deposited in a transaction account, savings account, or time account 
available for withdrawal within a reasonable period. The Maine 
statute gives the Superintendent of Banking for the State of Maine 
the authority to promulgate rules setting forth time limitations and 
disclosure requirements governing funds availability. Under the 
Superintendent of Banking's regulations, effective July 1, 1987 
(Regulation 18(IV)), and adopted amendments to this regulation, 
effective September 1, 1988, funds deposited to any deposit account 
in a Maine financial institution must be made available for 
withdrawal in accordance with the Act and Regulation CC (Regulation 
18-IV(A)(1), 02-029-118 Me. Code. R. Sec.  IV). The state regulation 
provides that an institution's funds availability policies for 
accounts subject to Regulation CC be disclosed in a manner 
consistent with the Regulation CC requirements. Funds availability 
policies for accounts not subject to Regulation CC must be disclosed 
in accordance with the state regulation (Regulation 18-IV(A)(2)).
    Funds availability and disclosures. The Maine regulation 
incorporates the Regulation CC availability and disclosure 
requirements with respect to deposits to accounts covered by 
Regulation CC. Because the state requirements are consistent with 
the federal requirements, the Maine regulation is not preempted by, 
nor does it supersede, the federal law.
    Accounts. The Maine funds availability law and regulations apply 
to accounts as defined by Regulation CC as well as savings accounts, 
as defined in the Board's Regulation D (12 CFR 204.2(d)). The funds 
availability schedules in Regulation CC apply only to accounts as 
defined in Regulation CC, which generally consist of transaction 
accounts. The Maine funds availability law and regulations continue 
to apply to deposits in all accounts, including those that are not 
accounts under Regulation CC. Under Sec.  229.19(e) of Regulation CC 
(Holds on other funds), however, the federal availability schedules 
may apply to savings, time, and other accounts not defined as 
accounts under Regulation CC in certain circumstances.
    Massachusetts
    In 1988, Massachusetts amended its statute governing funds 
availability (Mass. Gen. L. ch. 167D, section 35).
    1. Funds availability periods
    Massachusetts requires banking institutions to make funds 
available for withdrawal in accordance with the EFA Act and 
Regulation CC. Massachusetts defines local originating depository 
institution (local paying bank in Regulation CC terminology) as a 
depository institution located in Massachusetts (as distinguished 
from a depository institution located in the same

[[Page 16976]]

check-processing region--the terminology the EFA Act uses). 
Regulation CC no longer distinguishes between ``local'' and 
``nonlocal'' originating depository institutions, and therefore, the 
term ``local originating depository institution'' is no longer 
relevant for purposes of funds availability. Because the 
Massachusetts statute incorporates the Regulation CC availability 
requirements, the state requirements are consistent with the federal 
requirements, and the Massachusetts statute is not preempted by, nor 
does it supersede, the federal law.
    2. Disclosures
    The Massachusetts regulation incorporates the Regulation CC 
disclosure requirements with respect to both accounts covered by 
Regulation CC and savings and other accounts not governed by the 
federal regulation. Because the state requirements are consistent 
with the federal requirements, the Massachusetts regulation is not 
preempted by, nor does it supersede, the federal law. The 
Massachusetts disclosure rules would continue to apply to accounts 
not governed by the Regulation CC disclosure requirements.
    3. Other general provisions
    Accounts. The Massachusetts statute governs the availability of 
funds deposited in ``any demand deposit, negotiable order of 
withdrawal account, savings deposit, share account or other asset 
account.'' Regulation CC applies only to accounts as defined in 
Sec.  229.2(a). Regulation CC does not affect the Massachusetts 
statute to the extent that the state law applies to deposits in 
savings and other accounts (including transaction accounts where the 
account holder is a bank, foreign bank, or the U.S. Treasury) that 
are not accounts under Regulation CC. Under Sec.  229.19(e) of 
Regulation CC, Holds on other funds, the federal availability 
schedules may apply to savings, time, and other accounts not defined 
as accounts under Regulation CC, in certain circumstances.
    New York
    In 1983, the New York State Banking Department, pursuant to 
section 14-d of the New York Banking law, issued regulations 
requiring that funds deposited in an account be made available for 
withdrawal within specified time periods, and provided certain 
exceptions to those availability schedules. Part 34 of the New York 
State Banking Department's General Regulations established time 
frames within which commercial banks, trust companies, and branches 
of foreign banks (collectively, banks); and savings banks, savings 
and loan associations, and credit unions (collectively, savings 
institutions) must make funds deposited in customer accounts 
available for withdrawal.
    1. Funds availability periods
    The Banking Department amended part 34, effective September 1, 
1988, generally to exclude accounts covered by Regulation CC from 
the scope of the state regulation, except for deposits drawn on non-
local, but in-state, banks. The New York schedule for banks and 
savings institutions permits maximum holds on funds deposited by 
checks drawn on a nonlocal, but in state, bank or savings 
institution ranging from no later than the fourth business day (in 
the case of banks) to no later than the fifth business day (in the 
case of savings institutions). Because Regulation CC requires funds 
to be made available no later than the second business day (unless 
an exception applies, as discussed below), Regulation CC preempts 
the New York schedule for funds availability.
    Exceptions to the availability schedules. New York law provides 
exceptions to the state availability schedules for large deposits, 
new accounts, repeated overdrafters, doubtful collectibility, 
foreign items, and emergency conditions (part 34.5, renumbered from 
34.4). In all cases where the federal availability schedule preempts 
the state schedule, only the federal exceptions will apply. Because 
the federal availability schedule preempts the state schedule for 
all cases, the New York exceptions do not apply.
    2. Disclosures
    The revised New York regulation does not contain funds 
availability disclosure requirements applicable to accounts subject 
to Regulation CC.
    3. Other provisions
    Accounts. The New York statute governs the availability of funds 
deposited in savings accounts and time deposits, as well as accounts 
as defined in Sec.  229.2(a) of Regulation CC. Regulation CC applies 
only to accounts as defined in Sec.  229.2(a). Regulation CC does 
not affect the New York statute to the extent that the state law 
applies to deposits in savings accounts and time deposits, which are 
not accounts under Regulation CC. Under Sec.  229.19(e) of 
Regulation CC, Holds on other funds, the federal availability 
schedules may apply to savings, time, and other accounts not defined 
as accounts under Regulation CC, in certain circumstances.
    Items. The New York law and regulation apply to items deposited 
to accounts. Part 34.3(e) defines item as a check, negotiable order 
of withdrawal or money order deposited into an account. The Board 
interprets the definition of item in New York law to be consistent 
with the definition of check in Regulation CC (Sec.  229.2(k)).

    By order of the Board of Governors of the Federal Reserve 
System, March 3, 2011.
Robert deV Frierson,
Deputy Secretary of the Board.
[FR Doc. 2011-5449 Filed 3-24-11; 8:45 am]
BILLING CODE 6210-01-P