[Federal Register Volume 82, Number 114 (Thursday, June 15, 2017)]
[Rules and Regulations]
[Pages 27552-27601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11379]
[[Page 27551]]
Vol. 82
Thursday,
No. 114
June 15, 2017
Part II
Federal Reserve System
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12 CFR Part 229
Availability of Funds and Collection of Checks; Final Rule
Federal Register / Vol. 82 , No. 114 / Thursday, June 15, 2017 /
Rules and Regulations
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FEDERAL RESERVE SYSTEM
12 CFR Part 229
[Regulation CC; Docket No. R-1409]
RIN 7100-AD68
Availability of Funds and Collection of Checks
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule.
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SUMMARY: The Board is amending subparts A, C, and D of Regulation CC,
Availability of Funds and Collection of Checks, which implements the
Expedited Funds Availability Act of 1987 (EFA Act), the Check Clearing
for the 21st Century Act of 2003 (Check 21 Act), and the official staff
commentary to the regulation. In the final rule, the Board has modified
the current check collection and return requirements to reflect the
virtually all-electronic check collection and return environment and to
encourage all depositary banks to receive, and paying banks to send,
returned checks electronically. The Board has retained, without change,
the current same-day settlement rule for paper checks. The Board is
also applying Regulation CC's existing check warranties under subpart C
to checks that are collected electronically, and in addition, has
adopted new warranties and indemnities related to checks collected and
returned electronically and to electronically-created items.
DATES: Effective July 1, 2018.
FOR FURTHER INFORMATION CONTACT: Clinton N. Chen, Attorney (202-452-
3952), Legal Division; or Ian C.B. Spear, Senior Financial Services
Analyst (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; Board of Governors of the Federal Reserve
System, 20th and C Streets NW., Washington, DC 20551.
SUPPLEMENTARY INFORMATION:
I. Statutory and Regulatory Background
Congress enacted the EFA Act \1\ to provide depositors of checks
with prompt funds availability and to foster improvements in the check
collection and return processes. Section 609(b) directs the Board to
consider requiring depository institutions and Federal Reserve Banks to
take certain steps to improve the check-processing system, such as
automating the check-return process.\2\ Section 609(c) authorizes the
Board to regulate any aspect of the payment system and any related
function of the payment system with respect to checks in order to carry
out the provisions of the EFA Act.\3\
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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\ EFA Act section 609(b)(4) states that in 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).
\3\ EFA Act section 609(c)(1) states that in order to carry out
the provisions of this title, the Board of Governors of the Federal
Reserve System shall have the responsibility to regulate any aspect
of the payment system, including the receipt, payment, collection,
or clearing of checks; and any related function of the payment
system with respect to checks. 12 U.S.C. 4008(c)(1). EFA Act section
609(c)(2) states that the Board shall prescribe such regulations as
it may determine to be appropriate to carry out its responsibility.
12 U.S.C. 4008(c)(2). EFA Act section 611(f) authorizes the Board to
impose on or allocate among depository institutions the risks of
loss and liability in connection with any aspect of the payment
system, including the receipt, payment, collection, or clearing of
checks, and any related function of the payment system with respect
to checks. Such liability shall not exceed the amount of the check
giving rise to the loss or liability, and, where there is bad faith,
other damages, if any, suffered as a proximate consequence of any
act or omission giving rise to the loss or liability. 12 U.S.C.
4010(f).
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The Board implemented the EFA Act in subparts A, B, and C of
Regulation CC. 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 and includes rules regarding exceptions to the schedules,
disclosure of funds availability policies, and payment of interest.\4\
Subpart C of Regulation CC implements the EFA Act's provisions
regarding forward collection and return of checks.
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\4\ The term ``bank'' as used in this notice and in Regulation
CC (12 CFR 229.2(e)) includes a commercial bank, savings bank,
savings and loan association, credit union, and a U.S. agency or
branch of a foreign bank.
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The current provisions of subpart C presume that banks generally
handle checks in paper form and include provisions to speed the
collection and return of checks, such as the expeditious return
requirements for paying and returning banks, authorization to send
returns directly to depositary banks, notification of nonpayment of
large-dollar returned checks, standards for check indorsement, and
specifications for same-day settlement of checks presented to the
paying bank.
The Check 21 Act, which became effective in October 2004,
facilitated electronic collection and return of checks by permitting
banks to create a paper ``substitute check'' from an electronic image
and electronic information derived from a paper check. The Check 21 Act
authorized banks to provide substitute checks to a bank or a customer
that had not agreed to electronic exchange. The Board implemented the
Check 21 Act primarily in subpart D of Regulation CC.\5\
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\5\ Section 15 of the Check 21 Act states that the Board may
prescribe such regulations as the Board determines to be necessary
to implement, prevent circumvention or evasion of, or facilitate
compliance with the provisions of this Act. 12 U.S.C. 5014.
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II. Summary of the Current, Proposed, and Final Rule
On February 4, 2014, the Board published a notice of proposed
rulemaking (``proposal'') intended to facilitate the banking industry's
ongoing transition to fully-electronic interbank check collection and
return.\6\ The Board requested comment on amendments to subparts A, C,
and D of Regulation CC.\7\ The Board received 40 responses to its
proposal from a variety of commenters, including financial
institutions, trade associations, clearinghouses, private individuals,
and academia. The Board has considered all comments received and has
adopted amendments to Regulation CC as described below.\8\
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\6\ The Board originally proposed amendments in 2011 (``2011
proposal''). 76 FR 16862 (March 25, 2011). Based on its analysis of
the comments received on the 2011 proposal, the Board revised its
proposed amendments and requested comment in the proposal in 2014.
79 FR 6674 (Feb. 4, 2014).
\7\ The Board is not amending subpart B of Regulation CC at this
time. Section 1086 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act amended the EFA Act to make the Board's authority for
the EFA Act's provisions implemented in subpart B joint with the
Consumer Financial Protection Bureau.
\8\ After publication of the Board's proposal, the OCC, Board,
and the FDIC began a review of regulations to identify outdated or
otherwise unnecessary regulatory requirements imposed on insured
depository institutions, as required by the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (EGRPRA). The Board has
also considered comments related to subparts A, C, and D of
Regulation CC received as part of the EGRPRA process.
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A. Return Requirements
Regulation CC requires a paying bank that determines not to pay a
check to return the check expeditiously.\9\ Under
[[Page 27553]]
the current expeditious return provisions of Regulation CC, a paying
bank must return the check as provided under either the ``two-day
test'' or the ``forward-collection test.'' \10\ Regulation CC permits a
paying bank to send a returned check either directly to the depositary
bank or to any bank agreeing to handle the return expeditiously.\11\
Regulation CC also currently requires a paying bank that determines not
to pay a check in the amount of $2,500 or more to provide a notice of
nonpayment to the depositary bank such that the notice is received by
the depositary bank within the same timeframe as under the ``two-day
test'' for expeditious return.\12\
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\9\ When Congress enacted the EFA Act in 1987, the time required
for delivery of returned paper checks to the depositary bank was
often longer than the maximum hold periods to which the banks would
be subject under the EFA Act. Many paying banks did not have
dedicated transportation infrastructure to return paper checks and
would typically send the returned check by mail, which could
significantly slow the return process. 52 FR 47112, 47118 (Dec. 11,
1987). To speed the return of checks and to reduce the risk that
depositary banks would make funds from a check available before
learning of the check's nonpayment, the Board in Regulation CC
exercised its authority under sections 609(b) and (c) the EFA Act to
automate the return process and to establish the expeditious return
requirement. 53 FR 19372, 19377 (May 27, 1988).
\10\ Under the two-day test, a paying bank must send a returned
check 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. 12 CFR 229.30(a)(1)(i).
Under the forward-collection test, a paying bank must send 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
CFR 229.30(a)(2).
For nonlocal checks, there is a four-day test under which a
paying bank must send a returned check 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. 12 CFR 229.30(a)(1)(ii). Because there is now 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\ 12 CFR 229.30(a).
\12\ Return of the check itself satisfies the notice of
nonpayment requirement if the return meets the timeframe requirement
for a notice of nonpayment.
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These return requirements were originally implemented when check
collection and return was largely paper-based. Now, the interbank
clearing process is almost entirely electronic: by the beginning of
2017 the Federal Reserve Banks received over 99.99 percent of checks
electronically from 99.06 percent of routing numbers and presented over
99.99 percent of checks electronically to over 99.76 percent of routing
numbers. This mostly electronic environment offers lower costs, faster
returns, and fewer errors, which substantially reduces risk to the
check system compared to the previous largely paper-based environment.
A portion of check returns, however, are still conducted using paper:
by the beginning of 2017 the Federal Reserve Banks received 99.63
percent of returned checks electronically from over 99.37 percent of
routing numbers and delivered 99.41 percent of returned checks
electronically but to only 92.84 percent of routing numbers.
In an effort to identify incentives that would encourage the
broadest possible implementation of electronic check return for those
remaining institutions still using paper, the Board requested comment
in its proposal on two alternative approaches to the requirements
imposed on paying banks and returning banks. Under the first
alternative (``Alternative 1''), the Board proposed to eliminate the
expeditious return requirement for paying banks and returning
banks.\13\ The Board also proposed under Alternative 1 to require the
paying bank to provide the depositary bank with a notice of nonpayment
when the paying bank sends the returned check in paper form, but not
when the paying bank sends the returned check in electronic form.\14\
The notice of nonpayment requirement would apply to all paper returned
checks regardless of the amount of the check being returned, and the
paying bank would be required to deliver the notice to the depositary
bank by 2 p.m. on the second business day following presentment of the
check to the paying bank (two hours earlier than the current
requirement).
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\13\ The Board believed that the approach in Alternative 1 would
provide incentives to depositary banks to accept electronic returns.
Under this alternative, depositary banks that do not currently
accept electronic returns would have a greater incentive to do so
because only by receiving returns electronically would they be
likely to learn about nonpayment of a deposited check before making
funds available to their customers. Alternative 1 was based on the
Board's belief that in today's virtually all-electronic check-
processing environment, a check returned electronically through the
entire return path should be received by the depositary bank within
two business days of the check's presentment to the paying bank
without an expeditious return requirement, assuming returning banks
do not change processing timeframes.
\14\ Retaining a notice of nonpayment requirement only for paper
returned checks in Alternative 1 would have provided paying banks
with an incentive to send returned checks electronically (in order
to avoid having to comply with the notice of nonpayment requirement)
and ensure that depositary banks receive timely notice of returned
checks (because they would generally receive either the electronic
return or a notice of nonpayment within the two-day timeframe).
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Under the second alternative (``Alternative 2''), the Board
proposed to eliminate the notice of nonpayment requirement and to
preserve the expeditious return requirement with slight modification.
Specifically, the Board proposed that paying banks would be subject to
a modified expeditious return requirement (using the ``two-day test'')
if the paying bank has an agreement to send returned checks
electronically either directly to the depositary bank or to a returning
bank that is subject to the expeditious return requirement.\15\
Returning banks would be subject to requirements similar to those for
paying banks under proposed Alternative 2.
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\15\ Under Alternative 2, depositary banks that do not currently
accept electronic returns would have a greater incentive to do so
because they would not otherwise be entitled to expeditious return
of unpaid checks and would therefore be at a greater risk of having
to make funds available to their customers before learning that the
deposited check was returned unpaid.
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Commenters were generally split as to whether the Board should
adopt proposed Alternative 1, proposed Alternative 2, or neither of the
proposed alternatives.\16\ Most commenters, however, expressed support
for certain aspects of each proposed alternative. The Board has adopted
a final rule that incorporates elements of both proposed Alternative 1
and Alternative 2.
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\16\ Commenters that preferred Alternative 1 emphasized that it
had the least financial, technology, and potential liability impact
on financial institutions. Commenters that opposed Alternative 1
stated that it did not provide sufficient incentives for depository
institutions to accept electronic returns and could result in slower
return of checks. Furthermore, these commenters noted that
Alternative 1 placed an increased risk on depositary banks that may
receive electronic returns outside of the two-day window. Commenters
that preferred Alternative 2 reasoned that it provided greater
incentives than Alternative 1 for depository institutions to accept
electronic returns. Commenters against Alternative 2 stated that it
was difficult for a paying bank to know whether it had agreements in
place that would allow it to send returned checks electronically
indirectly to a particular depositary bank. The commenters that
preferred neither alternative stated that a significant number of
smaller financial institutions still relied on paper returns and
would incur costs to shift to electronic returns and generally have
fewer resources to manage the increased risk and exposure from
potentially slower paper returns.
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In the final rule, the Board has required all returned checks, both
paper and electronic, to satisfy a modified version of the ``two-day
test,'' meaning that they must be returned in an expeditious manner,
such that the check would normally be received by the depositary bank
not later than 2 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. The Board also has added a new condition for
expeditious-return liability, specifically that a paying bank and
returning bank may be liable to a depositary bank for failing to return
a check in an expeditious manner only if the depositary bank has
arrangements in place such that the paying bank or returning bank could
return a returned check electronically, directly or indirectly, by
commercially reasonable
[[Page 27554]]
means. The depositary bank has the burden of proof for demonstrating
that its arrangements for accepting returned checks electronically are
commercially reasonable. The Board believes that this approach will
provide incentives to depositary banks to receive electronic returns so
that they preserve their ability to make a claim that a check was not
returned expeditiously.\17\ The final rule also provides that if a
paying bank determines not to pay a check in the amount of $5,000 or
more (rather than the current $2,500 threshold), it must provide a
notice of nonpayment such that the notice would normally be received by
the depositary bank by 2 p.m. (rather than the current deadline of 4
p.m.) on the second business day following the banking day on which the
check was presented to the paying bank.
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\17\ The Board believes that paying banks will have an incentive
to send returns electronically because electronic returns are more
likely meet the requirements of the ``two-day test'' than paper
returns. The Board also believes that there are only minimal risks
of paying banks attempting to evade the expeditious return
requirements (and avoid liability) by refusing to enter into
agreements to send electronic returns. Most paying banks already
have in place agreements to return checks electronically and use
entirely electronic return processes. Smaller paying banks that may
not have in place electronic return arrangements typically use the
Federal Reserve Banks' check return service, which enables those
banks to return checks indirectly to the depositary bank
electronically, thereby subjecting those paying banks or the Federal
Reserve Banks to liability for failure to return a check
expeditiously under the final rule.
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B. Same-Day Settlement
Section 229.36(f) of Regulation CC currently 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 by 8 a.m. (local
time of the paying bank) on a business day.\18\ A paying bank may not
charge presentment fees for checks--for example, by settling for less
than the full amount of the checks--that are presented in accordance
with same-day settlement requirements.
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\18\ The Board established the same-day settlement rule, which
became effective in 1994, to reduce the competitive disparity
between the Federal Reserve Banks and other presenting banks and to
balance the bargaining power between presenting banks and paying
banks more equitably.
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In its proposal, the Board proposed to retain, without substantive
change, Regulation CC's current same-day settlement rule because the
Board believed that the terms of electronic presentment should be
determined by agreement between banks. Most commenters agreed with
Board's proposal, stating that the terms of electronic presentment are
already effectively governed by agreements between banks such that an
electronic same-day-settlement rule would be unnecessary or even
burdensome. Some commenters also believed that the Board should
eliminate the paper same-day-settlement rule entirely, as the original
rationale for its implementation is no longer relevant given today's
almost all-electronic check-presentment environment. Although the Board
agrees that the terms of electronic presentment should be appropriately
determined by agreement between banks, the Board believes that the
existence of the paper same-day-settlement rule can be a valuable
incentive for banks to negotiate electronic same-day settlement
agreements. Consistent with the majority of comments received, the
Board in its final rule retains the current same-day settlement rule,
with only minor technical changes.\19\
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\19\ The Board proposed minor technical changes to reflect the
existence of a single check processing region nationwide.
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C. Framework for Electronic Check Collection and Return
Regulation CC, subpart C currently applies only to paper checks.
Thus, the provisions of subpart C related to acceptance of returned
checks, presentment, and warranties do not apply to electronic images
of checks (``electronic images'') or to electronic information derived
from checks (``electronic information'').\20\ Rather, the collection
and return of electronic images and electronic information are governed
by agreements between the banks. These agreements may be in the form of
the Federal Reserve Banks' operating circular or a clearinghouse
agreement.\21\ The agreements often include, among other terms,
warranties for electronic checks similar to those made for substitute
checks under the Check 21 Act (``Check-21-like warranties'').\22\
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\20\ Current Sec. 229.2(k) generally follows the definition of
``check'' from the EFA Act and does not include an electronic images
or electronic information within the definition of ``check.''
\21\ With respect to checks and returned checks handled by the
Federal Reserve Banks, Regulation J (12 CFR part 210) provides
protections to banks receiving electronic items from a prior bank.
Clearinghouse rules also typically include such protection.
\22\ That is, warranties that a bank will not be asked to pay an
item twice and that the electronic image and electronic information
are sufficient to create a substitute check.
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The Board proposed amendments to subpart C that would create a
regulatory framework for the collection and return of electronic images
and electronic information. The Board proposed to define the terms
``electronic check'' and ``electronic returned check'' as an electronic
image or electronic information related to a check or returned check.
The Board also proposed to apply the provisions of subpart C to banks
that send and receive these items by agreement as if they were checks,
unless otherwise agreed by the sending and receiving banks.\23\ The
majority of commenters agreed with the Board's proposed definition of
electronic check and electronic returned check and its proposal to
apply the provisions of subpart C to these items as if they were
checks.\24\ Therefore, the Board has adopted the proposal as its final
rule with clarifying changes so that ``electronic check'' and
``electronic returned check'' are now defined as an electronic image
and electronic information derived from a check or returned check, for
the reasons discussed in detail below in the section-by-section
analysis.
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\23\ Pursuant to existing Sec. 229.37 of subpart C, the parties
could, by agreement, vary the effect of the provisions of subpart C
as they apply to electronic checks and electronic returned checks.
\24\ As defined in the final rule, whether the sending bank and
the receiving bank have an agreement to send the item electronically
determines if an item qualified as an ``electronic check'' or an
``electronic returned check.''
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The Board also proposed to apply existing paper-check warranties
and the Check-21-like warranties to electronic checks and electronic
returned checks.\25\ The existing paper-check warranties include the
returned-check warranties; the notice of nonpayment warranties; the
settlement amount, encoding, and offset warranties; and the transfer
and presentment warranties related to a remotely-created check. The
Check-21-like warranties include warranties that a bank will not be
asked to pay an item twice and that the electronic image and electronic
information are sufficient to create a substitute check. These
warranties ensure that a bank that receives a check for collection,
presentment, or return receives the same warranties regardless of
whether the check is in paper or electronic form. Commenters generally
agreed with the proposal, and the Board believes that extending the
warranties is important to create adequate protections. In the final
rule, the Board has applied the existing paper-check warranties and the
Check-21-like warranties to electronic checks and electronic returned
checks as proposed.
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\25\ Specifically, the Board proposed to apply the paper-check
warranties in current Sec. 229.34 to electronic checks and
electronic returned checks.
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The Board proposed to add new indemnities for electronically-
created items, which are check-like items created in electronic form
that never existed in paper form. Electronically-
[[Page 27555]]
created items can be difficult to distinguish from electronic images of
paper checks. The Board proposed that a bank transferring an image or
information that is not derived from a paper check (i.e., an
electronically-created item) indemnifies each transferee bank, any
subsequent collecting bank, the paying bank, and any subsequent
returning bank against any loss, claim, or damage that results from the
fact that the image or information was not derived from a paper check.
The Board also proposed limiting the amount of the indemnity so that it
would not exceed the amount of the loss of the indemnified bank, up to
the amount of settlement or other consideration received by the
indemnifying bank and interest and expenses of the indemnified bank
(including costs and reasonable attorney's fees and other expenses of
representation). Commenters generally agreed that the Board in its
final rule should provide some sort of protection for the handling of
electronically-created items, but there was no consensus about whether
the Board's proposed indemnities or an alternative, such as warranties,
was most appropriate. Some of these commenters supported applying
protections to receivers of electronically-created items similar to
those for checks or substitute checks.
The Board has adopted in the final rule the indemnities for
electronically-created items as proposed, and in response to comments
received, new indemnities for losses caused by the fact that (1) the
electronically-created item was not authorized by the account holder
and (2) a subsequent bank pays an item that has already been paid.\26\
The Board believes that these indemnities will provide basic
protections for banks handling electronically-created items that are
unauthorized or presented more than once. In the final rule, the Board
also defines ``electronically-created item'' to mean an electronic
image that has all the attributes of an electronic check or electronic
returned check but was created electronically and not from a paper
check.
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\26\ Each bank that transfers or presents an electronically-
created item and receives a settlement or other consideration
indemnifies each transferee bank, any subsequent collecting bank,
the paying bank, and any subsequent returning bank.
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Finally, the Board proposed to add a new indemnity for remote
deposit capture that would indemnify a depositary bank that received a
deposit of an original paper check that was returned unpaid because the
check was previously deposited using a remote deposit capture service
and paid. Commenters expressed concern that as proposed, the indemnity
would deter financial institutions from offering remote deposit capture
service, thereby inhibiting its growth. Many of these commenters
believed that the indemnity should not apply to checks bearing a
restrictive indorsement.
The Board believes that the indemnity places appropriate incentives
on the parties best positioned to prevent multiple deposits of the same
item and has adopted the proposed indemnity. Based on comments
received, the Board has added an exception to the indemnity that would
prevent an indemnified bank from making an indemnity claim if it
accepted an original check containing a restrictive indorsement that is
inconsistent with the means of deposit, such as ``for mobile deposit
only.''
D. Effective Date
The Board proposed a six month effective date following publication
of the final rule and requested comment on whether it was sufficient.
The Board received 17 comments regarding the proposed effective date.
Four commenters agreed that a six month effective date was sufficient.
Twelve commenters requested a 12 month effective date and stated that a
longer effective date will allow financial institutions to make the
necessary technology, policy, and consumer disclosure changes. One
commenter requested an 18-24 month effective date. The Board has
adopted an effective date of July 1, 2018. The Board believes that this
time period will allow financial institutions to adjust their systems
to comply with the final rule.
E. Additional Aspects of the Proposal
The Board also proposed several other minor amendments to subparts
A, C, and D, and the accompanying commentary. The Board's proposed
revisions, the comments the Board received, and the Board's final rule
are described in additional detail in the section-by-section analysis.
F. Consultation With Other Agencies
As directed by section 609(e) of the EFA Act, the Board consulted
with the Comptroller of the Currency, the Board of Directors of the
Federal Deposit Insurance Corporation, and the National Credit Union
Administration Board during the rulemaking process.\27\
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\27\ 12 U.S.C. 4008(e).
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III. Legal Authority
In issuing the final rule, the Board is exercising its authority
under sections 609(b) and (c) and 611(f) of the EFA Act and section 15
of the Check 21 Act to amend subparts C and D, and, in connection
therewith, subpart A, of Regulation CC to provide incentives for
depositary banks to receive, and paying banks to send, returned checks
electronically and to allocate liability among depository institutions
related to check collection and return.
IV. Section-by-Section Analysis
The paragraph citations in this section are to the paragraphs of
the final rule unless otherwise stated.\28\
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\28\ Where the Board has renumbered a section, the Board has
made corresponding corrections to cross-references in other sections
of the final rule-text.
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A. General
1. Sec. 229.1(b)--Authority and Purpose; Organization
Regulation CC currently describes the scope and purpose of subparts
A through D in Sec. 229.1(b). The Board proposed to add similar
descriptions for each of Regulation CC's appendices. The Board did not
receive comments on proposed Sec. 229.1(b). The Board has adopted
Sec. 229.1(b) as proposed, with additional technical amendments to
reflect the adoption of Sec. 229.30(a), discussed below.
B. Definitions
1. Section 229.2(z)--Paying Bank
The current commentary to Sec. 229.2(z) explains that for purposes
of subparts C and D, 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.
The Board proposed to eliminate outdated cross-references in paragraph
2 of the commentary and make other editorial changes. The Board did not
receive any comments on the proposed commentary to Sec. 229.2(z) and
has adopted it as proposed with minor technical changes for clarity.
2. Section 229.2(dd)--Routing Number
Regulation CC currently defines the term ``routing number'' as the
number printed on the face of the check or the number in the bank's
indorsement. The Board proposed revising the definition of ``routing
number'' for purposes of subpart C and subpart D to include a bank-
identification number contained in an electronic image or electronic
information. The Board also proposed revising the commentary to the
[[Page 27556]]
definition of ``routing number'' to address electronic checks and to
clarify that, in the case of payable-through checks, the routing number
appearing on the check is that of the payable-through bank.
Two commenters requested that the Board distinguish between active
routing numbers and those that are retired or never issued. One
commenter requested that the Board provide clear authority to
collecting banks to return or reject routing numbers that are listed as
retired.
In the final rule, the Board has defined ``routing number'' as
proposed, except that the terms ``electronic check and electronic
returned check'' are used instead of ``electronic image of or
electronic information derived from a check'' because the former terms
are now defined.\29\ With respect to the comments on retired routing
numbers, Regulation CC does not affect a collecting bank's ability to
accept or reject a check for collection. For example, in 2015 the
Federal Reserve Banks revised Operating Circular 3, governing their
check service, to provide that the Federal Reserve Banks will not
handle checks drawn on routing numbers that have been retired by the
American Bankers Association's Registrar of Routing Numbers.
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\29\ Although the term ``routing number'' is used in subpart B,
amendments to subpart B must be joint with the CFPB. Accordingly,
the amendments apply only for purposes of subparts C and D.
---------------------------------------------------------------------------
3. Section 229.2(uu)--Indemnifying Bank
In connection with the new indemnity the Board proposed for
``electronic image or electronic information not related to a paper
check'' and the newly defined term ``electronically-created item,'' the
Board has revised Sec. 229.2(uu) to clarify that the term
``indemnifying bank'' means a bank that provides an indemnity under
Sec. 229.53 with respect to a substitute check or a bank that provides
an indemnity under Sec. 229.34 with respect to remote deposit capture
or an electronically-created item.
4. Section 229.2(vv)--MICR Line
Regulation CC currently defines ``MICR line'' as the numbers
printed near the bottom of a check in magnetic ink, in accordance with
American National Standard (ANS) Specifications for Placement and
Location of MICR Printing, X9.13 for an original check and ANS
Specifications for an Image Replacement Document-IRD, X9.100-140 for a
substitute check, unless the Board by rule or order determines that
different standards apply.
The Board proposed to amend the definition of ``MICR line'' for
purposes of subpart C and subpart D so that it also includes the
numbers contained in an electronic image of and electronic information
related to the check in accordance with ANS Specifications for
Electronic Exchange of Check Image Data-Domestic, X9.100-187, unless
the Board determines by rule or order that different standards apply.
The Board proposed to revise the commentary to the definition of ``MICR
line'' to state that the banks exchanging the electronic check may
determine the applicable standard for electronic checks and electronic
returned checks. The Board requested comment on whether the ``MICR
line'' definition should specify an industry standard at all, given
that the exchange of electronic items between banks is by agreement.
One Federal Reserve Bank commenter stated that electronic items and
electronic returned items do not have a MICR line per se, but rather
the MICR-line information is contained in the data records that
accompany the image. The commenter suggested that the Board expand the
proposed definition to include data contained in those records, as
specified in the industry standard. The commenter also stated that the
Board should tie the definition to generally accepted industry
standards rather than using the currently prevailing standards so that
the Board would not have to use a notice and comment process to move
from one iteration of the standard to the successor version. One
commenter also proposed creating an identifier for a remotely captured
check in the MICR line.
In the final rule's definition of ``MICR line,'' the Board has
incorporated the data records that accompany the image, as specified
for MICR line data in the industry standard. The final rule, like the
proposed rule, ties the ``MICR line'' definition to the specified
standard. The Board does not believe that tying the definition to
generally accepted industry standards provides sufficient clarity for
the parties involved and believes that tying the definition to the
specified standard is more appropriate to provide banks with certainty.
Banks can vary this rule by agreement to accept a future standard or an
alternate specification. If industry standards are revised in the
future, the Board will consider updating the references to these
standards.
5. Section 229.2(bbb)--Copy and Sufficient Copy
The terms ``copy'' and ``sufficient copy'' were added to Regulation
CC in 2004 in connection with the adoption of the final rule
implementing the Check 21 Act.\30\ The term ``copy'' is used throughout
subpart C (for example, in connection with the notice in lieu of return
provisions) and the definition is limited to paper reproductions of
checks.
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\30\ 69 FR 47290, 47309 (Aug. 4, 2004).
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The Board proposed to expand the current definition of ``copy'' to
include an electronic reproduction of a check that a recipient has
agreed to receive from the sender instead of receiving a paper
reproduction.
Regulation CC currently defines a ``sufficient copy'' as 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 (such as an indemnity claim or an expedited recredit claim)
is valid.
The Board did not propose to revise the current definitions of
``copy'' or ``sufficient copy.'' The Board, however, proposed to
clarify the current commentary to the definition to clarify that a
``sufficient copy,'' which is used to resolve claims related to the
receipt of a substitute check, must be a copy of the original check
(and not of the substitute check). The Board received one comment
supporting the proposal and no opposing comments. The Board has adopted
proposed Sec. 229.2(bbb) and the related commentary as proposed.
6. Section 229.2(fff)--Remotely Created Check
Regulation CC currently defines a ``remotely created check'' as 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. Regulation CC places liability for
unauthorized remotely created checks on the depositary bank.\31\
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\31\ See Sec. 229.34(b) of the final rule, formerly Sec.
229.34(d).
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The Board requested comment on whether it should narrow the scope
of the definition of ``remotely created check'' to include only checks
created by the payee (or payee's agent), as opposed to the current
definition's scope of checks ``not created by the paying bank.'' \32\
The Board also requested comment on (1) the extent to which depositary
banks are receiving warranty claims related to checks that were not
created by their customers or agents, (2) the extent to which paying
[[Page 27557]]
banks may be inadvertently making warranty claims for items that had
been created by the paying bank, and thus were not covered by the
definition of ``remotely created check,'' and (3) what the substance of
the warranties should be were the Board to narrow the definition of
``remotely created check.'' In addition, the Board requested comment on
whether the Board should revise the definition of ``remotely created
check'' to include items bearing ``signatures'' that were obtained
electronically from the drawer and resemble the drawer's handwritten
signature.
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\32\ Such a change would exclude, for example, checks created by
the account-holder independently or through a bill-paying service
(other than a service offered by the paying bank).
---------------------------------------------------------------------------
Six commenters, including a comment letter submitted by a group of
institutions and trade associations (``group letter''), addressed
remotely created checks. Two commenters stated that the Board should
not narrow the definition of remotely created check. One of these
commenters stated that there is no discernable difference between
remotely created checks created by payees and paying banks and that
narrowing the definition of a remotely created check would lead to
confusion in the handling of these items. Four commenters, including
the group letter, suggested that the Board narrow the definition to
include only checks created by the payee or payee's agent. These
commenters stated that because the warranty shifts loss from the paying
bank to the depositary bank, the warranty should apply only in
situations where the payee or payee's agent created the check. The
commenters stated that in situations where the account-holder instructs
its own bill-paying agent to create the check, the depositary bank
should not be held liable if the account-holder later claims such check
was not authorized.
The Board did not receive any comments on the extent to which
depositary banks are receiving remotely created check warranty claims
related to checks that were not created by the depositary banks'
customers or their agents. The Board did not receive any comments on
whether it should revise the definition of remotely created check to
include items bearing ``signatures'' that were obtained electronically
from the drawer and resemble the drawer's handwritten signature.
In the final rule, the Board has not modified the definition of
remotely created checks. Under the current definition, in order to
assert a warranty claim, the parties to a check do not have to
distinguish between checks that are created by the payee or its agent
from other checks, such as checks created by a customer's bill-payment
service. In the absence of any evidence that the warranty has been
broadly asserted on checks created by account-holders, the Board
continues to believe that this definition is operationally efficient
for paying banks because they more easily can determine whether the
warranty applies to a particular check.
7. Section 229.2(ggg)--Electronic Check and Electronic Returned Check
The current definition of ``check'' in Regulation CC does not
include electronic images and electronic information. The Board
proposed the addition of Sec. 229.2(ggg) setting forth two new defined
terms, ``electronic check'' and ``electronic returned check.'' The
proposal defined ``electronic check'' and ``electronic returned check''
as (1) an electronic image of a check, or returned check, or electronic
information related to a check, or returned check, respectively, that a
bank or a nonbank depositor sends to a receiving bank pursuant to an
agreement with the receiving bank, and (2) that conforms with ANS
Specifications for Electronic Exchange of Check Image Data--Domestic,
X9.100--187, unless the Board determines that a different standard
applies or the parties otherwise agree. The proposal permitted the
sending and receiving banks to agree that an ``electronic check'' or an
``electronic returned check'' need not contain both an electronic image
and electronic information. Under the proposal, an item could be an
``electronic check'' or ``electronic returned check,'' even if it is
not sufficient to create a substitute check, but the sending bank would
warrant that such items are sufficient to create substitute checks,
unless otherwise agreed.\33\
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\33\ See Sec. 229.34(a).
---------------------------------------------------------------------------
The proposed commentary to Sec. 229.2(ggg) clarified that the
terms of the agreements for sending and receiving electronic checks and
returned checks may vary. For example, banks may agree that both an
electronic image and electronic information must be provided for
presentment, or they may agree that the electronic information alone is
sufficient for presentment. Additionally, the agreements may differ as
to what constitutes receipt of an electronic check or electronic
returned check.
One commenter suggested that the Board define an ``electronic
check'' and an ``electronic returned check'' so that the electronic
record would be effectively equivalent to a check only if the
electronic record includes an image and data from the paper check,
rather than the proposed definition specifying image or data. The
commenter emphasized the importance of both image and data, especially
in complex use cases, such as instances in which the check names
multiple payees that each must indorse the check before it can be
properly negotiated.
To address the concerns raised by this commenter, the Board in the
final rule has defined ``electronic check'' and ``electronic returned
check'' to mean ``an electronic image of, and electronic information
derived from, a paper check or paper returned check.'' The Board has
also revised its proposed definition to refer to electronic information
``derived from'' (rather than ``related to'') a paper check or paper
returned check. This revision addresses another commenter's concern
that electronic check and electronic returned check (which are derived
from paper checks) may be read to apply to electronically-created items
(which are not derived from paper checks). The Board has also revised
its proposed definition to refer to electronic information derived from
a paper check or paper returned check, as the term ``check'' in subpart
C includes electronic checks and electronic returned checks unless
otherwise specified, pursuant to section 229.30.
8. Section 229.2(hhh)--Electronically-Created Item
The Board proposed a new indemnity for an ``electronic image or
electronic information not related to a paper check'' in proposed Sec.
229.34(b). One commenter suggested that the Board consider formally
defining an electronically-created item. In the final rule, the Board
has adopted in Sec. 229.2(hhh) a newly defined term, ``electronically-
created item,'' to refer to the items covered by the new indemnity. The
Board has also adopted accompanying commentary. The Board has defined
this term to mean ``an electronic image that has all the attributes of
an electronic check or electronic returned check but was created
electronically and not derived from a paper check.''
C. Subpart C--Collection of Checks
The Board proposed two alternative approaches to the requirements
that apply to the return of checks, which are outlined above. Also as
explained above, the Board has adopted a final rule that incorporates
elements of both proposed Alternative 1 and Alternative 2. Under the
final rule, all returned checks, both paper and electronic, are subject
to a modified version of the ``two-day test,'' meaning that they must
be returned in an expeditious manner, such that the check would
normally be
[[Page 27558]]
received by the depositary bank not later than 2 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. The Board also
added a new section that prevents a depositary bank from asserting a
claim against a paying bank or returning bank for failure to return a
check in an expeditious manner unless the depositary bank has
arrangements in place such that the paying bank or returning bank could
return the check to the depositary bank electronically, directly or
indirectly, through commercially reasonable means. The depositary bank
has the burden of proof for demonstrating that its arrangements for
accepting returned checks electronically are commercially reasonable.
In addition, if a paying bank determines not to pay a check in the
amount of $5,000 or more, it must provide a notice of nonpayment such
that the notice would normally be received by the depositary bank not
later than 2 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.
1. Section 229.30--Electronic Checks and Electronic Information
a. Section 229.30(a)--Checks Under This Subpart
The Board proposed that electronic checks and electronic returned
checks be subject to the provisions of subpart C as if they were checks
or returned checks, unless the subpart provides otherwise. The Board
noted in proposed commentary to Sec. 229.30(a) that Sec. 229.37
permits banks to vary by agreement the effect of the provisions in
subpart C as they apply to electronic checks and electronic returned
checks.
The Board received 14 comments on proposed Sec. 229.30(a). Eight
commenters generally supported the Board's proposal to apply the terms
of subpart C to ``electronic checks'' and ``electronic returned
checks'' as if they were checks, unless otherwise agreed by the sending
and receiving banks. Five commenters expressed concerns that this could
result in increased risks to banks because electronic checks and
electronic returned checks are currently governed by agreements between
banks and that the Board should address and limit any increased risks.
One commenter suggested that the Board specify the provisions that the
sending banks and receiving banks may vary by agreement to avoid
confusion. The commenter also suggested that the Board set a ceiling on
a dollar amount of checks that could be electronically returned so that
all parties know the level of risk they would be assuming by accepting
electronic returns.
Given that electronic checks and electronic returned checks are
currently governed by agreements between banks, the Board believes that
the commentary and rule text as proposed provide sufficient clarity as
to the ability of banks to vary by agreement the effect of the
provisions in subpart C as they apply to electronic checks and
electronic returned checks to address and limit any perceived risks.
The Board has not set a ceiling on the dollar amount of checks that
could be electronically returned, as the Board believes that banks are
in the best position to determine their risk tolerance. The Board has
adopted Sec. 229.30(a) and provided clarification by replacing
``unless otherwise provided'' with ``except where `paper check' or
`paper returned check' is specified.'' The Board has also provided
additional examples of the application of Sec. 229.30(a) in the
commentary and clarified that where ``check'' or ``returned check'' is
used in subpart A it includes also ``electronic check'' or ``electronic
returned check'' for the purposes of subpart C, except where ``paper
check'' or ``paper returned check'' is specified.
b. Section 229.30(b)--Writings
In proposed Sec. 229.30(b), the Board would permit, under certain
circumstances, a bank required to provide information in writing or in
written form under subpart C to satisfy that requirement by providing
that information in electronic form. Specifically, the receiving bank
would have to agree to receive that information electronically from the
sending bank. In proposed commentary to Sec. 229.30(b), the Board
provided as an example that a bank could send a notice in lieu of
return electronically if the receiving bank agreed to receive the
notice electronically. The Board did not receive any comments on
proposed Sec. 229.30(b) and has adopted it as proposed with minor
technical edits.
2. Section 229.31--Paying Bank's Responsibility for Return of Checks
and Notices of Nonpayment
a. Section 229.31(a) and (b)--Return of Checks and Expeditious Return
of Checks
Current Sec. 229.30(a) provides that a paying bank must return a
check in an expeditious manner (as measured by either the two-day/four-
day test or the forward-collection test) and that a paying bank may
send a returned check to the depositary bank or to any other bank
agreeing to handle the returned check expeditiously. It also provides
that a paying bank may convert a check to a qualified returned check
(and sets forth format standards for qualified returned checks) and
that the expeditious return requirements do not affect a paying bank's
responsibility to return a check within the deadlines required by the
UCC, Regulation J, or current Sec. 229.30(c).
Current Sec. 229.30(b) provides that a paying bank unable to
identify the depositary bank may send the 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 current Sec.
229.31(a). The paying bank must advise the bank to which the check is
sent that the paying bank is unable to identify the depositary bank.
The expeditious return requirements of current Sec. 229.30(a) do not
apply to the paying bank's return of a check when the paying bank is
unable to identify the depositary bank.
The Board proposed two alternative approaches to revising these
provisions. With Alternative 1, the Board proposed elimination of the
expeditious return requirement imposed on a paying bank. Accordingly,
the Board proposed to remove the provisions setting forth the two-day/
four-day test and the forward-collection test, as well as to remove all
references to expeditious return from the regulation and the
commentary.
Alternative 2 would retain an expeditious return requirement
consistent with a two-day test, such that the check would normally be
received by the depositary bank not later than 2 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. Alternative 2
would move the cutoff hour for receipt of a returned check from 4 p.m.
to 2 p.m. (local time of the depositary bank), consistent with similar
changes elsewhere in the proposal. In addition, Alternative 2 would
modify the existing rule by providing that, where the second business
day following presentment is not a banking day for the depositary bank,
the paying bank satisfies the expeditious return requirement if it
sends the returned check in a manner such that the depositary bank
would normally receive the returned check on or before the depositary
bank's next banking day. (Proposed new language italicized.)
Both Alternatives 1 and 2 would have retained the existing
provisions permitting a paying bank that is
[[Page 27559]]
returning a check to send the returned check directly to the depositary
bank, to any other bank agreeing to handle the returned check, or to
any bank that handled the check for forward collection when the paying
bank is unable to identify the depositary bank. In Alternative 2,
however, a paying bank's choice of return path would be subject to the
requirement for expeditious return.
In addition, under both alternatives, the Board proposed to revise
the commentary to the provision on handling checks where the depositary
bank is not identifiable. The proposed new commentary would provide an
example related to a check presented electronically, stating that a
paying bank would be unable to identify the depositary bank if the
depositary bank's indorsement is neither in an addenda record nor
within the image of the check that was presented electronically.\34\ A
paying bank, however, would not be ``unable'' to identify the
depositary bank merely because the depositary bank's indorsement is
available within the image, and the paying bank must retrieve and
visually review the image, rather than attached as an addenda record.
Like the current commentary, the proposed commentary for both
alternatives would have required a paying bank returning a check to a
prior collecting bank because it is unable to identify the depositary
bank to advise the prior collecting bank of this fact. The Board noted
in the proposed commentary that, in the case of an electronic returned
check, the advice requirement may have been satisfied in such a manner
as the parties agree.
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\34\ The Board expects that these cases will be unusual as
depositary banks generally apply their indorsements electronically.
---------------------------------------------------------------------------
Under both alternatives, the Board would have preserved the ability
of a paying bank to convert a check into a qualified returned check and
the format standards for doing so as well as the statement that the
section does not affect a paying bank's responsibility to return a
check within the deadlines required by the UCC, Regulation J, or
proposed Sec. 229.31(g), relating to the midnight deadline extension.
Seven commenters preferred Alternative 1 (elimination of the
expeditious return requirement), 10 commenters, including the group
letter, preferred Alternative 2 (maintaining the two-day test for
expeditious-return), and eight commenters preferred neither. Commenters
that supported Alternative 1 believed that the option had the least
financial and operational effect on depository institutions. Commenters
that supported Alternative 2 expressed doubt as to whether Alternative
1, which would eliminate the expeditious return requirement, would
provide sufficient incentives for depository institutions to accept
electronic returns. The commenters that preferred neither alternative
stated that a significant number of smaller depository institutions
still relied on paper returns. Some commenters suggested that the Board
retain the forward-collection test in addition to the two-day
expeditious return requirement, as it would facilitate paying bank
compliance when there is uncertainty regarding how the paying bank's
returning banks can handle a particular return item.
After considering the comments, the Board has adopted proposed
Alternative 2's two-day expeditious return rule requirement for Sec.
229.31(a) and (b).\35\ As described in more detail in Section II above,
the Board believes that maintaining the two-day test for expeditious-
return, along with the other return requirements, offers the
appropriate incentives for banks to accept electronic returns.
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\35\ As discussed in greater detail below, under Sec.
229.33(a)(1) of the final rule, a paying bank or returning bank may
be liable to a depositary bank under Sec. 229.38 for failing to
return a check in an expeditious manner only if the depositary bank
has arrangements in place such that the paying bank or returning
bank could return a returned check to the depositary bank
electronically, directly or indirectly, by commercially reasonable
means.
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The Board did not receive comments on the other aspects of the
return process in Alternative 2 for proposed Sec. 229.31(a) (dealing
with routing of returned checks and creation of qualified returned
checks) or the corresponding commentary. Consistent with maintaining an
expeditious return requirement, the Board has adopted those provisions
with minor technical changes for clarity. The Board has also adopted
the specific requirements for expeditious return by a paying bank as
set forth in Alternative 2 for proposed Sec. 229.31(b),with minor
technical changes for clarity and revisions to align the commentary
with the Board's final amendments to Sec. 229.33(a).
b. Section 229.31(c)--Notice of Nonpayment
Notice of nonpayment requirement (Sec. 229.31(c)(1)). Current
section 229.33(a) of Regulation CC requires that, 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 of the depositary bank) on the
second business day following the banking day on which the check was
presented to the paying bank. The notice may be provided by any
reasonable means, including the returned check, a writing (including a
copy of the check), telephone, Fedwire, telex, or other form of
telegraph. Current commentary to Sec. 229.33(a) explains that the
return of the check itself may serve as the notice, so long as the
returned check would be received by the depositary bank within the time
limits for the notice. The commentary further explains that in
determining whether the returned check will satisfy the notice
requirement, the paying bank may rely on the availability schedules of
returning banks as the time that the returned check is expected to be
delivered to the depositary bank, unless the paying bank has reason to
know the availability schedules are inaccurate.
The Board proposed two alternative approaches to revise this
provision. Proposed Alternative 1 would have retained a notice of
nonpayment requirement, but only if the paying bank sent the returned
check in paper form. The notice of nonpayment requirement, however,
would apply regardless of the dollar amount of the check being
returned. Under Alternative 1, the Board proposed to move the deadline
by which a notice of nonpayment must be received by the depositary bank
from 4 p.m. to 2 p.m. (local time of the depositary bank) on the second
business day following the banking day of presentment. The proposed 2
p.m. deadline would be consistent with banks' generally applicable
cutoff hour for receipt of checks under section 4-108 of the UCC, after
which a bank may consider an item to be received on its next banking
day. Alternative 1 would eliminate the statement in the commentary to
current Sec. 229.33(a) that the paying bank may rely on the
availability schedules of returning banks as the time that the returned
check is expected to be delivered to the depositary bank. That
statement was inconsistent with the regulatory text providing for a
fixed deadline for the depositary bank's receipt of notice of
nonpayment. Furthermore, the Board proposed in Alternative 1 to delete
references to Fedwire, telex, or other form of telegraph, although the
use of these means of providing notice would nonetheless remain
acceptable. Proposed Alternative 2 would have eliminated the notice of
nonpayment requirement.
Most commenters supported Alternative 1, which would have retained
the notice of nonpayment, whether or not they supported retention of
the expeditious return requirement.
[[Page 27560]]
Numerous commenters suggested increasing the threshold for the notice
of nonpayment, such as to $5,000 or $10,000. Several commenters,
including the group letter, suggested that there may still be a need to
maintain a requirement for high-dollar item notification of non-payment
for all items--both paper and electronic--to protect the depositary
banks from a loss in high-dollar item situations.
One commenter, the group letter, did not support the requirement
that the depositary bank receive the notice of nonpayment by 2 p.m. The
group letter stated that the paying bank often relies on a third-party
service provider to assist with the delivery of notices of nonpayment,
and should be able to rely on the third party's availability schedule
that establishes when the notice of nonpayment will be received by the
depositary bank.
The Board has adopted in Sec. 229.31(c)(1) and its accompanying
commentary Alternative 1 of the proposal and the proposed accompanying
commentary with modifications. The Board agrees with commenters that
notice of nonpayment requirements will reduce risks to depositary banks
for all returned items, and therefore the notice requirement adopted by
the Board applies regardless of whether the paying bank sends a paper
or electronic return. The Board believes that paying banks will have
incentives to send returns electronically in order to avoid the
likelihood that they would fail to meet their expeditious return
obligations using paper returns, as described below.
The Board has also increased the threshold for notice from $2,500
to $5,000. The Board has also revised the notice of nonpayment
requirement to require a paying bank to provide notice to the
depositary bank such that the notice ``would normally be received'' by
2 p.m. The commentary also clarifies that a paying bank may rely on the
availability schedule of a third party that provides the notices of
nonpayment on its behalf. This approach parallels that of the
expeditious return requirement.
Content of notices (Sec. 229.31(c)(2)). Section 229.33(b)
currently requires a paying bank to include the following information
in a notice of nonpayment: (1) Name and routing number of the paying
bank; (2) name of the payee(s); (3) amount of the check being returned;
(4) date of the indorsement of the depositary bank; (5) account number
of the customer(s) of the depositary bank; (6) branch name or number of
the depositary bank from its indorsement; (7) trace number associated
with the indorsement of the depositary bank; and (8) reason for
nonpayment.
The Board offered two alternative approaches to revise this
provision. Proposed Alternative 1 would have required the paying bank
to include the specified information in a notice of nonpayment only to
the extent it is available to the paying bank. In addition, the Board
proposed in Alternative 1 that the notice include, to the extent
available to the paying bank, the information contained in the check's
MICR line when the check is received by the paying bank. The check's
MICR line would typically include the account number of the paying
bank's customer, the check's serial number, and, if the check is a
corporate-sized check, the auxiliary-on-us field. In Alternative 1, the
Board also proposed that the notices include essentially all the other
information required in current Sec. 229.33(b), to the extent
available to the paying bank.\36\ In addition, Alternative 1 proposed
retention of the statement in current Sec. 229.33(b) that, if the
paying bank is not sure of the accuracy of an item of information, it
shall include the required information to the extent possible and
identify any item of information for which the bank is not sure of the
accuracy.
---------------------------------------------------------------------------
\36\ The Board proposed deleting the requirement to include the
paying bank's routing number because the paying bank's routing
number would already be set forth in the MICR line of the check.
---------------------------------------------------------------------------
Proposed Alternative 2 would have eliminated the requirement of the
notice of nonpayment.
The Board received one comment, the group letter, on the content of
the notice of nonpayment. The group letter supported inclusion of MICR
line information as a data element in the notice. However, the group
letter recommended elimination of the requirement to include the
account number of the depositing customer and the branch name or number
of the depositary bank from its indorsement. The group letter stated
that a depositary bank would rely solely on its own check processing or
deposit account system for this information. The group letter also
suggested elimination of the requirement to include the name of the
paying bank because the depositary bank should rely on the identity of
the paying bank that is associated with the MICR line routing number
information. In addition, the group letter recommended elimination of
the requirement that the paying bank include and identify in the notice
those data elements about which the paying bank is uncertain as to
their accuracy. The group letter noted that this type of statement is
infrequently used and that paying banks typically do not have a means
of knowing which information is uncertain as to accuracy. Furthermore,
the letter states that there is no standardized code or symbol that is
agreed upon within the check industry for a bank to indicate
uncertainty.
The Board agrees that including the account number of the
depositing customer and the branch name or number of the depositary
bank from its indorsement is of little use to the depositary bank
because it will rely on its own systems to determine that information.
The Board also agrees that the name of the paying bank is not necessary
because banks will rely on the identity of the paying bank that is
associated with the MICR line routing number information.\37\ The Board
recognizes that there is no standardized code or symbol agreed upon
within the check industry, but also believes that there are instances
in which an indicator of uncertainty is useful, such as for a
handwritten check with a payee name that is difficult to decipher.
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\37\ The information requirements in the final rule for a notice
of nonpayment are consistent with the information requirements for
an electronic returned check, which often serves as the notice.
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The Board has adopted as its final rule in Sec. 229.31(c)(2)(i)
Alternative 1 of the proposal, but has eliminated the content
requirements of the account number of the depositing customer, the
branch name or number of the depositary bank from its indorsement, and
the name of the paying bank. The Board has adopted as its final rule in
Sec. 229.31(c)(2)(ii) the provision regarding the uncertainty
indicator as proposed with clarifications in the commentary that banks
may indicate uncertainty, such as with a question mark, in accordance
with general industry practices or as otherwise agreed to by the
parties.
c. Section 229.31(d)--Exceptions to the Expeditious Return of Checks
and Notice of Nonpayment
Depositary banks that are not subject to subpart B (Sec.
229.31(d)(1)). Current Sec. Sec. 229.30(e) and 229.33(e) state that
the expeditious return requirements and the notice of nonpayment
requirements, respectively, do not apply with respect to checks
deposited in a depositary bank that does not maintain accounts (as
defined in Regulation CC), because that depositary bank is not subject
to the funds availability requirements of subpart B. The Board proposed
to retain the substance of these exceptions as relevant to Alternative
1 (exceptions to
[[Page 27561]]
notice of nonpayment requirement) and Alternative 2 (exceptions to
expeditious return requirement) when the check is being returned to a
depositary bank that is not subject to subpart B (either because the
depositary bank does not maintain ``accounts'' or because the
depositary bank is not a ``depository institution'' under the EFA Act).
The Board did not receive any comments on the proposed alternatives and
has adopted them as proposed at Sec. 229.31(d)(1).
Unidentifiable depositary bank (Sec. 229.31(d)(2)). Current Sec.
229.30(b) of Regulation CC provides that the expeditious return
requirement of current Sec. 229.30(a) does not apply to the paying
bank's return of a check if the depositary bank is unidentifiable.
However, current Sec. 229.33 of Regulation CC does not exempt a paying
bank from the notice of nonpayment requirement when the depositary bank
is unidentifiable.
The Board proposed that neither the expeditious return nor notice
of nonpayment requirement would apply if the paying bank cannot
identify the depositary bank with respect to the returned check. One
commenter, the group letter, supported these revisions. The Board has
adopted these exemptions as proposed at Sec. 229.31(d)(2) with minor
technical changes for clarity.
Other proposed exception to expeditious return requirement. Under
Alternative 2, the Board proposed that a paying bank would not be
subject to the expeditious return requirement if it does not have an
agreement to send electronic returned checks to the depositary bank or
to a returning bank that is subject to the expeditious return
requirement for that check. Thus, under Alternative 2, a paying bank
would not be subject to the expeditious return requirement when it or
the depositary bank did not agree to accept returned checks
electronically.
Under proposed Alternative 2, a paying bank could avoid the
expeditious return requirement by choosing to send returned checks only
in paper form. In its discussion of Alternative 2, the Board suggested
that it would be unlikely that a paying bank would make such a choice
in order to avoid the expeditious return requirement, given that paying
banks would have a cost incentive to return checks electronically
whenever possible. In addition, a paying bank would be subject to the
expeditious return requirement under Alternative 2 if it had the
necessary agreements to send electronic returned checks, but
nevertheless chose to send paper returned checks. The Board requested
comment on whether it should impose a limit--longer than two business
days--on the timeframe within which a paper returned check must be
received by the depositary bank.
Commenters stated that it would be difficult for a paying bank to
know whether or not it had an electronic return arrangement with the
depositary bank through its returning bank as set forth in Alternative
2, resulting in uncertainty as to whether or not the paying bank would
be subject to the expeditious return requirement. Additionally,
commenters were concerned that some banks would decide not to have an
agreement with a returning bank or depositary bank to accept electronic
returns so that they would not be subject to the expeditious return
requirement.
The Board recognizes that although Alternative 2 provided an
incentive to the depositary bank to accept electronic returns, it did
not provide strong incentives to the paying bank to send electronic
returns. The Board also agrees that determining in advance of returning
a check whether the expeditious return exception applied under
Alternative 2 could be difficult in some cases.
Therefore, as discussed above, the Board has not adopted
Alternative 2 in its final rule. Rather, all paying banks and returning
banks are subject to the expeditious return rule, regardless of whether
they return checks electronically or via paper. The final rule,
discussed further below, Sec. 229.33(a) limits the expeditious return
liability in certain cases. Specifically, a paying or returning bank
may be liable to a depositary bank for failing to return a check in an
expeditious manner only if the depositary bank has arrangements in
place such that the paying or returning bank could return a returned
check to the depositary bank electronically by commercially reasonable
means. The final rule places the burden on a depositary bank that makes
a claim for a violation of the expeditious return requirement to
demonstrate that its arrangements are commercially reasonable.
d. Section 229.31(e)--Identification of Returned Check
Current Sec. 229.30(d) 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. The
Board proposed to revise the reference to the ``face'' of the check to
a reference to the ``front'' of the check. The Board also proposed to
expand the second sentence of current Sec. 229.30(d) to cover the
return of either a substitute check or an electronic returned check and
to specify that the reason for return must be included such that the
information is retained on any subsequent substitute check. The Board
proposed to revise the accompanying commentary to provide greater
clarity on the circumstances in which ``refer to maker'' by itself may
be used as a reason for return, such as when a drawer with a positive
pay arrangement instructs the bank to return the check. The proposed
commentary provided greater clarity on the circumstances in which
``refer to maker'' by itself would be an impermissible reason for
return, such as when a check is being returned because the paying bank
already paid the item. The proposed language explained that, in such
cases, the payee and not the drawer would have more information as to
why the check is being returned.
Three commenters, including the group letter, supported the use of
``refer to maker'' as an appropriate reason for return, stating that
this reason is needed in the situation where a paying bank has
suspicion of possible fraud of the check or account, but has
insufficient information to form a conclusive view. Two commenters,
including the group letter, agreed with the proposal that ``refer to
maker'' should not be used in situations involving duplicate
presentment.
In Sec. 229.31(e) of its final rule, the Board has adopted the
proposed regulatory language on reasons for return with minor technical
changes for clarity. Based on the alternatives suggested by commenters,
the Board also changed the words ``permissible'' and ``not
permissible'' to ``appropriate'' and ``inappropriate'' in the
commentary. Although some commenters suggested that the Board remove
all reference to ``refer to maker,'' the Board retained references to
``refer to maker'' in the commentary to provide basic guidance to the
industry and in recognition that ``refer to maker'' can be appropriate
in some cases. Furthermore, the Board added two new examples--an
altered or unauthorized check--of inappropriate uses of ``refer to
maker'' to the commentary.
e. Section 229.31(f)--Notice in Lieu of Return
Current Sec. 229.30(f) provides 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
[[Page 27562]]
available, a written notice of nonpayment containing the information
specified in current Sec. 229.33(b).
The Board proposed to revise the information required to be
included in a notice in lieu of return and in a notice of nonpayment.
Proposed Alternative 1 provided 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 for such
notices. Proposed Alternative 2, which did not contain a notice of
nonpayment requirement, nevertheless would have required the same
information as Alternative 1 for notices in lieu of return.
The Board also proposed several revisions to the commentary to the
notice-in-lieu provisions. Specifically, the Board proposed to clarify
in the commentary that notice by a legible facsimile of both sides of
the check may satisfy the requirements for a notice in lieu of return.
In addition, the Board clarified that a bank may send a notice in lieu
of return as an electronic image of both sides of the check only if it
has an agreement to do so with the receiving bank.
Two commenters, including the group letter, addressed the proposed
notice in lieu of return provision. One commenter supported the Board's
proposal. The group letter, as with the notice of nonpayment,
recommended that the notice in lieu of return should not include the
account number of the depositing customer and the branch name or number
of the depositary bank from its indorsement. The letter stated that a
depositary bank would rely solely on its own check processing or
deposit account system for this information. The group letter also
suggested that the notice in lieu of return should not include the name
of the paying bank because the depositary bank should rely on the
identity of the paying bank that is associated with the MICR line
routing number information.\38\
---------------------------------------------------------------------------
\38\ One comment, received as part of the EGRPRA process,
supported continued use of notice in lieu generally, stating that
there are instances where the notice serves as the best method
available to a credit union returning a check and the additional
flexibility thus provides an important and continuing benefit.
---------------------------------------------------------------------------
Similar to the notice of nonpayment, the Board has adopted as its
final rule the notice in lieu of return with clarification that the
account number of the depositing customer, the branch name or number of
the depositary bank from its indorsement, and the name of the paying
bank is not required. The Board has also revised the commentary to
clarify examples of when notice in lieu of return is permissible.
f. Section Sec. 229.31(g)--Extension of Deadline
Current Sec. 229.30(c) provides that the deadline (as set forth in
either the UCC, Regulation J (12 CFR part 210), or Sec. 229.36 of
Regulation CC) for return of a check or notice of nonpayment is
extended to the time of dispatch where a paying bank uses a means of
delivery that would ordinarily result in receipt by the bank to which
it is sent (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 such later time as
set by the receiving bank under UCC 4-108; (and further extended if a
paying bank uses a ``highly expeditious'' means of transportation), or
(2) prior to the cutoff hour of 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 for
the paying bank under the UCC. (Saturday is never a banking day under
Regulation CC.)
The Board also proposed to extend the deadline for return or notice
of dishonor or nonpayment (Alternative 1) or for return or notice of
dishonor (Alternative 2) to the time of dispatch only if the returned
check or notice is actually received by the depositary bank (or, in the
case of an unidentifiable depositary bank, the bank to which the return
is sent) within the specified timeframe. Under the proposal, returned
checks and notices must be received by the depositary bank or receiving
bank (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 such later time as set by the
receiving bank under UCC 4-108 or (2) prior to the cutoff hour of 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 for the paying bank under the UCC.
As noted above, both Alternative 1 and Alternative 2 clarified that
the extension would apply to the deadlines for notice of dishonor or
nonpayment under the UCC. The Board intended that clarification to be
non-substantive. The Board proposed to eliminate the existing further
extension of the deadline if the paying bank uses a ``highly
expeditious'' means of transportation, given the existing prevalence of
electronic return.\39\ The Board proposed to clarify in the commentary
that the paying bank may satisfy its midnight or other return deadline
by sending an electronic returned check prior to the expiration of the
deadline, if the paying bank has an agreement to do so with the
receiving bank. The time when the electronic returned check is
considered to be received by the depositary bank is determined by the
agreement.
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\39\ The example of ``highly expeditious'' means of
transportation in the current commentary is a West Coast paying bank
using an air courier to ship a returned check directly to an East
Coast returning bank.
---------------------------------------------------------------------------
One commenter, the group letter, addressed these proposed changes.
The group letter supported the Board's proposed commentary that
clarified when an item is received by the depositary bank and agreed
that the timing of the receipt of an electronic return by the
depositary bank is appropriately determined by agreement. The group
letter recommended that the Board revise the proposed commentary
specifically to refer to bilateral agreements and clearinghouse rules
or operating circulars, instead just of agreements generally. The group
letter also suggested that the Board review the commentary to indicate
more clearly that the paying bank satisfies its return obligation under
the UCC in the context of an electronic returned check when the paying
bank sends the electronic returned check from the paying bank's
location in accordance with the UCC midnight deadline.
The Board has adopted the proposed deadline extension in Sec.
229.31(g) and the accompanying commentary with the addition of a
reference in the commentary to bilateral agreements and clearinghouse
rules or operating circulars. The commentary clearly states that a
paying bank's sending of the electronic return after midnight, by
agreement, satisfies the midnight deadline.
g. Section 229.31(h)--Payable-Through and Payable-at Checks
Current Sec. 229.36(a) provides that a check payable at or through
a paying bank is considered to be drawn on that bank for purposes of
subpart C's expeditious return and notice of nonpayment
requirements.\40\ The Board proposed to move this provision to proposed
Sec. 229.31(h). The Board also proposed to move commentary addressing
the treatment of payable-through or payable-at bank under the
[[Page 27563]]
midnight deadline provision of UCC 4-301 from current Sec. 229.30(a)
to the commentary for proposed Sec. 229.31(h). The Board did not
receive any comments on proposed Sec. 229.31(h) and has redesignated
current Sec. 229.36(a) as proposed.
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\40\ 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 UCC 4-301.
---------------------------------------------------------------------------
h. Section 229.31(i)--Reliance on Routing Number
Current Sec. 229.30(g) provides that a paying bank may return a
returned check based on any routing number designating the depositary
bank appearing on the returned check in the depositary bank's
indorsement. The Board proposed to redesignate this provision as Sec.
229.31(i). The proposed commentary to Sec. 229.31(i) provided that the
paying bank also may rely on any routing number designating the
depositary bank in the electronic check sent pursuant to an agreement
when the electronic check is received by the paying bank.
The Board did not receive any comments on the redesignation or the
proposed commentary to Sec. 229.31(i). In Sec. 229.31(i) of the final
rule, the Board has adopted the provision and commentary as proposed.
3. Section 229.32--Returning Bank's Responsibility for Return of Checks
a. Section 229.32(a)--Return of Checks
Current Sec. 229.31(a) sets forth a returning bank's expeditious
return requirement and provides a two-day/four-day test and a forward-
collection test for expeditious return, similar to the tests for paying
banks described above. Under current Sec. 229.31(a), a returning bank
may send a returned check to the depositary bank or to any bank
agreeing to handle the returned check expeditiously. This section also
provides that a returning bank may convert a check to a qualified
returned check (and sets forth format standards for qualified returned
checks) and provides a one-business-day extension under the forward-
collection test and deadline for return under the UCC and Regulation J
if the returning bank converts a check to a qualified returned check.
The extension does not apply to the two-day/four-day test or to checks
returned directly to the depositary bank. Under current Sec.
229.31(b), if a returning bank is unable to identify the depositary
bank, the returning bank 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.
Alternative 1 of proposed Sec. 229.32 would eliminate the
requirement that a returning bank return a check expeditiously.
Accordingly, Alternative 1 would delete the two-day/four-day and
forward-collection tests of current Sec. 229.31(a) and would eliminate
all references to expeditious return from the regulation and
accompanying commentary. Proposed Alternative 2 would retain the
expeditious return requirement for returning banks and the two-day test
of current Sec. 229.31(a). Both proposed alternatives would retain the
provisions permitting a returning bank to send a returned check to the
depositary bank, to any bank agreeing to handle the returned check, or,
if the depositary bank is unidentifiable, to 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 to a prior
collecting bank (if the returning bank was a collecting bank with
respect to the returned check). In addition, both proposed alternatives
would retain existing provisions that permit returning banks to convert
a check to a qualified returned check. However, the provisions that
permit a one-business-day extension for a qualified returned check
would be eliminated in both proposed alternatives. Given the current
prevalence of electronic check collection and return, such an extension
does not appear to be operationally necessary or provide incentives for
electronic handling.
The current commentary to Sec. 229.31(a) explains that a returning
bank agrees to handle a returned check for expeditious return if the
returning bank publishes or distributes availability schedules for the
return of returned checks and accepts the returned check for return;
handles a returned check for return that it did not handle for forward
collection; or otherwise agrees to handle a returned check. The Board
proposed to clarify that a returning bank may send an electronic
returned check directly to the depositary bank if the returning bank
has an agreement with the depositary bank to do so. The Board also
proposed to clarify in the commentary that a returning bank agrees to
handle a returned check if it agrees with the paying bank or returning
bank to handle electronic returned checks sent by that bank.
The Board did not receive any comments specifically concerning
Sec. 229.32(a). The Board has adopted Alternative 2 of Sec. 229.32(a)
as proposed, retaining the expeditious return requirement for returning
banks, with a two-day test. In addition, the Board has adopted the
proposed regulatory and commentary text that appeared in both
alternative proposals regarding unidentifiable depositary banks,
qualified returned checks, cut-off hours, and UCC sections affected.
b. Section 229.32(b)--Expeditious Return of Checks
Under Alternative 2 of proposed Sec. 229.32(b), the Board would
modify the existing rule in current Sec. 229.31(a) for expeditious
return of checks by a returning bank to require that a returning bank
must return the check in a manner such that the check would normally be
received by the depositary bank not later than 2 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.\41\ This
returning bank's expeditious return requirement under Alternative 2 of
proposed Sec. 229.32(b) would be consistent with the paying bank's
expeditious return requirement under Alternative 2 of Sec. 229.31(b).
In addition, Alternative 2 of proposed Sec. 229.32(b) would eliminate
the current provisions setting forth a four-day test for expeditious
return of nonlocal checks (which no longer exist) and a forward-
collection test, and would remove all references to those tests
throughout the regulation and related commentary. The proposed
commentary to Alternative 2 would retain language in the current
commentary to Sec. 229.31(a) describing when a returning bank is
subject to the expeditious return requirement with respect to a
returned check. The proposed commentary also would clarify that a
returning bank could agree with the paying bank or another returning
bank to handle returned checks sent by that paying bank or other
returning bank for expeditious return to certain depositary banks. The
proposed commentary would have removed the current example that states
that, in handling a returned check that it did not handle for forward
collection, a returning bank agrees to return the check
expeditiously.\42\
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\41\ As noted above, Alternative 1 would have eliminated the
expeditious return requirement.
\42\ Deletion of this example was consistent with the proposed
regulatory provisions that exempted a returning bank from the
expeditious return requirements if it did not have arrangements in
place to return the check electronically (See discussion of Sec.
229.32(c) below).
---------------------------------------------------------------------------
The Board did not receive any comments specifically concerning
Sec. 229.32(b). The Board has adopted an expeditious return
requirement for
[[Page 27564]]
returning banks, with a two-day expeditious return test, for the
reasons discussed above in this section-by-section analysis with
respect to the two-day expeditious return test for paying banks. The
Board has also adopted the proposed commentary with modifications to
clarify that a returning bank that agrees to handle a returned check
(as described in the commentary to Sec. 229.32(a)) is subject to the
expeditious return requirement for the reasons discussed below in Sec.
229.33(a) of this section-by-section analysis.
c. Section 229.32(c)--Exceptions to Expeditious Return of Checks by
Returning Bank
Alternative 1 of proposed Sec. 229.32(c) would eliminate the
expeditious return requirement, and thus eliminate these exceptions to
that requirement. Alternative 2 of proposed Sec. 229.32(c) included
exceptions to the expeditious return requirement similar to those set
forth for paying banks under Alternative 2 of proposed Sec. 229.31(c):
The expeditious return requirement would not apply if (1) the returning
bank does not have an agreement to send electronic returned checks
directly or indirectly to the depositary bank, and the returning bank
has not otherwise agreed to handle the returned check; (2) the check is
being returned to a depositary bank that is not subject to subpart B of
Regulation CC; or (3) the check is being returned to an unidentifiable
depositary bank.
No agreements for direct or indirect electronic return. Alternative
2 of proposed Sec. 229.32(c) would not subject a returning bank to the
expeditious return requirement if the returning bank did not have an
agreement to send electronic returned checks to the depositary bank or
to a returning bank that has an agreement to send electronic returned
checks to the depositary bank, and the returning bank has not otherwise
agreed to handle the returned check expeditiously. As with paying banks
under Alternative 2 of proposed Sec. 229.31(c), a returning bank would
be subject to the expeditious return requirement if it had the
necessary agreements to send electronic returned checks, but chose to
send paper returned checks. The proposed commentary to Alternative 2 of
proposed Sec. 229.32(c) provided an example of when a returning bank
would not be subject to the expeditious return requirement because it
had no agreement to send electronic returned checks directly or
indirectly to the depositary bank.
Depositary bank not subject to subpart B. Alternative 2 of proposed
Sec. 229.32(c) would provide an exception to a returning bank's
expeditious return requirement for checks deposited into a depositary
bank that is not subject to subpart B of Regulation CC. The proposed
commentary to Alternative 2 explained that a bank is not subject to
subpart B when it does not maintain ``accounts'' and when it is not a
``depository institution'' within the meaning of the EFA Act.
Unidentifiable depositary bank. The Board proposed under
Alternative 2 to provide that a returning bank that receives a returned
check for which the paying bank was unable to identify the depositary
bank would not be subject to the expeditious return requirement. Even
though the returning bank may be able to identify the depositary bank,
it would be difficult for the returning bank to meet the two-day test
because the paying bank likely would have sent the returned check as if
it were not subject to the expeditious return requirement. A returning
bank would still be required to use ordinary care when returning the
item.\43\
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\43\ UCC 4-202.
---------------------------------------------------------------------------
The Board did not receive any comments concerning Alternative 2 of
proposed Sec. 229.32(c). For the reasons stated in Sec. 229.31(d) of
this section-by-section analysis, the Board has adopted as its final
rule Alternative 2 of proposed Sec. 229.32(c) and the accompanying
commentary, with clarifying revisions, setting out exceptions to the
expeditious return of checks for returning banks with modifications to
correspond to the exceptions for paying banks, including removal of the
exception for returning banks that do not have agreements for direct or
indirect electronic return. Because a returning bank that handles a
returned check is subject to the expeditious return requirement, as
described in Sec. 229.32(b) of this section-by-section analysis, the
Board has also adopted an exception to the expeditious return
requirement for returning banks that handle a misrouted check pursuant
to Sec. 229.33(f).
d. Section 229.32(d)--Notice in Lieu of Return
The current notice in lieu of return requirements for returning
banks are the same as for paying banks. The Board requested comment on
changes to the notice-in-lieu provisions for returning banks in Sec.
229.32(d) and the related commentary that parallel the proposed notice-
in-lieu provisions for paying banks. The Board did not receive any
comments on these provisions and has adopted the changes to parallel
those for paying banks discussed in Sec. 229.31(f).
e. Section 229.32(e)--Settlement
In proposed Sec. 229.32(e), the Board retained a returning bank's
settlement obligation for returned checks as set forth in current Sec.
229.31(c). In the proposed commentary to Sec. 229.32(e), the Board
made minor revisions to the current commentary to current Sec.
229.31(c) to improve clarity. The Board did not receive any comments on
proposed Sec. 229.32(e) or the proposed related commentary and has
adopted the revisions as proposed.
f. Section 229.32(f)--Charges
In proposed Sec. 229.32(f) the Board retained the current Sec.
229.31(d), which provides that a returning bank may impose a charge on
a bank sending a returned check for handling the returned check. The
Board did not receive any comments on proposed Sec. 229.32(f). The
Board has retained current Sec. 229.31(d) and redesignated it as Sec.
229.32(f) as proposed.
g. Section 229.32(g)--Reliance on Routing Number
Current Sec. 229.31(g) provides that a returning bank may return a
returned check based on any routing number designating the depositary
bank appearing on the returned check in the depositary bank's
indorsement or in magnetic ink on a qualified returned check. The Board
proposed to redesignate this provision as Sec. 229.32(g). The Board
also proposed to add to the current commentary a statement that a
returning bank, when returning a check, may rely on routing numbers in
the electronic returned check received by the returning bank pursuant
to an agreement. This proposed revision is similar to that described in
connection with the proposed commentary to proposed Sec. 229.31(i),
above. The Board did not receive any comments on proposed Sec.
229.32(g) or the proposed related commentary and has adopted them as
proposed.
4. Section 229.33--Depositary Bank's Responsibility for Returned Checks
and Notices of Nonpayment
The Board proposed to consolidate the regulation's provisions
related to a depositary bank's responsibility for returned checks and
notices of nonpayment in one section.
a. Section 229.33(a)--Right to Assert Claim
As discussed above, the Board proposed two alternatives with
respect to the expeditious return requirement.
[[Page 27565]]
Alternative 1 would eliminate the expeditious return requirement, and
Alternative 2 would retain the expeditious return requirement so long
as the paying bank had agreements in place to send an electronic
return, directly or indirectly, to the depositary bank. Some commenters
stated that Alternative 1 had the potential to slow check returns and
provided a lack of incentives for depositary banks that currently
accept paper checks to accept electronic returns. Other commenters
stated that, under Alternative 2, it may be difficult for a paying bank
to know whether its returning bank had an electronic return arrangement
with a particular depositary bank and thus whether it was subject to
the expeditious return requirement. These commenters also raised the
concern that a paying bank could avoid being subject to the expeditious
return requirement by not having an agreement with either a depositary
bank or returning bank to accept electronic returns. In light of the
concerns raised with both Alternative 1 and Alternative 2, the Board
has adopted a final rule that imposes an expeditious return requirement
for all paying and returning banks (discussed above under Sec. Sec.
229.30 and 229.31).
Rather than basing the applicability of the expeditious return
requirement on the electronic return arrangements established by the
paying and returning banks with the depositary bank, the final rule
places limits on a depositary bank's ability to bring a claim for a
violation of an expeditious return requirement. Section 229.33(a)(1) of
the final rule states that a paying bank or returning bank may be
liable to a depositary bank under Sec. 229.38 for failing to return a
check in an expeditious manner only if the depositary bank has
arrangements in place such that the paying bank or returning bank could
return a returned check to the depositary bank electronically, directly
or indirectly, by commercially reasonable means. Section 229.33(a)(2)
of the final rule states that the depositary bank has the burden of
establishing that its arrangements for electronic returns meet the
``commercially reasonable'' standard.
The Board believes that this provision, in combination with the
two-day expeditious return requirement for all checks as well as the
notice of nonpayment requirement for returned checks over $5,000,
provides an effective incentive for electronic returns. Specifically,
the Board believes that under the final rule, depositary banks will
have appropriate incentives to accept electronic returns in order to
retain their ability to bring claims for violations of an expeditious
return requirement, and paying banks and returning banks will have
incentives to send returns electronically in order to avoid the
likelihood that they would fail to meet their expeditious return
obligations using paper returns.
The ``commercially reasonable means'' requirement is intended to
prevent a depositary bank from establishing electronic return
arrangements that are very limited in scope or that provide
unreasonable barriers to presentment such that, in practice, the
depositary bank would accept only a small number of its returns
electronically. The Board believes the commercially reasonable means
standard allows for case-by-case flexibility and can change over time
to reflect market practices.
b. Section 229.33(b)--Acceptance of Electronic Returned Checks and
Electronic Notices of Nonpayment
In Alternative 1, the Board proposed to provide that a depositary
bank's agreement with the transferor bank governs its acceptance of
electronic returned checks and electronic written notices of
nonpayment.\44\ The transferor bank may be either the paying bank or a
returning bank. Alternative 2 was identical to Alternative 1, except
references to notices of nonpayment were omitted. The proposed
commentary clarified the operation of the provision and described some
of the details that might be specified in such an agreement. The Board
did not receive any comments on the proposal. The Board has adopted
Alternative 1 and the related commentary as proposed, now designated as
Sec. 229.33(b).
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\44\ An agreement is not required for a paying bank to provide
an oral notice of nonpayment, i.e., a notice provided over the
telephone as discussed in Sec. 229.33(c) below.
---------------------------------------------------------------------------
c. Section 229.33(c)--Acceptance of Paper Returned Checks and Paper
Notices of Nonpayment
Current Sec. 229.32(a) specifies the locations where a depositary
bank must accept returned checks and notices of nonpayment.\45\ The
Board proposed to specify that the provisions of current Sec.
229.32(a) would apply to paper returned checks and paper notices of
nonpayment only, as the acceptance of electronic returns and notices
would be covered by an agreement between the banks. The Board also
proposed to eliminate the references to situations in which 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. Because there is a now single national check-
processing region, these situations no longer exist. The Board did not
receive any comments on the proposed regulatory text and has adopted it
as proposed, now designated as Sec. 229.33(c). The Board has adopted
the proposed corresponding commentary with one revision, which removes
as redundant the statement that banks may vary by agreement the
location at which notices are received.
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\45\ Current Sec. 229.33(c) provides that Sec. 229.32(a)
governs where a depositary bank must accept written notices of
nonpayment.
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d. Section 229.33(d)--Acceptance of Oral Notices of Nonpayment
Current Sec. 229.33(c) requires a depositary bank to accept oral
notices of nonpayment (1) either at the telephone or telegraph number
of its return-check unit indicated in the indorsement, or, if no such
number appears in the indorsement or if the number is illegible, at the
general purpose number of its head office or the branch indicated in
the indorsement; and (2) at any other number held out by the bank for
receipt of notice of nonpayment.
Proposed Alternative 1 provided that a depositary bank must accept
oral notices of nonpayment (1) at the telephone number indicated in the
indorsement, rather than solely the telephone number of the return-
check unit indicated in the indorsement and (2) at any other number
held out by the bank for receipt of notice of nonpayment.\46\ (Proposed
Alternative 2 eliminated the notice of nonpayment provision.) The Board
also requested comment on whether a depositary bank that has agreed to
accept written notices of nonpayment electronically should be required
to also accept oral notices of nonpayment. The Board did not receive
any comments on Alternative 1 and has adopted it and the accompanying
commentary as proposed, now designated as Sec. 229.33(d).
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\46\ Similar to the notice of nonpayment provisions for paying
banks, the Board proposed to delete references in the depositary
bank notice of nonpayment provisions to using the telegraph as a
means of accepting notices.
---------------------------------------------------------------------------
e. Section 229.33(e)--Payment
Current Sec. 229.32(b) sets forth the depositary bank's duties to
settle with a paying bank or returning bank for a returned check. The
Board proposed to make minor non-substantive amendments to this
provision. The Board did not receive any comments on this provision and
has adopted it, and the accompanying commentary, as proposed, now
designated as Sec. 229.33(e).
[[Page 27566]]
f. Section 229.33(f)--Misrouted Returned Checks and Written Notices of
Nonpayment
The Board proposed to modify slightly current Sec. 229.32(c),
which requires a bank that receives a misrouted returned check or
written notice of nonpayment on the basis that it is the depositary
bank, but determines that it is not the depositary bank, to send the
returned check or notice to the depositary bank directly, to a
returning bank agreeing to handle the returned check or notice
expeditiously, or back to the bank from which it received the misrouted
return or notice. Consistent with the Board's proposed changes to the
expeditious return requirements of both Alternative 1 and Alternative
2, the Board also proposed to remove the requirement that a returning
bank agree to handle the returned check expeditiously. The Board did
not receive any comments on this provision, and has adopted it as
proposed, now designated as Sec. 229.33(f).\47\
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\47\ As described above in Sec. 229.32(c) of this section-by-
section analysis, the Board has adopted an exception to the
expeditious return requirement of Sec. 229.32(b) for returning
banks that handle misrouted returned checks pursuant to this
section.
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g. Section 229.33(g)--Charges
The proposal set forth without change the provisions of current
Sec. 229.32(d) prohibiting a depositary bank from imposing charges for
accepting and paying checks being returned to it. The Board did not
receive any comments on this provision, and it remains unchanged in the
final rule, now designated as Sec. 229.33(g).
h. Section 229.33(h)--Notification to Customer
Current Sec. 229.33(d) requires a depositary bank to notify its
customer when it receives a returned check or notice of nonpayment
related to that customer's account. The Board proposed to amend this
provision to also require that the depositary bank notify its customer
when the bank receives notice of recovery under Sec. 229.35(b)
(liability of bank handling a check).\48\
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\48\ The notice of recovery customer notification provision is
currently set forth in the commentary to Sec. 229.33(d).
---------------------------------------------------------------------------
Both proposed Alternatives 1 and 2 would add this requirement,
although Alternative 2 did not retain the reference to a notice of
nonpayment. The Board did not receive any comments on the proposed
provision or related commentary. In its final rule, the Board has
adopted Alternative 1 and the related commentary as proposed, now
designated as Sec. 229.33(h).
i. Section 229.33(i)--Depositary Bank Without Accounts
Current Sec. 229.33(e) provides that the notice of nonpayment
requirement does not apply to checks deposited in a depositary bank
that does not maintain accounts (as defined in Regulation CC). The
Board did not propose any changes nor receive any comments on this
provision. It remains unchanged in the final rule, designated as Sec.
229.33(i).
5. Section 229.34--Warranties and Indemnities
a. Section 229.34(a)--Warranties With Respect to Electronic Checks and
Electronic Returned Checks
Proposed Sec. 229.30(a), adopted in the final rule, provides that
electronic checks and electronic returned checks are subject to the
provisions of subpart C as if they were checks. Accordingly, the
Board's proposed Sec. 229.34 applied all of the warranties and
indemnities in that section to a bank that handles an electronic check
or electronic returned check. In addition to those warranties, the
Board proposed that new warranties be made with respect to electronic
checks and electronic returned checks.
Content of warranties. The Board proposed to add new warranties
that would be made by a bank that transfers or presents an electronic
check or electronic returned check and receives settlement or other
consideration for it. The Board proposed that the bank would warrant
that the electronic image accurately represents all of the information
from the original check as of the time the original check was
truncated, that the electronic information contains an accurate record
of all the MICR line information required for a substitute check under
the regulation's substitute check definition,\49\ and the amount. The
bank would also warrant that no person will receive transfer,
presentment, or return of, or otherwise be charged for, an electronic
check or electronic returned check, 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. These warranties are similar to the warranties
provided in Sec. 229.52 for transfers of substitute checks and would
result in a seamless warranty chain regardless of whether a check is in
the form of an electronic check or a substitute check.
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\49\ 12 CFR 229.2(aaa).
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The Board proposed to clarify in the commentary that the warranties
in Sec. 229.34(a) are in addition to any warranties a bank makes under
Sec. 229.34(b) through (e) with respect to an electronic check or
electronic returned check. Furthermore, the Board proposed to clarify
in the commentary how the new warranties in Sec. 229.34(a)(1) relate
to the creation of substitute checks and the substitute check
warranties. The Board also proposed to clarify in the commentary that
the sending bank and receiving bank may vary the new warranties by
agreement with respect to the parties that are bound by the agreement.
Parties to whom the warranties are made. The Board proposed to
provide that these warranties would flow, in the case of electronic
checks sent for forward collection, to the transferee bank, any
subsequent collecting bank, the paying bank, and the drawer of the
check. The Board proposed to provide that, in the case of an electronic
returned check, the warranties would flow to the transferee returning
bank, any subsequent returning bank, the depositary bank, and the owner
of a returned check. These provisions are consistent with the flow of
the substitute check warranties in Sec. 229.52.
Most commenters agreed with the proposal to extend warranties to
electronic checks and electronic returned checks. Four commenters
expressed concern that the proposal could result in some increased risk
to banks because electronic checks and electronic returned checks are
currently governed by agreements between banks and requested, without
further elaboration, that the Board limit these risks. Some commenters
disagreed with the portion of the proposal that extended the warranties
to the drawer of the check and the owner of the returned check because
it would complicate the interbank warranty process, complicate the
appropriate resolution of the dispute, and potentially expose banks
other than the account holding bank to direct liability.
In the final rule, the Board has adopted Sec. 229.34(a) and the
accompanying commentary as proposed. The Board acknowledges that
electronic checks and electronic returned checks are currently governed
by agreements between banks and notes that, as stated in the
commentary, the warranties in Sec. 229.34(a) can be varied by
agreement by the sending bank and receiving bank. The Board believes
that extending the warranties to the drawer of the check and the owner
of the returned check is important to maintain a consistent chain of
Check-21-like warranties regardless of whether the check is in the form
of an electronic check or a substitute check. The final
[[Page 27567]]
rule provides protection for drawers and owners from harm that is
usually beyond their control, such as harm resulting from illegible
images or incorrect MICR lines.
b. Section 229.34(b)--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 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. The Board
proposed to retain this provision without substantive change. The Board
also proposed to revise the commentary to conform to the Federal Trade
Commission's proposed changes to its Telemarketing Sales Rule
concerning remotely created checks.\50\ The Board did not receive any
comments with respect to this section and has adopted it, now
designated as Sec. 229.34(b), with revisions to the commentary to
simplify the discussion of the Federal Trade Commission's final
Telemarketing Sales Rule concerning remotely created checks by
providing a cross-reference.\51\ The Board has also added an
introduction to the commentary for Sec. 229.34 to clarify that the
warranties apply to paper checks and electronic checks.
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\50\ The proposed rule is available on the FTC's Web site at
https://www.ftc.gov/policy/federal-register-notices/16-cfr-part-310-telemarketing-sales-rule-federal-register-notice.
\51\ The final rule is available on the FTC's Web site at
https://www.ftc.gov/policy/federal-register-notices/16-cfr-part-310-telemarketing-sales-rule-final-rule-amendments.
---------------------------------------------------------------------------
c. Section 229.34(c)--Settlement Amount, Encoding, and Offset
Warranties
Current Sec. 229.34(c) contains additional warranties provided by
banks related to the settlement amount requested, the encoding on the
check, and certain settlement offsets. Under the proposed rule, the
Board would have retained these provisions, and they would be
applicable to electronic checks and electronic returned checks by
operation of Sec. 229.30(a), which provides that electronic checks and
electronic returned checks are subject to the provisions of subpart C
as if they were checks or returned checks, unless the subpart provides
otherwise. In addition, the Board proposed to revise slightly the
encoding warranty, which currently provides a warranty that the
information encoded after issue in magnetic ink on the check or
returned check is correct, and that the information encoded after issue
includes information placed in the MICR line of a substitute check that
represents that check or returned check. The Board proposed to revise
the wording of that warranty to provide (1) that a bank warrants that
the information encoded after issue is ``accurate,'' instead of
``correct'' and (2) that the information encoded after issue regarding
the check or returned check means any information that could be encoded
in the MICR line of a paper check. The Board did not receive any
comments with respect to this section and has adopted it as proposed,
now designated as Sec. 229.34(c). The Board has also added an
introduction to the commentary for Sec. 229.34 to clarify that the
warranties apply to paper checks and electronic checks.
d. Section 229.34(d)--Returned Check Warranties
Current Sec. 229.34(a) contains warranties provided by paying
banks and returning banks with respect to returned checks. Like the
settlement and encoding warranties discussed above, the Board proposed
to retain these returned check warranties and make them applicable to
electronic returned checks by operation of Sec. 229.30(a), which
provides that electronic returned checks are subject to the provisions
of subpart C as if they were checks or returned checks, unless the
subpart provides otherwise. Under one of the current returned check
warranties, the paying bank warrants that it returned the check by its
return deadline under the UCC (or the UCC deadline as extended under
Regulation CC), and the Board's Regulation J (12 CFR part 210), which
governs the collection and return of checks through Federal Reserve
Bank. The Board proposed to remove the reference to return deadlines
specified in Regulation J. Any variation of this warranty for checks
collected through the Federal Reserve Banks would be addressed in
Regulation J and need not be specified in Regulation CC. The Board did
not receive any comments with respect to this section and has adopted
the section and its commentary, consistent with the proposal and the
expeditious return requirements in Alternative 2, now designated as
Sec. 229.34(d). The Board has also added an introduction to the
commentary for Sec. 229.34 to clarify that the warranties apply to
paper checks and electronic checks.
e. Section 229.34(e)--Notice of Nonpayment Warranties
Current Sec. 229.34(b) contains warranties provided by the paying
bank with respect to a notice of nonpayment to the transferee bank, any
subsequent transferee bank, the depositary bank, and the owner of the
check. Under proposed Alternative 1, the requirement for notices of
nonpayment would be retained, along with the notice of nonpayment
warranties. Under one of the current notice of nonpayment warranties,
the paying bank warrants that it returned or will return the check by
its return deadline under the UCC (or the UCC deadline as extended
under Regulation CC), and the Board's Regulation J (12 CFR part 210),
which governs the collection and return of checks through Federal
Reserve Bank. As was the case with the return warranties discussed
above, the Board proposed to remove the reference to return deadlines
specified in Regulation J; any variation of this warranty for checks
collected through the Federal Reserve Banks would be addressed in
Regulation J and need not be specified in Regulation CC.
Current Regulation CC also provides that the notice of nonpayment
warranties do not apply with respect to checks drawn on a state or a
unit of general local government that are not payable through or at a
bank. State and local governments are not ``paying banks'' under the
rule and checks drawn on state and local governments are explicitly
excluded from the notice of nonpayment requirements under Sec.
229.42.\52\ Similarly, the Treasury of the United States and the U.S.
Postal Service are not ``paying banks,'' and checks drawn on those
entities are also excluded from the notice of nonpayment requirement
under Sec. 229.42. Accordingly, the Board proposed to explicitly state
in the notice of nonpayment warranty section that those warranties are
not made with respect to checks drawn on the Treasury of the United
States or U.S. Postal Service money orders.
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\52\ See commentary to the definition of ``paying bank'' in
Sec. 229.2(z).
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The Board did not receive any comments with respect to this
section. As discussed above in Sec. 229.31(c), the Board has adopted
the notice of nonpayment requirement for returned checks over $5,000.
Accordingly, the Board is also adopting the notice of nonpayment
warranties consistent with its proposal under Alternative 1, now
designated as Sec. 229.34(e). The Board has added an introduction to
the commentary for Sec. 229.34 to clarify that
[[Page 27568]]
the warranties apply to paper checks and electronic checks.\53\
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\53\ The Board has also corrected an error in the current
commentary, which incorrectly used ``return'' instead of ``does not
return'' in stating that ``This paragraph imposes liability on a
paying bank that gives notice of nonpayment and then subsequently
returns the check.''
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f. Section 229.34(f)--Remote Deposit Capture Indemnity
The Board proposed a new indemnity to address the allocation of
liability when a depositary bank accepts deposit of a check through
``remote deposit capture,'' that is, when the depositor sends the bank
electronic information about a check, such as a photographic image,
which the bank uses to create an electronic check or substitute check
for collection. The proposed indemnity would be provided by a bank that
accepted a check via remote deposit capture to a bank that accepted the
original check for deposit, in the event the bank that accepted the
original check incurred a loss because the check had already been paid.
Under the proposal, the indemnity would be provided by a depositary
bank that (1) is a ``truncating bank'' under Regulation CC because it
accepts deposit of an electronic image or other electronic information
related to an original check, (2) does not receive the original check,
(3) receives settlement or other consideration for an electronic check
or substitute check related to the original check, and (4) does not
receive the check returned unpaid. The proposed indemnity ran to a
depositary bank that accepts the original check for deposit for that
depositary bank's losses due to the check having already been paid.
Thirty commenters addressed the proposed indemnity relating to
remote deposit capture. Twenty-two commenters opposed the indemnity as
proposed, believing that it would cause small institutions to stop
offering remote deposit capture.\54\ Of those, 10 commenters proposed
offering an indemnity for remote deposit capture only when the bank
does not mandate a restrictive indorsement that states the item is, for
example, ``for mobile deposit only at XYZ bank, date, and account
number.'' One commenter recommended shifting the liability only if the
institution that accepted the paper check does not offer remote deposit
capture. Some commenters requested clarification of how the warranty
applies when a check is truncated by multiple banks.
---------------------------------------------------------------------------
\54\ One comment, received as part of the EGRPRA process,
expressed similar concerns.
---------------------------------------------------------------------------
Six commenters, including a Federal Reserve Bank commenter and the
group letter, supported the proposed provision, stating that it is
reasonable to impose the loss on the truncating bank because it is best
positioned to control the subsequent deposit of the paper check by its
customer. Two commenters, including the group letter, suggested that
the proposal include a time period within which the indemnified bank
must make a claim. Three commenters, including the group letter,
suggested that the Board include commentary on the process by which the
indemnified bank must obtain information from the paying bank to
identify the indemnifying bank. A few commenters, including the group
letter, suggested that the Board clarify that the indemnity is not
applicable when the loss is the result of an alteration of an item, or
counterfeit item.
The Board finds that basing the indemnity on whether the depositary
bank that accepts the original check also offers remote deposit capture
would not be an appropriate approach. The Board believes that the bank
that accepts the original check should receive the indemnity,
irrespective of whether that bank also offers remote deposit capture.
As noted by many commenters, the bank that accepts a check via remote
deposit capture is in the best position to address the actions of its
own customer and to guard against the subsequent deposit of the paper
check. The Board believes that this indemnity provides an appropriate
incentive for the bank providing remote deposit capture services to
take steps to minimize potential fraudulent deposits. The Board also
believes that Sec. 229.38(g) provides sufficient clarity that actions
under this section must be brought within one year after the date of
the occurrence of the violation involved.
Based on comments received, however, the Board has added an
exception to the indemnity, and associated commentary, which would
prevent a bank from making an indemnity claim if it accepted the
original check containing a restrictive indorsement inconsistent with
the means of deposit, such as ``for mobile deposit only.'' The Board
believes that providing this exception may reduce accidental double
deposits and may provide incentives for banks that receive remote
deposit capture deposits to take steps to minimize intentionally
fraudulent deposits.
The Board believes that the details of how to ascertain the
identity of the indemnifying bank are best left to the banks involved.
The Board will continue to monitor the use of this indemnity and may
consider further action should conditions warrant. In the final rule
and corresponding commentary, the Board is changing this section's
title from the proposed ``Truncating Bank Indemnity'' to ``Remote
Deposit Capture Indemnity'' and has designated this section as Sec.
229.34(f).\55\
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\55\ The final rule provides that the bank providing the
indemnity accepts a deposit of ``an electronic image or other
electronic information'' related to an original check, rather than
an ``electronic check.'' This revision reflects the fact that the
data deposited by the indemnifying bank's customer may not meet all
the requirements of the definition of ``electronic check,'' such as
not including the identity of the depositary bank and the truncating
bank, and the indemnifying bank may need to format the data as an
electronic check or a substitute check before sending it for
collection.
---------------------------------------------------------------------------
g. Section 229.34(g)--Indemnities With Respect to Electronically-
Created Items
As a practical matter, a bank receiving an electronic image
generally cannot distinguish an image that is derived from a paper
check from an electronically-created item. Nonetheless, the bank
receiving the electronically-created item often handles the
electronically-created image as if it were derived from a paper check.
Accordingly, the Board proposed a new requirement for a bank that
transfers an electronic image or electronic information that is not
derived from a paper check to indemnify the transferee bank, any
subsequent collecting bank, the paying bank, and any subsequent
returning bank against any loss, claim, or damage that results from the
fact that the image or information was not derived from a paper check.
The proposed indemnity would protect a bank that receives an
electronically-created item from a sending bank against any loss or
damage that results from the fact that there was no original check
corresponding to the item that the sending bank transferred. The
indemnity would not flow to the paying bank's customer, payee, or
depositary bank of the item. The Board reasoned that the payee and the
depositary bank are in the best position to know whether an item is
electronically created and to prevent the item from entering the check-
collection system. Additionally, for items electronically created by
the paying bank's customer, the customer introduces the item into the
check collection system.\56\ Therefore, the Board did not believe it
would be
[[Page 27569]]
appropriate for subsequent banks handling the item to indemnify those
parties for losses. The Board also proposed examples of the indemnity
in the commentary.
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\56\ For an electronically-created item not created by the
paying bank's customer that results in an unauthorized debit, the
paying bank's customer should normally be made whole by the paying
bank in accordance with UCC 4-401 or Regulation E (12 CFR part
1005), as applicable.
---------------------------------------------------------------------------
Eighteen commenters, including the group letter, addressed the
indemnities relating to electronically-created items. All commenters,
except one, agreed with providing some form of indemnity for
electronically-created items. Of these commenters, some agreed with the
proposal without recommending any changes, some agreed and requested
that the Board clarify the indemnities without further specification,
and some agreed and requested that the indemnities be combined with
some form of warranty. The commenters that proposed the indemnities be
combined with warranties, including the group letter and one Federal
Reserve Bank commenter, suggested providing either the same warranties
as for checks, the same warranties as for substitute checks, or a
combination of the two. The commenter that opposed the proposed
indemnities stated that electronically-created items present inherent
risks, and that banks with a substantial volume of these transactions
can adequately mitigate the risk without mandating indemnity
requirements for other banks that are not similarly situated.
Three commenters, including the group letter, requested that the
Board clarify that a paying bank may bring a claim under the proposed
indemnity to recover a paying bank's losses arising from its own
Regulation E noncompliance. The group letter also suggested that the
Board clarify that an electronically-created ``remotely created check''
would be covered by the proposed indemnities and provide more detailed
commentary regarding the application of the indemnity to an
unauthorized electronically-created item.
In the final rule, the Board has adopted two additional indemnities
along with the previously proposed indemnity for electronically-created
items. The newly adopted indemnities are for losses caused by the fact
that (1) the person on whose account the electronically-created item is
drawn did not authorize the issuance of the item in the amount stated
on the item or to the payee stated on the item, and (2) a person
receives a transfer, presentment, or return of, or otherwise is charged
for an electronically-created item such that the person is asked to
make payment based on an item or check it has already paid. Each bank
that transfers or presents an electronically-created item and receives
settlement indemnifies the transferee bank, any subsequent collecting
bank, the paying bank, and any subsequent returning bank. The
transferees protected by these additional indemnities will have a claim
against the indemnifying bank for damages pursuant to Sec. 229.34(i)
regardless of whether the damages would have occurred if the item
transferred had been derived from a paper check. The Board believes
that these additional indemnities provide a basic level of protection
from unauthorized items and duplicate presentment, which are common
problems associated with electronically-created items. The Board is
adopting these protections as indemnities, rather than warranties as
some commenters proposed, as there would not likely be a difference in
the damage calculation as between an indemnity and a warranty, and the
rule permits a comparative negligence claim for indemnities, which may
be appropriate in some cases for these items. Alongside the new
indemnities, the Board has adopted the indemnity with respect to
electronically-created items as proposed. The provisions on indemnities
for electronically-created items are designated as Sec. 229.34(g) in
the final rule.
The Board believes that the commentary and corresponding examples
included with the newly defined term ``electronically-created item'' in
Sec. 229.2(hhh) provide sufficient clarity that an electronically-
created ``remotely created check'' would meet the definition and
therefore would also be covered by Sec. 229.2(g). The Board has
clarified in the commentary that a paying bank may bring a claim under
the proposed indemnity to recover a paying bank's losses arising from
Regulation E non-compliance. The Board has also revised the commentary
and examples to provide additional clarity with respect to unauthorized
items and the application of the indemnities to depositary banks.
h. Section 229.34(h)--Damages for Breach of Warranties
The Board proposed no substantive changes to current Sec.
229.34(e) (and related commentary) limiting the amount of damages for
breach of the warranties set forth in Sec. 229.34. The Board did not
receive any comments with respect to this provision, and it remains
unchanged in the final rule, designated as Sec. 229.34(h), except to
correct cross-references in the commentary.
i. Section 229.34(i)--Indemnity Amounts
The Board proposed a new provision, and accompanying commentary, to
specify the maximum amounts of the new proposed indemnities for
electronically-created items and remote deposit capture. Specifically,
the Board proposed to provide that the indemnity amount not exceed the
sum of the amount of the loss, up to the amount of the settlement or
other consideration received by the indemnifying bank, and interest and
expenses (including costs, reasonable attorney's fees and other
expenses of representation).
In addition, the Board proposed to subject the indemnities for
electronically-created items and remote deposit capture to a
comparative negligence standard by providing that the indemnity amount
would be reduced by the portion of the indemnified bank's loss that is
attributable to the indemnified bank's negligence or failure to act in
good faith. The proposal also specified that the indemnity would not
affect the rights of a person under the UCC or other applicable
provisions of state or federal law.
One commenter, the group letter, stated that the Board should not
allow the comparative negligence defense for the indemnities because it
would complicate the resolution of claims by paying banks.
Specifically, the group letter expressed concern that the truncating
bank would raise a comparative negligence defense in order to improve
its bargaining position. The group letter stated that the losses
associated with electronically-created items and remote deposit capture
should be placed on the bank that allowed it to enter the payment
system and that the paying bank had no control over the creation of the
item.
The Board does not believe it is appropriate to allow a bank that
has been negligent or acted in bad faith to obtain an indemnity.
Moreover, reducing the amount of the indemnity based on the negligence
or failure to act in good faith on the part of the indemnified party is
consistent with the approach taken in the Check 21 Act. Accordingly,
the Board has adopted proposed Sec. 229.34(i) with the addition of
commentary clarifying that an indemnified bank may not recover more
than the indemnity amount described.
j. Section 229.34(j)--Tender of Defense
Current Sec. 229.34(f) provides for the tender of defense by a
bank that is sued for a breach of a Regulation CC warranty. The
regulation permits tender of defense to a prior bank in the collection
or return chain and sets out notice requirements for the tender. The
Board proposed a minor change to this provision to broaden its
application to
[[Page 27570]]
indemnities as well as warranties. The Board did not receive any
comments with respect to this provision and has adopted it as proposed,
now designated as Sec. 229.34(j).
k. Section 229.34(k)--Notice of Claim
Current Sec. 229.34(g) provides that a notice of a warranty claim
must be provided to the warranting bank within 30 days after the
claimant has reason to know of the warranty breach and the identity of
the warranting bank, otherwise the warranting bank is discharged to the
extent of any loss caused by the delay in giving notice. The Board
proposed to expand this provision of the rule (and its accompanying
commentary) to cover notices of indemnity claims as well as warranty
claims. The Board did not receive any comments with respect to this
section and has adopted the provisions substantively as proposed, with
minor editorial changes, now designated as Sec. 229.34(k).
6. Section 229.35--Indorsements
Regulation CC currently requires a bank (other than the paying
bank) that handles a check or returned check to indorse the check in a
manner that permits a person to interpret the indorsement in accordance
with the indorsement standard set forth in Appendix D to the
regulation. Current Appendix D pertains to indorsements that banks
apply to original checks and substitute checks.
The Board proposed to eliminate Appendix D and instead to
incorporate into the regulation (and accompanying commentary) the
industry indorsement standards for paper checks, substitute checks, and
electronic checks, specifically American National Standard (ANS)
Specifications for Physical Check Endorsements, X9.100-111 for a paper
checks other than substitute checks; ANS Specifications for an Image
Replacement Document, X9.100-140 for substitute checks; and ANS
Specifications for Electronic Exchange of Check and Image Data--
Domestic, X9.100-187 for electronic checks. The proposal did not amend
Sec. 229.35(b) or (c).
The Board proposed to state in the commentary that ANS X9.100-187
is an industry standard for handling checks electronically, but that
multiple electronic check standards may exist that would enable a
receiving bank to create a substitute check, and that the parties may
agree to send and receive checks as electronic images and information
that conform to a different standard.
The Board also proposed to include the portions of the current
commentary that discuss allocation of liability in the commentary to
the liability section (Sec. 229.38). The Board also proposed to move
those portions of the commentary that discuss the obligations of banks
that create a substitute check (``reconverting banks'') into the
commentary to Sec. 229.51(b), which sets out requirements for
reconverting banks. The Board proposed to make clarifying changes
throughout the proposed commentary to Sec. 229.35. For example, in
paragraph 5 of the commentary to Sec. 229.35(b), the Board proposed to
clarify the regulation's use of the term ``final settlement.''
Two commenters addressed the Board's proposal to eliminate Appendix
D. One commenter, the group letter, recommended that the Board retain a
version of Appendix D in order to clearly establish the
responsibilities of banks with respect to indorsements. Specifically,
the group letter stated that there have been growing problems in the
check industry with banks not complying with the indorsement
requirements in Appendix D. The group letter expressed concern that if
Regulation CC simply incorporates by reference the check industry
standards for the bank indorsement requirements, the problems of
noncompliance would worsen. Another commenter agreed with the Board
that eliminating the indorsement requirement in Appendix D would have
little to no effect on the collection or return process.
The Board has adopted the proposed revisions to Sec. 229.35 and
the accompanying commentary with minor technical revisions to clarify
industry standards referenced and to conform to the Board's retention
of the expeditious return requirements, as described above. The Board
has also removed references to carbon bands, as discussed below in
Sec. 229.38(d). The Boards believes that banks' processes related to
substitute checks and applying indorsements and identifications
electronically have become well-established since 2004, when the
current indorsement standard in Appendix D became effective.
Furthermore, industry standards set forth the specifics for how banks
should indorse, or identify themselves. In the absence of any evidence
that eliminating the indorsement requirement in Appendix D will result
in a significant increase in noncompliance, the Board has determined
that incorporating by reference the substance of the indorsement
standards in Sec. 229.35(a) is sufficient.
7. Section 229.36--Presentment and Issuance of Checks
a. Section 229.36(a)--Receipt of Electronic Checks
Current Sec. 229.36(a) provides that 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
Regulation CC. As discussed above, the Board proposed to move this
provision to Sec. 229.31, which contains other provisions related to
paying banks. The Board proposed to add a new provision in Sec.
229.36(a) to provide that a paying bank's receipt of an electronic
check is governed by the paying bank's agreement with the presenting
bank. The Board proposed to state in the related commentary that the
terms of the agreement are determined by the parties and may include,
for example, the electronic address or electronic receipt point at
which the paying bank agrees to accept electronic checks, as well as
when presentment occurs. The Board did not receive any comments with
respect to this section and has adopted Sec. 229.36(a) and the
accompanying commentary with minor editorial changes.
b. Section 229.36(b)--Receipt of Paper Checks
Current Sec. 229.36(b) describes the locations at which a check is
considered received by the paying bank. The Board proposed amendments
to this provision to specify that it applies to locations for accepting
checks in paper form only, and to make non-substantive editorial
changes. The Board also proposed revisions to the commentary to clarify
how the provision applies to substitute checks and to delete the
statement about the tradeoff between including an address on a check,
versus simply stating the name of the bank to encourage acceptance
outside a bank's local area, in light of the elimination of the
distinction between local and nonlocal checks.
In addition, the Board proposed a new provision in the regulation
to permit a bank to require that checks presented to it as a paying
bank be separated from returned checks. This provision mirrors a
similar provision in Sec. 229.33(c)(2) that permits a depositary bank
to require that returned checks be separated from forward-collection
checks.
The Board did not receive any comments with respect to this section
and has adopted Sec. 229.36(b) and accompanying commentary with minor
technical changes for clarity.
[[Page 27571]]
c. Section 229.36(c)--Liability of Bank During Forward Collection
Section 229.36(d) of Regulation CC currently provides that
settlement between banks for the forward collection of a check are
final when made, and sets out the chain of liability during forward
collection. The Board did not propose any changes to this section, and
it remains unchanged in the final rule, redesignated as Sec.
229.36(c).
e. Section 229.36(d)--Same-Day Settlement
Section 229.36(f) of Regulation CC currently 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 by 8 a.m. (local
time of the paying bank) on a business day.\57\ The Board proposed to
retain, without substantive change, the current same-day settlement
provisions and to clarify that the provisions apply only to
presentments of checks in paper form. Electronic check presentment
would continue to be governed by the paying bank's agreement with the
presenting bank. The Board also proposed to remove the requirement that
a paying bank's designated location must be in a check-processing
region consistent with the routing number on the check. As there is now
only one national check-processing region, this provision is obsolete.
---------------------------------------------------------------------------
\57\ A paying bank may not charge presentment fees for checks--
for example, by settling for less than the full amount of the
checks--that are presented in accordance with same-day settlement
requirements.
---------------------------------------------------------------------------
Seventeen commenters, including the group letter, addressed same-
day settlement. The majority of commenters agreed with the retention of
the same-day settlement rule, stating the terms of electronic
presentment are already effectively governed by agreements between
banks. These commenters also expressed concern that an electronic same-
day settlement rule would require a bank to manage multiple electronic
exchange agreements.
Four commenters supported the creation of an electronic same-day
settlement rule.\58\ These commenters stated that in today's mostly
electronic environment, the current paper same-day settlement rule is
no longer effective at addressing the competitive advantages the
Federal Reserve Banks have compared to the private sector correspondent
banks when presenting and settling checks to paying banks. Four
commenters suggested that the Board sunset the paper same-day
settlement rule altogether.
---------------------------------------------------------------------------
\58\ One comment, received as part of the EGRPRA process,
similarly supported an electronic same-day settlement rule.
---------------------------------------------------------------------------
In the final rule, the Board has retained, without substantive
change, the current same-day settlement provisions. The Board agrees
with the majority of commenters that the terms of electronic
presentment can be determined by banks' agreements, as they are under
current industry practice. This is consistent with the approach
generally taken elsewhere with respect to electronic checks. The Board
believes that the paper same-day settlement rule remains relevant, even
though the nation's check collection system is now virtually all-
electronic, because of the negotiating leverage it provides presenting
banks in obtaining electronic presentment agreements with paying
banks.\59\
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\59\ Some commenters have expressed concerns that private-sector
presenting banks, unlike the Reserve Banks, have not been able to
obtain electronic presentment agreements with a broad range of
paying banks. As described in the Board's competitive impact
analysis below, the Board believes a correspondent bank that decides
to present checks to a paying bank irrespective of whether the bank
agrees to electronic presentment, like the Reserve Banks do, should
also be able to obtain such electronic presentment agreements.
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The Board has not adopted an electronic same-day settlement rule at
this time. In response to the current proposal and the Board's 2011
proposal, many commenters voiced significant policy and operational
concerns with the application of the same-day settlement rule to
electronic checks. Moreover, in the absence of general industry
standards, an electronic same-day settlement rule would need to address
the implications of a paying bank communication or technical failure
and prescribe technical specifications, such as communication protocols
and security requirements.\60\ Given the lack of industry consensus
supporting an electronic same-day settlement rule and the practical
challenges of crafting such a rule, the Board does not believe that the
same-day settlement rule should be extended to cover electronic
presentment at this time, but remains open to considering regulatory
changes in the future that are broadly supported by the industry and
foster the efficiency of the check collection system.
---------------------------------------------------------------------------
\60\ For example, an electronic same-day settlement rule may
need to address circumstances in which a paying bank experiences a
system failure that prevents the presenting bank from transmitting
the electronic checks to the paying bank by the presentment
deadline.
---------------------------------------------------------------------------
For these reasons, the Board has adopted Sec. 229.36(f) and the
accompanying commentary, redesignated as Sec. 229.36(d), with minor
editorial changes for clarity and to conform to the Board's retention
of the expeditious return and notice of nonpayment requirements, as
described above.
d. Section 229.36(e)--Issuance of Payable-Through Checks
Current Sec. 229.36(e) contains requirements for information that
must appear on payable-through checks to enable depositary banks to
identify those checks as local or nonlocal. As there is now a single
national check-processing region and all checks are local, these
requirements are no longer necessary. The Board proposed to eliminate
this subsection and its accompanying commentary. The Board did not
receive any comments with respect to this section and is removing
current Sec. 229.36(e) and its accompanying commentary as proposed.
8. Section 229.37--Variation by Agreement
Regulation CC currently permits parties to vary by agreement the
effect of the provisions in subpart C, and the commentary provides
examples of situations where variation by agreement is permissible. The
Board proposed to revise the examples of permissible variations by
agreement listed in the commentary to this section if the Board were to
eliminate either the expeditious return requirement or the notice of
nonpayment requirement in its final rule. The Board also requested
comment on the prevalence of a practice that involved a paying bank
debiting its customer's account and partially settling with the
presenting bank upon receipt of electronic information related to a
check (prior to the actual presentment of an electronic image of the
check) and whether such a practice should be included as an example of
an impermissible variation by agreement.
The Board received three comments, including the group letter, on
Sec. 229.37. Two commenters, including the group letter, supported the
Board's variation by agreement proposal and stated that the Board
should not prohibit or limit the ability of banks to vary by agreement
any of the provisions of subpart C in regards to electronic exchange
relationships. Two commenters, including the group letter, stated that
they were not aware of banks engaging in the practice that involved
receiving electronic information with the check image to be delivered
later. One commenter recommended that the warranty in proposed Sec.
229.34(a)(1)(ii)--
[[Page 27572]]
the warranty on duplicate presentment with respect to electronic checks
and electronic returned checks--should not be able to be varied by
agreement without further elaboration.
Because commenters stated that they were not aware of a practice
that involves receiving electronic information with the check image to
be delivered later, the Board did not adopt any revisions addressing
such practices. The Board believes that banks should be allowed to vary
by agreement the warranty in Sec. 229.34(a)(1)(ii) as they are
ultimately in the best position to determine the specific warranties
and indemnities. The Board has not modified the current regulation or
commentary, except for minor technical changes to clarify example 9
(previously example 10) and removing example 7 from the commentary, to
reflect that only one check processing region exists today.
9. Section 229.38--Liability
a. Section 229.38(a)--Standard of Care, Liability, Damages
Section 229.38(a) of current Regulation CC requires banks to
exercise ordinary care and act in good faith in complying with the
requirements of subpart C of the regulation and sets forth the measure
of damages for non-compliance. The Board proposed to retain the current
provisions of this section, except that under Alternative 2 references
to notices of nonpayment in the regulation and the accompanying
commentary would be deleted.
The Board did not receive comments on proposed Sec. 229.38(a). As
the final rule retains the requirement for notices of nonpayment, the
Board has not amended Sec. 229.38(a) or its accompanying commentary
other than corrections to cross-references corresponding to
redesignated sections of the final rule-text.
b. Section 229.38(b)--Paying Bank's Failure To Make Timely Return
Regulation CC currently provides that a paying bank that fails to
comply with both the expeditious return requirement and its return
deadline under the UCC, Regulation J, or Regulation CC will be liable
for one or the other but not both. The Board proposed to remove this
provision and its accompanying commentary under Alternative 1, which
did not contain an expeditious return requirement.
The Board did not receive comments on proposed Sec. 229.38(b). As
the final rule retains an expeditious return requirement, the Board has
not amended Sec. 229.38(b) or its accompanying commentary other than
corrections to cross-references corresponding to redesignated sections
of the final rule-text.
c. Section 229.38(c)--Comparative Negligence
Section 229.38(c) of current Regulation CC set forth a comparative
negligence standard in the case where a person asserting a claim has
not exercised ordinary care or acted in good faith in indorsing a
check, accepting a returned check or notice of nonpayment, or
otherwise. Under Alternative 2, the Board proposed to eliminate the
references in the regulation and the commentary to notices of
nonpayment. The Board did not receive comments on proposed Sec.
229.38(c). As the final rule retains the requirement for notices of
nonpayment, the Board has not amended Sec. 229.38(c). The Board has
revised the accompanying commentary to remove references and examples
to carbon bands, and obscured or unreadable indorsements, as the Board
recognizes that in a virtually all-electronic check collection and
return environment such instances are exceedingly rare and unlikely to
cause difficulty for paying banks in identifying the depositary bank.
In doing so, the Board does not intend to change the application of
Sec. 229.38(c) or the outcome of such scenarios in the unlikely event
that they actually occur.
d. Section 229.38(d)--Responsibility for Certain Aspects of Checks
Section 229.38(d)(1) sets forth the liabilities of banks in the
check collection chain for marks on the check that obscure indorsements
on the check. Specifically, a paying bank is responsible for damages
resulting from an illegible indorsement to the extent that the
condition of the check when issued by the paying bank or its customer
adversely affected the ability of a bank to indorse the check legibly.
By contrast, the depositary bank is liable to the extent the condition
of the back of a check arising after issuance and prior to acceptance
of the check by the depositary bank adversely affects the ability of a
bank to indorse the check legibly. The current commentary provides
examples of these liabilities with multiple references to the
indorsement standard in Appendix D.
The Board did not propose any substantive amendments to Sec.
229.38(d), but did propose changes to the accompanying commentary. In
accordance with the proposed changes to Sec. 229.35 (and the proposed
elimination of Appendix D), the Board proposed to replace the
references to Appendix D in the commentary with a specific reference to
the appropriate industry standard. In addition, the Board proposed to
move the substance of the discussion regarding liability for carbon
band and similar marking on the back of a check from the commentary to
Sec. 229.35(a) to the commentary to Sec. 229.38(d). The Board
requested comment on whether its proposed revisions clarified liability
for unreadable indorsements, as well as whether any checks still used
carbon bands.
Section 229.38(d)(2) of Regulation CC currently 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. As there is now a single
national check-processing region, this provision is obsolete, and the
Board proposed to delete current Sec. 229.38(d)(2) and its
accompanying commentary.
One commenter, the group letter, stated that there is little or
minimal usage of carbon bands on the back of checks and suggested that
this text be deleted from the commentary. The Board has revised the
accompanying commentary to remove references and examples to carbon
bands and obscured or unreadable indorsements, as the Board recognizes
that in a virtually all-electronic check collection and return
environment such instances are exceedingly rare and unlikely to cause
difficulty for paying banks in identifying the depositary bank. In
doing so, the Board does not intend to change the application of Sec.
229.38(d) or the outcome of such scenarios in the unlikely event that
they actually occur. The Board has adopted the changes to Sec.
229.38(d) otherwise as proposed.
e. Sections 229.38(e)-(h)
The Board did not propose changes to Sec. 229.38(e) through (h) or
the accompanying commentary. Those sections address circumstances where
the time for bringing an action may be extended, clarify that the civil
liability provisions of subpart B and the Act do not apply to subpart
C, provide for jurisdiction in U.S. District Courts, and permit
reliance on Board rulings. Sections 229.38(e) through (h) and the
accompanying commentary remain unchanged in the Board's final rule.
10. Section 229.39--Insolvency of Bank
Current Sec. 229.39 of Regulation CC addresses what happens when a
paying bank, collecting bank, returning bank, or depositary bank
suspends payments when a check is in the process of being
[[Page 27573]]
collected or returned. Current Sec. 229.39(a) requires a receiver,
trustee, or agent in charge of a closed bank to return a check to the
transferor bank or customer that transferred the check if the check or
returned check (1) is in, or comes into, the possession of the paying
bank, collecting bank, depositary bank, or returning bank that suspends
payment and (2) is not paid. This provision is similar to UCC 4-216(a).
Current Sec. 229.39(b) and (c) provide banks with ``preferred''
claims against a paying bank, collecting bank, returning bank, or
depositary bank with respect to checks or returned checks that are not
returned by the receiver, trustee, or agent in charge of a closed bank.
Currently, a bank that is prior to the paying bank in the collection
chain has a claim against a paying bank that has ``finally paid'' (that
is, has no legal right to return) the check, but suspends payment
without making a settlement for the check that is or becomes final.
Similarly, a bank that is prior to the depositary bank in the return
chain has a claim against a depositary bank that has become obligated
to pay the returned check. Regulation CC currently provides claims to
banks in the collection or return chain that have not received
settlement that is or becomes final from a collecting bank, paying
bank, or returning bank that itself had received final settlement prior
to suspending payments. These sections are derived from UCC 4-216(b).
Although both Regulation CC and the UCC use the term ``preferred
claim,'' the Official Comment to the UCC provides that purpose of UCC
4-216 ``is not to confer upon banks, holders of items, or anyone else
preferential positions in the event of bank failures over general
depositors or any other creditors of the failed banks.'' Rather, UCC 4-
216 is intended to fix the cut-off point at which an item has
progressed far enough in the collection or return process where it is
preferable to permit the item to continue the remaining collection or
return process, rather than return the item and reverse the associated
entries.\61\
---------------------------------------------------------------------------
\61\ UCC 4-216, cmt. 1.
---------------------------------------------------------------------------
The Board proposed to amend and combine sections 229.39(b) and (c)
(and make conforming changes to the accompanying commentary) to clarify
that the claims do not give a bank a preferential position over
depositors or other creditors of the failed banks. The Board did not
intend these changes to be substantive, but rather to more clearly
reflect the intent to adopt the same rule as the UCC. The Board did not
receive comments on these proposed clarifications. The Board has
adopted these changes as proposed and made minor editorial changes to
the corresponding commentary for clarity.
Current section 229.38(d) provides that a paying bank has a
preferred claim against a presenting bank that breaches a settlement
amount or encoding warranty. The Board intended that the claim be a
preferred claim, putting the paying bank in the position of a secured
creditor.\62\ The Board requested comment on whether it should retain
this preferred claim.
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\62\ 57 FR 46596 (Oct. 14, 1992). The Board, however, did not
intend this to be a ``preference'' under the Bankruptcy Code (i.e.,
an avoidable transfer).
---------------------------------------------------------------------------
Two commenters, including the group letter, commented on this
provision and supported retaining the preferred claim against the
presenting bank in the event of a breach of warranty. The group letter
stated that because financial institutions treat warranty claims as
part of the original check payment that was previously settled to the
presenting bank before receivership, the paying bank should have a
preference for the warranty claim in receivership above other claims of
the failed presenting bank. The other commenter stated that banks do
not go through the normal bankruptcy process and that many check
warranty claims are processed as ``with entry'' adjustments through the
Federal Reserve or pursuant to the ECCHO rules. The commenter stated
that there is an expectation that payments related to the failed bank
should be allowed to fully process, including payment of warranty
claims on checks cleared prior to such bank's failure. The Board has
retained the preferred claim of the existing regulation and
accompanying commentary in current Sec. 229.39(d), redesignated as
Sec. 229.39(c).
The Board did not proposed changes to existing Sec. 229.39(e),
which provides that the suspension of payments by a bank does not
prevent any settlement made by that bank from becoming final if
finality occurs automatically upon the lapse of time or the occurrence
of certain events. The Board has redesignated this provision and its
accompanying commentary as Sec. 229.38(d).
11. Section 229.40--Effect of Merger Transaction
Section 229.40 permits merged banks to be considered as separate
banks for one year period following consummation of the merger. This
section contained a special rule providing an extended period for
mergers that occurred close to the century date change (mergers
consummated on or after July 1, 1998, and before March 1, 2000). The
Board proposed to remove the special rule as obsolete. The Board also
proposed revisions to the examples of regulatory requirements that
could be effected by the merger rule. The Board did not receive any
comments on the proposal and has removed the special rule and made the
commentary revisions with minor technical changes for clarity.
12. Section 229.41--Relation to State Law
Section 229.41 provides that subpart C of Regulation CC supersedes
inconsistent provisions of state law, but only to the extent of the
inconsistency. The Board did not proposes any revisions to the
regulation or its accompanying commentary and these provisions are
unchanged in the final rule.
13. Section 229.42--Exclusions
Section 229.42 provides that the expeditious return, notice of
nonpayment, and same-day settlement requirements of subpart C do not
apply to a check drawn on the U.S. Treasury, a U.S. Postal Service
money order, or a check drawn on a state or unit of general local
government that is not payable through or at a bank. The Board proposed
revisions to this section and its accompanying commentary under both
Alternatives 1 and 2 to align the provisions with the proposed
elimination of the expeditious return requirement (Alternative 1) or
the notice of nonpayment requirement (Alternative 2). As the final rule
contains both of those requirements, the Board has not adopted any
revisions to this section of the regulation and commentary other than
corrections to cross-references corresponding to redesignated sections
of the final rule-text.
14. Section 229.43--Checks Payable in Guam, American Samoa, and the
Northern Mariana Islands
Section 229.43 sets forth the rules applicable to checks that are
drawn on banks located in Guam, American Samoa, and the Northern
Mariana Islands (Pacific island checks). These checks often bear U.S.
routing numbers and are deposited in and collected by U.S. banks,
although they do not meet the Regulation CC definition of ``check''
because they are not drawn on a U.S. bank. Consistent with the
expansion of other provisions in the regulation to address electronic
checks, the Board proposed expand the definition of ``Pacific Island
check'' to include an
[[Page 27574]]
electronic image of or electronic information related to a demand draft
drawn on a Pacific island bank. The Board also proposed two variations
of the list of applicable regulatory provisions (and related commentary
changes) that apply to Pacific Island checks, one for Alternative 1 and
one for Alternative 2. The Board also proposed to revise the commentary
to clarify that bank offices in Guam, American Samoa, and the Northern
Mariana Islands are banks for purposes of the ``Check 21'' provisions
in subpart D (but not subparts B or C) of the regulation, because the
Check 21 Act includes those locations in the definition of ``state,''
whereas the EFA Act does not.
The Board did not receive any comments on the proposed changes to
Sec. 229.43 and its commentary. The Board has adopted a revised list
of regulatory provisions applicable to Pacific Island checks to conform
to the final rule's retention of both the expeditious return and the
notice of nonpayment requirements. The Board has also revised the
definition of ``Pacific Island check'' to reflect changes to the
definition of electronic check discussed above and made corresponding
changes to the commentary. The Board has adopted the other regulatory
and commentary provisions as proposed.
D. Subpart D--Substitute Checks
1. Section 229.51--General Provisions Governing Substitute Checks
Section 229.51 of Regulation CC sets forth the requirements for a
substitute check to be the legal equivalent of the original check.
Currently, these provisions require, among other things, that the
reconverting bank and truncating bank are identified in accordance with
Appendix D of Regulation CC and ANS Specifications for an Image
Replacement Document, X9.100-140 (ANS X9.100-140). As discussed above,
the Board is removing Appendix D from Regulation CC and instead
referring to industry standards, such as ANS X9.100-140. Accordingly,
the Board proposed to make conforming changes to Sec. 229.51, removing
all references to Appendix D in the regulation and accompanying
commentary and making non-substantive organizational revisions to the
commentary. The Board did not receive any comments on Sec. 229.51 and
has adopted the proposed regulatory and commentary changes with non-
substantive editorial corrections.
2. Section 229.52--Substitute Check Warranties
Section 229.52 of Regulation CC sets forth the warranties made by a
bank that transfers, presents, or returns a substitute check for which
it receives consideration.\63\ The Board proposed revisions to this
section to address the case where a bank rejects a check submitted for
deposit (such as through an ATM) and sends back to its customer a
substitute check (or a paper or electronic representation of a
substitute check). That bank would not receive consideration for that
check and therefore would give no warranties under current Sec. 229.52
for the substitute check it created, rendering that substitute check
ineligible for legal equivalence under Sec. 229.51(a) (which
equivalence requires a bank warranty). The Board proposed a new Sec.
229.52(a)(2) and accompanying commentary to provide that the bank in
the situation described above would make the warranties in Sec.
229.52(a) regardless of whether the bank received consideration for the
substitute check.
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\63\ These warranties include a warranty that the substitute
check meets the requirements for legal equivalence in Sec.
229.51(a)(1) and (2) and a warranty that no bank will be asked to
pay a check that has already been paid (the ``no double debit''
warranty).
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The proposed commentary explained that the bank that creates a
substitute check to return to the customer in the scenario addressed by
new Sec. 229.52(a)(2) 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 (but that the bank is not a
depositary bank, collecting bank, or returning bank with respect to the
check, nor does the bank's identification of itself on the back of the
check as a reconverting bank constitute the bank's indorsement of the
check). The proposed commentary also explained that a bank that is a
truncating bank under Sec. 229.2(eee)(2) because it accepts deposit of
a check electronically might be subject to a claim by another
depositary bank that accepts the original check for deposit, pursuant
to proposed Sec. 229.34(f).
The Board received one comment on these provisions, which supported
the proposal. The Board has adopted the proposed changes to Sec.
229.52 and its accompanying commentary with minor technical
clarifications.
3. Section 229.53--Substitute Check Indemnity
Section 229.53 sets forth the indemnity provided by a bank that
transfers, presents, or returns a substitute check and receives
consideration for the check. For the reasons discussed above in Sec.
229.52, the Board proposed to add a new paragraph to Sec. 229.53(a)
and accompanying commentary to provide for an indemnity to be given by
a bank that rejects a check submitted for deposit and sends back to its
customer a substitute check, but does not receive consideration for the
check. The Board did not receive any comments on Sec. 229.53 and has
adopted the proposed changes to the regulation and commentary.
4. Section 229.54--Expedited Recredit for Consumers
Section 229.54 addresses a consumer's ability to make a claim for
expedited recredit with respect to a substitute check. The Board
proposed to update the cross-references in Sec. 229.54 to reflect the
adoption of new warranties for electronic checks, as detailed above
Sec. 229.34(a). The Board did not receive any comments on Sec. 229.54
and has adopted the proposed changes to the commentary to update cross-
references.
E. Appendix D
For the reasons stated in Sec. 229.35 of this section-by-section
analysis the Board has removed and reserved Appendix D.
V. Competitive Impact Analysis
The Board conducts a competitive impact analysis when it considers
an operational or legal change, if that change would have a direct and
material adverse effect on the ability of other service providers to
compete with the Federal Reserve in providing similar services due to
legal differences or due to the Federal Reserve's dominant market
position deriving from such legal differences. All operational or legal
changes having a substantial effect on payments-system participants
will be subject to a competitive-impact analysis, even if competitive
effects are not apparent on the face of the proposal. If such legal
differences exist, the Board will assess whether the same objectives
could be achieved by a modified proposal with lesser competitive impact
or, if not, whether the benefits of the proposal (such as contributing
to payments-system efficiency or integrity or other Board objectives)
outweigh the materially adverse effect on competition.\64\
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\64\ Federal Reserve Regulatory Service, 7-145.2.
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In general, the Board does not believe that the amendments to
Regulation CC have a direct and material adverse effect on the ability
of other service providers
[[Page 27575]]
to compete effectively with the Reserve Banks in providing similar
services due to legal differences (the special case of the same-day
settlement rule is discussed below). The amendments, which are intended
to foster electronic check collection and return, apply to the Reserve
Banks and private-sector service providers alike and do not affect the
competitive position of private-sector presenting banks vis-[agrave]-
vis the Reserve Banks.
Regulation CC's same-day settlement rule, which became effective in
1994, reduced (but did not eliminate) the Reserve Banks' competitive
advantage with respect to presentment of paper checks. In 1998, the
Board requested comment on whether the same-day settlement rule should
be modified to reduce or eliminate the remaining legal disparities
between correspondent banks and the Reserve Banks in the presentment
and settlement of checks.\65\ Commenters generally concluded that the
drawbacks of reducing the remaining legal disparities outweighed any
advantage to the Reserve Banks.\66\ Based on an analysis of the
comments, the Board did not propose amendments to the same-day
settlement rule at that time to reduce or eliminate these remaining
legal differences.
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\65\ 63 FR 12700 (March 16, 1998). Under Regulation J, the
Reserve Banks have the legal ability to obtain same-day settlement
for items they present before the paying bank's cut-off hour
(typically 2 p.m. local time), whereas the latest that a private-
sector bank may present a paper check for same-day settlement is 8
a.m. local time under Regulation CC's same-day settlement rule. In
addition, Reserve Banks receive settlement by debiting the Federal
Reserve account of the paying bank or its designated correspondent
settlement agent (autocharge), whereas the paying bank settles with
a correspondent presenting bank by crediting the Reserve Bank
account designated by the presenting bank (such as by Fedwire).
\66\ 63 FR 68701 (Dec. 14, 1998). In particular, commenters
expressed concern that extending correspondent banks' presentment
deadline to 2 p.m. would disrupt paying banks' corporate cash
management services and that moving the Reserve Banks' presentment
deadline to earlier in the day would be undesirable because it would
slow the collection of checks. In addition, commenters wanted to
retain the efficiency of settling for Reserve Bank presentments by
autocharge but did not want to extend to correspondent banks the
ability to debit the paying bank's account.
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Because Regulation CC's same-day settlement rule does not apply to
electronic checks, which are governed by agreement, the Board requested
comment on whether to adopt an electronic same-day settlement rule in
2011 and again as part of the proposal in 2014. In both instances,
commenters voiced significant policy and operational concerns with the
application of the same-day settlement rule to electronic checks.
A small number of commenters expressed concerns that private-sector
presenting banks have not been able to obtain electronic presentment
agreements with a broad range of paying banks and stated that an
electronic same-day settlement rule would allow private-sector
collecting banks to compete more effectively with the Reserve Banks.
The Board does not believe, however, that the Reserve Banks' ability to
obtain electronic presentment agreements is attributable to legal
differences. The Reserve Banks have adopted a business practice to
present checks directly whether or not the bank agrees to accept
presentment electronically, which provides an incentive for paying
banks to accept electronic presentment. A correspondent bank that
decides to present checks directly to a paying bank regardless of
whether the bank agrees to electronic presentment should likewise be
able to obtain such electronic presentment agreements. In many cases,
however, correspondent banks have adjusted their back office operations
to accommodate only electronic check presentments. The Board believes
that these developments reflect business decisions of those
correspondent banks rather than unfair competitive advantages of
Reserve Banks.\67\
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\67\ The Reserve Banks made significant investments in equipment
for printing paper substitute checks to facilitate the
implementation of the Check 21 Act. They continue to use these
capabilities, particularly in the case of check returns, which over
600 endpoints still do not receive electronically. Correspondent
banks have generally not made the same investments in printers to
create substitute checks as have the Reserve Banks, but could easily
do so, individually or collectively, to make paper presentment a
realistic option without incurring a significant expense. Although
it would not be desirable to increase the proportion of checks
presented in paper form, correspondent banks' ability to present
paper checks could likely create a sufficient incentive for paying
banks to accept checks electronically.
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Moreover, in the absence of general industry standards, an
electronic same-day settlement rule would need to address the
implications of a paying bank communication or technical failure and
prescribe technical specifications, such as communication protocols and
security requirements. Given the lack of industry support for an
electronic same-day settlement rule and the practical challenges of
crafting such a rule, the Board has not extended the same-day
settlement rule to cover electronic presentment.
The Board has retained the same-day settlement rule for the
presentment of paper checks, even though the nation's check collection
system is now virtually all-electronic, because of the negotiating
leverage it provides presenting banks in obtaining electronic
presentment agreements with paying banks. The Board remains open to
considering regulatory changes broadly supported by the industry that
reduce legal disparities between the Reserve Banks and private-sector
collecting banks and foster the efficiency of the check collection
system.
VI. The Riegle Community Development and Regulatory Improvement Act of
1994
The Riegle Community Development Regulatory Improvement Act of 1994
requires that agency regulations that impose additional reporting,
disclosure, and other requirements on insured depository institutions
take effect on the first calendar quarter following publication in
final form. 12 U.S.C. 4802(b). Consistent with the Riegle Community
Development Act, this final rule is effective on July 1, 2018.
VII. Paperwork Reduction Act
Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the Board may not conduct or sponsor, and
the respondent is not required to respond to, an information collection
unless it displays a currently valid Office of Management and Budget
(OMB) control number. The OMB control number is 7100-0235. In addition,
as permitted by the PRA, the Board proposes to extend for three years,
with revision, the Disclosure Requirements Associated with Availability
of Funds and Collections of Checks (Regulation CC) (Reg CC; OMB No.
7100-0235). The Board reviewed the final rule under the authority
delegated to the Board by the OMB.
The final rule contains requirements subject to the PRA. The
revised disclosure requirements of this final rule are found in
sections 229.31(c) and 229.33(h). Section 229.31(c) imposes a notice of
nonpayment requirement on paying banks that determine not to pay a
check, both paper and electronic, in the amount of $5,000 or more.
Section 229.33(h) requires a depositary bank to notify its customer if
the depositary bank receives a returned check, notice of nonpayment, or
notice of recovery under section 229.35(b). The Board did not receive
any specific comments on the PRA analysis.
The Board has a continuing interest in the public's opinions of
collections of information. At any time, commenters may submit comments
regarding the
[[Page 27576]]
burden estimate, or any other aspect of this collection of information,
including suggestions for reducing the burden, to Nuha Elmaghrabi,
Federal Reserve Board Clearance Officer, Office of the Chief Data
Officer, Board of Governors of the Federal Reserve System, Washington,
DC 20551. A copy of the comments may also be submitted to the OMB desk
officer (1) by mail to U.S. Office of Management and Budget, 725 17th
Street NW., 10235, Washington, DC 20503; (2) by facsimile to 202-395-
6974; or (3) by email to: [email protected], Attention,
Federal Banking Agency Desk Officer.
A. Proposed Revision, With Extension, of the Following Information
Collection
Title of Information Collection: Disclosure Requirements Associated
with Availability of Funds and Collections of Checks (Regulation CC).
Agency form number: Reg CC.
OMB control number: 7100-0235.
Frequency of Response: Event-generated.
Affected Public: Businesses or other for-profit.
Respondents: State member banks and uninsured state branches and
agencies of foreign banks.
Estimated annual burden hours: Specific availability policy
disclosure and initial disclosures--8,308 hours; Notice in specific
policy disclosure--34,895 hours; Notice of exceptions--99,700 hours;
Locations where employees accept consumer deposits--249 hours; Annual
notice of new ATMs--4,985 hours; Changes in policy--4,000 hours;
Providing notice of nonpayment by paying bank--582 hours; Providing
notifications to customer--6,148 hours; Expedited recredit for
consumers--8,724 hours; Expedited recredit for banks--3,739 hours;
Consumer awareness--4,985 hours; and Expedited recredit claim notice--
6,231 hours.
Estimated average time per response: Specific availability policy
disclosure and initial disclosures--1 minute; Notice in specific policy
disclosure--3 minutes; Notice of exceptions--3 minutes; Locations where
employees accept consumer deposits--15 minutes; Annual notice of new
ATMs--5 hours; Changes in policy--20 hours; Providing notice of
nonpayment by paying bank--1 minute; Providing notifications to
customer--1 minute; Expedited recredit for consumers--15 minutes;
Expedited recredit for banks--15 minutes; Consumer awareness--1 minute;
and Expedited recredit claim notice--15 minutes.
Number of respondents: 997 respondents (100 respondents for changes
in policy).
Abstract: Regulation CC requires commercial banks, savings
associations, credit unions, and U.S. branches and agencies of foreign
banks to make funds deposited in transaction accounts available within
specified time periods, disclose their availability policies to
customers, and begin accruing interest on such deposits promptly. The
disclosures are intended to alert customers that their ability to use
deposited funds may be delayed, prevent unintentional (and potentially
costly) overdrafts, and allow customers to compare the policies of
different banks before deciding at which bank to deposit funds. The
regulation also requires notice to the depositary bank and to a
customer of nonpayment of a check. Model disclosure forms, clauses, and
notices are appended to the regulation to ease compliance.
Current Action: Regulation CC currently requires a paying bank that
determines not to pay a check in the amount of $2,500 or more. Return
of the check itself satisfies the notice of nonpayment requirement if
the return meets the timeframe requirement for the notice. Under the
Board's final rule, a paying bank is required to provide a notice of
nonpayment if a paying bank determines not a pay a check in the amount
of $5,000 or more. (Return of the check itself would continue to
satisfy the notice requirement if the return meets the timeframe
requirement for notice.) The Board therefore expects that its final
rule will reduce the number of notices that paying banks send.
Regulation CC also currently requires a depositary bank to notify
its customer when it receives a returned check or notice of nonpayment
related to that customer's account. The final rule requires that the
depositary bank notify its customer when the bank receives a notice of
recovery under 229.35(b). The Board does not expect that this new
requirement will significantly affect the burden of depositary banks.
VIII. Regulatory Flexibility Act
An initial regulatory flexibility analysis (IRFA) was included in
the proposal in accordance with section 3(a) of the Regulatory
Flexibility Act, 5 U.S.C. 601 et seq. (RFA). In the IRFA, the Board
requested comment on all aspects of the IRFA, and, in particular,
comments on the cost of the proposed expeditious return rules to small
depository institutions. The Board also requested comments on any
approaches, other than the proposed alternatives, that would reduce the
burden on all entities. Finally, the Board requested comments on any
significant alternatives that would minimize the impact of the proposal
on small entities.
The RFA requires an agency to prepare a final regulatory
flexibility analysis (FRFA) unless the agency certifies that the rule
will not, if promulgated, 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 final regulation. The final rule
applies to all depository institutions. The Board has prepared the
following FRFA pursuant to the RFA.
B. Statement of the Need for, and Objectives of, the Final Rule
The Board is finalizing the foregoing amendments to Regulation CC
pursuant to its authority under the EFA Act and the Check 21 Act. The
final rule reflects the substantial transition in the collection of
checks from a largely paper-based process to one that is virtually all-
electronic. The full benefits and cost savings of the electronic check-
processing methods facilitated by the Check 21 Act cannot be realized
so long as some banks continue to employ paper-processing methods. The
objective of the final rule is to encourage all banks to collect and
return checks electronically.
C. Description of Small Entities Affected by the Final Rule
The final rule would apply to all depository institutions
regardless of their size.\68\ Pursuant to regulations issued by the
Small Business Administration (13 CFR 121.201), a ``small banking
organization'' includes a depository institution with $550 million or
less in total assets. Based on call report data as of December 2016,
there are approximately 10,185 depository institutions that have total
domestic assets of $550 million or less and thus are considered small
entities for purposes of the RFA. Based on data regarding checks
returned through the Reserve Banks, the Board estimates that by the
beginning of 2017, approximately 89 percent of small depository
institutions have arrangements to receive returned checks
electronically, whereas 11 percent (approximately 500 small depository
institutions) had not.
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\68\ The final rule would not impose costs on any small entities
other than depository institutions.
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[[Page 27577]]
D. Summary of Significant Issues Raised by Public Comments in Response
to the Board's IRFA, the Board's Assessment of Such Issues, and a
Statement of Any Changes Made as a Result of Such Comments
The Board did not receive any comments explicitly in response to
the IRFA in the proposed rule. Commenters, however, discussed the
proposed rule's impact on small entities. Some commenters expressed
concerns that the proposed expeditious return requirements, both
Alternatives 1 and 2, would penalize small entities that still require
paper returns. Some commenters also stated that the Board's proposed
remote deposit capture indemnity would be too burdensome on small
institutions and discourage them from offering the service to its
customers.
In the final rule, as described in detail above, the Board adopted
an expeditious return requirement that incorporates elements of both
alternatives that had been proposed. The final rule's expeditious
return requirement is intended to encourage the broadest possible
implementation of electronic check return for those remaining
institutions still using paper. A small depositary bank that currently
receives returned checks in paper form and that chooses to begin to
receive returned checks electronically will incur some cost associated
with that transition. As explained in more detail below, the Board
continues to expect that these costs would be relatively low for a
small depositary bank, which typically would receive only a small
volume of returned checks. Under the final rule, small depositary banks
may also choose to accept only paper returns; however, they will not be
able to make a claim against the paying bank or returning bank that a
check was not returned expeditiously. The Board expects that each small
depositary bank will weigh the costs and benefits of whether to accept
returns electronically.
In the final rule, the Board adopted the proposed remote deposit
capture indemnity, with an added exception. Some of the commenters that
stated the proposed remote capture indemnity would cause small entities
to stop offering remote capture indemnity suggested that the Board
incorporate a provision such that a depositary bank that accepts an
original check containing a restrictive indorsement inconsistent with
the means of deposit should not be able to make an indemnity claim. The
Board has added this exception to the indemnity and associated
commentary, as described in detail above. A depository institution,
whether small or large, that accepts a check via remote deposit capture
can protect itself through rules and safeguards with respect to the
actions of its own customer and is in the best position to guard
against the subsequent deposit of the paper check.
E. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
By conditioning the depositary bank's ability to make an
expeditious return claim on whether it has commercially reasonable
arrangements in place to receive the returned check electronically, the
final rule would encourage, but not require, depositary banks to accept
check returns in electronic form. As stated above, a depositary bank
that currently receives returned checks in paper form and that chooses
to begin to receive returned checks electronically will incur some cost
associated with that transition. The Board continues to expect 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, the Federal Reserve Banks 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.\69\ To receive returned checks in this fashion, a depositary
bank may need to establish an electronic connection to a Reserve Bank,
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
continues to estimate that this transition would cost a small
depositary bank approximately $3,000 annually.\70\
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\69\ 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.
\70\ This estimate takes into account the cost to a small
depositary bank to establish and maintain an electronic connection
to a Reserve Bank, which is estimated to be $190 per month. See 81
FR 75058 (Oct. 28, 2016). Some small banks 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 banker's bank, corporate credit union,
or nonbank processor.
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Conversely, a small depositary bank that does not choose to accept
returned checks electronically would, under the final rule, incur
additional risk associated with that decision. Specifically, if a paper
returned check is not delivered to the bank in a timely fashion, the
bank might make funds available to its depositor before learning
whether the check has been returned unpaid. A depositary bank that has
no arrangements in place to accept returned checks electronically will
be unable to make an expeditious return claim against the paying bank
or returning bank. As stated above, 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 rule by making arrangements to accept returned checks
electronically, directly or indirectly, by commercially reasonable
means from the paying bank or returning bank.
Any costs to a small depositary 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.
Regulation CC currently requires a paying bank that determines not
to pay a check in the amount of $2,500 or more to 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 the notice. Under the
Board's final rule, a paying bank is required to provide a notice of
nonpayment if a paying bank determines not a pay a check in the amount
of $5,000 or more. (Return of the check itself would continue to
satisfy the notice requirement if the return meets the timeframe
requirement for notice.) The Board therefore expects that its final
rule will reduce the number of notices that paying banks send.
The final rule also requires that the paying bank send a notice of
nonpayment such that the notice or check would normally be received by
the depositary bank by 2 p.m. local time of the depositary bank, as
opposed to the currently required 4 p.m. local time, on the second
business day following the banking day of presentment. This earlier
required time for receipt by the depositary bank may impose additional
cost on the paying bank sending notice or returned check. However, any
[[Page 27578]]
increased cost to a paying bank associated with delivering a notice or
returned check by the earlier time may not be material depending on a
bank's current processing schedules, and it may be offset by reduced
depositary bank losses associated with checks that are returned unpaid.
Furthermore, the Board does not expect the earlier required time to
incur any additional cost for paying banks that rely on the return of
the check to satisfy its notice of nonpayment requirement because both
must be sent such that the notice or check would normally be received
by the depositary bank by 2 p.m. on the second business day following
the banking day of presentment.
Regulation CC currently applies only to paper checks. In the final
rule, the Board is amending Regulation CC to create a regulatory
framework for the collection and return of electronic images and
electronic information. This framework includes applying existing
paper-check warranties and the Check-21-like warranties to electronic
checks and electronic returned checks. These warranties include, for
example, the returned-check warranties; the notice of nonpayment
warranties; the settlement amount, encoding, and offset warranties; and
the transfer and presentment warranties related to a remotely created
check. These warranties can be varied by agreement between banks. The
Board does not expect depository institutions to incur extra costs
associated with these changes, as in many cases these or similar
warranties are generally included in interbank agreements for
electronic image exchange or in clearinghouse rules. In addition, while
the new warranties impose liabilities on the warranting entities, the
Board believes that the current practices of most institutions in the
check collection chain are consistent with the warranties and does not
expect that warranting entities will need to take any additional steps
to protect themselves.
The Board has adopted in the final rule indemnities for
electronically-created items and remote deposit capture, as described
fully above. The Board believes that these indemnities place
appropriate incentives on the parties best positioned to minimize risk.
The Board finds that it is reasonable to expect that small depositary
banks will weigh the costs and benefits associated with transferring
electronically-created items, as well as offering remote deposit
capture, and take the appropriate precautions to limit risk.
For example, a depositary bank that is unsure whether an
electronically-created item was authorized may choose not to accept the
item for deposit. A bank that does accept such an item and sends it for
collection accepts the risk that it may be required to indemnify a
subsequent bank collecting bank from any losses due to the fact that
the item was not authorized. Similarly, a bank that offers remote
deposit capture may require that the customer indorse the check with
the words ``for mobile deposit only'' before capturing the check or
take other steps to protect against a deposit of the original check.
The Board believes that these indemnities will provide basic
protections for banks handling electronically-created items and help
prevent multiple deposits of the same item.
F. Significant Alternatives to the Proposed Rule
As discussed above in this Federal Register notice and in the 2011
and 2014 proposals, the Board has extensively considered possible
alternatives to the expeditious return requirement and framework for
electronic checks. As explained in detail in the preamble, the Board
believes that the other alternatives would either impose greater costs
on small entities than would this final rule, or would be less
effective in providing appropriate incentives for electronic check
collection.
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 amends 12 CFR
part 229 as follows:
PART 229--AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS
(REGULATION CC)
0
1. The authority citation for part 229 continues to read as follows:
Authority: 12 U.S.C. 4001-4010, 12 U.S.C. 5001-5018.
Subpart A--General
0
2. In Sec. 229.1, paragraph (b)(3) is revised and paragraphs (b)(5)
through (10) are added to read as follows:
Sec. 229.1 Authority and purpose; organization
* * * * *
(b) * * *
(3) Subpart C of this part contains rules to expedite the
collection and return of checks and electronic checks by banks. These
rules cover the direct return of checks and electronic checks, the
manner in which the paying bank and returning banks must return checks
and electronic checks to the depositary bank, notification of
nonpayment by the paying bank, indorsement and presentment of checks
and electronic checks, same-day settlement for certain checks, the
liability of banks for failure to comply with subpart C of this part,
and other matters.
* * * * *
(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 B of this part is reserved.
(7) 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.
(8) Appendix D of this part is reserved.
(9) Appendix E of this part contains Board interpretations, which
are labeled ``Commentary,'' of the provisions of this 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)).
(10) 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.
0
3. In Sec. 229.2, paragraphs (dd), (uu), (vv), and (bbb) are revised
and paragraphs (ggg) and (hhh) are added to read as follows:
Sec. 229.2 Definitions
* * * * *
(dd) Routing number means--
(1) The number printed on the face of a check in fractional form on
in nine-digit form;
(2) The number in a bank's indorsement in fractional or nine-digit
form; or
(3) For purposes of subpart C and subpart D, the bank-
identification number contained in an electronic check or electronic
returned check.
* * * * *
(uu) Indemnifying bank. Indemnifying bank means--
(1) For the purposes of Sec. 229.34, a bank that provides an
indemnity under
[[Page 27579]]
Sec. 229.34 with respect to remote deposit capture or an
electronically-created item, or
(2) For the purposes of Sec. 229.53, a bank that provides an
indemnity under Sec. 229.53 with respect to a substitute check.
(vv) 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 (unless the Board
by rule or order determines that different standards apply)--
(1) 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, or
(2) For purposes of subpart C and subpart D, contained in a record
specified for MICR line data in an electronic check or electronic
returned check in accordance with American National Standard
Specifications for Electronic Exchange of Check Image Data--Domestic,
X9.100-187 (hereinafter ANS X9.100--187).
* * * * *
(bbb) Copy and sufficient copy. (1) A copy of an original check
means--
(i) Any paper reproduction of an original check, including a paper
printout of an electronic image of the check, a photocopy of the
original check, or a substitute check; or
(ii) Any electronic reproduction of a check that a recipient has
agreed to receive from the sender instead of a paper reproduction.
(2) 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.
* * * * *
(ggg) Electronic check and electronic returned check mean an
electronic image of, and electronic information derived from, a paper
check or paper returned check, respectively, that--
(1) Is sent to a receiving bank pursuant to an agreement between
the sender and the receiving bank; and
(2) Conforms with ANS X9.100-187, unless the Board by rule or order
determines that a different standard applies or the parties otherwise
agree.
(hhh) Electronically-created item means an electronic image that
has all the attributes of an electronic check or electronic returned
check but was created electronically and not derived from a paper
check.
Subpart C--Collection of Checks
0
4. Section 229.30 is revised to read as follows:
Sec. 229.30 Electronic checks and electronic information.
(a) Checks under this subpart. Electronic checks and electronic
returned checks are subject to this subpart as if they were checks or
returned checks, except where ``paper check'' or ``paper returned
check'' is specified. For the purposes of this subpart, the term
``check'' or ``returned check'' as used in Subpart A includes
``electronic check'' or ``electronic returned check,'' except where
``paper check'' or ``paper returned check'' is specified.
(b) Writings. If a bank is required to provide information in
writing under this subpart, the bank may satisfy that requirement by
providing the information electronically if the receiving bank agrees
to receive that information electronically.
0
5. Section 229.31 is revised to read as follows:
Sec. 229.31 Paying bank's responsibility for return of checks and
notices of nonpayment.
(a) Return of checks. (1) Subject to the requirement of expeditious
return under paragraph (b) of this section, a paying bank may send a
returned check to the depositary bank, to any other bank agreeing to
handle the returned check, or as provided in paragraph (a)(2) of this
section.
(2) A paying bank that is unable to identify the depositary bank
with respect to a check may send the returned check to any bank that
handled the check for forward collection and must advise the bank to
which the check is sent that the paying bank is unable to identify the
depositary bank.
(3) 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.
(4) Except as provided in paragraph (g) of this section, this
section does not affect a paying bank's responsibility to return a
check within the deadlines required by the UCC or Regulation J (12 CFR
part 210).
(b) Expeditious return of checks. (1) Except as provided in
paragraph (d) of this section, if a paying bank determines not to pay a
check, it shall return the check in an expeditious manner such that the
check would normally be received by the depositary bank not later than
2 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.
(2) If the second business day following the banking day on which
the check was presented to the paying bank is not a banking day for the
depositary bank, the paying bank satisfies the expeditious return
requirement if it sends the returned check in a manner such that the
depositary bank would normally receive the returned check not later
than 2 p.m. (local time of the depositary bank) on the depositary
bank's next banking day.
(c) Notice of nonpayment. (1) If a paying bank determines not to
pay a check in the amount of $5,000 or more, it shall provide notice of
nonpayment such that the notice would normally be received by the
depositary bank not later than 2 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. If the day the paying bank is
required to provide notice is not a banking day for the depositary
bank, receipt of notice not later than 2 p.m. (local time of the
depositary bank) on the depositary bank's next banking day constitutes
timely notice. Notice may be provided by any reasonable means,
including the returned check, a writing (including a copy of the
check), or telephone.
(2)(i) To the extent available to the paying bank, notice must
include the information contained in the check's MICR line when the
check is received by the paying bank, as well as--
(A) Name of the payee(s);
(B) Amount;
(C) Date of the indorsement of the depositary bank;
(D) The bank name, routing number, and trace or sequence number
associated with the indorsement of the depositary bank; and
(E) Reason for nonpayment.
(ii) If the paying bank is not sure of the accuracy of an item of
information, it shall include the information required by this
paragraph to the extent possible,
[[Page 27580]]
and identify any item of information for which the bank is not sure of
the accuracy.
(iii) The notice may include other information from the check that
may be useful in identifying the check being returned and the customer.
(d) Exceptions to the expeditious return of checks and notice of
nonpayment requirements. The expeditious return and notice of
nonpayment requirements of paragraphs (b) and (c) of this section do
not apply if--
(1) The check is deposited in a depositary bank that is not subject
to subpart B of this part; or
(2) A paying bank is unable to identify the depositary bank with
respect to the check.
(e) Identification of returned check. A paying bank returning a
check shall clearly indicate on the front of the check that it is a
returned check and the reason for return. If the paying bank is
returning a substitute check or an electronic returned check, the
paying bank shall include this information such that the information
would be retained on any subsequent substitute check.
(f) Notice in Lieu of Return. 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 paragraph (c)(2)
of this section. The copy or written 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 requirements of this
subpart.
(g) Extension of deadline. The deadline for return or notice of
dishonor or nonpayment under the UCC or Regulation J (12 CFR part 210),
or Sec. 229.36(d)(3) and (4) is extended to the time of dispatch of
such return or notice if the depositary bank (or the receiving bank, if
the depositary bank is unidentifiable) receives the returned check or
notice--
(1) On or before the depositary bank's (or 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. (local time
of the depositary bank or receiving bank) or later set by the
depositary bank (or receiving bank) under UCC 4-108, for all deadlines
other than those described in paragraph (g)(2) of this section; 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 UCC) for the paying bank.
(h) 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.
(i) Reliance on routing number. A paying bank may return a returned
check based on any routing number designating the depositary bank
appearing on the returned check in the depositary bank's indorsement.
0
6. Section 229.32 is revised to read as follows:
Sec. 229.32 Returning bank's responsibility for return of checks.
(a) Return of checks. (1) Subject to the requirement of expeditious
return under paragraph (b) of this section, a returning bank may send a
returned check to the depositary bank, to any other bank agreeing to
handle the returned check, or as provided in paragraph (a)(2) of this
section.
(2) A returning bank that is unable to identify the depositary bank
with respect to a check may send the returned check to any collecting
bank that handled the returned check for forward collection if the
returning bank was not a collecting bank with respect to the returned
check, or to 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 to a bank must advise the
bank to which the returned check is sent that the returning bank is
unable to identify the depositary bank.
(3) A returning 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.
(b) Expeditious return of checks. (1) Except as provided in
paragraph (c) of this section, a returning bank shall return a returned
check in an expeditious manner such that the check would normally be
received by the depositary bank not later than 2 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.
(2) If the second business day following the banking day on which
the check was presented to the paying bank is not a banking day for the
depositary bank, the returning bank satisfies the expeditious return
requirement if it sends the returned check in a manner such that the
depositary bank would normally receive the returned check not later
than 2 p.m. (local time of the depositary bank) on the depositary
bank's next banking day.
(c) Exceptions to the expeditious return of checks. The expeditious
return requirement of paragraph (b) of this section does not apply if--
(1) The check is deposited in a depositary bank that is not subject
to subpart B of this part;
(2) A paying bank is unable to identify the depositary bank with
respect to the check; or
(3) The bank handles a misrouted returned check pursuant to Sec.
229.33(f).
(d) 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 such copy is available, a written
notice of nonpayment containing the information specified in Sec.
229.31(c). The copy or written 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 requirements of this section
and the other requirements of this subpart.
(e) 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.
(f) Charges. A returning bank may impose a charge on a bank sending
a returned check for handling the returned check.
(g) Reliance on routing number. A returning bank may return a
returned check based on any routing number designating the depositary
bank appearing on the returned check in the depositary bank's
indorsement or in magnetic ink on a qualified returned check.
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7. Section 229.33 is revised to read as follows:
Sec. 229.33 Depositary bank's responsibility for returned checks and
notices of nonpayment.
(a) Right to assert claim. (1) A paying bank or returning bank may
be liable to a depositary bank under Sec. 229.38 for failing to return
a check in an
[[Page 27581]]
expeditious manner only if the depositary bank has arrangements in
place such that the paying bank or returning bank could return a
returned check to the depositary bank electronically, directly or
indirectly, by commercially reasonable means.
(2) For purposes of paragraph (a)(1) of this section, the
depositary bank that has asserted a claim has the burden of proof for
demonstrating that the depositary bank's arrangements meet the standard
of paragraph (a)(1).
(b) Acceptance of electronic returned checks and electronic notices
of nonpayment. A depositary bank's agreement with the transferor bank
governs the terms under which the depositary bank will accept
electronic returned checks and electronic written notices of
nonpayment.
(c) Acceptance of paper returned checks and paper notices of
nonpayment. (1) A depositary bank shall accept paper returned checks
and paper notices of nonpayment during its banking day--
(i) At a location, if any, at which presentment of paper checks for
forward collection is requested by the depositary bank; and
(ii)(A) At a branch, head office, or other location consistent with
the name and address of the bank in its indorsement on the check;
(B) 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; or
(C) If no routing number or address appears in its indorsement on
the check, at any branch or head office of the bank.
(2) A depositary bank may require that paper returned checks be
separated from paper forward collection checks.
(d) Acceptance of oral notices of nonpayment. A depositary bank
shall accept oral notices of nonpayment during its banking day--
(1) At the telephone number indicated in the indorsement; and
(2) At any other number held out by the bank for receipt of notice
of nonpayment.
(e) Payment. (1) A depositary bank shall pay the returning bank or
paying bank returning the check to it for the amount of the check prior
to the close of business on the depositary bank's banking day on which
it received the check (``payment date'') by--
(i) Debit to an account of the depositary bank on the books of the
returning bank or paying bank;
(ii) Cash;
(iii) Wire transfer; or
(iv) Any other form of payment acceptable to the returning bank or
paying bank.
(2) The proceeds of the payment must be available to the returning
bank or paying bank in cash or by credit to an account of the returning
bank or paying bank on or as of the payment date. If the payment date
is not a banking day for the returning bank 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 bank or paying bank. These payments are final when made.
(f) Misrouted returned checks and written notices of nonpayment. If
a bank receives a returned check or written notice of nonpayment 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 or notice, it
shall either promptly send the returned check or notice to the
depositary bank directly or by means of a returning bank agreeing to
handle the returned check or notice, or send the check or notice back
to the bank from which it was received.
(g) Charges. A depositary bank may not impose a charge for
accepting and paying checks being returned to it.
(h) Notification to customer. If the depositary bank receives a
returned check, notice of nonpayment, or notice of recovery under Sec.
229.35(b), 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, notice of nonpayment, or notice of
recovery, or within a longer reasonable time.
(i) Depositary bank without accounts. The requirements of this
section with respect to notices of nonpayment do not apply to checks
deposited in a depositary bank that does not maintain accounts.
0
8. Section 229.34 is revised to read as follows:
Sec. 229.34 Warranties and indemnities.
(a) Warranties with respect to electronic checks and electronic
returned checks. (1) Each bank that transfers or presents an electronic
check or electronic returned check 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
includes an accurate record of all MICR line information required for a
substitute check under Sec. 229.2(aaa) 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 check or electronic returned
check, 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 makes the warranties under paragraph (a)(1) of
this section makes the warranties to--
(i) In the case of transfers for collection or presentment, the
transferee bank, any subsequent collecting bank, the paying bank, and
the drawer; and
(ii) In the case of transfers for return, the transferee returning
bank, any subsequent returning bank, the depositary bank, and the
owner.
(b) 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
(b)(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 (b)(1) of this section, the warranting bank may defend by
proving that the customer of the paying bank is precluded under UCC 4-
406, as applicable, from asserting against the paying bank the
unauthorized issuance of the check.
(c) Settlement amount, encoding, and offset warranties. (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 bank, returning bank, 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
[[Page 27582]]
encoded after issue regarding the check or returned check is accurate.
For purposes of this paragraph, the information encoded after issue
regarding the check or returned check means any information that could
be encoded in the MICR line of a paper check.
(4) If a bank settles with another bank for checks presented, or
for returned checks for which it is the depositary bank, in an 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.
(d) Returned check warranties. (1) Each paying bank or returning
bank that transfers a 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--
(i) 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 UCC or Sec.
229.31(g) of this part;
(ii) It is authorized to return the check;
(iii) The check has not been materially altered; and
(iv) In the case of a notice in lieu of return, the check has not
and will not be returned.
(2) 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.
(e) Notice of nonpayment warranties. (1) 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--
(i) 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 UCC or Sec. 229.31(g) of this part;
(ii) It is authorized to send the notice; and
(iii) The check has not been materially altered.
(2) These warranties are not made with respect to checks drawn on
the Treasury of the United States, U.S. Postal Service money orders, or
check drawn on a state or a unit of general local government that are
not payable through or at a bank.
(f) Remote deposit capture indemnity. (1) The indemnity described
in paragraph (f)(2) of this section is provided by a depositary bank
that--
(i) Is a truncating bank under Sec. 229.2(eee)(2) because it
accepts deposit of an electronic image or other electronic information
related to an original check;
(ii) Does not receive the original check;
(iii) Receives settlement or other consideration for an electronic
check or substitute check related to the original check; and
(iv) Does not receive a return of the check unpaid.
(2) A bank described in paragraph (f)(1) of this section shall
indemnify, as set forth in Sec. 229.34(i), a depositary bank that
accepts the original check for deposit for losses incurred by that
depositary bank if the loss is due to the check having already been
paid.
(3) A depositary bank may not make an indemnity claim under
paragraph (f)(2) of this section if the original check it accepted for
deposit bore a restrictive indorsement inconsistent with the means of
deposit.
(g) Indemnities with respect to electronically-created items. Each
bank that transfers or presents an electronically-created item and
receives a settlement or other consideration for it shall indemnify, as
set forth in Sec. 229.34(i), each transferee bank, any subsequent
collecting bank, the paying bank, and any subsequent returning bank
against losses that result from the fact that--
(1) The electronic image or electronic information is not derived
from a paper check;
(2) The person on whose account the electronically-created item is
drawn did not authorize the issuance of the item in the amount stated
on the item or to the payee stated on the item (for purposes of this
paragraph (g)(2), ``account'' includes an account as defined in section
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); or
(3) A person receives a transfer, presentment, or return of, or
otherwise is charged for an electronically-created item such that the
person is asked to make payment based on an item or check it has
already paid.
(h) Damages. Damages for breach of the warranties in this section
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.
(i) Indemnity amounts. (1) The amount of the indemnity in
paragraphs (f)(2) and (g) of this section shall not exceed the sum of--
(i) The amount of the loss of the indemnified bank, up to the
amount of the settlement or other consideration received by the
indemnifying bank; and
(ii) Interest and expenses of the indemnified bank (including costs
and reasonable attorney's fees and other expenses of representation).
(2)(i) If a loss described in paragraph (f)(2) or (g) of this
section results in whole or in part from the indemnified bank's
negligence or failure to act in good faith, then the indemnity amount
described in paragraph (i)(1) of this section shall be reduced in
proportion to the amount of negligence or bad faith attributable to the
indemnified bank.
(ii) Nothing in this paragraph (i)(2) affects the rights of a
person under the UCC or other applicable provision of state or federal
law.
(j) Tender of defense. If a bank is sued for breach of a warranty
or for indemnity 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.
(k) Notice of claim. Unless a claimant gives notice of a claim for
breach of warranty or for indemnity under this section to the bank that
made the warranty or indemnification within 30 days after the claimant
has reason to know of the breach or facts and circumstances giving rise
to the indemnity and the identity of the warranting or indemnifying
bank, the warranting or indemnifying bank is discharged to the extent
of any loss caused by the delay in giving notice of the claim.
0
9. In Sec. 229.35, paragraphs (a) and (d) are revised to read as
follows:
Sec. 229.35 Indorsements.
(a) Indorsement standards. A bank (other than a paying bank) that
handles a check during forward collection or a returned check shall
indorse the check in a manner that permits a person to interpret the
indorsement, in accordance with American National
[[Page 27583]]
Standard (ANS) Specifications for Physical Check Endorsements, X9.100-
111 (ANS X9.100-111), for a paper check other than a substitute check;
ANS Specifications for an Image Replacement Document, X9.100-140 (ANS
X9.100-140), for a substitute check; and ANS Specifications for
Electronic Exchange of Check and Image Data--Domestic, X9.100-187 (ANS
X9.100-187), for an electronic check; unless the Board by rule or order
determines that different standards apply or the parties otherwise
agree.
* * * * *
(d) Indorsement for depositary bank. A depositary bank may arrange
with another bank to apply the other bank's indorsement as the
depositary bank indorsement, provided that any indorsement of the
depositary bank on the check avoids the area reserved for the
depositary bank indorsement as specified in the indorsement standard
applicable to the check under paragraph (a) of this section. The other
bank indorsing as depositary bank is considered the depositary bank for
purposes of subpart C of this part.
0
10. Section 229.36 is revised to read as follows:
Sec. 229.36 Presentment and issuance of checks.
(a) Receipt of electronic checks. The terms under which a paying
bank will accept presentment of an electronic check is governed by the
paying bank's agreement with the presenting bank.
(b) Receipt of paper checks. (1) A paper check is considered
received by the paying bank when it is received--
(i) At a location to which delivery is requested by the paying
bank;
(ii) At an address of the bank associated with the routing number
on the check, whether contained in the MICR line or in fractional form;
(iii) 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; or
(iv) At any branch or head office, if the bank is identified on the
check by name without address.
(2) A bank may require that checks presented to it as a paying bank
be separated from returned checks.
(c) 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.
(d) Same-day settlement. (1) A paper check is considered presented,
and a paying bank must settle for or return the check pursuant to
paragraph (d)(2) of this section, if a presenting bank delivers the
check in accordance with reasonable delivery requirements established
by the paying bank and demands payment under this paragraph (d)--
(i) At a location designated by the paying bank for receipt of
paper checks under this paragraph (d) at which the paying bank would be
considered to have received the paper check under paragraph (b) of this
section or, if no location is designated, at any location described in
paragraph (b) of this section; and
(ii) By 8 a.m. on a business day (local time of the location
described in paragraph (d)(1)(i) of this section).
(2) A paying bank may require that paper checks presented for
settlement pursuant to paragraph (d)(1) of this section be separated
from other forward-collection checks or returned checks.
(3) If presentment of a paper check meets the requirements of
paragraph (d)(1) 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.
(4) Notwithstanding paragraph (d)(3) of this section, if a paying
bank closes on a business day and receives presentment of a paper check
on that day in accordance with paragraph (d)(1) of this section--
(i) 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--
(A) 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
(B) Returns the check.
(ii) If the closing is voluntary, unless the paying bank settles
for or returns the check in accordance with paragraph (d)(3) 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.
0
11. In Sec. 229.38 paragraphs (b), (c), and (d) are revised to read as
follows:
Sec. 229.38 Liability.
* * * * *
(b) Paying bank's failure to make timely return. If a paying bank
fails both to comply with its expeditious return requirements under
Sec. 229.31(b) and with the deadline for return under the UCC,
Regulation J (12 CFR part 210), or the extension of deadline under
Sec. 229.31(g) in connection with a single nonpayment of a check, the
paying bank shall be liable under either Sec. 229.31(b) 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 or notice
of nonpayment (Sec. 229.33(b), (c), and (d)), 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.
(2) 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.
* * * * *
0
12. Section 229.39 is revised to read as follows:
Sec. 229.39 Insolvency of bank.
(a) Duty of receiver to return unpaid checks. A check or returned
check in, or coming into, the possession of a paying
[[Page 27584]]
bank, collecting bank, depositary bank, or returning bank that suspends
payment, and which is not paid, shall be returned by the receiver,
trustee, or agent in charge of the closed bank to the bank or customer
that transferred the check to the closed bank.
(b) Claims against banks for checks not returned by receiver. If a
check or returned check is not returned by the receiver, trustee, or
agent in charge of the closed bank under paragraph (a) of this section,
a bank shall have claims with respect to the check or returned check as
follows:
(1) If the paying bank has finally paid the check, or if a
depositary bank is obligated to pay the returned check, and suspends
payment without making a settlement for the check or returned check
with the prior bank that is or becomes final, the prior bank has a
claim against the paying bank or the depositary bank.
(2) If a collecting bank, paying bank, 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 claim against the collecting bank or
returning bank.
(c) Preferred claim against presenting bank for breach of warranty.
If a paying bank settles with a presenting bank for one or more checks,
and if the presenting bank breaches a warranty specified in Sec.
229.34(c)(1) or (3) with respect to those checks and suspends payments
before satisfying the paying bank's warranty claim, the paying bank has
a preferred claim against the presenting bank for the amount of the
warranty claim.
(d) Finality of settlement. If a paying bank or depositary bank
gives, or a collecting bank, paying bank, or returning bank gives or
receives, a settlement for a check or returned check and thereafter
suspends payment, the suspension does not prevent or interfere with the
settlement becoming final if such finality occurs automatically upon
the lapse of a certain time or the happening of certain events.
0
13. Section 229.40 is revised to read as follows:
Sec. 229.40 Effect of merger transaction.
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.
0
14. Section 229.42 is revised to read as follows:
Sec. 229.42 Exclusions.
The expeditious return (Sec. Sec. 229.31(b) and 229.32(b)), notice
of nonpayment (Sec. 229.31(c)), and same-day settlement (Sec.
229.36(d)) 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.
0
15. In Sec. 229.43, paragraphs (a)(2) and (b) are revised to read as
follows:
Sec. 229.43 Checks payable in Guam, American Samoa, and the Northern
Mariana Islands.
(a) * * *
(2) Pacific island check means--
(i) 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); and
(ii) An electronic image of, and electronic information derived
from, a demand draft or returned demand draft drawn on or payable
through or at a Pacific island bank that--
(A) Is sent to a receiving bank pursuant to an agreement between
the sender and the receiving bank; and
(B) Conforms with ANS X9.100-187, unless the Board by rule or order
determines that a different standard applies or the parties otherwise
agree.
(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) or an electronic check defined in Sec. 229.2(ggg), 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) Section 229.30(a) (Checks under this subpart), and (b)
(Writings);
(2) Section 229.32 (Returning bank's responsibilities for return of
checks) except that the returning bank is not subject to the
requirement to return a Pacific Island check in an expeditious manner;
(3) Section 229.33(b) (Acceptance of electronic returned checks and
electronic notices of nonpayment), (c) (Acceptance of paper returned
checks and paper notices of nonpayment), Sec. 229.33(d) (Acceptances
of oral notices of nonpayment), Sec. 229.33(e) (Payment), Sec.
229.33(f) (Misrouted returned checks and written notices of
nonpayment), Sec. 229.33(g) (Charges);
(4) Section 229.34(a) (Warranties with respect to electronic checks
and electronic returned checks), Sec. 229.34(b) (Transfer and
presentment warranties with respect to a remotely-created check), Sec.
229.34(c)(2) (Cash letter total warranty), Sec. 229.34(c)(3) (Encoding
warranty), Sec. 229.34(f) (Remote deposit capture warranty), Sec.
229.34(g) (Indemnities with respect to electronically-created items),
Sec. 229.34(h) (Damages), Sec. 229.34(i) (Indemnity amounts), and
Sec. 229.34(j) (Tender of defense);
(5) Section 229.35 (Indorsements); for purposes of Sec. 229.35(c)
(Indorsement by a bank), the Pacific island bank is deemed to be a
bank;
(6) Section 229.36(c) (Liability of bank during forward
collection);
(7) Section 229.37 (Variation by agreement);
(8) Section 229.38 (Liability), except for Sec. 229.38(b) (Paying
bank's failure to make timely return);
(9) Section 229.39 (Insolvency of bank), except for Sec. 229.39(c)
(Preferred claim against presenting bank for breach of warranty); and
(10) Section 229.40 (Effect of merger transaction), Sec. 229.41
(Relation to state law) and Sec. 229.42 (Exclusions).
Subpart D--Substitute Checks
0
16. In Sec. 229.51, paragraphs (b)(2) through (3) are revised to read
as follows:
Sec. 229.51 General provisions governing substitute checks.
* * * * *
(b) * * *
(2) Identifies the reconverting bank in a manner that preserves any
previous reconverting-bank identifications, in accordance with ANS
X9.100-140; and
(3) Identifies the bank that truncated the original check, in
accordance with ANS X9.100-140.
* * * * *
0
17. In Sec. 229.52, paragraph (a) is revised to read as follows:
Sec. 229.52 Substitute check warranties.
(a) Content and provision of substitute-check warranties. (1) 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--
(i) The substitute check meets the requirements for legal
equivalence described in Sec. 229.51(a)(1) and (2); and
(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.
[[Page 27585]]
(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 in paragraph
(a)(1) of this section regardless of whether the bank received
consideration.
* * * * *
0
18. In Sec. 229.53, paragraph (a) is revised to read as follows:
Sec. 229.53 Substitute check indemnity.
(a) Scope of indemnity. (1) 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.
(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.
* * * * *
Appendix D to Part 229--[Removed and Reserved]
0
19. Appendix D to part 229 is removed and reserved.
0
20. In appendix E to part 229:
0
A. Under ``II. Section 229.2 Definitions'':
0
i. Revise paragraph 2 under ``Z. 229.2(z) Paying Bank'';
0
ii. Revise DD. 229(dd);
0
iii. Revise VV. 229.2(vv);
0
iv. Revise BBB. 229.2(bbb);
0
v. Add GGG. 229.2(ggg); and
0
vi. Add HHH. 229.2(hhh).
0
B. Revise XVI through XXVI and XXIX;
0
C. In ``XXX. Sec. 229.51 General provisions governing substitute
checks,'' revise paragraph B;
0
D. Revise XXXI;
0
E. In ``XXXII. Sec. 229.53 Substitute Check Indemnity,'' paragraphs A,
B.1., B.1. Examples, and B.3. are revised.
0
F. In ``XXXIII. Section 229.54 Expedited Recredit for Consumers,''
paragraph A.2. is revised.
The revisions and addition read as follows:
Appendix E to Part 229--Commentary
* * * * *
II. Section 229.2 Definitions
* * * * *
Z. 229.2(z) Paying Bank
* * * * *
2. Under Sec. 229.31, 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 and
notice of nonpayment requirements of Subpart C. The payable-through
or payable-at bank may contract with the payor with respect to its
liability in discharging these responsibilities. 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. Allowing
the payable-through bank additional time to forward checks to the
payor and await return or pay instructions from the payor may delay
the return of these checks, increasing the risks to depositary
banks. Subpart C of this part requires payable-through and payable-
at banks to return a check expeditiously based on the time the
payable-through or payable-at bank received the check for forward
collection.
* * * * *
DD. 229.2(dd) 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 form of the routing number of the paying bank
generally is printed in magnetic ink near the bottom of the check
(the MICR line; see ANS X9.13). In the case of an electronic check,
the routing number of the paying bank is contained in the electronic
image of the check (in nine-digit form and fractional form) and in
the electronic information related to the check (in nine-digit
form). When 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. Industry standards
require depositary banks, subsequent collecting banks, and returning
banks to place their routing numbers in nine-digit form in their
indorsements. (See Sec. 229.35 and commentary thereto).
* * * * *
VV. 229.2(vv) MICR Line
1. Information in the MICR line of a check must be printed in
accordance with ANS X9.13 for original checks and in accordance with
ANS X9.100-140 for substitute checks, and must be contained in
electronic checks in accordance with ANS X9.100-187. 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. Banks that exchange checks electronically may agree to
other standards for including MICR line information in the checks
that they exchange electronically.
* * * * *
BBB. 229.2(bbb) Sufficient Copy and Copy
1. A ``copy'' or a ``sufficient copy'' as defined in 229.2(bbb)
must be a paper reproduction of a check, unless the parties sending
and receiving the copy otherwise agree. Therefore, an electronic
image of a check is not a ``copy'' or a ``sufficient copy'' absent
an agreement to that effect. If a customer has agreed to receive
such information electronically, however, a bank that is required to
provide a copy or sufficient copy may satisfy that requirement by
providing an electronic image. (See Sec. 229.58).
2. A sufficient copy, which is used to resolve claims related to
the receipt of a substitute check, must be a copy of the original
check.
3. 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.
* * * * *
GGG. 229.2(ggg) Electronic Check and Electronic Returned Check
1. Banks often enter into agreements under which a check may be
transferred, returned, or presented electronically instead of
transferring, returning, or presenting the paper check. For example,
an agreement may provide that either an electronic image of the
[[Page 27586]]
check or electronic information related to the check may be sent
instead of the paper check. In order to satisfy Regulation CC's
definition of ``electronic check'' (or ``electronic returned
check''), however, both the electronic image of the check and
electronic information derived from the check must be sent. A
sending bank and receiving bank may also agree, for example, that
instead of sending the electronic check or electronic returned check
directly to the receiving bank, the electronic check or electronic
returned check may be sent to an intermediary that stores the
electronic check or electronic returned check on the receiving
bank's behalf and makes the electronic check or electronic returned
check available for the receiving bank to retrieve.
2. A sending bank must have an agreement with the receiving bank
in order to send an electronic check instead of a paper check. The
agreement to receive an electronic check or electronic returned
check may be either bilateral or through a Federal Reserve Bank
operating circular, clearinghouse rule, or other interbank
agreement. (See UCC 4-110).
3. ANS X9.100-187 is the most prevalent industry standard for
electronic checks and electronic returned checks that will enable
banks to create substitute checks. Multiple standards, however,
exist that would enable a bank to create a substitute check from an
electronic check. Therefore, the banks exchanging electronic checks
may agree that a different standard applies to electronic checks
exchanged between the two banks. Additionally, banks that exchange
checks electronically may agree to transfer, present, or return only
electronic images of checks or only electronic information related
to checks. In these situations, the sending bank and receiving bank
will have agreed to a different standard as ANS X9.100-187 requires
both an electronic image and electronic information.
4. Electronic checks and electronic returned checks as defined
in Regulation CC are subject to subpart C, except as otherwise
provided in that subpart. (See Sec. 229.30 and commentary thereto).
HHH. 229.2(hhh) Electronically-Created Item
1. Electronically-created items are also sometimes referred to
in the industry as ``electronic payment orders'' or ``EPOs.''
2. Because an electronically-created item as defined in
Regulation CC never existed in paper form, it does not meet the
definition of ``electronic check'' in 229.2(ggg) and therefore an
electronically-created item cannot be used to create a substitute
check that is the legal equivalent of the original paper check.
3. An electronically-created item can resemble an electronic
image of a paper check or an electronic image of a remotely created
check. (See 229.2(fff) (definition of remotely created check)).
Examples
a. A corporate customer of a bank, rather than printing and
mailing a paper check to a payee, electronically creates an image
that looks like an image of the corporate customer's paper checks
and emails the image to the payee.
b. A consumer uses a smart-phone application through which the
consumer provides the payee name, amount, and the consumer's
signature. The application electronically sends this information,
appearing formatted as a check, to the payee.
c. A consumer calls his utility company to make an emergency
bill payment, and provides his bank account information. The utility
company uses this information to create an electronically-created
item and deposits the electronically-created item with its bank to
obtain payment from the consumer.
* * * * *
XVI. Section 229.30 Electronic Checks and Electronic Information
A. 229.30(a) Checks Under This Subpart
1. A bank may agree to receive an electronic check or electronic
returned check from another bank instead of a paper check or
returned check. (See Sec. 229.2(bbb) and commentary thereto).
Section 229.30(a) does not give a bank the right to send an
electronic check or electronic returned check absent an agreement to
do so with the receiving bank.
2. Electronic checks and electronic returned checks are subject
to subpart C of this part as if they were checks or returned checks,
unless otherwise provided in subpart C. For example, Sec.
229.31(c), which requires a paying bank to provide a notice of
nonpayment if the paying bank determines not to pay a check in the
amount of $5,000 or more, also applies when a paying bank determines
not to pay an electronic check in the amount of $5,000 or more. A
depositary bank's obligation to pay for a returned check (Sec.
229.33(e)) also applies with respect to an electronic returned
check.
Additionally, Sec. Sec. 229.33(b) and 229.36(a) specify that
the parties' agreements govern the receipt of electronic returned
checks and electronic written notices of nonpayment, and electronic
checks, respectively. Section 229.34(a) sets forth warranties that
are given only with respect to electronic checks and electronic
returned checks and section 229.34(f) sets forth an indemnity given
only with respect to remote deposit capture. Warranties that apply
to paper checks or paper returned checks also apply to electronic
checks and electronic returned checks, including Sec. 229.34(b)
(transfer and presentment warranties with respect to remotely
created checks), Sec. 229.34(c) (settlement amount, encoding, and
offset warranties), Sec. 229.34(d) (returned check warranties), and
Sec. 229.34(e) (notice of nonpayment warranties). The parties may,
by agreement, vary the effect of the provisions in subpart C of this
part as they apply to electronic checks and electronic returned
checks, except that as set forth in Sec. 229.37, no agreement can
disclaim the responsibility of a bank for its own lack of good faith
or failure to exercise ordinary care. (See Sec. 229.37 and
commentary thereto).
3. Certain provisions of subpart C relate solely to paper checks
or paper returned checks, as specified, such as Sec. 229.33(c)
(acceptance of paper returned checks) and Sec. 229.36(d) (same-day
settlement).
B. 229.30(b) Writings
1. Provisions in subpart C of this part require that a paying
bank or returning bank send information in writing. For example,
Sec. 229.31(f) requires that a notice in lieu be either a copy of
the check or a written notice of nonpayment. A bank may send
information required to be in writing in electronic form if the bank
sending the information has an agreement with the bank receiving the
information to do so.
XVII. Section 229.31 Paying Bank's Responsibility for Return of Checks
and Notices of Nonpayment
A. 229.31(a) Return of Checks
1. Routing of returned checks.
a. This subsection is subject to the requirements of expeditious
return provided in Sec. 229.31(b).
b. The paying bank acts, in effect, as an agent or subagent of
the depositary bank in selecting a means of return. Under Sec.
229.31(a), a paying bank is authorized to route the returned check
in a variety of ways:
i. It may send the returned check directly to the depositary
bank by sending an electronic returned check directly to the
depositary bank if the paying bank has an agreement with the
depositary bank to do so, or by using a courier or other means of
delivery, bypassing returning banks; or
ii. It may send the returned check or electronic returned check
to any returning bank agreeing to handle the returned check or
electronic returned check, regardless of whether or not the
returning bank handled the check for forward collection.
c. 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. A paper check may be returned to the
depositary bank at any physical location permitted under Sec.
229.33(c).
2. a. In some cases, a paying bank will be unable to identify
the depositary bank through the use of ordinary care and good faith.
These cases are now rare as depositary banks generally apply their
indorsements electronically. A paying bank, for example, would be
unable to identify the depositary bank if the depositary bank's
indorsement is neither in an addenda record nor within the image of
the check that was presented electronically. A paying bank, however,
would not be ``unable'' to identify the depositary bank merely
because the depositary bank's indorsement is available within the
image rather than attached as an addenda record.
b. In cases where the paying bank is unable to identify the
depositary bank, the paying bank may send the returned check to a
returning bank that agrees to handle the returned check. The
returning bank may be better able to identify the depositary bank.
c. 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 presenting bank or a prior collecting
bank is required to accept the returned check and send it to another
prior collecting bank in the path used for forward
[[Page 27587]]
collection or to the depositary bank. If the paying bank has an
agreement to send electronic returned checks to a bank that handled
the check for forward collection, the paying bank may send the
electronic returned check to that bank.
d. A paying bank returning a check to a prior collecting bank
because it is unable to identify the depositary bank 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. In the case of an
electronic returned check, the advice requirement may be satisfied
as agreed to by the parties. The advice will warn the bank that this
check will require special research and handling in accordance with
Sec. 229.32(a)(2). The returned check may not be prepared as a
qualified return.
e. 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 UCC 4-208.
3. Midnight deadline. Except for the extension permitted by
Sec. 229.31(g), discussed below, this section does not relieve a
paying bank from the requirement for timely return (i.e., midnight
deadline) under UCC 4-301 and 4-302, which continue to apply. Under
UCC 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 UCC 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, the UCC midnight deadline gives the paying bank an incentive
to make a prompt return.
4. UCC provisions affected. This paragraph directly affects the
following provisions of the UCC, 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 settlement for returned checks is
made under Sec. 229.32(e), not by revocation of settlement.
B. 229.31(b) Expeditious Return of Checks
1. This section requires a paying bank (which, for purposes of
subpart C, may include a payable-through and payable-at bank (see
Sec. 229.2(z)) that determines not to pay a check to return the
check expeditiously. Section 229.31(d) sets forth exceptions to this
general rule. If a paying bank is not subject to the requirement for
expeditious return under Sec. 229.31(b), the paying bank,
nonetheless, must return the check within its deadlines under the
UCC, Regulation J (12 CFR part 210) or Sec. Sec. 229.36(d)(3) and
(f)(4), as extended by Sec. 229.31(g), for returning the item or
sending notice.
2. Two-Day Test
a. A returned check, including the original check, substitute
check, or electronic returned check, is returned expeditiously if a
paying bank sends the returned check in a manner such that the
returned check would normally be received by the depositary bank not
later than 2 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.
b. A paying bank may satisfy its expeditious return requirement
by returning either an electronic returned check or a paper check.
For example, a paying bank could meet the expeditious return test by
sending an electronic returned check directly to the depositary
bank, if the paying bank has an agreement with the depositary bank
to do so, such that it normally would reach the depositary bank by
the specified deadline, or sending an electronic returned check to a
returning bank, if the paying bank has an agreement with the
returning bank to do so, within the returning bank's timeframe for
delivering electronic returned checks to the depositary bank within
the return deadline. A paying bank that sends a returned check in
paper form would typically need a highly expeditious means of
delivery to meet the expeditious return test.
c. This test does not require actual receipt of the returned
check by the depositary bank within the specified deadline. In
determining whether an electronic returned check would normally
reach a depositary bank within the specified deadline, a paying bank
may rely on a returning bank's return deadlines and availability
schedules for electronic returned checks and returned checks
destined for the depositary bank. A paying bank may not rely on the
availability schedules if the paying bank has reason to believe that
these schedules do not reflect the actual time for return of an
electronic returned check to the depositary bank to which the paying
bank is returning the check. The paying bank is not responsible for
unforeseeable delays in the return of the check, such as
communication failures or transportation delays.
d. Where the second business day following presentment of the
check to the paying bank is not a banking day for the depositary
bank, the depositary bank might not process checks on that day.
Consequently, if the last day of the time limit is not a banking day
for the depositary bank, the check may be delivered to the
depositary bank not later than 2 p.m. (local time of the depositary
bank) on the depositary bank's next banking day and the return will
still be considered expeditious.
e. Paying banks and returning banks are subject to the
expeditious return rule, however, under section 229.33(a) a paying
or returning bank may be liable to a depositary bank for failing to
return a check in an expeditious manner only if the depositary bank
has arrangements in place such that the paying or returning bank
could return a returned check to the depositary bank electronically
by commercially reasonable means. The depositary bank has the burden
of proof for demonstrating that its arrangements are commercially
reasonable.
3. Examples
a. The paying bank and depositary bank have a bilateral
agreement under which the depositary bank agrees to receive
electronic returned checks directly from the paying bank. If a check
is presented to a paying bank on Monday, the paying bank should send
the returned check such that an electronic returned check normally
would be received by the depositary bank by 2 p.m. (local time of
the depositary bank) on Wednesday. This result is the same if,
instead of a bilateral agreement, the paying bank and depositary
bank are members of the same clearinghouse and agree to exchange
electronic returned checks under clearinghouse rules.
b. The depositary bank has an agreement to receive electronic
returned checks from Returning Bank A but not from the paying bank.
The paying bank, however, has an agreement with Returning Bank A to
send electronic returned checks to Returning Bank A. If a check is
presented to the paying bank on Monday, the paying bank should send
the returned check such that the depositary bank normally would
receive the returned check by 2 p.m. (local time of the depositary
bank) on Wednesday. A paying bank may satisfy this requirement by
sending either an electronic returned check or a paper returned
check to Returning Bank A in a manner that permits Returning Bank A
to send an electronic returned check to the depositary bank by 2
p.m. on Wednesday. The paying bank may also send a paper returned
check to the depositary bank if a paper returned check would
normally be received by the depositary bank by 2 p.m. on Wednesday.
c. The paying bank has an agreement to send electronic returned
checks to Returning Bank A. The depositary bank has an agreement to
receive electronic returned checks from Returning Bank B. The paying
bank does not have an agreement to send electronic returned checks
to Returning Bank B. Returning Bank A, however, has an agreement to
send electronic returned checks to Returning Bank B. If a check is
presented to the paying bank on Monday, the paying bank should send
the returned check such that the depositary bank normally would
receive the returned check by 2 p.m. (local time of the depositary
bank) on Wednesday.
C. 229.31(c) Notice of Nonpayment
1. Requirement
a. The paying bank must send a notice of nonpayment if it
decides not to pay a check in the amount of $5,000 or more. Except
in the case where the returned check or a notice in lieu of return
serves as the notice of nonpayment, the notice of nonpayment carries
no value, and the check or substitute check must be returned in
addition to the notice of nonpayment. The paying bank must send the
notice of nonpayment such that it would normally be received by the
depositary bank not later than 2 p.m. (local time of the depositary
bank) on the second business day following presentment. In
determining whether the notice requirement is satisfied, the paying
bank may rely on the availability schedules of a third party that
[[Page 27588]]
provides the notice on behalf of the paying bank as the time that
the notice is expected to be delivered to the depositary bank,
unless the paying bank has reason to know the availability schedules
are inaccurate.
b. A bank identified by routing number as the paying bank is
considered the paying bank under this subpart and would be required
to provide a notice of nonpayment even though that bank determined
that the check was not drawn by a customer of that bank. (See
commentary to the definition of paying bank in Sec. 229.2(z)). A
bank designated as a payable-through or payable-at bank and to which
the check is sent for payment or collection is responsible for the
notice of nonpayment requirement. The payable-through or payable-at
bank may contract with the payor with respect to its liability in
discharging these responsibilities.
c. The paying bank should not send a notice of nonpayment until
it has finally determined not to pay the check. Under Sec.
229.34(e), by sending the notice the paying bank warrants that it
has returned or will return the check. If a paying bank sends a
notice and subsequently decides to pay the check, the paying bank
may mitigate its liability on this warranty by notifying the
depositary bank that the check has been paid.
d. The return of the check itself may serve as the required
notice of nonpayment. In some cases, the returned check may be
received by the depositary bank within the time requirements of
Sec. 229.31(c)(1) and no notice other than the return of the check
will be necessary. If the check is not received by the depositary
bank within the time limits for notice, the return of the check may
not satisfy the notice requirement. In determining whether the
returned check will satisfy the notice requirement, the paying bank
may rely on the availability schedules of returning banks as the
time that the returned check is expected to be delivered to the
depositary bank, unless the paying bank has reason to know the
availability schedules are inaccurate.
e. The requirement for notice does not affect the requirements
for return of the check under the UCC (or Sec. 229.31(b)). A paying
bank is not responsible for failure to give notice of nonpayment to
a party that has breached a presentment warranty under UCC 4-208,
notwithstanding that the paying bank may have returned the check.
(See UCC 4-208 and 4-302).
2. Content of Notices
a. This paragraph provides that, to the extent the information
is available to the paying bank, the notice must at a minimum
contain the information contained in the check's MICR line when the
check was received by the paying bank. The MICR line information
includes the paying bank's routing number, the account number of the
paying bank's customer, the check number, and auxiliary on-us fields
for corporate checks, and may include the amount of the check.
b. Although it has no duty to do so, a paying bank that cannot
identify the depositary bank from the check itself may wish to send
the notice to the earliest collecting bank it can identify and
indicate that the notice is not being sent to the depositary bank.
The collecting bank may be able to identify the depositary bank and
forward the notice, but is under no duty to do so. In addition, the
collecting bank may actually be the depositary bank.
c. A bank must identify an item of information if the bank is
uncertain as to that item's accuracy. A bank may make this
identification in accordance with general industry practices, or by
other reasonable means. For example, where the paying bank receives
a handwritten check with a payee name that the paying bank cannot
decipher using a good faith effort, the paying bank could include a
``?'' symbol in the payee's name field of the notice to indicate its
uncertainty as to that particular element.
D. 229.31(d) Exceptions to the Expeditious Return of Checks and
Notice of Nonpayment
1. Depositary Banks Not Subject to Subpart B of This Part
a. Subpart B of this part applies only to ``checks'' deposited
in transaction ``accounts.'' A depositary bank with only time or
savings accounts or credit card accounts need not comply with the
availability requirements of subpart B of Regulation CC. Thus, the
expeditious return requirement of Sec. 229.31(b) and the notice of
nonpayment requirement of Sec. 229.31(c) do not apply to checks
being returned to banks that do not hold accounts. The paying bank's
midnight deadline in UCC 4-301 and 4-302 and Sec. 210.12 of
Regulation J (12 CFR 210.12), and the extension in Sec. 229.31(g),
would continue to apply to these checks.
b. The expeditious return requirement and the notice of
nonpayment requirement apply only to ``checks'' deposited in a bank
that is a ``depository institution'' under the EFA Act. 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 requirements of subpart B
of this regulation. Thus, the expeditious return and notice of
nonpayment requirements of this section would not apply to a paying
bank returning a check that was deposited in one of these banks.
2. Unidentifiable Depositary Banks
a. A paying bank that sends a check to a bank that handled the
check for forward collection because the paying bank is unable to
identify the depositary bank is not subject to the requirement for
expeditious return by the paying bank or to the requirement for
notice of nonpayment. Although the lack of requirement for notice of
nonpayment under this paragraph will create risks for the depositary
bank, the inability to identify the depositary bank will generally
be due to the depositary bank's, or a collecting bank's, failure to
indorse as required by Sec. 229.35(a). If the depositary bank
failed to use the proper indorsement, it should bear the risks of
less- than-expeditious return or not receiving notice of nonpayment
in a timely manner. 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.
b. This paragraph does not relieve a paying bank from the
liability for the lack of expeditious return or not providing notice
of nonpayment 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, and the depositary bank placed its indorsement on the
original check making the indorsement unreadable. (See Sec.
229.38(c)).
c. A paying bank's return of a check to an unidentifiable
depositary bank is subject to its midnight deadline under UCC 4-301,
Regulation J (if the check is returned through a Federal Reserve
Bank), and the extension provided in Sec. 229.31(g).
E. 229.31(e) 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. A reason such
as ``Refer to Maker'' may be appropriate in certain cases, such as
when a drawer with a positive pay arrangement instructs the bank to
return the check. By contrast, a reason such as ``Refer to Maker''
would be inappropriate in cases where a check is being returned due
to the paying bank having already paid the item, where a check has
been altered, or where a check is unauthorized. In such cases, the
payee and not the drawer would generally have more information as to
why the check is being returned.
2. If the returned check is a substitute check or electronic
returned check, the reason for return information must be included
such that it is retained on any subsequent substitute check. For
substitute checks, this requirement 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 so
that the information is retained on any subsequent substitute check.
For electronic returned checks, this requirement could be met by
including the reason for return in accordance with ANS X9.100-187.
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.
F. 229.31(f) Notice in Lieu of Return
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 that does not have the
[[Page 27589]]
original check may have an image of both sides of the check, but the
image may be insufficient or may not be in the proper format such
that the bank cannot create a substitute check or provide required
substitute check warranties. In that case, the check would be
unavailable for return. A bank using a notice in lieu of return
gives a warranty under Sec. 229.34(d)(1)(iv) that the check, in any
form, has not been and will not be returned.
2. A notice in lieu of return must be in writing (either in
paper form, or if agreed to by the parties electronic form), but not
provided by telephone or other oral transmission. The requirement
for a writing and the indication that the notice is a substitute for
the returned check is necessary so that any returning bank and the
depositary bank are informed that the notice carries value. A check
that is lost or otherwise unavailable for return may be returned by
sending a legible copy of both sides of the check or, if such a copy
is not available to the paying bank, a written notice of nonpayment
containing the information specified in Sec. 229.31(c)(2). The copy
or written notice must clearly indicate it is a notice in lieu of
return. Notice by a legible facsimile of both sides of the check may
satisfy the requirements for a notice in lieu of return.
The paying bank may send an electronic image of both sides of
the check as a notice in lieu of return only if it has an agreement
to do so with the receiving bank. (See Sec. 229.30(b)).
3. The requirement of this paragraph supersedes the requirement
of UCC 4-301(a) as to the form and information required of a notice
of dishonor or nonpayment.
4. The notice in lieu of return is subject to the provisions of
this subpart relating to returned checks and is treated like a
returned check for purposes of this subpart. Reference in the
regulation and this commentary to a returned check includes a notice
in lieu of return unless the context indicates otherwise.
5. If not all of the information required by Sec. 229.31(c)(2)
is available, the paying bank may make a claim against any prior
bank handling the check as provided in Sec. 229.35(b).
G. 229.31(g) Extension of Deadline
1. This paragraph permits extension of the deadlines in the UCC,
Regulation J (12 CFR part 210), and Sec. 229.36(d)(3) and (4) 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(d)(3) or (4)), in two circumstances:
a. A paying bank may, by agreement, send an electronic returned
check instead of a paper returned check or 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 reaches the depositary bank (or receiving bank, if
the depositary bank is unidentifiable) on or before the depositary
bank's (or 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. (local time of the depositary
bank or receiving bank) or later set by the depositary bank (or
receiving bank) under UCC 4-108. This paragraph applies to the
extension of all midnight deadlines except Saturday midnight
deadlines (see the following paragraph).
b. A paying bank may observe a banking day, as defined in the
applicable UCC, on a Saturday, which is not a business day and
therefore not a banking day under Regulation CC. In such a case, the
UCC 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 its back-office
operations staff available on Saturday to prepare and send the
electronic returned checks, and the returning bank or depositary
bank that would be receiving this electronic information may not
have staff available to process it until Sunday night or Monday
morning. 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 (or receiving
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.
2. The time limits that are extended in each case 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 UCC 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(d)(3) and (4).
3. If the paying bank has an agreement to do so with the
receiving bank (such as through bilateral agreements, clearinghouse
rules, or operating circular), the paying bank may satisfy its
midnight or other return deadline by sending an electronic returned
check prior to the expiration of the deadline. The time when the
electronic returned check is considered to be received by the
depositary bank is determined by the agreement. The paying bank
satisfies its midnight or other return deadline by dispatching paper
returned checks to another bank by courier, including a courier
under contract with the paying bank, prior to expiration of the
deadline.
4. This paragraph directly affects UCC 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.
H. 229.31(h) Payable Through and Payable at Checks
1. For purposes of subpart C of this part, 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 subpart C 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 and
receipt of notices of nonpayment for checks that are payable through
or at a bank to the depositary bank.
2. 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 UCC 4-301.
I. 229.31(i) Reliance on Routing Number
1. Although Sec. 229.35 requires 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) or in the electronic check sent pursuant to an
agreement when the check, or electronic check, 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).
XVIII. Section 229.32 Returning Bank's Responsibility for Returned
Checks
A. 229.32(a) Return of Checks
1. Routing of Returned Check
a. Under Sec. 229.32(a), the returning bank is authorized to
route the returned check in a variety of ways:
i. It may send the returned check directly to the depositary
bank by sending an electronic returned check directly to the
depositary bank if the returning bank has an agreement with the
depositary bank to do so, or by using a courier or other means of
delivery; or
ii. It may send the returned check or electronic returned check
to any returning bank agreeing to handle the returned check
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. A paper returned check may be sent to the depositary bank at
any physical location permitted under Sec. 229.33(b).
2. Unidentifiable Depositary Bank
a. Returning banks agreeing to handle checks for return to
depositary banks under Sec. 229.32(a) are expected to be expert in
identifying depositary bank indorsements. In the limited cases where
the returning bank cannot identify the depositary bank, if the
returning bank did not handle the check for
[[Page 27590]]
forward collection, it may send the returned check to any collecting
bank that handled the check for forward collection.
b. If, on the other hand, 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.
c. The returning bank's return of a check under this paragraph
is subject to the requirement to use ordinary care under UCC 4-
202(b). (See definition of returning bank in Sec. 229.2(cc)).
d. As in the case of a paying bank returning a check under Sec.
229.31(a)(2), a returning bank returning a check under Sec.
229.32(a)(2) must advise the bank to which it sends the returned
check that it is unable to identify the depositary bank. This advice
must be conspicuous, such as a stamp on the check or a notice on the
cash letter. The returned check may not be prepared as a qualified
return. In the case of an electronic returned check, the advice
requirement may be satisfied as agreed to by the parties.
3. A returning bank agrees to handle a returned check if it--
a. Publishes or distributes availability schedules for the
return of returned checks and accepts the returned check for return;
b. Handles a returned check for return that it did not handle
for forward collection;
c. Agrees with the paying bank or returning bank to handle
electronic returned checks sent by that bank; or
d. Otherwise agrees to handle a returned check.
4. 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, unless the sending bank and returning bank
agree otherwise, the cut-off hour for returned checks may not be
earlier than 2 p.m. (local time of the returning bank). 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.
5. Qualified returned checks. A qualified returned check will be
handled by subsequent returning banks more efficiently than a raw
return. 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. 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.
6. 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 UCC 4-202(c) regarding the
responsibility of collecting banks).
7. UCC sections affected. Section 229.32 directly affects UCC
Section 4-214(a) and may affect other sections or provisions. (See
UCC 4-202(b)). Section 4-214(a) is affected in that settlement for
returned checks is made under Sec. 229.32(e) and not by charge-back
of provisional credit.
B. 229.32(b) Expeditious Return of Checks
1. The standards for return of checks established by this
section are similar to those for paying banks in Sec. 229.31(b).
This section requires a returning bank to return a returned check
expeditiously, subject to the exceptions set forth in Sec.
229.32(c). 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.
2. A returning bank that agrees to handle a returned check (see
commentary to Sec. 229.32(a)) is subject to the expeditious return
requirement with respect to the returned check except as provided in
Sec. 229.32(c)).
3. Two-day test. As in the case of a paying bank, a returning
bank's return of a returned check is expeditious if it is sent in a
manner such that the depositary bank would normally receive the
returned check by 2 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. Although a returning bank will not
have firsthand 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. Paying banks and returning banks are subject to the
expeditious return rule, however, under section 229.33(a) a paying
or returning bank may be liable to a depositary bank for failing to
return a check in an expeditious manner only if the depositary bank
has arrangements in place such that the paying bank or returning
bank could return a returned check to the depositary bank
electronically by commercially reasonable means. The depositary bank
has the burden of proof for demonstrating that its arrangements are
commercially reasonable.
4. Example. Returning Bank A does not have an agreement to send
electronic returned checks to the depositary bank but has an
agreement to send electronic returned checks to Returning Bank B,
which, in turn, has an agreement to send electronic returned checks
to the depositary bank. If a check is presented to the paying bank
on Monday, each returning bank would need to send the returned check
in a manner such that the depositary bank normally would receive the
returned check by 2 p.m. (local time of the depositary bank) on
Wednesday.
C. 229.32(c) Exceptions to the Expeditious Return of Checks
1. This paragraph sets forth the circumstances under which a
returning bank is not required to return the check to the depositary
bank in accordance with Sec. 229.32(b).
2. Depositary bank not subject to subpart B. This paragraph is
similar to Sec. 229.31(d)(1) and relieves a returning bank of its
obligation to make expeditious return to a depositary bank that does
not hold ``accounts'' under subpart B of this regulation or is not a
``depository institution'' within the meaning of the EFA Act. (See
commentary to Sec. 229.31(d)).
3. Unidentifiable depositary bank. A returning bank is not
subject to the expeditious return requirements of Sec. 229.32(b) in
handling a returned check for which the paying bank cannot identify
the depositary bank.
4. Misrouted returned check. A returning bank is not subject to
the expeditious return requirements of Sec. 229.32(b) in handling a
misrouted returned check pursuant to Sec. 229.33(f). A bank acting
as a returning bank because it received a returned check on the
basis that it was the depositary bank and sends the misrouted
returned check to the correct depositary bank, directly or through
subsequent returning banks, is similarly not subject to the
expeditious return requirements of Sec. 229.32(b). (See commentary
to Sec. 229.33(f)).
D. 229.32(d) Notice in Lieu of Return
1. This paragraph is similar to Sec. 229.31(f) 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 (or when the bank must retain possession of
the check for protest) and does not have sufficient information to
create a substitute check. (See commentary to Sec. 229.31(f)).
E. 229.32(e) Settlement
1. Under the UCC, a paying bank settles with a presenting bank
after the check 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 Sec. 229.36(c) and commentary to Sec.
229.35(b)).
3. A returning bank may vary the settlement method it uses by
agreement with
[[Page 27591]]
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 bank or returning bank because of its
insolvency or otherwise, recovery can be had by returning banks,
paying banks, and collecting banks from prior banks on this basis of
the liability of prior banks under Sec. 229.35(b).
4. This paragraph affects UCC 4-214(a) in that a paying bank 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 Sec.
229.36(c), a bank collecting a check remains liable to prior
collecting banks and the depositary bank's customer under the UCC.
F. 229.32(f) 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.
G. 229.32(g) Reliance on Routing Number
1. This paragraph is similar to Sec. 229.31(i) 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,
or in the electronic returned check received by the returning bank
pursuant to an agreement, or on qualified returned checks. (See
commentary to Sec. 229.31(i)).
XIX. Section 229.33 Depositary Bank's Responsibility for Returned
Checks and Notices of Nonpayment
A. 229.33(a) Right To Assert Claim
1. This paragraph sets forth the circumstances under which a
paying bank or returning bank may be liable to a depositary bank for
failing to return a check in an expeditious manner in accordance
with Sec. Sec. 229.31(b) and 229.32(b) respectively.
2. This paragraph does not require a depositary bank to
establish arrangements to accept returned checks electronically,
either directly from the paying bank or indirectly from a returning
bank. Most depositary banks, however, have arrangements in place to
accept returned checks electronically. (See commentary to Sec. Sec.
229.31(b) and 229.32(b) for examples of direct and indirect
arrangements).
3. The depositary bank has the burden of proof for demonstrating
that its arrangements for accepting returned checks electronically
are commercially reasonable. The standard allows for case-by-case
flexibility and can change over time to reflect market practices.
The standard is intended to prevent a depositary bank from
establishing electronic return arrangements that are very limited in
scope or that provide unreasonable barriers to return such that, in
practice, the depositary bank would accept only a small proportion
of its returns electronically.
B. 229.33(b) Acceptance of Electronic Returned Checks and
Electronic Notices of Nonpayment
1. A depositary bank may agree directly with a returning bank or
a paying bank (or through clearinghouse rules) to accept electronic
returned checks. Likewise, a depositary bank may agree directly with
a paying bank (or through clearinghouse rules) to accept electronic
written notices of nonpayment. (See Sec. Sec. 229.2(ggg),
229.30(b), and 229.31(c) and commentary thereto). The depositary
bank's acceptance of electronic returned checks and electronic
written notices of nonpayment is governed by the depositary bank's
agreement with the banks sending the electronic returned check or
electronic written notice of nonpayment to the depositary bank (or
through the applicable clearinghouse rules). The agreement normally
would specify the electronic address or receipt point at which the
depositary bank accepts returned checks and written notices of
nonpayment electronically, as well as what constitutes receipt of
the returned checks and written notices of nonpayment. The agreement
also may specify whether electronic returned checks must be
separated from electronic checks sent for forward collection.
C. 229.33(c) Acceptance of Paper Returned Checks and Paper Notices
of Nonpayment
1. This paragraph states where the depositary bank is required
to accept paper returned checks and paper notices of nonpayment
during its banking day. (These locations differ from locations at
which a depositary bank must accept oral notices or electronic
notices. (See Sec. 229.33(b) and (d) and commentary thereto). This
paragraph is derived from UCC 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 paper returned checks and paper notices
of nonpayment:
a. The depositary bank must accept paper returned checks and
paper notices of nonpayment at any location at which it requests
presentment of forward collection paper checks, 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 paper returned checks
and paper notices of nonpayment 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 paper returned checks and paper
notices of nonpayment 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 paper returned checks and
paper notices of nonpayment. Accordingly, a depositary bank may
limit the locations at which it must accept paper returned checks
and paper notices of nonpayment by specifying a branch or head
office in its indorsement.
ii. If no address appears in the depositary bank's indorsement,
the depositary bank must accept paper returned checks and paper
notices of nonpayment 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.
iii. If no routing number or address appears in its indorsement,
the depositary bank must accept a paper returned check at any branch
or head office of the bank. Section 229.35 and applicable industry
standards require that the indorsement contain a routing number, a
name, and a location. Consequently paragraphs (c)(1)(ii)(B) and (C)
of this section apply only where the depositary bank has failed to
comply with the indorsement requirement.
3. For ease of processing, a depositary bank may require that
returning banks or paying banks returning checks to it separate
returned checks from forward collection checks being presented.
D. 229.33(d) Acceptance Oral Notices of Nonpayment
In the case of telephone notices, the depositary bank may not
refuse to accept notices at the telephone numbers identified in this
section, but may transfer calls or use a recording device.
E. 229.33(e) Payment
1. As discussed in the commentary to Sec. 229.32(e), under this
regulation a paying bank or returning bank does not obtain credit
for a returned check by charge-back but by, in effect,
``presenting'' 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 by
agreement.
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 UCC 4-108, which permits the bank to establish a cut-off hour,
generally not earlier than 2 p.m. (local time of the depositary
bank), 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 bank or paying bank on the banking day that
it receives the returned
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check, because the returning bank 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
to the returning bank or paying bank on the day it receives the
returned check, even if the returning bank 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 bank 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 a provisional settlement with its nonbank
customer for a check that is returned. (See also Sec. Sec.
229.19(c)(2)(ii), 229.33(h), and 229.35(b)).
F. 229.33(f) Misrouted Returned Checks and Written Notices of
Nonpayment
1. This paragraph permits a bank receiving a check or written
notice of nonpayment (either in paper form or electronic form) on
the basis that it is the depositary bank to send the misrouted
returned check or written notice of nonpayment 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 or written notice of nonpayment. When sending a returned check
under this paragraph, the bank receiving the misrouted check is
acting as a returning bank. Alternatively, the bank receiving the
misrouted returned check or written notice of nonpayment must send
the check or notice back to the bank from which it was received.
2. In sending a misrouted returned check, the bank to which the
returned check was misrouted (the incorrect depositary bank) could
receive settlement from the bank to which it sends the misrouted
check under Sec. 229.33(f) (the correct depositary bank, a
returning bank that agrees to handle it, or the bank from which the
misrouted check was received). The correct depositary bank would be
required to pay for the returned check under Sec. 229.33(e), 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.
229.32(e). The bank to which the returned check was misrouted is
required to act promptly, i.e., within its midnight deadline. This
paragraph does not affect a bank's duties under Sec. 229.35(b).
G. 229.33(g) 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.
H. 229.33(h) Notification to Customer
1. This paragraph requires a depositary bank to notify its
customer of nonpayment upon receipt of a returned check or notice of
nonpayment. 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. 229.33(h) in writing may send
the notice by email or facsimile if the bank sends the notice to the
email 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 the receipt of a notice of nonpayment, provided the
notice meets all the requirements of Sec. 229.13(g).
XX. Section 229.34 Warranties and Indemnities
A. Introduction
1. Unless otherwise specified, warranties that apply to checks
or returned checks also apply to electronic checks and electronic
returned checks, including under paragraphs (b) (transfer and
presentment warranties with respect to remotely created checks), (c)
(settlement amount, encoding, and offset warranties), (d) (returned
check warranties), and (e) (notice of nonpayment warranties). (See
Sec. 229.30(a) and commentary thereto). Paragraph (f), however,
sets forth remote deposit capture indemnities provided to banks that
accept an original check for deposit for losses incurred by that
depositary bank if the loss is due to the check having already been
paid. Paragraph (a) sets forth warranties that are given only with
respect to electronic checks and electronic returned checks.
Paragraph (g) sets forth indemnities with respect to electronically
created items.
B. 229.34(a) Warranties With Respect to Electronic Checks and
Electronic Returned Checks
1. Paragraph (a) of Sec. 229.34 sets forth the warranties that
a bank makes when transferring or presenting an electronic check or
electronic returned check and receiving settlement or other
consideration for it. Electronic checks and electronic returned
checks sent pursuant to an agreement with the receiving bank are
treated as checks subject to subpart C. Therefore, the warranties in
Sec. 229.34(a) are in addition to any warranties a bank makes under
paragraphs (b), (c), (d), and (e) with respect to an electronic
check or electronic returned check. For example, a bank that
transfers and receives consideration for an electronic check that is
derived from a remotely created check warrants that the remotely
created check, from which the electronic check is derived, is
authorized by the person on whose account the check is drawn.
2. The warranties in Sec. 229.34(a)(1) relate to a subsequent
bank's ability to create a substitute check. This paragraph provides
a bank that creates a substitute check from an electronic check or
electronic returned check with a warranty claim against any prior
bank that transferred the electronic check or electronic returned
check. The warranties in this paragraph correspond to the warranties
made by a bank that transfers, presents, or returns a substitute
check (a paper or electronic representation of a substitute check)
for which it receives consideration. (See Sec. 229.52 and
commentary thereto). A bank that transfers an electronic check or
electronic returned check that is an electronic representation of a
substitute check also makes the warranties and indemnities in
Sec. Sec. 229.52 and 229.53.
3. By agreement, a sending and receiving bank may vary the
warranties the sending bank makes to the receiving bank for
electronic images of or electronic information related to checks,
for example, to provide that the bank transferring the check does
not warrant that the electronic image or information is sufficient
for creating a substitute check. (See Sec. 229.37(a)). The
variation by agreement, however, would not affect the rights of
banks and persons that are not bound by the agreement.
C. 229.34(b) 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 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. The Federal Trade
Commission's Telemarketing Sales Rule (16 CFR part 310) contains
further regulatory provisions regarding remotely created checks.
2. The scope of the transfer and presentment warranties for
remotely created
[[Page 27593]]
checks differs from that of the corresponding UCC warranty
provisions in two respects. The UCC warranties 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 Sec.
229.34(b). In addition, the UCC 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 Sec. 229.34(b)
warranties specifically cover the amount as well as the payee stated
on the check. Neither the UCC warranties, nor the Sec. 229.34(b)
warranties, apply to the date stated on the remotely created check.
3. A bank making the Sec. 229.34(b) warranties may defend a
claim asserting violation of the warranties by proving that the
customer of the paying bank is precluded by UCC 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.
4. The transfer and presentment warranties for a remotely
created check apply to a remotely created check that has been
converted to an electronic check or reconverted to a substitute
check.
D. 229.34(c) Settlement Amount, Encoding, and Offset Warranties
1. Paragraph (c)(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 or in the
electronic cash letter file) 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 UCC 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 bank, returning bank, 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 or cash letter control record) that will indicate the
total of the checks or returned checks. Paragraph (c)(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 (c)(3) provides that a bank that presents or
transfers a check or returned check warrants the accuracy of
information encoded regarding the check after issue, and that exists
at the time of presentment or transfer, to any bank that
subsequently handles the check or returned check. Paragraph (c)(3)
applies to all MICR-line encoding on a paper check, substitute
check, or contained in an electronic check or electronic returned
check. Under UCC 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 (c)(3) expands
on the UCC by providing that all banks that transfer or present a
check or returned check make the encoding warranty. In addition,
under the UCC, the encoder makes the warranty to subsequent
collecting banks and the paying bank, while paragraph (c)(3)
provides that the warranty is made to banks in the return chain as
well.
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 (c)(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 (c)(3) against
the presenting bank or any preceding bank that handled the
misencoded check.
5. Paragraph (c)(4) provides that a paying bank or a depositary
bank may set 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.
E. 229.34(d) Returned Check Warranties
1. This paragraph includes warranties that a returned check,
including a notice in lieu of return or an electronic returned
check, 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 UCC
(subject to any claims or defenses under the UCC, such as breach of
a presentment warranty) or Sec. 229.31(g); that the paying bank 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 check has not been and will not be
returned for payment. (See commentary to Sec. 229.31(f)). The
warranty does not include a warranty that the bank complied with the
expeditious return requirements of Sec. Sec. 229.31(b) and
229.32(b). 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).
F. 229.34(e) Notice of Nonpayment Warranties
1. This paragraph sets forth warranties for notices of
nonpayment. This warranty does not include a warranty that the
notice is accurate and timely under Sec. 229.31(c). The
requirements of Sec. 229.31(c) that are not covered by the warranty
are subject to the liability provisions of Sec. 229.38. These
warranties are designed to protect depositary banks that rely on
notices of nonpayment. This paragraph imposes liability on a paying
bank that gives notice of nonpayment and then subsequently does not
return the check. (See commentary to Sec. 229.31(c)).
G. 229.34(f) Remote Deposit Capture Indemnity
1. This indemnity provides for a depositary bank's potential
liability when it permits a customer to deposit checks by remote
deposit capture (i.e., to truncate checks and deposit an electronic
image of the original check instead of the original check). Because
the depositary bank's customer retains the original check, that
customer might, intentionally or mistakenly, deposit the original
check in another depositary bank. The depositary bank that accepts
the original check, in turn, may make funds available to the
customer before it learns that the check is being returned unpaid
and, in some cases, may be unable to recover the funds from its
customer. Section 229.34(f) provides the depositary bank that
accepts the original check for deposit with a claim against the
depositary bank that did not receive the original check because it
permitted its customer to truncate it, received settlement or other
consideration for the check, and did not receive a return of the
check unpaid. This claim exists only if the check is returned to the
depositary bank that accepted the original check due to the fact
that the check had already been paid.
2. Examples
a. Depositary Bank A offers its customers a remote deposit
capture service that permits customers to take pictures of the front
and back of their checks and send the image to the bank for deposit.
Depositary Bank A accepts an image of the check from its customer
and sends an electronic check for collection to Paying Bank. Paying
Bank, in turn, pays the check. Depositary Bank A receives settlement
for the check. The same customer who sent Depositary Bank A the
electronic image of the check then deposits the original check in
Depositary Bank B. There is no restrictive indorsement on the check.
Depositary Bank B sends the original check (or a substitute check or
electronic check) for collection and makes funds from the deposited
check available to its customer. The customer withdraws the funds.
Paying Bank returns the check to Depositary Bank B indicating that
the check already had been paid. Depositary Bank B may be unable to
charge back funds from its customer's account. Depositary Bank B may
make an indemnity claim against Depositary Bank A for the amount of
the funds Depositary Bank B is unable to recover from its customer.
b. The facts are the same as above with respect to Depositary
Bank A and B; however, the original check deposited in Depositary
Bank B bears a restrictive indorsement ``for mobile deposit at
Depositary Bank A only'' and the customer's account number at
Depositary Bank A. Depositary Bank B may not make an indemnity claim
against Depositary Bank A because Depositary Bank B accepted the
original check bearing a restrictive indorsement inconsistent with
the means of deposit.
c. The facts are the same as above with respect to Depositary
Bank A; however, Depositary Bank B also offers a remote deposit
capture service to its customer. The customer uses Depositary Bank
B's remote
[[Page 27594]]
deposit capture service to send an electronic image of the front and
back of the check, after sending the same image to Depositary Bank
A. The customer deposits the original check into Depositary Bank C
without a restrictive indorsement. Paying Bank pays the check based
on the image presented by Depositary Bank A, and Depositary Bank A
receives settlement for the check without the check being returned
unpaid to it. Paying Bank returns the checks presented by Depositary
Bank B and Depositary Bank C. Neither Depositary Bank B nor
Depositary Bank C can recover the funds from the deposited check
from the customer. Depositary Bank B does not have an indemnity
claim against Depositary Bank A because Depositary Bank B did not
receive the original check for deposit. Depositary Bank C, however,
would be able to bring an indemnity claim against Depositary Bank A.
3. A depositary bank may, by agreement, allocate liability for
loss incurred from subsequent deposit of the original check to its
customer that sent the electronic check related to the original
check to the depositary bank.
H. 229.34(g) Indemnities With Respect to Electronically-Created
Items
1. As a practical matter a bank receiving an electronic image
generally cannot distinguish an image that is derived from a paper
check from an electronically-created item. Nonetheless, the bank
receiving the electronically-created item often handles the
electronically-created image as if it were derived from a paper
check.
2. Paragraph (g) of Sec. 229.34 sets forth the indemnities that
a bank provides when transferring or presenting an electronically-
created item and receiving settlement or other consideration for it.
The indemnities set forth in Sec. 229.34(g) are provided only by
banks and only to subsequent banks in the collection chain. The
indemnities ultimately shift liability for losses to the depositary
bank due to the fact the electronically created item is not derived
from a paper check, was unauthorized, or was transferred or
presented for payment more than once. (See Sec. 229.34(i) and
commentary thereto). The depositary bank cannot assert the
indemnities set forth in Sec. 229.34(g) 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 paying bank's losses in paragraph (g)(1) of this section
include losses arising from Regulation E non-compliance caused by
the receipt of an electronically-created item.
3. Under paragraphs (g)(2) and (3), indemnified banks have a
claim for damages pursuant to Sec. 229.34(i) regardless of whether
the damages would have occurred if the item transferred had been
derived from a paper check.
3. Examples
a. A paying bank pays an electronically-created item, which the
paying bank's customer subsequently claims is unauthorized. The
paying bank may incur liability on the item due to the fact the item
is electronically created and not derived from a paper check. For
example, the paying bank may have no means of disputing the
customer's claim without examining the physical check, which does
not exist. The indemnity in Sec. 229.34(g) enables the paying bank
to recover from the presenting bank or any prior transferor bank for
the amount of its loss, as permitted under Sec. 229.34(i), due to
receiving the electronically-created item.
b. A bank receives an electronic image of and electronic
information related to an electronically-created item and, in turn,
produces a paper item that is indistinguishable from a substitute
check. The paper item is not a substitute check because the item is
not derived from an original, paper check. That bank may incur a
loss because it cannot produce the legal equivalent of a check (See
Sec. 229.53 and commentary thereto). The indemnity in Sec.
229.34(g) enables a bank that received the electronically-created
item to recover from the bank sending the check for the amount of
the loss permitted under Sec. 229.34(i).
c. A paying bank is not required by Sec. 229.31(b) to return an
electronically-created item expeditiously. The depositary bank
incurs a loss because it receives the return of the electronically-
created item unexpeditiously and is unable to recover funds
previously made available to its customer. The depositary bank is
not an indemnified party under Sec. 229.34(g) and therefore cannot
recover its loss pursuant to that indemnity.
I. 229.34(h) Damages
1. This paragraph adopts for the warranties in Sec. 229.34(a),
(b), (c), (d), and (e) the damages provided in UCC 4-207(c) and 4A-
506(b). (See definition of interest compensation in Sec.
229.2(oo)).
J. 229.34(i) Indemnity Amounts
1. This paragraph adopts for the amount of the indemnities
provided for in Sec. 229.34(f)(2) and (g) an amount comparable to
the damages provided in Sec. 229.53(b)(1)(ii) of subpart D of this
regulation.
2. The amount of an indemnity would be reduced in proportion to
the amount of any 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).
3. An indemnified bank may be able to make an indemnity claim
against more than one indemnifying depositary bank. However, an
indemnified bank may not recover in the aggregate across all
indemnifying banks more than the amount described in this paragraph.
Therefore, an indemnified bank that recovers the amount of its the
loss from one indemnifying depositary bank under this paragraph no
longer has a loss that it can collect from a different indemnifying
depositary bank.
K. 229.34(j) Tender of Defense
1. This paragraph adopts for this regulation the vouching-in
provisions of UCC 3-119.
L. 229.34(k) Notice of Claim
1. This paragraph adopts the notice provisions of UCC sections
4-207(d) and 4-208(e) and applies them to this section's indemnities
and warranties. The time limit set forth in this paragraph applies
to notices of claims for warranty breaches and for indemnities. 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 requires banks to use a standard form of
indorsement when indorsing checks during the forward collection and
return process. It is designed to facilitate the identification of
the depositary bank and the prompt return of checks. The indorsement
standard a bank must use depends on the type of check being
indorsed. Paper checks must be indorsed in accordance with ANS
X9.100-111. Substitute checks must be indorsed in accordance with
ANS X9.100-140. Electronic checks must be indorsed in accordance ANS
X9.100-187. The Board, however, may by rule or order determine that
different standards apply.
2. The parties sending and receiving a check may agree that
different indorsement standards will apply to such checks. For
example, although ANS X9.100-187 is an industry standard for banks'
exchange of electronic checks, the parties may agree to send and
receive electronic checks that conform to a different standard.
3. Banks generally apply indorsements to a paper check in one of
two ways: (1) In accordance with ANS X9.100-111, banks print or
``spray'' indorsements onto a paper 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) in accordance with ANS X9.100-140, 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.
4. A bank might use check-processing equipment that captures an
image of a check prior to spraying an indorsement onto that item. If
the bank truncates that item, it should ensure that it also applies
an indorsement to the item electronically. 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. (See commentary to Sec. 229.51(b)).
5. 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 paper returned checks and paper notices of nonpayment.
Banks should note, however, that Sec. 229.33(c) requires a
depositary bank to receive paper returned checks at the location(s)
at which it receives paper forward-collection checks, as well as the
other locations enumerated in Sec. 229.33(c). (See Sec. 229.33(c)
and commentary thereto).
[[Page 27595]]
6. Under the UCC, a specific guarantee of prior indorsement is
not necessary. (See UCC 4-207(a) and 4-208(a)). Use of guarantee
language in indorsements of paper checks, 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.
7. 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 and
notices of nonpayment 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 Sec. 229.35.
8. In general, paper checks will be handled more efficiently if
depositary banks place their indorsement so that the nine-digit
routing number is not obscured by pre-existing matter on the back of
the check. 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 on the back of the paper check reserved
for the depositary bank indorsement.
9. A paying bank is not required to indorse the check; however,
if a paying bank does indorse a check that is returned, it should
follow the indorsement standards for collecting banks and returning
banks. Collecting banks and returning banks are required to indorse
the check for tracing purposes. With respect to the identification
of a paying bank that is also a reconverting bank, see commentary to
Sec. 229.51(b)(2).
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 paragraph 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 intermediary 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
UCC, 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 to a bank that subsequently handles the check
and does not receive payment for the check 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 bank or returning bank also may recover from a
prior collecting bank as provided in Sec. Sec. 229.31(a) and
229.32(b) (in those cases where the paying bank is unable to
identify the depositary bank). This paragraph does not affect a
paying bank's accountability for a check under UCC 4-215(a) and 4-
302. Nor does this paragraph affect a collecting bank's
accountability under UCC 4-214 and 4-215(d). A collecting bank
becomes accountable upon receipt of final settlement as provided in
the foregoing UCC sections. Final settlement in Sec. Sec.
229.32(e), 229.33(e), and 229.36(c) is intended to be consistent
with final settlement in the UCC (e.g., UCC 4-213, 4-214, and 4-
215). (See also Sec. 229.2(cc) (definition of returning bank) and
commentary thereto).
6. This paragraph also provides that a bank may have the rights
of a holder based on the handling of a 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).
7. This paragraph affects the following provisions of the UCC,
and may affect other provisions depending on circumstance:
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 Sec.
229.33(h)).
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 UCC (See UCC 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 applicable industry
standard 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. An indorsing bank may by
agreement with the depositary bank apply its own indorsement as the
depositary bank indorsement. In that case, the actual 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 subpart B, but the bank indorsing as depositary bank is
considered the depositary bank for purposes of subpart C (e.g., for
purposes of determining the right to assert a claim under Sec.
229.33(a) for failure to return a check expeditiously and accepting
paper checks under Sec. 229.33(c)). The check will be returned, and
notice of nonpayment will be given, to the bank indorsing as
depositary bank.
2. Because the depositary bank for subpart 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 subpart
C under Sec. 229.37.
[[Page 27596]]
XXII. Section 229.36 Presentment and Issuance of Checks
A. 229.36(a) Receipt of Electronic Checks
1. A paying bank may agree to accept presentment of electronic
checks. (See Sec. 229.2(ggg) and commentary thereto). The paying
bank's acceptance of such electronic checks is governed by the
paying bank's agreement with the bank sending the electronic check
to the paying bank. The terms of these agreements are determined by
the parties and may include, for example, the electronic address or
electronic receipt point at which the paying bank agrees to accept
electronic checks, as well as when presentment occurs. The agreement
also may specify whether electronic checks sent for forward
collection must be separated from electronic returned checks.
B. 229.36(b) Receipt of Paper Checks
1. The paragraph specifies four locations at which the paying
bank must accept presentment of paper 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 paper checks may be made, and presentment is
considered to occur, at a location (including a processing center)
requested by the paying bank. This provision adopts the common law
rule 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 UCC 4-204(c)). If a bank designates different
locations for the presentment of forward collection paper checks
bearing different routing numbers, for purposes of this paragraph it
requests presentment of paper checks bearing a particular routing
number only at the location designated for receipt of forward
collection paper checks bearing that routing number.
b. If the check specifies the name and address of a branch or
head office, or other location (such as a processing center), the
paper check may be delivered 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 of paper checks. The designation
of an address on the check generally is in the control of the paying
bank.
c. i. Delivery of a paper check may be made at an office of the
bank associated with the routing number on the check. In the case of
a substitute check, delivery may be made at an office of the bank
associated with the routing number in the electronic check from
which it was derived. 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. Paper
checks generally are handled by collecting banks on the basis of the
nine-digit routing number contained in the MICR line (or on the
basis of the fractional form routing number if the MICR line is
obliterated) on the check, rather than the printed name or address.
The definition of a paying bank in Sec. 229.2(z) 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. In these cases, the payor bank has selected
the payable-through bank as the point through which presentment of
paper checks is to be made.
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 paper checks by more specific branch addresses that might be
printed on the checks, and to deliver paper checks to each branch. A
collecting bank normally would deliver all paper checks to one
location. In cases where paper 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.
d. If the paper 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 UCC 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.
2. This paragraph may affect UCC 3-111 to the extent that the
UCC requires presentment to occur at a place specified in the
instrument.
C. 229.36(c) 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 UCC 4-201 during forward
collection of a check. That UCC 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 UCC 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 UCC, 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 UCC
4-215(a)(2) or (3), because a paying bank has the right to recover
settlement from a returning bank or depositary bank to which it
returns a check under this subpart. Other provisions of the UCC 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 Sec.
229.2(cc)).
D. 229.36(d) Same-Day Settlement
1. This paragraph governs settlement for presentment of paper
checks. Settlement for presentment of electronic checks is governed
by the agreement of the parties. (See Sec. 229.36(a) and commentary
thereto). This paragraph provides that, under certain conditions, a
paying bank must settle with a presenting bank for a paper check on
the same day the paper check is presented in order to avail itself
of the ability to return the paper check on its next banking day
under UCC 4-301 and 4-302. This paragraph does not apply to paper
checks presented for immediate payment over the counter. Settling
for a paper check under this paragraph does not constitute final
payment of the paper check under the UCC. This paragraph does not
supersede or limit the rules governing collection and return of
paper 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 paper checks to qualify for mandatory same-day
settlement, information accompanying the paper 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 paper check or checks must be
presented at a location designated by the paying bank for receipt of
paper checks for same-day settlement by 8 a.m. local time of that
location. The designated presentment location must be a location at
which the paying bank would be considered to have received a paper
check under Sec. 229.36(b). The paying bank may not designate a
location solely for presentment of paper 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 paper
checks at that location for the purposes of Sec. 229.36(b).
ii. If the paying bank does not designate a presentment
location, it must accept presentment of paper check for same-day
settlement at any location identified in Sec. 229.36(b), i.e., at
an address of the bank
[[Page 27597]]
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. A paying bank and a
presenting bank may agree that paper checks will be accepted for
same-day settlement at an alternative location or that the cut-off
time for same-day settlement be earlier or later than 8 a.m. local
time of the presentment location.
iii. In the case of a paper check payable through a bank but
payable by another bank, this paragraph does not authorize direct
presentment to the bank by which the paper 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 paper check is
sent for payment or collection.
b. Reasonable delivery requirements. A paper check is considered
presented when it is delivered to and payment is demanded at a
location specified in paragraph (d)(1). 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 paper 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 paper 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 paper checks at the
presentment location constitutes effective presentment.
c. Sorting of checks. A paying bank may require that paper
checks presented to it for same-day settlement be sorted separately
from other forward collection paper checks it receives as a
collecting bank or paper returned checks it receives as a returning
bank or depositary bank. For example, if a bank provides
correspondent check collection services and receives unsorted paper
checks from a respondent bank that include paper 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 (d)(3). If the
collecting bank receives sorted paper checks from its respondent
bank, consisting only of paper 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 paper checks and must make settlement in
accordance with this paragraph.
3. Settlement
a. If a bank presents a paper check in accordance with the time
and location requirements for presentment under paragraph (d)(1),
the paying bank either must settle for the paper check on the
business day it receives the paper check without charging a
presentment fee or return the paper check prior to the time for
settlement. (This return deadline is subject to extension under
Sec. 229.31(g).) 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), unless the presenting bank agrees
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 paper 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. Paper checks that are presented after the 8 a.m. (local time
of the location at which the paper checks are presented) 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 paper 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 paper checks are
presented to the paying bank. Paper 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
paper checks presented on these days (e.g., by opening their back
office operations). In other cases, a paying bank may be unable to
settle for paper checks presented on a day it is closed. If the
paying bank closes on a business day and paper checks are presented
to the paying bank in accordance with paragraph (d)(1), the paying
bank is accountable for the paper checks unless it settles for or
returns the paper checks by the close of Fedwire on its next banking
day. In addition, paper 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 UCC midnight deadline
(UCC 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 Sec.
229.2(oo), to the presenting bank for the value of the float
associated with the paper 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 UCC 4-109(b).
5. Good faith. Under Sec. 229.38(a), both the presenting bank
and paying bank are held to a standard of good faith, defined in
Sec. 229.2(nn) 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 paper
checks for same-day settlement might not be considered good faith on
the part of the paying bank. Similarly, presenting a large volume of
paper 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. UCC sections affected. This paragraph directly affects the
following provisions of the UCC and may affect other sections or
provisions:
a. Section 4-204(b)(1), in that a presenting bank may not send a
paper check for same-day settlement directly to the paying bank, if
the paying bank designates a different location in accordance with
paragraph (d)(1).
b. Section 4-213(a), in that the medium of settlement for paper
checks presented under this paragraph is limited to a credit to an
account at a Federal Reserve Bank and that, for paper 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 paper
check is received is superseded by the requirement to settle for
paper 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 paper check is received is superseded by
the requirement to settle for paper checks presented under this
paragraph by the close of Fedwire.
XXIII. Section 229.37 Variations by Agreement
A. This section is similar to UCC 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 UCC 4-103(a) (which in turn
follows UCC 1-201(3)) should be followed in construing this section.
For example, as stated in Official Comment 2 to
[[Page 27598]]
UCC 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 UCC 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 UCC.
C. The following are examples of situations where variation by
agreement is permissible, subject to the limitations of this
section:
1. 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)).
2. A depositary bank may authorize returning banks to commingle
paper qualified returned checks with paper forward collection
checks. (See Sec. 229.33(c)).
3. 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)).
4. 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)).
5. A collecting bank or paying bank may agree to accept forward
collection checks without the indorsement of a prior intermediary
collecting bank. (See Sec. 229.35(a)).
6. A bank may agree to accept returned checks without the
indorsement of a prior bank. (See Sec. 229.35(a)).
7. A presenting bank may agree with a paying bank to present
paper checks for same-day settlement by a deadline earlier or later
than 8 a.m. (See Sec. 229.36(d)(1)(ii)).
8. A presenting bank and a paying bank may agree that
presentment takes place when the paying bank receives an electronic
transmission of information describing the check rather than upon
delivery of the physical check. (See Sec. 229.36(b)).
9. A depositary bank may agree with a paying bank 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, a depositary bank entering into such an agreement may be
responsible under this part or other applicable law to other
interested parties for any losses caused by the acceptance of an
image or notice in lieu of a returned check. (See Sec. Sec.
229.31(f) and 229.38(a)).
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 subpart C of the regulation.
Thus, the standard of care applies to a paying bank under Sec. Sec.
229.31, to a returning bank under Sec. 229.32, to a depositary bank
under Sec. Sec. 229.33, to a bank erroneously receiving a returned
check or written notice of nonpayment as depositary bank under Sec.
229.33(f), and to a bank indorsing a check under Sec. 229.35. The
standard of care is similar to the standard imposed by UCC 1-203 and
4-103(a) and includes a duty to act in good faith, as defined in
Sec. 229.2(nn) 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 UCC 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 UCC 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 UCC 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 229.31(b) imposes requirements on the paying bank for
expeditious return of a check and leaves in place the UCC deadlines
(as they may be modified by Sec. 229.31(g)), 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 UCC (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 subpart C of this regulation. This
comparative negligence rule may have particular application where a
paying bank or returning bank delays in returning a check because of
difficulty in identifying the depositary bank, where the depositary
bank has failed to exercise ordinary care in applying its
indorsement.
D. 229.38(d) Responsibility for Certain Aspects of Checks
1. 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 ANS X9.100-111'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 ANS X9.100-111'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 ANS
X9.100-111 is rendered illegible by a subsequent indorsement that a
reconverting bank later applies to the substitute check in
accordance with ANS X9.100-140, or because a subsequent bank
receiving a substitute check cannot apply its indorsement to the
substitute check legibly in accordance with ANS X9.100-111 as a
result of the shift in the previous indorsement.
2. Responsibility under paragraph (d)(1) is treated as
negligence for comparative negligence purposes, and the contribution
to damages under paragraph (d)(1) is treated in the same way as the
degree of negligence under paragraph (c) of this section.
* * * * *
XXV. Section 229.39 Insolvency of Bank
A. Introduction
1. These provisions cover situations where a bank becomes
insolvent during collection or return of a check. Paragraphs (a),
(b), and (d) of Sec. 229.39 are derived from UCC 4-216. They are
intended to apply to all banks. Like UCC 4-216, paragraphs (a), (b),
and (d) of Sec. 229.39 are intended to establish the point
[[Page 27599]]
in the collection process at which collection or return of a check
should be either stopped or continued when a particular bank
suspends payments. Section 229.39(a) sets forth the circumstances
under which the receiver must stop collection or return and,
instead, send the check back to the bank or customer that
transferred the check. Section 229.39(b) sets forth the
circumstances under which the collection or return of the check
should continue. Paragraphs (a) and (b) of Sec. 229.39 are not
intended to confer upon banks preferential positions in the event of
bank failures over general depositors or any other creditor of the
failed bank. (See UCC 4-216, cmt. 1).
B. 229.39(a) Duty of Receiver To Return Unpaid Checks
1. This paragraph requires a receiver of a closed bank to return
a check to the prior bank if the paying bank or the receiver did 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) Claims Against Banks for Checks Not Returned by the
Receiver
1. This section sets forth the claims available to banks in
situations in which a receiver does not return a check under Sec.
229.39(a). In those situations, the prior bank would not be a holder
of the check and would be unable to pursue claims as a holder.
2. Paragraph (b)(1) of Sec. 229.39 gives a bank a 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 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 claim.
3. Paragraph (b)(2) of Sec. 229.39 gives a bank a claim against
a closed collecting bank, paying bank, or returning bank that
receives settlement for but does not make settlement 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)(1), if the bank
with a 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 claim.
D. 229.39(c) Preferred Claim Against Presenting Bank for Breach of
Warranty
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 preferred claim 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.
E. 229.39(d) 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
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 Sec. 229.2(t). This rule affects the status of the
combined entity in a number of areas in this subpart, such as the
following:
1. The paying bank's responsibility for notice of nonpayment
(Sec. 229.31(c)).
2. Where the depositary bank must accept returned checks (Sec.
229.33(b) and (c)).
3. Where the depositary bank must accept notice of nonpayment
(Sec. 229.33(b) and (c)).
4. Where a paying bank must accept presentment of paper checks
(Sec. 229.36(b)).
* * * * *
XXIX. Section 229.43 Checks Payable in Guam, American Samoa, and the
Northern Mariana Islands
A. 229.43(a) Definitions
1. For purposes of subparts B and C of this part, bank offices
in Guam, American Samoa, and the Northern Mariana Islands (which
Regulation CC defines as Pacific island banks) do not meet the
definition of bank in Sec. 229.2(e) because they are not located in
the United States. Some checks drawn on Pacific island banks
(defined as Pacific island checks) bear U.S. routing numbers and are
collected and returned by banks in the same manner as checks payable
in the U.S.
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), or an electronic image and
electronic information derived from a demand draft as defined in
Sec. 229.43(a)(2), the bank is subject to certain provisions of
subpart C of this part, as provided in this section. Because a
Pacific island bank is not a bank as defined in Sec. 229.2(e) for
purposes of subpart C, it is not a paying bank as defined in Sec.
229.2(z) for purposes of subpart C (unless otherwise noted in this
section). Pacific island banks are not subject to the provisions of
subparts B and C, but may be subject to the provisions of subpart D
of this part to the extent they create substitute checks. (See Sec.
229.2(ff) defining ``State'').
2. A bank may agree to handle a Pacific island check as a
returned check under Sec. 229.32 and may convert the returned
Pacific island check to a qualified returned check. 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 for purposes of subpart C of this part, Sec.
229.32(e) 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 generally is subject to the provisions of Sec.
229.33, except for Sec. 229.33(c) with respect to its application
to paper notices of nonpayment, Sec. 229.33(d) (acceptance of oral
notices of nonpayment), and Sec. 229.33(h) (notification to
customer of returned check). If the depositary bank receives the
returned Pacific island check directly from the Pacific island bank,
the provisions of Sec. 229.33(e) (regarding time and manner of
settlement for returned checks) do not apply, because the Pacific
island bank is not a paying bank for purposes of subpart C of this
part. In the event the Pacific island check is returned by a
returning bank, however, the provisions of Sec. 229.33(e) apply.
The depositary bank is not subject to the provisions in Sec.
229.33(c) with respect to paper notices of nonpayment for Pacific
island checks, but is subject to Sec. 229.33(c) with respect to
paper returned checks that are Pacific island checks.
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). A bank that acts as a returning bank for a Pacific
island check is not subject to the returned check warranties in
Sec. 229.34(d). Similarly, because the Pacific island bank is not a
``bank'' or a ``paying bank'' for purposes of subpart C of this
part, the notice of nonpayment warranties in Sec. 229.34(e), and
the presentment warranties in Sec. 229.34(c)(1) and (c)(4) 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(c), 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. Section 229.51 General Provisions Governing Substitute Checks
* * * * *
[[Page 27600]]
B. 229.51(b) Reconverting Bank Duties
1. In accordance with ANS X9.100-140, a reconverting bank must
indorse (or, if it is a paying bank with respect to the check or a
bank that rejected a check submitted for deposit, identify itself
on) the back of a substitute check in a manner that preserves all
indorsements applied, whether physically or 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. If a bank sprays an indorsement onto
a paper check after it captures an image of the check, it should
ensure that it applies an indorsement to the item electronically, if
it transfers the check as an electronic check or electronic returned
check. (See paragraph 4 of commentary to section 229.35(a)). A
reconverting bank satisfies its obligation to preserve all
previously applied indorsements by physically applying (overlaying)
electronic indorsements onto a substitute check that the
reconverting bank creates. A reconverting bank is not responsible
for obtaining indorsements that persons that previously handled the
check in any form should have applied but did not apply.
2. 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 a substitute check in accordance
with ANS X9.100-140.
3. If the reconverting bank is the paying bank or a bank that
rejected a check submitted for deposit, it also must identify itself
by applying its routing number to the back of the check. A
reconverting bank also must preserve on the back of the substitute
check, in accordance with ANS X9.100-140, the identifications of any
previous reconverting banks. The reconverting-bank and truncating-
bank routing numbers on the front of a substitute check and, if the
reconverting bank is the paying bank or a bank that rejected a check
submitted for deposit, the reconverting bank's routing number on the
back of a substitute check are for identification only and are not
indorsements or acceptances.
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 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.
4. The location of an indorsement applied to a paper check in
accordance with ANS X9.100-111 may shift if that check is truncated
and later reconverted to a substitute check. If an indorsement
applied to an original check in accordance with ANS X9.100-111 is
overwritten by a subsequent indorsement applied to a substitute
check in accordance with industry standards, then one or both of
those indorsements could be rendered illegible. As explained in
Sec. 229.38(c) and the commentary thereto, a reconverting bank is
liable for losses associated with indorsements that are rendered
illegible as a result of check substitution.
* * * * *
XXXI. Section 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 or when it
rejects a check submitted for deposit and returns to its customer a
substitute check. 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.
2. 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.
3. The substitute-check warranties and indemnity are not given
under sections 229.52 and 229.53 by a bank that truncates the
original check and by agreement transfers an electronic check to a
subsequent bank for consideration. However, the warranties in Sec.
229.34(a) would apply to the transfer of an electronic check, and
those warranties may be varied by agreement between the parties. A
bank that is a truncating bank under Sec. 229.2(eee)(2) because it
accepts a deposit of a check electronically might be subject to a
claim by another depositary bank that accepts the original check for
deposit. (See Sec. 229.34(f) and commentary thereto).
Example. A bank that receives an electronic check 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 with respect to the substitute check warranties.
That bank, however, may have similar warranty claims with respect to
the electronic check under Sec. 229.34(a) against the bank that
transferred the electronic check.
4. 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 UCC and other
Regulation CC warranties that apply to the original check also apply
to the substitute check.
5. 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
section 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.
6. The warranty in Sec. 229.52(a)(1)(ii), 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. (See also Sec.
229.34(a)(1)(ii)).
Example. A nonbank depositor truncates a check and in lieu of
the check sends an electronic check to both Bank A and Bank B. Bank
A and Bank B each use 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 are both reconverting banks
and each 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.
7. A bank that rejects a check submitted for deposit and,
instead of the original check,
[[Page 27601]]
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(ccc), 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 submitted 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
submitted for deposit but provides its customer with a substitute
check (or a paper or electronic representation of 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 for deposit 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(ccc)).
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. (See
Sec. 229.34(f) regarding claims by a depositary bank that accepts
deposit of an original check).
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.
XXXII. Section 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.
2. 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 image of the original check that was not derived from a
substitute check.
3. A reconverting bank also provides the substitute check
indemnity to a person to whom the bank transfers a substitute check
(or a paper or electronic representation of a substitute check)
derived from a check that the bank has rejected for deposit
regardless of whether the bank providing the indemnity has received
consideration.
* * * * *
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)(1)(ii). The drawer also could assert an indemnity claim.
Because there is only one original check for any payment
transaction, if the collecting bank 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 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.
* * * * *
3. The amount of an indemnity would be reduced in proportion to
the amount of any 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 section 229.38(c).
* * * * *
XXXIII. 229.54 Expedited Recredit for Consumers
A. * * *
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 section 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 section 229.34(a) or (d),
which contain returned-check warranties that are made to the owner
of the check.
* * * * *
By order of the Board of Governors of the Federal Reserve
System, May 26, 2017.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2017-11379 Filed 6-14-17; 8:45 am]
BILLING CODE 6210-01-P