[Federal Register Volume 79, Number 23 (Tuesday, February 4, 2014)]
[Proposed Rules]
[Pages 6674-6737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-30024]
[[Page 6673]]
Vol. 79
Tuesday,
No. 23
February 4, 2014
Part II
Federal Reserve System
-----------------------------------------------------------------------
12 CFR Part 229
Availability of Funds and Collection of Checks; Proposed Rule
Federal Register / Vol. 79 , No. 23 / Tuesday, February 4, 2014 /
Proposed Rules
[[Page 6674]]
-----------------------------------------------------------------------
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: Proposed rule, request for comment.
-----------------------------------------------------------------------
SUMMARY: On March 25, 2011, the Board published a notice of proposed
rulemaking (``2011 proposal'') intended to facilitate the banking
industry's ongoing transition to fully electronic interbank check
collection and return. Based on its analysis of the comments received
in response to the 2011 proposal, the Board is revising its proposed
amendments to subparts C and D of Regulation CC and is requesting
comment on a revised proposed rule that would, among other things,
encourage depositary banks to receive and paying banks to send returned
checks electronically. The Board is requesting comment on two
alternative frameworks for return requirements. Under Alternative 1,
the expeditious-return requirement currently imposed on paying banks
and returning banks for returned checks would be eliminated; a paying
bank returning a check would be required to provide the depositary bank
with a notice of nonpayment of the check--regardless of the amount of
the check being returned--only if the paying bank sends the returned
check in paper form. Under Alternative 2, the current expeditious-
return requirement--using the current two-day test--would be retained
for checks being returned to a depositary bank electronically via
another bank, but the notice-of-nonpayment requirement would be
eliminated. The Board is proposing to retain, without change, the
regulation's current same-day settlement rule for paper checks. In
addition, the Board is also requesting comment on applying Regulation
CC's existing check warranties to checks that are collected
electronically and on new warranties and indemnities related to checks
collected electronically and to electronically-created items.
DATES: Comments must be submitted by May 2, 2014.
ADDRESSES: You may submit comments, identified by Docket No. R-1409 and
RIN No. 7100 AD 68, by any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include docket
number in the subject line of the message.
FAX: 202/452-3819 or 202/452-3102.
Mail: Robert deV. Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted,
except as necessary for technical reasons. Accordingly, your comments
will not be edited to remove any identifying or contact information.
Public comments may also be viewed electronically or in paper in Room
MP-500 of the Board's Martin Building (20th and C Streets NW.) between
9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Sophia Allison, Senior Counsel (202/
452-3565), Legal Division; Samantha Pelosi, Manager, Financial Services
(202/530-6292); or Tyler Standage, Financial Services Analyst (202/452-
2087), Division of Reserve Bank Operations and Payment Systems; for
users of Telecommunication Devices for the Deaf (TDD) only, contact
202/263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
A. Statutory and Regulatory Background
Regulation CC (12 CFR part 229) implements the Expedited Funds
Availability Act of 1987 (EFA Act) and the Check Clearing for the 21st
Century Act of 2003 (Check 21 Act).\1\ The Board implemented the EFA
Act in subparts A, B, and C of Regulation CC and the Check 21 Act
primarily in subpart D.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
The EFA Act was enacted to provide depositors of checks with prompt
funds availability and to foster improvements in the check collection
and return processes. Subpart A of Regulation CC contains general
information, such as definitions of terms. Subpart B of Regulation CC
implements the EFA Act's funds-availability provisions and specifies
availability schedules within which banks must make funds available for
withdrawal. Subpart B also implements the EFA Act's rules regarding
exceptions to the schedules, disclosure of funds-availability policies,
and payment of interest. As part of its 2011 proposal, the Board
requested comment on proposed amendments to subpart B. This notice of
proposed rulemaking, however, does not address the proposed amendments
to subpart B.\2\ Because amendments to Subpart B must now be made
jointly with the Consumer Financial Protection Bureau (CFPB), the Board
does not propose amendment to Subpart B in this document.
---------------------------------------------------------------------------
\2\ 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.
---------------------------------------------------------------------------
Subpart C of Regulation CC implements the EFA Act's provisions
regarding forward collection and return of checks. Subpart C of
Regulation CC includes provisions to speed the collection and return of
checks, such as requirements for the expeditious return
responsibilities of 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 provisions of subpart C were adopted by the Board
pursuant to section 609(b) and (c) of the EFA Act.\3\ 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 steps to automate the check-return
process.\4\ 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.\5\ In addition, section 611(f) of the EFA Act authorizes the Board
to impose on or allocate among depository institutions
[[Page 6675]]
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 may 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.\6\
---------------------------------------------------------------------------
\3\ EFA Act section 609(b) and (c); 12 U.S.C. 4008 (b) and (c).
\4\ EFA Act section 609(b)(4) states that ``[i]n order to
improve the check processing system, the Board shall consider (among
other proposals) requiring, by regulation, that . . . the Federal
Reserve banks and depository institutions take such actions as are
necessary to automate the process of returning unpaid checks.'' 12
U.S.C. 4008(b)(4).
\5\ EFA Act section 609(c)(1) states that ``[i]n order to carry
out the provisions of this title, the Board of Governors of the
Federal Reserve System shall have the responsibility to regulate--
(A) any aspect of the payment system, including the receipt,
payment, collection, or clearing of checks; and (B) any related
function of the payment system with respect to checks.'' 12 U.S.C.
4008(c)(1).
\6\ EFA Act section 611(f); 12 U.S.C. 4010(f).
---------------------------------------------------------------------------
The current provisions of subpart C presume that banks generally
handle checks in paper form. For example, the current expeditious-
return provisions presume that banks are able to satisfy the
expeditious-return requirement by using the same modes of
transportation for paper returned checks that they used for forward
collection of paper checks and that they can deliver returned paper
checks at the same time that they deliver paper forward-collection
checks.
B. Electronic Check Collection and Return
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
of a paper check and from electronic information related to the 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. At
the end of 2005, the Reserve Banks received about 4 percent of checks
deposited for forward collection in electronic form and presented
approximately 28 percent of their checks in electronic form.\7\
Virtually all returned checks sent to and from Reserve Banks at that
time were in paper form. Reserve Banks estimate that, by the end of
2013, more than 99.9 percent of all forward checks, 99.0 percent of
FedReturn checks, and 97.0 percent of FedReciept Return checks will be
processed in electronic form.
---------------------------------------------------------------------------
\7\ Prior to the Check 21 Act, the Reserve Banks presented about
20 to 25 percent of their check volume electronically, primarily
under MICR line presentment programs.
---------------------------------------------------------------------------
II. Overview of the 2013 Proposal
In 2011, the Board proposed amendments to subparts C and D of
Regulation CC intended to facilitate the banking industry's ongoing
transition to fully-electronic interbank check collection and return
(``2011 proposal'').\8\ Based on its analysis of the comments received
on the 2011 proposal, the Board has revised its proposed amendments to
subparts C and D and is requesting comment on a revised proposed rule
(``2013 proposal'' or ``current proposal''). Under the current
proposal, As under the 2011 proposal, the Board proposes to exercise
its authority under section 609(b) and (c) of the EFA 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.
---------------------------------------------------------------------------
\8\ 76 FR 16862 (Mar. 25, 2011).
---------------------------------------------------------------------------
This section describes the primary issues presented in the current
proposal. A more detailed analysis of the proposed amendments is
provided in the Section-by-Section analysis that follows this section.
The Board requests comment on all aspects of the current proposal.
A. Return Requirements
The EFA Act, as implemented by subpart B of Regulation CC,
establishes maximum time periods for the holds that depositary banks
may place on funds deposited into checking accounts, including funds
deposited by check, before making the deposited funds available to the
customer. When the EFA Act was enacted in 1987, the time required for
delivery of returned checks to the depositary bank was often longer
than the maximum hold periods to which the banks would be subject under
the EFA Act. At that time, checks typically were collected and returned
in paper form, and returned checks were typically returned back through
the path used for forward collection. Returning a check could take long
periods of time if a paying bank were returning a check to a bank to
which it was not sending checks for forward collection. In such
situations, paying banks might not have the dedicated transportation
infrastructure and in such cases would typically send the returned
check by mail, which could significantly slow the return process.\9\ 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 exercised its authority under the EFA Act to
eliminate the requirement that the check be returned through the
forward endorsement chain and to adopt the expeditious return
requirement in Regulation CC.\10\
---------------------------------------------------------------------------
\9\ 52 FR 47112, 47118 (Dec. 11, 1987).
\10\ 52 FR 47112, 47119 (Dec. 11, 1987).
---------------------------------------------------------------------------
Today, even more so than in 2011, checks are both collected and
returned electronically. Electronic check-return methods substantially
reduce risk to the check system because they result in returned checks
being delivered to depositary banks more quickly and with fewer errors.
In addition, electronic return methods are less costly than paper
methods. The full benefits and cost savings of electronic check-return
methods cannot be realized, however, if paying banks and returning
banks must incur time and expense to deliver paper returned checks to
depositary banks that have not agreed to electronic returns. Moreover,
as technology has improved, the initial implementation and ongoing
costs incurred by a depositary bank to receive and paying banks to send
returned items electronically have decreased substantially.\11\ Over
time, these electronic delivery methods could become even faster and
less expensive than they are today.
---------------------------------------------------------------------------
\11\ For example, the Reserve Banks provide electronic copies of
returned checks in .pdf files to small depositary banks, which can
use the files to print substitute checks on their own premises if
necessary. After printing the substitute checks, the depositary bank
can process them in the same way it processes paper checks that are
physically delivered to it.
---------------------------------------------------------------------------
A check returned electronically can generally be delivered to a
depositary bank within two business days of the check's presentment to
the paying bank, even if the returned check is sent through more than
one returning bank. Therefore, the barriers to faster return of checks
that existed in 1988, when the expeditious-return requirement was first
adopted, generally do not exist today, because checks need not be
returned solely in paper form.
In addition, since the time when the expeditious-return requirement
was first adopted, the forward collection of checks today is almost
entirely electronic. A paying bank or returning bank that sends a paper
returned check today typically must use the mail, because the dedicated
air and ground transportation systems for paper checks have largely
been discontinued. Therefore, if a paper check must be delivered to a
depositary bank that does not accept returned checks electronically, or
if the paying bank sends a paper returned check, the depositary bank is
unlikely to receive the returned check within the expeditious-return
deadline (i.e., by 4 p.m. on the second business day following
presentment of the check to the paying bank).
1. Current Rule
Under the current expeditious-return provisions of Regulation CC, a
paying bank determines not to pay a check must return the check in an
expeditious manner, as provided under either the
[[Page 6676]]
``two-day test'' \12\ or the ``forward-collection test''.\13\ To meet
the two-day test, a paying bank must send a returned check in a manner
such that the check would normally be received by the depositary bank
not later than 4 p.m. (local time of the depositary bank) on the second
business day following the banking day on which the check was presented
to the paying bank. To meet 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. Regulation CC also 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.\14\
---------------------------------------------------------------------------
\12\ 12 CFR 229.30(a)(1).
\13\ 12 CFR 229.30(a)(2). 12 CFR 229.31(a) sets forth similar
tests for returning banks for expeditious return of checks.
\14\ 12 CFR 229.30(a).
---------------------------------------------------------------------------
In addition to requiring a paying bank to send a returned check
expeditiously, Regulation CC 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. The notice of
nonpayment must be sent 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. Return of the check itself satisfies the
notice of nonpayment requirement if the return meets the timeframe
requirement for a notice of nonpayment.
2. 2011 Proposal
By the end of 2010, the Reserve Banks received and sent virtually
all forward-collection checks electronically. Although at that time the
Reserve Banks received about 97.1 percent of returned checks
electronically, they delivered only 76.7 percent of returned checks
electronically. The 2011 proposal considered the Reserve Banks' check
collection and return statistics to be representative of the industry-
wide experience, and proposed amendments to subpart C to encourage
depositary banks to accept returned checks electronically. The 2011
proposal would place the risk of non-expeditious return on a depositary
bank that chooses not to accept electronic returns because of the
prevalence of electronic check-return methods and the declining costs
to a depositary bank to receive returned checks electronically.
Accordingly, the 2011 proposal proposed to revise the expeditious-
return requirement in Sec. 229.30 of Regulation CC to apply only to a
depositary bank that agreed to receive returned checks in electronic
form from the paying bank.\15\ Under the 2011 proposal, a depositary
bank would be deemed to agree to receive a returned check in electronic
form from the paying bank if the depositary bank agreed to receive an
``electronic return'' (i) directly from the paying bank; (ii) directly
from a returning bank that holds itself out as willing to accept
electronic returns directly or indirectly from the paying bank and has
agreed to return checks expeditiously; or (iii) as otherwise agreed
with the paying bank (e.g., through a network provided by a clearing
house or other third party). Under the 2011 proposal, a paying bank
would still be subject to Regulation CC's current midnight deadline
provisions for all returned checks.\16\
---------------------------------------------------------------------------
\15\ The Board proposed to retain the two-day test for
expeditious return, and to remove the four-day test and the forward-
collection test. See Proposed Sec. 229.30(a)(1) in the 2011
proposal, 76 FR 16862, 16895 (Mar. 25, 2011)).
\16\ 12 CFR 229.12 and 229.30(c); see Uniform Commercial Code
(UCC) 4-302.
---------------------------------------------------------------------------
The Board proposed in the 2011 proposal to retain the two-day test
for expeditious return, and to delete the four-day test and the
forward-collection test from Regulation CC. The Board also proposed in
the 2011 proposal to eliminate the current notice-of-nonpayment
requirement in Regulation CC \17\ because the two-day timeframe for a
notice of nonpayment would be the same as the proposed two-day
timeframe for expeditious return in situations where the depositary
bank has agreed to receive returned checks electronically. As a result,
a depositary bank that did not agree to receive returned checks
electronically from the paying bank under the 2011 proposal would not
have been entitled to expeditious return of the check and also would
not have been entitled to a notice of nonpayment. The Board
specifically requested comment in the 2011 proposal on whether the
notice-of-nonpayment requirement should be retained for checks being
returned to depositary banks that do not agree to accept electronic
returns in a nearly all-electronic environment.
---------------------------------------------------------------------------
\17\ 12 CFR 229.33(a).
---------------------------------------------------------------------------
The Board also requested comment in the 2011 proposal on two
alternative approaches to revising the expeditious-return requirement
to encourage electronic returns. Under the first alternative, a bank
that holds itself out as a returning bank would be required to accept a
returned check electronically from any other bank that holds itself out
as a returning bank (referred to in the 2011 proposal as the ``ACH-
operator-like'' approach).\18\ As noted in the 2011 proposal, this
approach was intended to ensure that an electronic return could reach
the depositary bank even if the paying bank and the depositary bank had
electronic-return agreements with different returning banks. The 2011
proposal stated that this approach could be costly for returning banks
to implement, because they would have to establish electronic return
connections and agreements with every other returning bank. The second
alternative would have required an electronic return to be returned
through the forward-collection chain, essentially reverting to the pre-
Regulation CC rule (referred to as the ``Uniform-Commercial-Code (UCC)-
like'' approach). The 2011 proposal noted that some depositary banks
might have agreements under which returned checks are delivered to a
different location than that from which the depositary bank sends its
checks for forward collection, and that the second alternative could
interfere with the operation of those agreements. The Board also
requested comment on whether there might be other approaches preferable
to those set forth in the 2011 proposal.
---------------------------------------------------------------------------
\18\ This first approach was referred to as the ``ACH-operator-
like'' approach because ACH network rules specify that an ACH
operator must exchange files and entries with all other ACH
operators. See Section 4.1.7 of the 2012 NACHA Operating Rules.
---------------------------------------------------------------------------
3. Summary of Comments
a. Expeditious-Return Requirement
About 25 commenters specifically addressed the 2011 proposed
amendments to eliminate the expeditious-return requirement. Almost all
of these commenters broadly supported the proposal to eliminate the
requirement for a paying bank or a returning bank if the depositary
bank had not agreed to accept an electronic return directly or
indirectly from the paying bank. A few commenters, however, opposed the
elimination of the expeditious-return requirement, stating that
eliminating a depositary bank's right to expeditious return if the
depositary bank had not agreed to accept returns electronically would
be too severe of a penalty. These commenters opposed using amendments
to Regulation CC to
[[Page 6677]]
encourage electronic check processing and stated that the marketplace
should be allowed to determine how and when banks choose to accept
returned checks electronically.
Almost all of the commenters that broadly supported eliminating the
expeditious-return requirement, however, expressed concern with its
practical implementation. In particular, commenters were concerned with
two implementation challenges raised by the provisions in the 2011
proposal that would deem a depositary bank to have agreed to accept
electronic returns from a paying bank if the depositary bank agrees to
accept electronic returns directly from a returning bank that ``has
held itself out'' as willing to accept electronic returns. First, some
of these commenters believed that it would not always be practical for
a paying bank to determine from which returning bank the depositary
bank has agreed to accept electronic returns. One commenter, however,
stated that depositary banks that accept electronic returns from
Federal Reserve Banks would not have to make such a determination.\19\
Second, commenters were concerned that a paying bank might be subject
to the expeditious-return requirement in circumstances where the paying
bank did not have an actual electronic-return agreement in place with
the returning bank that ``has held itself out'' as willing to accept
electronic returns. These commenters stated that in such circumstances,
it would be impractical for the paying bank both to establish a
connection for electronic return to that returning bank and to return
the check within the proposed two-day timeframe for expeditious return.
---------------------------------------------------------------------------
\19\ This commenter suggested that the Board designate the
Reserve Banks' listing of the depositary-bank endpoints (routing
numbers) to which they deliver returned checks electronically as the
determinative source for paying banks to ascertain whether or not a
depositary bank has agreed to accept electronic returns from Reserve
Banks.
---------------------------------------------------------------------------
To address the second concern, one comment letter submitted by a
group of institutions and trade associations (``group letter'')
proposed deeming a depositary bank to have agreed to receive electronic
returns from the paying bank if the depositary bank has either (1) an
agreement to receive electronic returns from a returning bank that, in
turn, has an actual agreement in place with the paying bank to accept
electronic returns, or (2) an agreement for expeditious return by means
of an electronic return through the Federal Reserve Banks, regardless
of whether the paying bank has an arrangement to send electronic
returns through the Federal Reserve Banks. As an alternative to
specifying that a depositary bank may agree to accept electronic
returns from the Reserve Banks, the group letter suggested that a
depositary bank could agree to accept electronic returns from a minimum
percentage of all paying banks, or through a returning bank(s) that
accepts electronic returns from a minimum percentage of all paying
banks.\20\
---------------------------------------------------------------------------
\20\ The group letter was signed by four groups representing
depository institutions: The Electronic Check Clearing House
Organization, The Clearing House, the Independent Community Bankers
Association (``ICBA''), and the Technology Policy Division of the
Financial Services Roundtable (``BITS''). Several other commenters
stated that they supported the group letter, at least with respect
to the suggested alternate approaches.
---------------------------------------------------------------------------
The group letter acknowledged that the second alternative, in
particular, could provide an incentive for depositary banks to accept
returns electronically through the Reserve Banks, as opposed to other
returning banks. The group letter stated, however, that the alternative
recognized the nature of the paper and electronic check return system
in which the Reserve Banks serve as the default returning bank for
paying banks sending returned checks to depositary banks that the
paying banks cannot reach electronically.
The Board also received comments on the ACH-operator-like approach
and the UCC-like approach set forth in the 2011 proposal. All of these
commenters opposed both alternatives. Commenters stated that the ACH-
operator-like approach would be too costly, and with no certain
benefit, because of the need to develop and implement operational
integration between returning banks that does not exist today.
Commenters also stated that the ACH-operator-like approach might
undesirably lock the banking industry into using specific returning
banks. In addition, commenters stated that the UCC-like approach
likewise would be very disruptive to banks' existing check-collection
processes, because not all banks that receive checks for collection in
electronic form from depositary banks have comparable agreements in
place to send returned checks in electronic form to the depositary
banks from which they received presentment in electronic form.
b. Notice-of-Nonpayment Requirement
Approximately 20 commenters specifically addressed the provisions
of the 2011 proposal regarding elimination of the notice-of-nonpayment
requirement. About half of these comments supported the proposal and
half opposed it. Commenters that supported the proposal stated that
eliminating the requirement would encourage depositary banks to receive
returns electronically and agreed that a depositary bank that receives
electronic returns typically would receive the returns within the time
in which it would otherwise receive the notice, thereby rendering a
separate notice unnecessary. These commenters also stated that
maintaining the notice-of-nonpayment requirement for checks being
returned to depositary banks that do not agree to accept electronic
returns would impose on paying banks the expense and operational burden
of establishing processes to identify depositary banks that have not
agreed to electronic return and of providing separate notices of
nonpayment (i.e., in addition to the electronic return itself) to those
banks.
In general, commenters opposing elimination of the notice-of-
nonpayment requirement stated that the notice remains an important
loss-prevention tool for depositary banks. Of the commenters opposed to
the elimination, about half stated that depositary banks that have not
agreed to receive returned checks electronically should continue to be
entitled to receive a notice of nonpayment. Other commenters stated
that even those institutions that receive electronic returns may
receive the notice of nonpayment sooner than the electronic return, and
that the faster receipt of the notice can make a difference regarding
the depositary bank's ability to charge back its customer's account
before the funds are withdrawn.
4. 2013 Proposal
The Board has considered the comments received on its 2011 proposal
and is now requesting comment on two alternative approaches to the
requirements imposed on paying banks and returning banks that return
checks. These alternatives are intended to recognize that, in today's
virtually all-electronic check processing environment, requiring
expeditious return of paper checks imposes substantial cost on banks
returning checks. The two alternatives also are intended to eliminate
some of the concerns that commenters identified with the 2011 proposal.
a. The two alternatives in the 2013 proposal, described in greater
detail below, are intended to identify the optimal incentives to impose
on banks returning checks to encourage the broadest possible
implementation of electronic check return. One alternative--Alternative
1--is intended
[[Page 6678]]
to impose incentives on depositary banks to accept electronic returns
by eliminating the expeditious-return requirement. 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 within the current expeditious-return
timeframes. The other alternative--Alternative 2--is intended to impose
incentives on depositary banks to accept electronic returns by
generally retaining the expeditious-return requirement except where the
depositary bank had not agreed to accept electronic returns. Under this
alternative, depositary banks that do not currently receive 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.
Alternative 1--No Expeditious Return Requirement
Proposed Alternative 1 would eliminate the expeditious-return
requirement imposed on paying banks and returning banks. Paying banks
would continue to be subject to the UCC's midnight deadline for
returning checks (including checks in electronic form), and returning
banks would continue to be required to use ordinary care when returning
the item.\21\
---------------------------------------------------------------------------
\21\ UCC 4-302 provides that a payor bank is accountable for the
amount of a check if the paying bank fails to return the item before
its midnight deadline (i.e., by midnight of the banking day
following the banking day on which the payor bank received the
check). UCC 4-202 states that a collecting bank exercises ordinary
care ``by taking proper action before its midnight deadline
following receipt of an item, notice, or settlement. Taking proper
action within a reasonably longer time may constitute ordinary care,
but the bank has the burden of establishing timeliness.''
---------------------------------------------------------------------------
At the time that the Board initially adopted the expeditious-return
requirement, the methods used for forward collection of checks were
often were faster than those used to return checks.\22\ The Board
initially adopted the expeditious-return requirement in Regulation CC
to speed the check-return process by encouraging paying banks to return
checks to the depositary bank using the same transportation methods as
they used for forward collection. In today's virtually all-electronic
check-processing environment, a check returned electronically should be
received by the depositary bank as a practical matter within two
business days of the check's presentment to the paying bank even
without an expeditious-return requirement.\23\
---------------------------------------------------------------------------
\22\ See 53 FR 19372 (May 27, 1988).
\23\ The time for receipt of the electronic return by the
depositary bank could change if returning banks were to change their
processing timeframes. It appears unlikely, however, that returning
banks would change such processing timeframes given that their
processes for electronic returns and there would not appear to be
any benefit in changing them to allow for slower electronic
processing.
---------------------------------------------------------------------------
Paper returned checks, however, are generally not delivered to
depositary banks as quickly as checks returned electronically, and the
UCC does not specify timeframes within which returned paper checks must
be received by a depositary bank.\24\ Therefore, Alternative 1 would
require paying banks that return checks in paper form to provide notice
of nonpayment to the depositary bank by 2 p.m. on the second business
day following presentment of the check to the paying bank, regardless
of the amount of the returned check.\25\ The requirement for notice of
nonpayment under Alternative 1 would not apply to a paying bank that
sends the returned check electronically (either directly to the
depositary bank or to a returning bank). The Board also proposes under
Alternative 1 to move up the deadline for receipt of notice of
nonpayment by the depositary bank from 4 p.m. to 2 p.m. (local time of
the depositary bank) on the second business day following presentment
of the check to the paying bank. The proposed 2 p.m. deadline would
correspond to the earliest cutoff hour a bank may set under the UCC for
items to be considered received on that banking day, rather than the
next banking day.\26\
---------------------------------------------------------------------------
\24\ While the UCC imposes deadlines for when paying banks and
returning banks must initiate returns, the UCC does not require
returned checks to be received by depositary banks within a
specified timeframe. See UCC 4-202. Rather, UCC 4-202 requires a
returning bank to exercise ordinary care in returning checks to its
transferor.
\25\ Proposed 12 CFR 229.31(d).
\26\ UCC 4-108.
---------------------------------------------------------------------------
Alternative 1 is intended to create incentives for a depositary
bank that still demands paper returns to transition to accept returns
electronically, because the depositary bank still would be subject to
the funds-availability timeframes in subpart B of Regulation CC even
though it would not be entitled to expeditious return. Under
Alternative 1, neither the paying bank nor the returning bank would be
subject to an expeditious-return requirement or to a notice-of-
nonpayment requirement if the paying bank sent the returned check
electronically to a returning bank. This would be the case under
Alternative 1 even if the returning bank had to create a substitute
check to mail to the depositary bank. A depositary bank under
Alternative 1 could reduce its risk of having to make funds available
before learning whether a check has been returned unpaid by accepting
returns electronically.
Alternative 1 also proposes, however, to impose a notice-of-
nonpayment requirement on paying banks that choose to send a paper
return. This provision of Alternative 1 is intended to impose on the
paying bank the increased costs of providing notice of nonpayment to
the depositary bank within the same amount of time that it would take
for a check returned electronically to reach the depositary bank.
Imposing this requirement on paying banks that send paper returns,
regardless of the amount of the returned paper check, is intended to
provide paying banks with an incentive to return checks electronically
in order to avoid the costs and burdens associated with providing the
notice of nonpayment.
The Board requests comment on whether eliminating the expeditious-
return requirement might result in a slower check-return process,
albeit one that is still electronic. The return process could be
slowed, for example, if returning banks adjust return-processing
timeframes or if multiple returning banks are involved in the return.
The Board also requests comment on whether Alternative 1 should
eliminate the notice-of-nonpayment requirement in addition to
eliminating the expeditious return requirement. Commenters on the 2011
proposal stated that, in some cases, a paying bank with the capability
to send returns electronically nonetheless must send a paper
return.\27\ In these cases, a paying bank would be unable to choose to
send a returned check electronically in order to avoid the cost of
sending notices of nonpayment. The Board requests comment on whether
there continue to be circumstances under which a paying bank cannot
avoid sending a returned check in paper form. The Board also requests
comment on whether Alternative 1 should retain the notice-of-nonpayment
requirement only for paper returned checks in amounts greater than
$2,500. Retaining the $2,500 threshold for notice of nonpayment in such
cases should reduce the number of notices that the paying bank would
have to send, because the vast majority of checks are less than $2,500.
The Board also
[[Page 6679]]
requests comment on whether the threshold for notices of nonpayment
should be increased to an amount above $2,500, such as $5,000.
---------------------------------------------------------------------------
\27\ The group letter stated that electronically-enabled paying
banks must send paper returns in some cases, citing as an example a
check that does not qualify for handling as an image return under an
electronic-return agreement, through no fault of the paying bank.
---------------------------------------------------------------------------
b. Alternative 2--Expeditious Return Requirement
Proposed Alternative 2 would preserve a requirement that a returned
check reach the depositary bank within a specified timeframe similar to
that proposed in the 2011 proposal. Specifically, Sec. 229.31(b) in
Alternative 2 would require a paying bank that determines not to pay a
check return the check in a manner such that the returned check would
normally be received by the depositary bank by 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.\28\ As under
Alternative 1, the Board proposes under Alternative 2 to eliminate the
forward-collection test and the four-day test and to retain only the
two-day test for expeditious return.
---------------------------------------------------------------------------
\28\ Section 229.31(b)(2) in Alternative 2 would provide that,
if the depositary bank is closed on the second business day
following presentment to the paying bank, the paying bank must
return the check in a manner such that it would normally be received
on or before the depositary bank's next banking day.
---------------------------------------------------------------------------
A paying bank would not be subject to the expeditious-return
requirement under Alternative 2 if the paying bank did not have an
agreement to send electronic returns (1) directly to the depositary
bank or (2) to a returning bank that is subject to the expeditious
return requirement. Returning banks under Alternative 2 would be
subject to a similar duty of expeditious return unless the returning
bank did not have an agreement to send electronic returned checks to
the depositary bank or to another returning bank that has an agreement
to send electronic returned checks to the depositary bank, and the
returning bank had not otherwise agreed to handle the returned check
expeditiously.\29\ Thus, similar to Alternative 1 and to the 2011
proposal, neither a paying bank nor a returning bank would have a duty
of expeditious return under Alternative 2 if the depositary bank had
not agreed to accept electronic returned checks from any returning
bank.
---------------------------------------------------------------------------
\29\ As discussed in more detail in the Section-by-Section
analysis, a returning bank would not be subject to the expeditious-
return requirement under Alternative 2 if the returned check is
deposited into a bank that is not subject to subpart B of Regulation
CC or if the depositary bank is unidentifiable.
---------------------------------------------------------------------------
Alternative 2 recognizes that in some cases a paying bank and a
depositary bank use different returning banks, and that in these cases
the returning bank from which the depositary bank has agreed to accept
electronic returned checks may have an agreement to receive electronic
returned checks from the paying bank's returning bank. Under
Alternative 2, the paying bank and the paying bank's returning bank
would be subject to the expeditious-return requirement in those
cases.\30\ Alternative 2 assumes that an electronic returned check that
must be returned through multiple returning banks would still be
delivered to a depositary bank within the proposed deadline for
expeditious return. The Board requests comment on the extent to which
an electronic returned check that must be processed by two returning
banks would be unable to be delivered to a depositary bank within the
proposed deadline.
---------------------------------------------------------------------------
\30\ See proposed 12 CFR 229.31(b) and proposed 12 CFR
229.32(b).
---------------------------------------------------------------------------
Many commenters on the 2011 proposal supported the concept of
applying the expeditious-return requirement only to returned checks
destined for a depositary bank that has agreed to accept electronic
returned checks. Most of these commenters, however, opposed the
proposed circumstances under which a depositary bank would be deemed to
have agreed to accept an electronic return from a paying bank such that
the paying bank would be subject to the expeditious-return requirement.
For example, many commenters expressed concern that a paying bank would
be subject to the expeditious-return requirement even though the paying
bank did not have the necessary agreements or connections for
electronic return at the time it would be required to send the return.
Under such a situation, a paying bank would have to send a paper
returned check in an expeditious manner, which would be very costly.
Commenters also expressed concern that paying banks would be unable to
determine from which returning bank(s) a depositary bank had agreed to
accept electronic returns.
Alternative 2 is intended to address these concerns by generally
not imposing an expeditious-return requirement on a paying bank if a
returning bank with which the paying bank has an electronic return
agreement does not, in turn, have an agreement to send electronic
returned checks either directly or indirectly to the depositary bank.
Moreover, Alternative 2 would not require a paying bank to determine
from which returning bank(s) a depositary bank accepts electronic
returns out of the universe of banks. Rather, a paying bank need only
determine whether one of its returning banks also has an agreement to
send returned checks electronically to the depositary bank.\31\
---------------------------------------------------------------------------
\31\ A paying bank could identify the depositary banks to which
a returning bank sends returned checks electronically by, for
example, a list of such banks published by the paying bank's
returning bank.
---------------------------------------------------------------------------
Many commenters on the 2011 proposal expressed concern with the
proposed definition of ``electronic return.'' These commenters stated
that the proposed definition would lead to uncertainty as to which
items were subject to the expeditious-return requirement. For example,
commenters expressed concern that items would be subject to the
expeditious-return requirement only if the item complied with the
specified industry standard, but not if the paying bank and returning
bank had agreed to exchange electronic items in a different format. In
the current proposal, the Board is proposing a new term, ``electronic
returned check,'' that is not limited to those items that comply with a
particular industry format or to items a depositary bank has directly
or indirectly agreed to receive from the paying bank. These provisions
of the current proposal are intended to address commenters' concerns
about varying the application of the expeditious-return requirement
based on format or based on whether a depositary bank had agreed to
accept the item.
Alternative 2 generally would impose an expeditious-return
requirement on paying and returning banks only if the depositary bank
has agreed to accept electronic returned checks directly from the
paying bank (or returning bank) or from another returning bank with
which the paying bank (or returning bank) has an electronic-return
agreement. Alternative 2 proposes to eliminate the notice-of-nonpayment
requirement for all returned checks. Alternative 2 presumes that the
requirement would be redundant in light of the proposed two-day
expeditious-return requirement. Alternative 2 is intended to provide
depositary banks that accept only paper returns an incentive to accept
returns electronically in order to obtain information more quickly
about the nonpayment of a returned check. Alternative 2 is also
intended to provide a depositary bank with an incentive to agree to
accept electronic returned checks from a returning bank that agrees to
receive electronic returned checks from a substantial number of paying
banks and returning banks. This provision of Alternative 2 is intended
to mitigate the likelihood that a depositary bank's returning bank
would be able to charge other returning banks or paying banks high
check-return fees because
[[Page 6680]]
the returning bank is the only connection to the depositary bank for
electronic returned checks.\32\ On the other hand, it could be argued
that Alternative 2 provides paying banks with an incentive to enter
into agreements to send electronic returned checks to returning banks
that, in turn, have agreements with very few depositary banks or other
returning banks. The Board requests comment on whether Alternative 2
provides the correct incentives for the efficient return of checks.
---------------------------------------------------------------------------
\32\ If a depositary bank chooses to select electronic returned
checks only from a single returning bank with few connections to
other banks, it will be unlikely that the paying bank or the paying
bank's returning bank has an agreement to send electronic returned
checks to the returning bank selected by the depositary bank.
---------------------------------------------------------------------------
The Board recognizes that, in rare cases, a paying bank might not
have any agreements to send electronic returned checks.\33\ In these
cases, a paying bank would not be subject to the expeditious return
requirement under Alternative 2. The Board requests comment on the
extent to which there are paying banks that do not have any agreements
to send electronic returned checks. The Board also requests comment on
whether Alternative 2 should retain the notice-of-nonpayment
requirement in some form, for example, for those situations where the
paying bank sends a paper returned check.
---------------------------------------------------------------------------
\33\ The group letter stated that electronically-enabled paying
banks must send paper returns in some cases, citing as an example a
check that does not qualify for handling as an image return under an
electronic-return agreement, through no fault of the paying bank.
---------------------------------------------------------------------------
c. Other Approaches to Return Requirements
The Board invites comment on whether the approaches suggested in
the group letter would be preferable to either Alternative 1 or
Alternative 2. One approach suggested in the group letter would entitle
a depositary bank to expeditious return if it agreed to accept returns
electronically from Reserve Banks. This approach could effectively
require banks to route returned checks only to specific returning
banks. The other approach suggested in the group letter would entitle a
depositary bank to expeditious return if it agreed to accept returns
electronically from a minimum percentage of paying banks, or from a
returning bank that accepted electronic returns from a minimum
percentage of paying banks. If the minimum percentage were too high
(the group letter suggested 75 percent as an example) under this
approach, then accepting returns electronically through the Reserve
Banks could be the only means for a depositary bank to meet the
threshold. Under those circumstances, this approach could result in
undue regulatory preference for the Reserve Banks' check-return
services. Conversely, if the percentage were too low, the suggested
approach could still result in a depositary bank accepting electronic
returns from a returning bank with which the paying bank does not have
an agreement for sending electronic returns.
B. Same-Day Settlement Rule
1. Current Rule
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. 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.\34\ The same-day settlement rule
was established in 1994 to reduce the competitive disparity between the
Reserve Banks and other presenting banks, and to balance the bargaining
power between presenting banks and paying banks more equitably. Today's
check-presentment environment is virtually all-electronic, and
electronic check presentment is governed by agreements between the
banks involved. As a result, it may no longer be necessary to set forth
in Regulation CC the terms of presentment for the limited number of
checks that continue to be presented in paper. The same-day settlement
rule's proscription against paying banks' assessment of presentment
fees, however, may continue to help balance the bargaining power
between collecting banks and paying banks in entering into electronic-
presentment agreements. If, in the future, the Board proposes to
eliminate the same-day settlement rule, it could also propose to retain
this proscription in order to maintain the current balance of
bargaining power, as well as reduce the competitive disparities between
Reserve Banks and private-sector banks.
---------------------------------------------------------------------------
\34\ See paragraph (3)(a) of the commentary to Sec. 229.36(f).
---------------------------------------------------------------------------
2011 Proposal
Under the 2011 proposal, a paying bank would have been permitted to
require checks presented for same-day settlement to be presented
electronically as ``electronic collection items,'' provided the paying
bank had agreed to receive electronic collection items from the
presenting bank.\35\ A paying bank would have been deemed to have
agreed to receive an electronic collection item if it agreed to do so
either directly from the presenting bank or as otherwise agreed with
the presenting bank. The timeframes, deadlines, and settlement methods
for same-day settlement presentments of electronic collections items
under the 2011 proposal would have been the same as those currently in
effect for same-day settlement presentments of paper items.
---------------------------------------------------------------------------
\35\ Proposed Sec. 229.2(s) defined an ``electronic collection
item'' as an electronic image of and information related to a check
that a paying bank sends for forward collection that (1) a paying
bank has agreed to receive under proposed Sec. 229.32(a), (2) is
sufficient to create a substitute check, and (3) conforms with
applicable industry standards for electronic images of and
information related to checks. 76 FR 16862, 16887 (Mar. 25, 2011).
---------------------------------------------------------------------------
2. Summary of Comments
About 25 commenters addressed the provisions of the 2011 proposal
on same-day settlement. The majority of these commenters found the
proposal to be unclear, particularly regarding how, and from which
banks, a paying bank must agree to receive presentment electronically
in order to require same-day settlement presentment to be electronic.
These commenters requested that the Board issue a revised proposal for
electronic same-day settlement after reviewing the comments received on
the 2011 proposal.
A minority of the commenters on the proposed same-day-settlement
provisions of the 2011 proposal supported the proposal, stating that
most small banks have adopted image-based check-processing technology
and are no longer able to receive paper check presentments in large
volumes and process them in an automated fashion. One commenter stated
that banks' existing agreements for electronic presentment provide a
reasonable framework for the electronic same-day settlement presentment
contemplated by the Board's proposal. Another commenter supporting the
2011 proposal stated that the Board also should consider establishing a
sunset date for paper presentments for same-day settlement because the
value of accelerated presentment and settlement is relatively lower
today due to the increased efficiency of direct check-image exchange
arrangements.
Several commenters stated that any rule governing electronic same-
day settlement should preserve the ability of a presenting bank to
receive same-day
[[Page 6681]]
settlement for the checks without being charged fees by the paying bank
(either presentment fees or fees for sending electronic collection
items), as is the case for checks presented in paper form under the
current same-day settlement rule. These commenters expressed concern
that paying banks and presenting banks might be unable to reach an
agreement as to the terms of electronic same-day settlement, or that
paying banks would only enter into agreements where the designated
electronic presentment point charged fees to the presenting bank. Some
commenters stated that banks should continue to have the option to
present paper checks for same-day settlement under the existing terms
in the event that banks were unable to reach agreement on electronic
presentment terms, even if the paying bank had already designated an
electronic presentment point or had agreed to receive presentment
electronically from another presenting bank.\36\
---------------------------------------------------------------------------
\36\ Several commenters also expressed concern with the
definition of ``electronic presentment point'' (and the related
definition of ``electronic return point'') used in the proposed
definition of ``electronic collection item.'' The revised proposal
would not define the terms ``electronic presentment point'' and
``electronic return point'' and therefore does not address these
comments in detail.
---------------------------------------------------------------------------
3. 2013 Proposal
The Board proposes to retain, without change, the regulation's
current same-day settlement rule. The 2011 proposal to incorporate
electronic same-day settlement provisions into Regulation CC was
intended to address the preference of many paying banks to receive all
of their interbank check presentments electronically. At the time of
the 2011 proposal, some presenting banks continued to present paper
checks for same-day settlement under Regulation CC. Almost all checks
are now presented electronically, however, and paying banks' prior
concerns about paper-check presentments appear to have been
ameliorated. The Board no longer believes it is necessary or
appropriate to specify terms for electronic same-day settlement in
Regulation CC because banks currently use electronic check presentment
on a nearly universal basis. Instead, the terms of electronic
presentment can be determined by banks' agreements, as they are under
current industry practice. This approach is consistent with the
approach taken elsewhere in the current proposal, under which a bank's
acceptance of a check or returned check in electronic form is governed
by the receiving bank's agreement with the sending bank (discussed
below).
The Board requests comment on whether paying banks are continuing
to receive paper checks presented for same-day settlement, and in
particular requests comment on whether presenting banks that generally
use electronic check-collection methods still present checks in paper
form to a paying bank that has already established the capability to
receive check presentments electronically. The Board also requests
comment on whether it should apply the same-day settlement rule to
electronic checks and, if so, how it might address the concerns of the
commenters raised in connection with the 2011 proposal.
C. Framework for Electronic Checks and Electronic Returned Checks
1. Current Rule
Regulation CC applies to paper checks.\37\ Therefore, subpart C's
provisions related to acceptance of returned checks, presentment, and
warranties do not apply to electronic images of checks (``electronic
images'') or to electronic information related to checks (``electronic
information''). Rather, the collection and return of checks in
electronic form is governed by agreements between the banks. These
agreements may be bilateral, or in the form of a Reserve Bank operating
circular or a clearinghouse agreement. 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''); 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.\38\
---------------------------------------------------------------------------
\37\ Current Sec. 229.2(k) generally follows the definition of
``check'' from the EFA Act, and does not include an electronic image
of a check or electronic information related to a check within the
definition of ``check.''
\38\ With respect to checks and returned checks handled by the
Reserve Banks, Regulation J (12 CFR part 210) provides similar
protections to banks receiving electronic items from a prior bank.
Clearinghouse rules also typically include such protection.
---------------------------------------------------------------------------
2. 2011 Proposal
The Board's 2011 proposal would have added provisions that, in
combination, created a default framework governing the collection and
return of electronic images and electronic information.
a. Checks Under Subpart C
In addition to applying the expeditious-return requirement and
same-day-settlement provisions of Regulation CC to electronic items,
the 2011 proposal would have applied the other provisions of subpart C
to electronic images and electronic information that a depositary bank
agreed to receive from a paying bank (``electronic return'') and that a
paying bank agreed to receive from a presenting bank (``electronic
collection item''). Under the 2011 proposal, an item would be an
``electronic collection item'' or an ``electronic return'' only if (1)
the item contained both an electronic image of a check and electronic
information related to a check (or returned check), (2) the electronic
image and electronic information were sufficient to create a substitute
check, (3) the electronic image and electronic information conformed in
format to American National Standard Specifications for Electronic
Exchange of Check and Image Data--X9.100-187, in conjunction with its
Universal Companion Document (hereinafter collectively referred to as
ANS X9.100-187), unless the parties otherwise agree or the Board
otherwise determines, and (4) the depositary bank or paying bank agreed
to accept the electronic image and electronic information. The 2011
proposal would have specified under what circumstances a paying bank or
depositary bank would be deemed to have agreed to receive electronic
collection items and electronic returns and when they would be deemed
to have been received.
b. Warranties
In the 2011 proposal, the Board proposed that Sec. 229.34's
existing warranties would be made by banks sending and receiving
electronic collection items and electronic returns. In addition, the
Board proposed new warranties that would apply specifically to
electronic collection items and electronic returns. First, the Board
proposed new Check-21-like warranties that would be made by a bank that
transfers or presents an electronic collection item or an electronic
return and receives consideration. In brief, the sending bank would
warrant that the electronic image accurately represents all of the
information from the original check, that the electronic information
contains an accurate record of all the MICR line information required
for a substitute check, and that no person will be charged twice for
the same item.
c. Electronically-Created Items
The 2011 proposal also contained provisions for warranties
specifically related to ``electronically-created items.''
Electronically-created items are electronic images that resemble images
[[Page 6682]]
of the fronts and backs of paper checks but that were created
electronically and not from, for example, scanning a paper check in
order to create the electronic image. Electronically-created items are
also sometimes referred to as ``electronic payment orders'' or
``EPOs.'' For example, a corporate customer sending payments might,
rather than printing and mailing a paper check, electronically create
an image that looks exactly like an image of the corporate customer's
paper checks, and email the image to the payee. Alternatively, a
consumer might use a smart-phone application through which the consumer
is able to fill in the payee and amount, and provide a signature, on
the phone's screen. The application then electronically sends the image
to the payee.
Because these items never existed in paper form, they do not meet
the definition of electronic images of checks or of electronic
information related to checks and therefore they cannot be used to
create substitute checks that are the legal equivalent of original
paper checks. Nonetheless, electronically-created items are often sent
through the check-collection system as if they are electronic images of
paper checks.
The 2011 proposal would have provided a bank receiving an
electronically-created item with certain warranty claims against a
prior bank. Specifically, the Board proposed that a bank that transfers
or presents an electronic image and related electronic information ``as
if'' they were derived from a paper check would make the all warranties
in current Sec. 229.34, even if the electronic image and information
were not derived from a paper check. For example, a bank sending an
electronically-created item to another bank would be liable to that
bank if that bank was asked to pay the item twice. The 2011 proposal
also provided that the existing warranties applicable to paper remotely
created checks (RCCs) would apply to electronically-created items that
visually resemble RCCs.\39\
---------------------------------------------------------------------------
\39\ Section 229.2(fff) of the regulation defines ``remotely
created check'' as a paper 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. Although
the regulation's remotely created check warranty does not extend to
the drawer, the drawer may be able to recover from the paying bank
for an unauthorized remotely created check under UCC 4-401.
---------------------------------------------------------------------------
3. Summary of Comments
a. Checks Under Subpart C
Three commenters, including the group letter, explicitly addressed
the Board's proposal generally to apply the terms of subpart C to
electronic collection items and electronic returns as if they were
checks or returned checks. All three commenters generally supported
this aspect of the 2011 proposal, because banks' agreements for the
electronic collection and return of checks generally already treat
images of and information related to checks as if they were checks or
returned checks under Regulation CC, the UCC, and other applicable law.
No commenter opposed applying subpart C of the regulation to these
items as if they were checks.
Commenters, however, expressed numerous concerns with specific
items that would be treated as checks under subpart C by virtue of the
Board's proposed definitions of ``electronic collection item'' and
``electronic return.'' At least one commenter believed that the Board's
definitions were too limited in that they included only those images
and information that a paying bank or depositary bank had agreed to
receive directly or indirectly from certain banks, and not those items
that, for example, a returning bank agreed to receive from a paying
bank without the depositary bank, in turn, agreeing to receive the item
from the returning bank. Commenters noted that the item sent between
the paying bank and returning bank would not be an ``electronic
return'' because the depositary bank would not have agreed to receive
it from the paying bank under the 2011 proposal. These commenters
stated that the proposal therefore created uncertainty as to the
applicability of subpart C's provisions, because a bank might not know
at the time it transfers an electronic image whether that image is an
``electronic collection item'' because the bank might not know whether
the depositary bank or paying bank has agreed to receive the item
electronically.
No commenter opposed, in concept, that an ``electronic collection
item'' or ``electronic return'' be sufficient to create a substitute
check. The group letter, however, suggested that banks may wish to
agree to exchange electronic images and electronic information even
though the images or information are insufficient to create substitute
checks (for example, if the image is not readable by the machine that
images checks). This letter suggested that the Board clarify that banks
could agree to collect electronic images or electronic information that
would otherwise be insufficient to create a substitute check, and that
the provisions of Regulation CC would not apply to those images or
information.\40\ Another commenter, however, opposed this suggestion,
stating that it would result in a bifurcated system that would create
even greater uncertainty.\41\
---------------------------------------------------------------------------
\40\ To distinguish between electronic images and information
that are ``electronic collection items'' and those that are not,
some commenters suggested that clearinghouse rules could require
items that are not ``electronic collection items'' to include a
``flag.''
\41\ In some cases, typically those involving a small depositary
bank, the depositary bank may not know how a subsequent
correspondent bank or other collecting bank handles, or ``flags,''
the item, and therefore may not know which warranties are applying
to the item as it proceeds through the check-collection chain.
---------------------------------------------------------------------------
The Board received comments both supporting and opposing the
provisions of the 2011 proposal that would specify the industry
standard for ``electronic collection items'' and ``electronic
returns.''\42\ Some commenters stated that the regulation need not
incorporate a standard, but should specify that banks handling
electronic images must agree to a technical standard (for example, ANS
X9.100-187), so long as the standard permits the receiving bank to
create a substitute check.
---------------------------------------------------------------------------
\42\ Some commenters supported incorporating that standard, but
thought that the phrase ``as amended from time to time by ANS''
should be added.
---------------------------------------------------------------------------
b. Warranties
Eight commenters addressed the proposed Check-21-like warranties in
the 2011 proposal. No commenter opposed, in concept, extending the
existing warranties to electronic collection items and electronic
returns, and four commenters explicitly supported it. Two commenters,
including the group letter, wanted the Board to clarify that the
parties may vary these warranties by agreement. Another commenter
opposed varying the warranties by agreement, stating that it would
create uncertainty.
c. Electronically-Created Items
Eight commenters addressed the provisions of the 2011 proposal for
applying existing warranties in Regulation CC to electronically-created
items. Six commenters, including the group letter, explicitly supported
the proposal. Three commenters, again including the group letter,
requested that the Board clarify that the parties may vary the
warranties by agreement. Another commenter opposed varying the
warranties by agreement. One Reserve Bank commenter suggested that the
Board expand its proposal to require a bank that introduces an
electronically-created item into the check collection system indemnify
all subsequent persons handling the electronically-created item against
any loss or damage
[[Page 6683]]
resulting from the fact that the electronically-created item was not
captured from a paper check.
Eighteen commenters addressed the provisions of the 2011 proposal
relating to ``eRCCs'' (electronically-created items that visually
resemble RCCs).\43\ Six commenters explicitly supported and no
commenters opposed applying existing RCC warranties to eRCCs. The group
letter recommended that the Board clarify that eRCCs would be subject
to the RCC warranty. Most commenters that addressed eRCCs suggested
that the Board apply all of subpart C's provisions to eRCCs.\44\ Two
commenters opposed that approach, believing that further study by the
Board and the public are necessary to determine an appropriate
regulatory framework for eRCCs.\45\
---------------------------------------------------------------------------
\43\ An ``eRCC'' is an electronically-created item that does not
bear the drawer's signature, that resembles an image of a remotely
created check, and that would meet the regulation's definition of
``remotely created check'' (See current Sec. 229.2(fff)), but for
the fact that the item never existed in paper form prior to the
depositary bank receiving the item electronically.
\44\ A few commenters suggested that the Board apply the
provisions of subpart C to eRCCs by modifying the definition of
either ``original check'' or ``remotely created check'' to include
remotely created checks that never existed as paper.
\45\ A few commenters indicated that eRCCs are in limited use
within the check-collection system. For example, telemarketers, on-
line businesses, or other payees that would normally use remotely
created checks use eRCCs instead to avoid the cost of printing and
then truncating the remotely created check.
Some commenters questioned whether there are legitimate reasons
for merchants or billers to use eRCCs, as opposed to using ACH
debits.
---------------------------------------------------------------------------
Commenters were split on whether subpart C's provisions should
apply to an electronically-created item that is created by the paying
bank's customer. These electronically-created items resemble images of
checks drawn by the paying bank's customer, rather than remotely
created checks. Four commenters, including the group letter and one
Reserve Bank commenter, stated that items created by a paying bank's
customer are a potentially useful payment innovation, that their
development has been impeded by uncertainty about the applicable legal
framework, and that coverage under subpart C would be an enabling first
step in the development of new products. Three commenters stated that
it was too soon to determine whether these products should be treated
as ``checks'' or whether they should be treated as a different type of
payment instrument.
4. 2013 Proposal
The Board is proposing a revised regulatory framework for the
collection and return of checks in electronic form based on its
analysis of the comments received on the 2011 proposal. Under the 2013
proposal, electronic images and electronic information will be treated
as checks under subpart C (with proposed simplifications to the
applicable definitions). The 2013 proposal would apply Check-21-like
warranties to electronic images and electronic information. The 2013
proposal would also require a bank sending an electronically-created
item to indemnify subsequent transferees for losses caused by the fact
the item was not derived from a paper check.\46\ The 2013 proposal also
provides for a new indemnity relating to remote deposit capture
services. The proposed new indemnity would cover depositary banks that
receive deposit of an original paper check that is returned unpaid
because it was previously deposited (and paid) using a remote deposit
capture service.
---------------------------------------------------------------------------
\46\ The 2011 proposal would have applied the warranties set
forth in current 229.34 to electronically-created items instead of
providing for an indemnity.
---------------------------------------------------------------------------
a. Checks Under Subpart C
Under proposed Sec. 229.30(a) of the 2013 proposal, electronic
images of checks and electronic information related to checks that
banks send and receive by agreement would be subject to the provisions
of subpart C as if they were checks, unless otherwise agreed by the
sending and receiving banks. In general, the Board proposes to use the
terms ``electronic check'' and ``electronic returned check,'' set forth
in proposed Sec. 229.2(ggg), instead of ``electronic collection item''
and ``electronic return'' as in the 2011 proposal. An item would be an
``electronic check'' or an ``electronic returned check'' based on
whether the sending bank and the receiving bank have an agreement to
send the item electronically, and not based on whether a paying bank or
depositary bank has agreed to receive the item electronically. A
sending bank must have an agreement with the receiving bank in order to
send an electronic check or electronic returned check. Like the 2011
proposal, the 2013 proposal would not require a bilateral agreement
between the receiving bank and the sending bank; a Reserve Bank
operating circular, clearinghouse rule, or other interbank agreement
may serve as an ``agreement'' to send and receive items electronically.
The 2013 proposal would permit sending banks and receiving banks to
agree to send and receive electronic images and electronic information
that do not conform with ANS X9.100-187. Therefore, unlike the 2011
proposal, electronic checks and electronic returned checks could
include electronic images of checks sent without accompanying
electronic information and electronic information sent without an
accompanying image.
Proposed Sec. 229.30(a) would provide that electronic checks and
electronic returned checks are subject to subpart C as if they were
checks or returned checks, unless otherwise provided in that subpart.
Specifically, other provisions of subpart C would specify that the
parties' agreements govern the receipt of electronic checks and
electronic returned checks,\47\ and proposed Sec. 229.34 would set
forth warranties (discussed below) that would be given with respect to
electronic checks and electronic returned checks. 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.
---------------------------------------------------------------------------
\47\ See proposed Sec. 229.33(a) (depositary bank acceptance of
electronic returned checks) and proposed Sec. 229.36(a) (paying
bank acceptance of electronic checks).
---------------------------------------------------------------------------
b. Warranties
Proposed Sec. 229.30(a) would apply the provisions of subpart C to
electronic checks and electronic returned checks. Specifically,
proposed Sec. 229.30(a) would apply the existing paper-check
warranties in Sec. 229.34 to electronic checks and electronic returned
checks (as in the 2011 proposal). These warranties would include the
returned-check warranties \48\ in proposed Sec. 229.34(e), the
warranty of notice of nonpayment in proposed Sec. 229.34(f) of
Alternative 1,\49\ the warranty and associated offset provisions for
settlement amount and encoding in proposed Sec. 229.34(d),\50\ and the
transfer and presentment warranties related to a remotely created check
in proposed Sec. 229.34(c).\51\
---------------------------------------------------------------------------
\48\ See current Sec. 229.34(a).
\49\ See current Sec. 229.34(b).
\50\ See current Sec. 229.34(c).
\51\ See current Sec. 229.34(d).
---------------------------------------------------------------------------
The current proposal would provide for additional warranties
relating to electronic checks and electronic returned checks. For
example, proposed Sec. 229.34(a) would set forth the Check-21-like
warranties for electronic checks and electronic returned checks,\52\
and proposed Sec. 229.37(a) would permit a sending and receiving bank
by agreement to vary the warranties the
[[Page 6684]]
sending bank makes to the receiving bank for electronic checks and
electronic returned checks.\53\ As in the 2011 proposal, the Board
proposes that these warranties flow, for electronic checks, to the
drawer and, for electronic returned checks, to the owner, in addition
to the banks receiving the items.
---------------------------------------------------------------------------
\52\ These warranties are substantively equivalent to those set
forth in the 2011 proposal.
\53\ Such an agreement could provide, for example, that the bank
transferring the electronic check does not warrant that the
electronic image or information are sufficient to create a
substitute check. The agreement would not, however, vary the effect
of the warranties with respect to banks and persons not bound by the
agreement.
---------------------------------------------------------------------------
c. Electronically-Created Items
The Board is proposing to add indemnities related to
electronically-created items, rather than to expand the Sec. 229.34
warranties to those items, as in the 2011 proposal. Proposed Sec.
229.34(b) would provide that a bank that transfers an electronic image
or electronic 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.
Proposed Sec. 229.34(i) would limit 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).
An electronically-created item cannot be used to create a
substitute check that meets the legal equivalence requirements of the
Check 21 Act and Regulation CC \54\ because an electronically-created
item is not derived from a paper check. As a practical matter, however,
a bank (including perhaps the depositary bank) receiving an
electronically-created item might be unable to distinguish the item
from any other image of a check that it receives electronically.
Accordingly, the bank unknowingly may transfer the image as if it were
an electronic check or electronic returned check (i.e., as if it were
derived from a paper check), or produce a paper item that is
indistinguishable from a substitute check (although not a valid
substitute check because it was not derived from a paper check). The
indemnity in proposed Sec. 229.34(b) would protect a bank that
receives an electronically-created item, creates a substitute check
from it, and incurs losses because the substitute check it created was
not the legal equivalent of the original check. The Board is proposing
an indemnity for harm caused by the fact that an electronically-created
item was not derived from a paper check instead of applying the
warranties of current Sec. 229.34 to electronically-created items
because the Board believes that these items do not fit well into the
existing warranty framework of Sec. 229.34.\55\ Banks may still incur
losses on these items, however, that they are unable to recover from
the sending bank because check warranties do not apply.\56\
Accordingly, proposed Sec. 229.34(b) would provide a bank that is
unable to make a warranty claim (i.e., because the image and
information was not derived from a paper check) with an indemnity claim
against a prior sending bank for losses caused from the fact that the
item was not derived from a paper check.
---------------------------------------------------------------------------
\54\ A substitute check is the legal equivalent of the original
check only if the substitute check accurately represents all of the
information on the front and back of the original check when the
original check was truncated. Truncate, as defined in the Check 21
Act and Regulation CC, means removing an original paper check from
the check collection or return process. In the case of an
electronically-created item, there is no original check of which a
substitute check can be a reproduction.
\55\ For example, it is not clear whether the midnight deadline
provisions of the UCC apply to electronically-created items.
\56\ In some cases, sending and receiving banks may have
incorporated indemnities related to electronically-created items
into their electronic check exchange agreement. In these cases, the
receiving bank may be able to recover from the sending bank through
a breach-of-contract claim.
---------------------------------------------------------------------------
The Board requests comment on its proposal to provide an indemnity
claim related to electronically-created items instead of extending the
check warranties of current Sec. 229.34 to electronically-created
items. The Board further requests comment on whether losses proximately
caused from not being able to make the warranty claim should be
interpreted to cover damages awarded for violations of Regulation E.
d. Indemnity Related to Remote Deposit Capture
Remote deposit capture is a practice where a bank permits its
customer to make a deposit by sending an electronic image of the front
and back of a check. Depositary banks typically set forth the terms of
the remote deposit capture service in their agreements with their
customers. Subpart C of Regulation CC does not explicitly address
issues related to remote deposit capture, and the Board did not propose
any related amendments as part of its 2011 proposal. In recent years,
remote deposit capture has become more prevalent, particularly for
consumer accounts.
Once a customer has used a depositary bank's remote deposit capture
service to send an image of the front and bank of a check for deposit,
the customer typically retains the original check for the time
specified under the agreement with the depositary bank. The Board has
become aware of situations where a deposit is made at one bank using a
remote deposit capture service and the original check is deposited at
another bank. In these situations, if the original check is deposited
after the image deposited through a remote deposit capture service, the
original check typically would be returned to the depositary bank
unpaid because the paying bank has already paid the check.\57\
---------------------------------------------------------------------------
\57\ Alternatively, it is possible that the original check is
deposited first, followed by subsequent remote deposit capture.
---------------------------------------------------------------------------
If the paying bank returns the original check to the depositary
bank that accepted it for deposit, that depositary bank might be unable
to charge the returned check back to its customer's account (for
example, the customer may have already withdrawn the funds). It is not
clear whether the depositary bank that accepts the original check would
be able to identify or recover directly from a depositary bank that
accepted and received settlement for a deposit made through a remote
deposit capture service.
Accordingly, the Board proposes to add a new indemnity in Sec.
229.34(g) related to remote deposit capture services. Proposed Sec.
229.34(g) would cover situations where a depositary bank that is a
truncating bank under Sec. 229.2(eee)(2) (i.e., because its customer
created an image of the front and back of the check and deposited it
through a remote deposit capture service) accepts and receives
settlement or other consideration for the check deposited through
remote deposit capture, but does not receive the original check and
does not receive a return of the check unpaid. Under these
circumstances, proposed Sec. 229.34(g) would indemnify another
depositary bank that accepts the original check for deposit for that
bank's losses due to the check having already been paid.\58\ This
indemnity would allow a depositary bank that accepts
[[Page 6685]]
deposit of an original check to recover directly from a bank that
permitted its customer to deposit the check through remote deposit
capture.
---------------------------------------------------------------------------
\58\ A depositary bank is a truncating bank under Sec.
229.2(eee)(2) if a person other than a bank truncates the original
check, but the depositary bank is the first bank to transfer,
present, or return, in lieu of the original check, a substitute
check or, by agreement with the recipient, information relating to
the original check (including data taken from the MICR line of the
original check or an electronic image of the original check).
---------------------------------------------------------------------------
The Board believes that the depositary bank that accepts an
original paper check should not bear the loss if that check has been
deposited multiple times. Rather, the depositary bank that introduced
the risk of multiple deposits of the same check by offering a remote
deposit capture service should bear the losses associated with multiple
deposits of a check. A depositary bank that receives the benefit of
permitting its customers to use remote deposit capture should also
internalize any risk or cost to other banks that may result from remote
deposit capture. One such risk is that the customer will deposit the
original check at another bank. That bank that accepted the check by
remote deposit capture is in a better position than any other bank to
minimize those costs and risks through the terms of its contract with
its customer.
The Board requests comment on all aspects of this indemnity,
including any unintended consequences that might result. The Board also
requests comment on whether the depositary bank that accepts the
original check for deposit would be able to identify the depositary
banks against which it may bring a claim for indemnity (i.e., those
banks that accepted the check through remote deposit capture from their
customers) and whether there are other more efficient or practical
remedies to address the underlying problem.
III. Section-by-Section Analysis
The paragraph citations in this section are to the paragraphs of
the proposed rule unless otherwise stated. The Board requests comment
on all aspects of the proposed rule.
D. Definitions
1. Section 229.2(dd)--Routing Number
In the 2011 proposal, the Board proposed to revise the definition
of the term ``routing number'' to include a bank-identification number
contained in an electronic image or electronic information. In the
current proposal, the Board is proposing substantively identical
revisions to the definition of ``routing number'' and to the related
commentary.\59\
---------------------------------------------------------------------------
\59\ Although the term ``routing number'' is used in subpart B,
amendments to subpart B must be joint with the CFPB. Accordingly,
the proposed amendments would apply only for purposes of subparts C
and D.
---------------------------------------------------------------------------
One commenter on the 2011 proposal stated that the proposed
revisions to the commentary incorrectly stated that the number
appearing in the electronic information related to a payable-through
check was that of the ``paying bank,'' as opposed to ``payable-through
bank.'' Accordingly, the Board is proposing revisions to the commentary
to the definition of ``routing number'' to clarify that, in the case of
payable-through checks, the routing number appearing on the check is
that of the payable-through bank.
2. 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 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, ANS X9.100-140 (hereinafter ANS X9.100-140) for a
substitute check, unless the Board by rule or order determines that
different standards apply.\60\ The 2011 proposal did not propose any
amendments to this definition. In the current proposal, the Board
proposes to amend the definition of ``MICR line'' for purposes of
subpart C and subpart D so that it includes the numbers contained in an
electronic image or electronic information in accordance with American
National Standard Specifications for Electronic Exchange of Check Image
Data--Domestic, X9.100-187 (hereinafter ANS X9.100-187), unless the
Board determines by rule or order that different standards apply.
---------------------------------------------------------------------------
\60\ The commentary to the definition of ``MICR line'' currently
provides that industry standards may vary the requirements for
printing the MICR line, such as by indicating the circumstances
under which the use of magnetic ink is not required.
---------------------------------------------------------------------------
The 2011 proposal proposed to add the new defined terms
``electronic collection item'' and ``electronic return'' to Regulation
CC. In commenting on these provisions of the 2011 proposal, commenters
recommended that the Board not specify a standard for electronic images
and electronic information, in part because commenters stated that
parties should have the flexibility to agree to exchange electronic
images and electronic information that did not satisfy a specified
standard. For example, banks may agree to different standards or
practices, including that, for purposes of subpart C, the MICR line
information may be in a format other than that required by ANS X9.100-
187.
In the current proposal, the Board proposes to revise the
commentary to the definition of ``MICR line'' to state that the banks
exchanging electronic checks may agree to specify the applicable
standard for electronic checks and electronic returned checks. The
Board requests 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.
3. 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.\61\ The term ``copy'' is used throughout
subpart C (for example, in connection with the notice in lieu of return
provisions). The Board did not propose any revisions to the definitions
of ``copy'' and ``sufficient copy'' as part of the 2011 proposal.
---------------------------------------------------------------------------
\61\ 69 FR 47290, 47309 (Aug. 4, 2004).
---------------------------------------------------------------------------
Currently, the definition of ``copy'' in Regulation CC is limited
to paper reproductions of checks. In the current proposal, the Board is
proposing to expand the 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
from 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 current proposal does not contain any
proposed revisions to the definition of ``sufficient copy.'' The Board,
however, is proposing to clarify in the commentary to the definition of
``sufficient copy'' that a ``sufficient copy'' must be a copy must be
of the original check (and not of a substitute check).\62\
---------------------------------------------------------------------------
\62\ See proposed commentary to Sec. 229.2(bbb) at paragraph 2.
---------------------------------------------------------------------------
4. Section 229.2(ggg)--Electronic Check and Electronic Returned Check
The current definition of ``check'' (Sec. 229.2(k)) does not
include electronic images and electronic information. In the 2011
proposal, the Board proposed to define the new terms ``electronic
collection item'' and ``electronic return''. In the current proposal,
the Board proposes to include two new defined terms, ``electronic
check'' and ``electronic returned check,'' in Regulation CC. The
current proposal would define ``electronic check'' and
[[Page 6686]]
``electronic returned check'' as (1) an electronic image of a check, or
returned check, or electronic information related to a check, or
returned check, that a bank sends to a receiving bank pursuant to an
agreement with the receiving bank, and (2) that conforms with ANS
X9.100-187, unless the Board determines that a different standard
applies or the parties otherwise agree. The current proposal, unlike
the 2011 proposal, would permit 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 current proposal, an ``electronic check'' or ``electronic
returned check'' need not be sufficient to create substitute checks in
order to meet the definitions. Under proposed Sec. 229.34(a), however,
parties sending and receiving electronic checks and electronic returned
checks would warrant that such items are sufficient to create
substitute checks, unless the parties otherwise agree.
The proposed commentary to the definition of ``electronic check''
and ``electronic returned check would clarify 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 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.
E. Subpart C--Collection of Checks
As noted above, the Board is proposing two alternative approaches
to the requirements that apply to the return of checks. Generally
speaking, the expeditious-return provisions that the Board proposes to
delete in Alternative 1 would be retained (in some form) in Alternative
2. Likewise, the notice-of-nonpayment provisions that the Board
proposes to retain in Alternative 1 would be deleted in Alternative 2.
1. Section 229.30--Electronic Images and Electronic Information
b. Section 229.30(a)--Checks Under This Subpart
The Board proposes a new Sec. 229.30(a), which would provide 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. Examples of where subpart C
would provide otherwise include proposed Sec. Sec. 229.33(a) and (b)
and Sec. Sec. 229.36(a) and (b), because these provisions
differentiate between checks in electronic form and checks in paper
form for purposes of where depositary banks and paying banks must
receive checks. Another example is proposed Sec. 229.37, which would
permit the parties to vary by agreement the effect of the provisions of
subpart C as they apply to electronic checks and electronic returned
checks.
Some commenters on the 2011 proposal, such as the group letter,
suggested that banks be allowed to agree to collect electronic check
images or electronic check information that do not conform to ANS
X9.100-187.\63\ These commenters stated that, in such cases, the
provisions of Regulation CC should not apply to the exchanged images or
information.
---------------------------------------------------------------------------
\63\ For example, banks may wish to exchange an electronic image
of a check that is readable but insufficient to create a substitute
check due to incomplete MICR line information.
---------------------------------------------------------------------------
In the current proposal, however, the Board proposes in proposed
Sec. 229.30(a) to apply the provisions of subpart C to electronic
check images and electronic check information notwithstanding the
suggestions of commenters on the 2011 proposal. The Board believes that
its proposed approach creates a uniform default framework for all
electronic images and information that parties agree to exchange. As
noted in the proposed commentary to Sec. 229.30(a), Sec. 229.37
permits banks to agree to vary the application of subpart C with
respect to electronic checks. For example, as noted in paragraph A.3.
of the proposed commentary to Sec. 229.34(a), banks that exchange
electronic checks may agree to vary the warranties in proposed Sec.
239.34(a) to provide that the bank transferring the electronic image or
electronic information does not warrant that the image or information
is sufficient to create a substitute check.
e. Section 229.30(b)--Writings
The Board proposes a new Sec. 229.30(b) that would permit certain
writings to be provided in electronic form. Specifically, proposed
Sec. 229.30(b) would permit a bank to satisfy a writing requirement
under subpart C by providing the information in electronic form if the
receiving bank has agreed to receive that information electronically
from the sending bank. For example, under proposed Sec. 229.30(b), a
bank could send a notice in lieu of return required by proposed Sec.
339.31(f) electronically if the receiving bank agreed to receive the
notice electronically.
2. Section 229.31--Paying Bank's Responsibility for Return of Checks
and Notices of Nonpayment
a. The provisions of proposed Sec. 229.31 are the same under
Alternative 1 and Alternative 2 unless otherwise indicated. Section
229.31(a)--Return of Checks
Currently, Sec. 229.30(a) sets forth a paying bank's expeditious
return requirement. The undesignated paragraph in Sec. 229.30(a)
provides 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. The undesignated paragraph also provides that a paying
bank may create a qualified return check (and sets forth format
standards for qualified returned checks) and provides that Sec.
229.30(a) does not affect a paying bank's responsibility to return a
check within the deadlines required by the UCC, Regulation J (12 CFR
part 210), or Sec. 229.30(c).
In proposed Sec. 229.31(a), the Board proposes to retain the
provisions currently set forth in the existing undesignated paragraph
of Sec. 229.30(a), subject to the revisions discussed below. Under
Alternative 1, proposed Sec. 229.31(a)(1) eliminates the expeditious
return requirement imposed on a paying bank. Accordingly, in
Alternative 1, the Board proposes to remove the provisions setting
forth the two-day/four-day test and the forward-collection test, as
well as remove all references to expeditious return from the rule text
and the commentary. Under Alternative 2, proposed Sec. 229.31(a)(1)
retains a modified expeditious return requirement as set forth in
proposed Sec. 229.31(b), while proposed Sec. 229.31(b) under
Alternative 2 would provide for only a two-day test for expeditious
return. Alternative 2, like proposed Alternative 1, would permit a
paying bank that is returning a check to send the returned check
directly to the depositary bank, to any other bank agreeing to handle
the returned check, or as provided in proposed Sec. 229.31(a)(2)
(unidentifiable depositary bank). In Alternative 2, however, a paying
bank's choice of return path would be subject to the requirement for
expeditious return. The Board is proposing to eliminate the restriction
that a paying bank may send the returned check only to a returning bank
that agrees to handle the return expeditiously (except in cases where
the depositary bank is unidentifiable). The Board believes that this is
redundant in
[[Page 6687]]
light of the overall condition in proposed Sec. 229.31(a)(1) (and
current Sec. 229.30(a)) that the choice of return path is subject to
the expeditious-return requirement.
Proposed Sec. 229.31(a)(1) under both Alternative 1 and
Alternative 2 would permit a paying bank to send a returned check to
the depositary bank, to any other bank agreeing to handle the returned
check, or as provided in proposed Sec. 229.31(a)(2) if the depositary
bank is unidentifiable. Retaining these provisions in Regulation CC
permits paying banks to continue to return checks using more direct
paths to depositary banks than otherwise permitted under UCC 4-301(d).
Proposed Sec. 229.31(a)(2) would set forth the provisions of
current Sec. 229.30(b) that permit a paying bank to send a return
check to any bank that handled the check for forward collection when
the paying bank is unable to identify the depositary bank.\64\ In 2011,
the Board proposed to revise the commentary to this provision to
provide that, for purposes of an electronic image and electronic
information, a depositary bank is unidentifiable only if the depositary
bank's indorsement is not in either an addenda record or in the image
of the check. The depositary bank would not be unidentifiable, however,
merely because the depositary bank's indorsement is not attached as an
addenda record, such that the paying bank must retrieve and visually
review the image. The group letter expressed support for this approach.
The Board proposes to retain this approach in the proposed commentary
to Sec. 229.31(a)(2).
---------------------------------------------------------------------------
\64\ As with other provisions of the 2013 proposal, under
Alternative 1, the Board would remove all references to the
expeditious return requirement.
---------------------------------------------------------------------------
The 2011 proposal also proposed commentary on how a paying bank
returning a check for which it cannot identify the depositary bank must
advise the bank to which it is sending the check that it is unable to
identify the depositary bank. Specifically, in the case of an
electronic return, the Board proposed that the advice requirement may
be satisfied by the paying bank inserting the routing number of the
bank to which it is sending the return where the paying bank otherwise
would have inserted the routing number of the depositary bank. Three
commenters addressed this aspect of the 2011 proposal and stated that
such an approach would cause confusion at returning banks that may also
serve as depositary banks. These commenters suggested the Board
continue to leave to industry standards and interbank agreements the
matter of how to advise a receiving bank that the depositary bank is
unidentifiable within an electronic return. The current proposal adopts
the approach suggested by these commenters in the proposed commentary
to proposed Sec. 229.31(i) which provides that, in the case of an
electronic returned check, the advice requirement may be satisfied in
such a manner as the parties agree.
One Reserve Bank commenter suggested that the Board further revise
this provision to preclude a bank that receives a returned check that
it handled for forward collection and that is properly advised that the
depositary bank is not identifiable from sending the returned check
back to the returning bank or the paying bank or from claiming that the
item is ``not our item'' (NOI) through a process like the Reserve
Banks' adjustment procedures. The Board requests comment on whether it
should incorporate such a provision into the regulation.
In proposed Sec. 229.31(a)(3), the Board proposes to retain the
portions of the undesignated paragraph in current Sec. 229.30(a) that
permit paying banks to qualify returned checks and that instruct paying
banks on how to do so. In the 2011 proposal, the Board requested
comment on whether the regulation's provisions for qualifying of paper
returned checks by paying banks and returning banks should be deleted.
All four commenters responding to this aspect of the 2011 proposal,
including the group letter, indicated that the need still exists for
qualified returns and carrier envelopes, and that there would be costs
associated with implementing alternative methods for returning checks
which currently are prepared as qualified returns or use carrier
envelopes.
In proposed Sec. 229.31(a)(4), the Board proposes to retain a
portion of the undesignated paragraph in current Sec. 229.30(a)
regarding the effect of proposed Sec. 229.31 on a paying bank's
deadlines. Proposed Sec. 229.31(a)(4) provides that proposed Sec.
229.31 does not affect a paying bank's responsibility to return a check
within the deadlines required by the UCC, Regulation J (12 CFR part
210), or current Sec. 229.30(c) relating to the midnight deadline
extension.
b. Section 229.31(b)--Expeditious Return of Checks by Paying Bank (or
Reserved)
Proposed Sec. 229.31(b) under Alternative 1 would be reserved.
Proposed Sec. 229.31(b) under Alternative 2 would incorporate the
provisions of current Sec. 229.30(a) imposing the duty of expeditious
return on paying banks. Proposed Sec. 229.31(b)(1) under Alternative 2
would set forth the general rule for expeditious return of checks: a
paying bank must 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. Proposed Sec. 229.31(b) under Alternative 2 would move up
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 current proposal.
Proposed Sec. 229.31(b)(2) under Alternative 2 would provide that,
where the second business day following presentment is not a banking
day for the depositary bank, a paying bank must send 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.
c. Section 229.31(c)--Exceptions to Expeditious Return by Paying Bank
(or Reserved)
Proposed Sec. 229.31(c) under Alternative 1 would be reserved.
Proposed Sec. 229.31(c) under Alternative 2 would incorporate
provisions from current Sec. 229.30(b) and current Sec. 229.30(e)
regarding exceptions for paying banks to the duty of expeditious
return. Specifically, Alternative 2 would include three exceptions to
the expeditious-return rule: (1) The paying bank does not have an
agreement to send electronic returned checks directly to the depositary
bank or to a returning bank that is subject to the expeditious return
requirement under proposed Sec. 229.32(b); (2) the check is being
returned to a depositary bank that is not subject to subpart B; and (3)
the check is being returned to an unidentifiable depositary bank. As in
the 2011 proposal, proposed Sec. 229.31(c) would group the exceptions
to the expeditious return requirement together in one paragraph.
No agreements for direct or indirect electronic return. Under
Alternative 2, a paying bank would not be subject to the expeditious-
return requirement if the paying bank did 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 under Sec.
229.32(b).\65\ A
[[Page 6688]]
paying bank would not be subject to the expeditious-return requirement
where the depositary bank did not agree to accept return checks
electronically. In addition, a paying bank would not be subject to the
expeditious-return requirement where the paying bank did not agree to
send returned checks electronically. Thus, a paying bank could avoid
the expeditious-return requirement under Alternative 2 by choosing to
send returned checks only in paper form. The possibility that a paying
bank would choose to send returned checks only in paper form in order
to avoid the expeditious-return requirement, however, seems unlikely
given that paying banks will 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.
---------------------------------------------------------------------------
\65\ See the discussion of proposed Sec. 229.32(b) in
Alternative 2 below for how returning banks otherwise agree to
handle returned checks expeditiously.
---------------------------------------------------------------------------
For example, assume that the paying bank has an agreement to send
electronic returned checks to Returning Bank A. Returning Bank A,
however, does not have an agreement to send electronic returned checks
directly or indirectly to the depositary bank. Returning Bank A has not
otherwise agreed to handle the returned check expeditiously. Under
these facts, the paying bank would not be subject to the expeditious
return requirement under Sec. 229.31(b). The paying bank, however,
must comply with any deadlines under the UCC, Regulation J (if sent
through the Reserve Banks), or proposed Sec. 229.31(e) (Extension of
deadline).
The UCC and Regulation J (if sent through the Reserve Banks) impose
requirements on when a returned check must be dispatched by the paying
bank, but do not impose requirements as to when the returned check must
be received by the depositary bank. Proposed Sec. 229.31(g), discussed
below, would impose requirements on the timing of receipt of a returned
check by the depositary bank, but only to the extent the paying bank
wishes to avail itself of the extension--that is, if the paying bank
sends the returned check after its midnight deadline. Therefore, the
Board requests comment on whether Alternative 2 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.
d. Section 229.31(d)--Notice of Nonpayment (or Reserved)
Proposed Sec. 229.31(d) under Alternative 1 would set forth
provisions from current Sec. 229.33(a) and current Sec. 229.33(b)
relating to notice of nonpayment. Proposed Sec. 229.31(d) under
Alternative 2 would be reserved.
Alternative 1 would retain a notice of nonpayment requirement.
Proposed Sec. 229.31 under Alternative 1 would set forth the
provisions pertaining to a paying bank's responsibility to provide
notice of nonpayment, and proposed Sec. 229.33 would set forth the
provisions pertaining to a depositary bank's responsibility to accept
such notice.
Notice-of-nonpayment requirement (Sec. 229.31(d)(1)). Regulation
CC currently 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. Under Alternative 1 of the current proposal, the notice of
nonpayment requirement would apply only if the paying bank sends the
returned check in paper form. The notice requirement, however, would
apply regardless of the dollar amount of the check being returned.
Also under Alternative 1, the Board also proposes to move up 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.
The Board recognizes that the proposed earlier deadline by which
the notice must be received by the depositary bank may impose
additional cost on the paying bank sending the notice. The Board
believes it is appropriate, however, for this cost to rest with a
paying bank that sends a paper return in order to encourage paying
banks to send returns electronically (and thereby avoid the notice
requirement). At the same time, the proposed earlier time of 2 p.m.
would benefit depositary banks, because they would learn sooner of the
nonpayment of returned paper checks. The Board requests comment on
whether the earlier deadline is likely to impose additional costs on
paying banks and the extent of any such additional costs.
The proposed 2 p.m. deadline should also speed up the time within
which the depositary bank's customer learns of a check's nonpayment.
Regulation CC currently requires a depositary bank receiving a returned
check or notice of nonpayment to notify its customer of the fact of
return by midnight of the banking day following the banking day on
which it received the returned check or notice. If the depositary bank
receives notice at 3 p.m. on Monday--a time of day that is permissible
under the current rule--then it may consider the notice received on its
next banking day, Tuesday, such that it need not give notice to its
customer until midnight of the night between Wednesday and Thursday.
Under Alternative 1, however, a depositary bank receiving notice of
nonpayment by 2 p.m. on Monday would be required to consider that
notice received on Monday and therefore would be required to give
notice to its customer by midnight of the night between Tuesday and
Wednesday. This faster notice of nonpayment to the depositary bank's
customer may benefit the customer by facilitating the customer's
ability to contact, and obtain payment from, the drawer of the returned
check.
Regulation CC currently permits a paying bank to satisfy the
notice-of-nonpayment requirement by returning the returned check
itself, provided that the returned check reaches the depositary bank by
the deadline for receipt of such notices. The commentary to current
Sec. 229.33 \66\ provides that ``[i]n 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.'' This statement in the commentary, however, appears
inconsistent with the regulatory text providing for a fixed deadline
for the depositary bank's receipt of notice of nonpayment. Therefore,
the proposed commentary to proposed Sec. 229.31(d) at paragraph 1.d.
would delete this statement. The Board requests comment on whether the
fixed deadline is appropriate or whether the paying bank should be able
to comply with the notice requirement by relying on a returning bank's
availability schedule.
---------------------------------------------------------------------------
\66\ 12 CFR Part 229, Appendix E, at paragraph XIX.A.3.
---------------------------------------------------------------------------
[[Page 6689]]
The last sentence of current Sec. 229.33(a) provides that notice
of nonpayment may be provided by any reasonable means, including
Fedwire, telex, or other form of telegraph. The Board believes that
Fedwire, telex, or other form of telegraph are very seldom, if ever,
used, and accordingly proposed Sec. 229.31(d)(1) would delete those
references. The use of these means of providing notice would
nonetheless remain acceptable under the Board's proposal, and a
depositary bank's acceptance of such notices would be governed by
proposed Sec. 229.33(a) and proposed Sec. 229.33(b), discussed infra.
The commentary to current Sec. 229.33(a) \67\ refers to current
Sec. 229.38(b). As discussed in more detail in connection with
proposed Sec. 229.38, Alternative 1 would eliminate current Sec.
229.38(b). Accordingly, the proposed commentary to proposed Sec.
229.31(d) at paragraph 1.e. deletes the reference to Sec. 229.38(b).
---------------------------------------------------------------------------
\67\ 12 CFR Part 229, Appendix E, at paragraph XIX.A.4.
---------------------------------------------------------------------------
Content of notices (Sec. 229.31(d)(2)). Current Sec. 229.33(b)
requires a paying bank to include the following information in a notice
of nonpayment: (1) The name and routing number of the paying bank; (2)
the name of the payee; (3) the amount of the check being returned; (4)
the date of the indorsement of the depositary bank; (5) the account
number of the depositary bank's customer; (6) the depositary bank's
branch name or number; (7) the trace number associated with the
indorsement of the depositary bank; and (8) the reason for nonpayment.
Proposed Sec. 229.31(d)(2)(i) would revise this provision to state
that a paying bank must include the specified information in a notice
of nonpayment only to the extent it is available to the paying
bank.\68\
---------------------------------------------------------------------------
\68\ Proposed Sec. 229.31(d)(2)(ii) would retain the provisions
of the undesignated portion of current Sec. 229.33(b) stating 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.
---------------------------------------------------------------------------
Proposed Sec. 229.31(d)(2)(i) would further revise the provisions
of current Sec. 229.33(b) to 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 2011 proposal requested
comment on whether notices in lieu of return should include, if
available, the information from the original check's MICR line. The
current proposal would require the MICR line information as specified
above to be included in both notices of nonpayment and notices in lieu
of return. Accordingly, the comments received on the 2011 proposal with
respect to inclusion of MICR line information in notices in lieu of
return are addressed here in the context of proposed Sec.
229.31(d)(2)(i).
The Board received nine comments on the provisions of the 2011
proposal related to the information that is required to be included in
a notice in lieu of return. All of these commenters, including the
group letter, suggested that information from the original check's MICR
line be included when providing notices. The current proposal adopts
this suggestion of the commenters.
As noted above, proposed Sec. 229.31(d)(2) would require that a
notice of nonpayment include the information from the MICR line of the
check at the time the check is received by the paying bank, if such
information is available. 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. Proposed Sec. 229.31(d)(2)(i)(A) would therefore delete the
reference in current Sec. 229.33(b)(1) to including 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. In addition, proposed Sec.
229.31(d)(2)(i)(F) would set forth the provisions of the undesignated
paragraph following current Sec. 229.33(b)(8) requiring that the
branch name or number of the depositary bank from its indorsement.
The Board recognizes that requiring MICR line information (if
available) to be included in a notice of nonpayment may impose
additional cost on a paying bank providing such notices. The Board
believes, however, that requiring the information from the MICR line in
the notice of nonpayment would benefit the depositary bank by improving
its ability to research the check and determine the account into which
the check was deposited.
Proposed Sec. 229.31(d)(2)(i)(E) retains the provision of current
Sec. 229.33(b)(5) requiring a notice of nonpayment to include the
account number of the customer(s) of the depositary bank. The Board
requests comment on how often that information is available to the
paying bank returning a check. In addition, proposed Sec.
229.31(d)(2)(i)(A) retains the provision of current Sec. 229.33(b)(1)
requiring a notice of nonpayment to include the name of the paying
bank. Under proposed Sec. 229.31(h), however, a check payable at or
through a paying bank would be considered to be drawn on that bank. The
Board requests comment on whether a depositary bank receiving a notice
of nonpayment or a notice in lieu of return would ever need to know the
name of the bank holding the account on which the check is drawn. More
generally, the Board requests comment on whether any of the information
in current Sec. 229.33(b) or proposed Sec. 229.31(d)(2)(i) required
to be included in a notice of nonpayment (if available) should no
longer be required.
Depositary banks that are not subject to subpart B (Sec.
229.31(d)(3)(i)). Proposed Sec. 229.31(d)(3)(i) would provide that the
notice-of-nonpayment requirement would not apply with respect to checks
that were deposited ``in a depositary bank that is not subject to
subpart B of this part.'' The commentary to current Sec. 229.30(e)
clarifies that depositary banks without ``transaction-type `accounts'
'' need not comply with the funds-availability requirements of subpart
B.\69\ In addition, although Federal Reserve Banks, Federal Home Loan
Banks, private bankers, and possibly certain industrial banks are not
subject to the funds-availability requirements of subpart B because
they are not ``depository institutions'' under EFA Act, Regulation CC
currently imposes an expeditious-return requirement \70\ and a notice-
of-nonpayment requirement \71\ on checks being returned to those banks.
Proposed Sec. 229.31(d)(3)(i) would provide that a paying bank would
have no notice-of-nonpayment requirement if 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.
Proposed Sec. 229.31(d)(3)(i) is intended to recognize that these
institutions do not bear the same risk of untimely notice of return as
banks that are subject to the funds-availability requirement.
---------------------------------------------------------------------------
\69\ 12 CFR Part 229, Appendix E, at paragraph XVI.E.1.
(``Subpart B of this regulation applies only to `checks' deposited
in transaction-type `accounts.' Thus, a depositary bank with only
time or savings accounts need not comply with the availability
requirements of Subpart B'').
\70\ See 12 CFR Part 229, Appendix E, at paragraph XVI.E.2.
(expeditious return).
\71\ Current Sec. 229.33(e) exempts only depositary banks
without transaction-type accounts from the notice-of nonpayment
requirement.
---------------------------------------------------------------------------
Unidentifiable depositary bank (Sec. 229.31(d)(3)(ii)). Current
Sec. 229.30(b) provides that the expeditious-return requirement of
that section does not apply to the paying bank's return of a check if
the depositary bank is unidentifiable. However, current
[[Page 6690]]
Sec. 229.33 does not exempt a paying bank from the notice-of-
nonpayment requirement even if the paying bank is unable to identify
the depositary bank.
Proposed Sec. 229.31(d)(3)(ii) would provide that the notice-of-
nonpayment requirement does not apply if the paying bank cannot
identify the depositary bank with respect to the returned check.\72\ It
is unlikely that a paying bank would be able to send a notice-of-
nonpayment within the timeframe specified by proposed Sec. 229.31(d)
if the paying bank cannot identify the depositary bank. The Board
requests comment on the proposed approach, as well as on whether any
timing requirement should apply for delivery of notices of nonpayment
in connection with a returned check for which the depositary bank is
unidentifiable.
---------------------------------------------------------------------------
\72\ Proposed Sec. 229.31(d)(3)(ii) is consistent with the
statement in the commentary to current Sec. 229.33(b), stating that
if a paying bank cannot identify the depositary bank, it may wish to
send the notice to the earliest collecting bank it can identify, but
that the collecting bank is under no duty to identify the depositary
bank and forward the notice. 12 CFR Part 229, Appendix E, at
paragraph XIX.B.2.
---------------------------------------------------------------------------
e. 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.''
In the 2011 proposal, the Board proposed that, if a returned check is a
substitute check or electronic return, the paying bank must indicate
the reason for the return in such a manner that the information would
be retained on any subsequent substitute check, instead of requiring
the reason for the return to be placed within the image of the original
check. The Board intended with this proposal to provide the industry
with greater flexibility as to the placement of the reason for return
while also ensuring that the reason for return would be retained on any
subsequent substitute check.\73\ The two commenters responding to this
aspect of the proposal, including the group letter, both supported it.
---------------------------------------------------------------------------
\73\ 76 FR 16862, 16877 (Mar. 25, 2011).
---------------------------------------------------------------------------
The provisions of the current proposal are very similar to those of
the 2011 proposal with regard to the identification of returned checks.
Proposed Sec. 229.31(e) would provide that, if the paying bank is
returning a substitute check or an electronic returned check, the
paying bank shall identify the check as a returned check and include
the reason for return such that the information be retained on any
subsequent substitute check.
The Board also proposed in the 2011 proposal to amend the
commentary to current Sec. 229.30(d) \74\ to state that ``refer to
maker'' is insufficient by itself as a reason for return, because
``refer to maker'' is an instruction to the recipient of the returned
check and not a reason for return (e.g., insufficient funds). One
commenter on this aspect of the 2011 proposal agreed that ``refer to
maker'' is insufficient as a reason for return. The other approximately
20 commenters on this aspect of the proposal, including the group
letter, uniformly opposed the proposed revision. Commenters noted that
``refer to maker'' is used as a catch-all to cover various reasons for
return, such as for suspected fraud, no match in a positive-pay file
provided by the drawer, or in connection with registered warrants
issued by states.\75\ These commenters noted that industry standards do
not currently permit using ``refer to maker'' as a reason for return in
addition to another reason, and that, therefore, accommodating the
proposed elimination of the ``refer to maker'' reason for return would
require system and process modifications by both the banks and the
customers that use these systems. These commenters stated that these
changes would be costly and take about two years to implement. A few
commenters recognized that, in the past, there has been some abuse of
using ``refer to maker,'' but that such abuse is less of a problem in
recent years. Other commenters stated that the Board did not
sufficiently explain any changes in circumstances that would warrant no
longer permitting ``refer to maker'' to be used as a reason for return.
---------------------------------------------------------------------------
\74\ 12 CFR Part 229, Appendix E, at paragraph XVI.D.1.
\75\ Commenters stated that in some cases in which a positive-
pay system is used, the paying bank does not know its customer's
factual basis for instructing the paying bank to return the check
and, in these cases, ``refer to maker'' serves as a necessary means
to instruct the payee to contact the drawer to determine the reason
the check was not paid.
---------------------------------------------------------------------------
After consideration of the comments received in response to the
2011 proposal, the Board continues to believe that ``refer to maker''
is an instruction to the recipient of the returned check, but
recognizes that there may be circumstances in which it may be necessary
for ``refer to maker'' to be used as the reason for return.
Accordingly, the commentary to proposed Sec. 229.31(e) would 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.
Additionally, the commentary to proposed Sec. 229.31(e) would include
an example of when ``refer to maker'' would not be permissible;
specifically, in cases where a check is being returned due to the
paying bank having already paid the item. The Board believes that, in
such cases, the payee and not the drawer would have more information as
to why the check is being returned.
f. 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 available, a
written notice of nonpayment containing the information specified in
current Sec. 229.33(b). The 2011 proposal would have revised the
commentary to the notice-in-lieu provisions to provide that a bank may
send a notice in lieu of return only where neither the check itself nor
an image of and information related to the check sufficient to create a
substitute check is available. In addition, the 2011 proposal would
have amended the commentary to provide that, if no image of both sides
of the check is available, the notice in lieu may be sent by written
electronic transmission,\76\ so long as it contained the required
information. The 2011 proposal, like the current regulation, would not
have permitted notice in lieu of return by telephone or other similar
oral transmission. The 2011 proposal proposed to leave the information
requirements for a notice in lieu of return unchanged. The Board
requested comment, however, on whether the information-content
specifications for a notice in lieu of return should be revised to
include the information from the original check's MICR line. Further,
as an alternative approach, the Board requested comment on whether the
regulation's provision for notice in lieu of return should be deleted.
---------------------------------------------------------------------------
\76\ E.g., by being sent electronically through the ACH system
or the check system, if permitted by applicable rules and standards.
---------------------------------------------------------------------------
All 12 commenters that addressed the 2011 proposal's provisions
related to notices in lieu of return believed that the notices remain
necessary in certain circumstances and recommended that the Board
retain the provisions related to notices in lieu of return. Nine of
these commenters, including the group letter, stated that the notices
should include
[[Page 6691]]
the information from the original check's MICR line, if available,
because that information is helpful to the depositary bank in locating
the item. The group letter suggested that the Federal Reserve work with
the banking industry to develop common standards for electronic notices
in lieu of return in order to facilitate their use. Most commenters
opposed sending notices in lieu of return through the ACH network.\77\
---------------------------------------------------------------------------
\77\ The National Automated Clearing House Association (NACHA)
noted in its comment letter that it had found there to be
insufficient support for this possibility from financial
institutions to begin considering revising its rules to support it.
---------------------------------------------------------------------------
After considering the comments received on the 2011 proposal, the
Board currently proposes to revise the information required to be
included in a notice in lieu of return and in a notice of nonpayment.
Specifically, proposed Sec. 229.31(f) under Alternative 1 would
require the paying bank to send 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 required in proposed Sec.
229.31(d)(2). Alternative 2, as noted above, does not contain a notice-
of-nonpayment requirement. Accordingly, proposed Sec. 229.31(f) under
Alternative 2 would require the paying bank to include the information
from the original check's MICR line, to the extent that information is
available, in such notices. The information from the original check's
MICR line typically would be included in electronic information, even
if the accompanying electronic image were illegible. The current
proposed commentary to proposed Sec. 229.31(f) is the same as that set
forth in the 2011 proposal: If no image of both sides of the check is
available, the notice in lieu may be sent by electronic transmission,
so long as it contains the required information. As under current Sec.
229.30(f), proposed Sec. 229.31(f) would require notice in lieu to be
in writing and would not permit notice in lieu of return by telephone
or other similar oral transmission. In addition, the proposed
commentary to proposed Sec. 339.31(f) would clarify 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.
a. Section Sec. 229.31(g)--Extension of Deadline
Current Sec. 229.30(c) provides that a paying bank's deadline (as
set forth in either the UCC, Regulation J (12 CFR part 210), or Sec.
229.36 of Regulation CC) to initiate the return of a check is extended
to the time at which a paying bank dispatches the return, if the paying
bank uses a means of delivery that ordinarily would result in receipt
by the bank to which the return is sent on or before the receiving
bank's next banking day following the day of the applicable deadline by
the earlier of the close of that banking day or a 2 p.m. cutoff hour
(or such later time as set by the receiving bank under UCC 4-108).\78\
The 2011 proposal would have extended a paying bank's return deadline
only if the paying bank sent the return such that the returned check
would be ordinarily received by the depositary bank within the two-day
timeframe mandated in the proposed expeditious-return test; that is, by
4 p.m. (local time of the depositary bank) on the second business day
following presentment to the paying bank. The 2011 proposal requested
comment, however, on whether the deadline extension should require the
return actually to reach the depositary bank within the two-day
timeframe for the extension to apply.
---------------------------------------------------------------------------
\78\ The current paragraph provides a further extension if the
paying bank uses a ``highly expeditious'' means of return, or if the
paying bank's deadline for return falls on a Saturday that is a
banking day for the paying bank under the UCC. (Saturday is never a
banking day under Regulation CC.)
---------------------------------------------------------------------------
All seven commenters addressing this aspect of the proposal,
including the group letter, supported requiring actual receipt by the
depositary bank within the specified timeframe, on the grounds that
paying banks should use the extension sparingly; requiring actual
receipt of the check would place squarely on the paying bank the risk
associated with using the extension.
Current Sec. 229.30(c) provides for extension of the deadline
where the paying bank uses a means of delivery that would ordinarily
result in receipt by the bank to which it is sent within the specified
timeframe. Proposed Sec. 229.31(g) would provide that a paying bank
may avail itself of the extension of the deadline only if the returned
check 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.\79\ Proposed Sec. 229.31(g) would
establish that returned checks must be received by the depositary bank
or receiving bank by the earlier of the close of the 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.
---------------------------------------------------------------------------
\79\ Proposed Sec. 229.31(g) is included in both Alternative 1
and Alternative 2, even though Alternative 1 would eliminate the
expeditious-return requirement.
---------------------------------------------------------------------------
Proposed Sec. 229.31(g) would also provide that the extension of
the deadline applies to the extension of deadlines for return of the
check or notice of dishonor or nonpayment under the UCC. Proposed Sec.
229.31(g) is intended to distinguish notice of dishonor or nonpayment
under the UCC from notice of nonpayment under Regulation CC. The Board
does not intend any substantive change. Proposed Sec. 229.31(g) would
also eliminate the provisions of current Sec. 229.30(c)(1) providing
for further extension of the deadline if the paying bank uses a
``highly expeditious'' means of transportation. Electronic delivery of
returned checks by paying banks has become the norm, and such delivery
of a returned check results in its receipt by a returning bank even
faster than does the commentary's current examples of ``highly
expeditious'' transportation.\80\ Therefore, the Board believes that a
paying bank should no longer be afforded an additional deadline
extension if it ships a returned check by air courier.
---------------------------------------------------------------------------
\80\ 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. 12 CFR Part 229, Appendix E, at paragraph
XVI.C.1.a.
---------------------------------------------------------------------------
b. 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.
The Board proposes to move these provisions to proposed Sec.
229.31(h), and, under Alternative 1, to remove the paragraph's
reference to expeditious return. Under Alternative 1, notice of
nonpayment would be the only subpart C requirement to which Sec.
229.31(h) would apply to payable-at and payable-through banks.\81\
---------------------------------------------------------------------------
\81\ 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.
---------------------------------------------------------------------------
c. Section 229.31(i)--Reliance on Routing Number
Current Sec. 229.30(f) provides that a paying bank may return a
check based on any routing number designating the depositary bank
appearing on the check in the depositary bank's indorsement. The 2011
proposal would have revised the commentary to current Sec. 229.30(f)
to provide that a paying bank may rely on any routing number
designating the
[[Page 6692]]
depositary bank in the electronic image of or information related to
the check. The group letter supported that proposed addition, and the
Board's current proposal includes substantially similar language in the
proposed commentary to Sec. 229.31(i).
One Reserve Bank commenter stated that, in addition to permitting
the paying bank to rely on any routing number designating the
depositary bank that appears on the check or in the associated
electronic image or information, the Board should prohibit any bank
that is identified as a depositary bank on the returned check or in the
electronic returned check from sending the return back to the returning
bank or the paying bank or otherwise treating the returned item as
``not our item'' (an NOI), such as through the Reserve Banks'
adjustment procedures. The Board requests comment on whether such a
prohibition should be incorporated into the regulation.
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. The undesignated paragraph in current Sec.
229.31(a) provides that a returning bank may send a returned check to
the depositary bank or to any other bank agreeing to handle the
returned check expeditiously. The same undesignated paragraph also
provides that a returning bank may create 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 creates 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.
Proposed Sec. 229.32(a) would retain the provisions of the
undesignated paragraph in current Sec. 229.31(a) described above,
subject to the revisions discussed below. For the reasons discussed
above, Alternative 1 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. Alternative 2
would retain a modified expeditious-return requirement in proposed
Sec. 229.32(b).
Under Alternative 1, proposed Sec. 229.32(a)(1) would permit a
returning bank to send a returned check to the depositary bank, to any
bank agreeing to handle the returned check, or as provided in proposed
paragraph Sec. 229.32(a)(2) if the depositary bank is unidentifiable.
Retaining this provision continues to permit returning banks to return
checks using more direct paths to depositary banks than permitted under
the UCC 4-301(d). Proposed Sec. 229.32(a)(1) under Alternative 2 would
be the same as under Alternative 1, subject to the duty of expeditious
return.
The Board proposes to clarify in the commentary that a returning
bank may send an electronic returned check directly to the depositary
bank only if the returning bank has an agreement with the depositary
bank to do so. The Board proposes to retain the language in the current
commentary stating that a returning bank agrees to handle a returned
check if the returning bank publishes or distributes availability
schedules for the return of checks and accepts the returned check for
return; handles a returned check that it did not handle for forward
collection; or otherwise agrees to handle a returned check for
expeditious return.\82\ The Board proposes to add that a returning bank
agrees to handle a returned check if it agrees with the paying bank to
handle electronic returned checks sent by the paying bank.
---------------------------------------------------------------------------
\82\ In Alternative 2, the commentary to proposed Sec.
229.32(b) describes the circumstances under which a returning bank
agrees to handle a returned check expeditiously.
---------------------------------------------------------------------------
Under both Alternative 1 and Alternative 2, proposed Sec.
229.32(a)(2) would set forth provisions relating to a returning bank's
responsibility for a returned check with an unidentifiable depositary
bank. Proposed Sec. 229.32(a)(2) would revise the provisions of
current Sec. 229.31(b) and accompanying commentary to provide that the
returning bank's responsibility is similar to that of a paying bank,
for the reasons discussed above in connection with proposed Sec.
229.31(a)(2). Under either Alternative 1 or Alternative 2, a returning
bank's return of a check to an unidentifiable depositary bank would not
be subject to the expeditious return requirement. Proposed Sec.
229.32(a)(3) would retain the provisions of the undesignated paragraph
in current Sec. 229.31(a) that permit returning banks to qualify
returned checks and that instruct returning banks on how to do so. As
noted above, all commenters on the qualified return check provisions of
the 2011 proposal indicated that the need still exists for qualified
returns and carrier envelopes, and that there would be costs associated
with implementing alternative methods for returning checks that
currently are prepared as qualified returns or use carrier envelopes.
Like the 2011 proposal, however, the current proposal would delete the
provisions of the undesignated paragraph of current Sec. 229.31(a)(2)
permitting a one-business-day extension for return for converting a
returned check to a qualified returned check. The Board received no
comments addressing the proposed elimination of the extension in
response to the 2011 proposal. The extension, if retained, might
benefit returning banks that choose to qualify and send paper returned
checks destined for depositary banks that have agreed to accept returns
electronically, a result that is inconsistent with the policy of
encouraging electronic return of checks. In addition, if a returned
check is destined for a depositary bank that does not accept returned
checks electronically, the Board believes that a returning bank's
midnight deadline affords it sufficient time to process and send the
returned check, irrespective of whether the returning bank qualifies
the returned check or not.\83\
---------------------------------------------------------------------------
\83\ The Board is proposing to delete the return-deadline
extensions for creating qualified returned checks under proposed
Alternatives 1 and 2.
---------------------------------------------------------------------------
b. Section 229.32(b)--Expeditious Return of Checks by Returning Bank
(or Reserved)
Under Alternative 1, Sec. 229.32(b) would be reserved. Under
Alternative 2, proposed Sec. 229.32(b)(1) would set forth the general
rule for expeditious return of checks: 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.\84\ Proposed Sec. 229.32(b)(2)
would parallel proposed Sec. 229.31(b)(2), which sets forth the return
deadline for paying banks under circumstances where the second business
day following presentment is not a banking day for the depositary bank.
Alternative 2 would delete the provisions of current Sec. 229.31(a)
setting forth the four-day test and the forward-collection test, as
well as remove all references to those tests
[[Page 6693]]
throughout the regulation and related commentary.
---------------------------------------------------------------------------
\84\ Consistent with the other proposed changes to the receipt
deadlines, the Board proposes to move up the cutoff hour for receipt
of a returned check from 4 p.m. to 2 p.m. (local time of the
depositary bank).
---------------------------------------------------------------------------
The proposed commentary to Sec. 229.32(b) under Alternative 2
would provide examples of when a returning bank is subject to the
expeditious return requirement with respect to a returned check. The
first examples are situations in which the returning bank itself is
subject to the expeditious return requirement, specifically, where the
returning bank has an agreement to send electronic returned checks
directly to the depositary bank, to another returning bank that has an
agreement to send electronic returned checks to the depositary bank, or
to another returning bank that otherwise agrees to handle the returned
check expeditiously under Sec. 229.32(b). Additionally, a returning
bank could agree to handle a returned check for expeditious return if
the returning bank publishes or distributes availability schedules for
the return of returned checks to the depositary bank and accepts the
returned check for return. A returning bank also could agree with the
paying bank or another returning bank to handle returned checks sent by
the paying bank or other returning bank for expeditious return to
certain depositary banks. Like the 2011 proposal, the proposed
revisions to the commentary on proposed Sec. 229.32(b) would explain
that a returning bank could accept a paper returned check that it did
not handle for forward collection without being deemed to have agreed
to handle the returned check for expeditious return.
The proposed commentary would retain the language in the current
commentary \85\ stating that a returning bank agrees to handle a
returned check 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 for expeditious return. The proposed commentary to
proposed Sec. 229.32(b) would include a clarification that a returning
bank agrees to handle a returned check if it agrees with the paying
bank to handle electronic returned checks sent by the paying bank.
---------------------------------------------------------------------------
\85\ 12 CFR Part 220, Appendix E, at paragraph XVII.A.2.a.
---------------------------------------------------------------------------
(c) Section 229.32(c)--Exceptions to Expeditious Return of Checks by
Returning Bank (or Reserved)
Proposed Sec. 229.32(c) would be reserved under Alternative 1.
Proposed Sec. 229.32(c) under Alternative 2 would include exceptions
to the expeditious-return requirement similar to those set forth forth
for paying banks in proposed Sec. 229.31(c) under Alternative 2: 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; (2) the check is being
returned to a depositary bank that is not subject to subpart B of this
regulation; and (3) the check is being returned to an unidentifiable
depositary bank. As in the 2011 proposal, proposed Sec. 229.32(c)
under Alternative 2 would be grouped together in one paragraph.
No agreements for direct or indirect electronic return. For the
reasons set forth in more detail above with respect to paying banks,
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, to
a returning bank that has an agreement to send electronic returned
checks to the depositary bank, or to a returning bank that otherwise
agrees to handle the returned check expeditiously under proposed Sec.
229.32(b) under Alternative 2. As with paying banks in proposed Sec.
229.31(c) under Alternative 2, a returning bank would be subject to the
expeditious-return requirement if the returning bank had the necessary
agreements to send electronic returned checks but chose to send paper
returned checks.
The proposed commentary to Sec. 229.32(c)(1) would explain that
the expeditious-return requirement would not apply to a returning bank
if: The returning bank did not have an agreement to send electronic
returned checks to the depositary bank, and did not have an agreement
to send electronic returned checks to another returning bank that had
an agreement to send electronic returned checks to the depositary bank.
By contrast, if the returning bank to which the paying bank sent the
returned check had an agreement to send electronic returned checks
directly to the depositary bank or to another bank that had an
agreement to send electronic returned checks directly to the depositary
bank, the first returning bank would be subject to the expeditious-
return requirement under proposed Sec. 229.32(b). Under the latter
circumstances, a check is presented to the paying bank on Monday would
have to be sent by the returning bank 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.
Depositary bank not subject to subpart B and unidentifiable
depositary bank. Proposed Sec. 229.32(c)(1) under Alternative 2 would
retain the exceptions to the expeditious-return requirement for checks
deposited into a depositary bank that does not maintain ``accounts''
and checks where the paying bank (or returning bank) is unable to
identify the depositary bank. Additionally, for the same reasons as set
forth in connection with proposed Sec. 229.32(c)(2) under Alternative
2 (and in connection with the exceptions to the notice-of-nonpayment
requirement set forth in proposed Sec. 229.32(d)(3) under Alternative
1), proposed Sec. 229.32(c) under Alternative 2 would expand the
circumstances under which a returning bank is not subject to the
expeditious-return requirement to include circumstances where a
returning bank is returning a check to a depositary bank that is not
subject to subpart B of Regulation CC because the bank is not a
``depository institution'' within the meaning of the EFA Act.
Similar to the provisions of the 2011 proposal, proposed Sec.
229.32(c) under Alternative 2 would 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. Under those circumstances, it likely
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.\86\ The proposed commentary to proposed Sec. 229.32(c) under
Alternative 2 would include the revised examples of the circumstances
under which a returning bank is unable to identify the depositary bank,
discussed in connection with proposed Sec. 229.31(a)(2) for paying
banks.
---------------------------------------------------------------------------
\86\ UCC 4-202.
---------------------------------------------------------------------------
d. Section 229.32(d)--Notice in Lieu of Return
The notice in lieu of return requirements for returning banks are
the same for returning banks as they are for paying banks. Under both
Alternative 1 and Alternative 2, proposed Sec. 229.32(d) and the
related proposed commentary would make changes that parallel those
discussed in connection with proposed Sec. 229.31(f) for paying banks,
for the
[[Page 6694]]
reasons discussed above in connection with proposed Sec.
229.31(f).\87\
---------------------------------------------------------------------------
\87\ Were the Board to adopt proposed Alternative 2, a returning
bank's sending of a notice in lieu of return would be subject to the
expeditious return requirement.
---------------------------------------------------------------------------
e. Section 229.32(e)--Settlement
Like the 2011 proposal, the current proposal at proposed Sec.
229.32(e) would not amend the current provisions of Regulation CC
setting forth a returning bank's settlement obligation for returned
checks.\88\ The proposed commentary to proposed Sec. 32(e) would
provide clarifying revisions.
---------------------------------------------------------------------------
\88\ 12 CFR 229.31(c).
---------------------------------------------------------------------------
f. Proposed Sec. 229.32(f)--Charges
The 2011 proposal would have clarified that the party on which a
returning bank may impose a charge for handling a returned check is the
bank that sent the returned check to it, rather than another party. One
commenter supported the proposed clarification. One Reserve Bank
commenter, however, suggested that the Board should eliminate
prohibitions on fees that banks may charge to each other for handling
checks. The commenter was concerned that prohibitions on fees might
stifle innovation in the development of bank-to-bank practices and
services related to handling checks electronically.
Proposed Sec. 229.32(f) would not amend the provisions of current
Sec. 229.31(d) related to charges a returning bank may impose for
handling returned checks. The Board requests comment on whether it
should eliminate regulatory prohibitions on returning bank fees for
returning checks.
g. Section 229.32(g)--Reliance on Routing Number
The proposed commentary to proposed Sec. 229.32(g) would provide
that a returning bank, when returning a check, may rely on any routing
number designating the depositary bank in the electronic returned check
received by the returning bank. These proposed revisions are similar to
those described in connection with the proposed commentary to proposed
Sec. 229.31(i), discussed above.
4. Section 229.33--Depositary Bank's Responsibility for Returned Checks
and Notices of Nonpayment
As in the 2011 proposal, the Board proposes 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)--Acceptance of Electronic Returned Checks and
Electronic Notices of Nonpayment
Proposed Sec. 229.33(a) would provide that a depositary bank's
agreement with the transferor bank governs its acceptance of electronic
returned checks and electronic written notices of nonpayment (as
opposed to oral notices of nonpayment, i.e., those provided over the
telephone, which are discussed below under proposed Sec. 229.33(c)).
The transferor bank may be either the paying bank or a returning bank.
Under Alternative 2, the reference to notice of nonpayment would be
omitted. The proposed commentary to proposed Sec. 229.33(a) under both
Alternative 1 and Alternative 2 would provide that 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.
b. Section 229.33(b)--Acceptance of Paper Returned Checks and Paper
Notices of Nonpayment
Current Sec. 229.32(a)specifies that the locations where a
depositary bank must accept returned checks and notices of
nonpayment.\89\ Similar to the provisions of the 2011 proposal,
proposed Sec. 229.33(b) would not incorporate the provisions of
current Sec. 229.32(a)(2)(iii), addressing situations where 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 single national check-processing
region. Proposed Sec. 229.33(b) under both Alternative 1 and
Alternative 2 would require a depositary bank that includes its address
in its indorsement to receive paper returned checks at a location
consistent with that address and at a location, if any, at which it
requests presentment of paper checks. The Board received no comments on
the similar provisions of the 2011 proposal.
---------------------------------------------------------------------------
\89\ Current Sec. 229.33(c) provides that Sec. 229.32(a)
governs where a depositary bank must accept written notices of
nonpayment.
---------------------------------------------------------------------------
c. Section 229.33(c)--Acceptance of Oral Notices of Nonpayment
Current Sec. 229.33(c) requires a depositary bank to accept oral
notices of nonpayment at the telephone or telegraph number of its
return check unit indicated in the indorsement (or the general purpose
number if no such number appears), as well as at any other number held
out by the bank for receipt of notice of nonpayment.\90\ Under
Alternative 1, proposed Sec. 229.33(c) would provide that a depositary
bank must accept oral notices of nonpayment at any telephone number
that appears in its indorsement, rather than refer solely to the
telephone number of the returned check unit. Under Alternative 2,
proposed Sec. 229.33(c) would be reserved.
---------------------------------------------------------------------------
\90\ Similar to proposed Sec. 229.31(d), proposed Sec.
229.33(c) would delete references to using the telegraph as a means
of accepting notices.
---------------------------------------------------------------------------
The commentary to current Sec. 229.33(c) states that the
depositary bank may not refuse to accept notices at the telephone
numbers provided in this section, but may transfer calls or use a
recording device.\91\ The Board requests 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.
---------------------------------------------------------------------------
\91\ 12 CFR Part 229, Appendix E, at paragraph XIX.C.1.
---------------------------------------------------------------------------
d. Section 229.33(d)--Payment for Returned Checks by Depositary Banks
Proposed Sec. 229.33(d) sets forth, with minor technical
amendments, the provisions of current Sec. 229.32(b) governing a
depositary bank's payment for returned checks.
e. Section 229.33(e)--Misrouted Returned Checks and Written Notices of
Nonpayment
Proposed Sec. 229.33(e) would retain the provisions of current
Sec. 229.32(c) requiring a bank that receives a misrouted returned
check or written notice of nonpayment on the basis that it is the
depositary bank to send the returned check or notice to the correct
depositary bank, to a returning bank agreeing to handle the returned
check or notice, or back to the bank from which it received the
misrouted return or notice. The Board expects that depositary banks and
their transferor banks should be able to address in their agreements
the appropriate actions to be taken by the depositary bank in the event
it receives a misrouted electronic returned check or written electronic
notice of nonpayment. The Board requests comment on what actions
depositary banks typically take when they receive a misrouted written
electronic notice of nonpayment.
f. Section 229.33(f)--Charges
Proposed Sec. 229.33(f) sets 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.
[[Page 6695]]
g. Section 229.33(g)--Notification to Customer
Proposed Sec. 229.33(g) would amend the provisions of current
Sec. 229.33(d) to include the requirement that a depositary bank
notify its customer under circumstances where a depositary bank
receives notice of recovery under current Sec. 229.35(b) (liability of
bank handling a check), which the current proposal does not propose to
amend. Currently, this requirement is set forth only in the commentary
to current Sec. 229.32(d).\92\ Under Alternative 1, proposed Sec.
229.33(g) would refer to both returned checks and notices of
nonpayment. Under Alternative 2, proposed Sec. 229.33(g) would refer
only to returned checks.
---------------------------------------------------------------------------
\92\ 12 CFR Part 229, Appendix E, at paragraph XIX.D.1.
---------------------------------------------------------------------------
5. Section 229.34--Warranties and Indemnities
Proposed Sec. 229.30(a) provides that electronic checks and
electronic returned checks are subject to the provisions of subpart C
as if they are checks. Accordingly, proposed Sec. 229.34 would apply
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 is proposing that new warranties be made
with respect to electronic checks and electronic returned checks.
Content of warranties. Proposed Sec. 229.34(a)(1) would add new
warranties to the regulation that would be made by a bank that
transfers or presents an electronic check or electronic returned check
and receives a settlement or other consideration for it. Under proposed
Sec. 229.34(a)(1), 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,\93\ and that no person will receive
transfer, presentment, or return of, or otherwise be charged for, the
electronic image of or electronic information related to the check or
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.
---------------------------------------------------------------------------
\93\ 12 CFR 229.2(aaa).
---------------------------------------------------------------------------
These warranties are substantively the same as those set forth in
the 2011 proposal, which commenters supported. All but one commenter
suggested that the parties exchanging the electronic image or
electronic information should be able to vary the warranties by
agreement. The current proposal would clarify in the proposed
commentary to proposed Sec. 229.34(a) that the sending bank and
receiving bank may vary by agreement the warranties the sending bank
makes to the receiving bank for electronic images of or electronic
information related to checks. The effect of the variation, however,
would extend only to the parties that are bound by the agreement. For
example, the banks' agreement may provide that the bank transferring
the check does not warrant that the image and information are
sufficient for creating a substitute check.
Parties to whom the warranties are made. Similar to the provisions
of the 2011 proposal, proposed Sec. 229.34(a)(2)(i) would 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. Proposed Sec.
229.34(a)(2)(ii) would 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.
Some commenters on the 2011 proposal opposed extending the
warranties to the drawers and the owners, believing that the warranties
should be made only between the parties exchanging the items. These
commenters stated that, absent the proposed warranties, banks'
customers are adequately protected under the UCC for improper charges
to their account (such as paying an item twice). The group letter
supported extending the warranties to drawers and owners only if banks
were permitted to vary the application of the warranties through
operating circular, clearinghouse rules, or customer agreement. The
group letter also suggested that the drawer should not be able to
recover from a collecting bank unless the drawer first has made a claim
against its bank.
The Board believes that proposed Sec. 229.34(a)(2) is consistent
with the warranty flow set forth by section 5 of the Check 21 Act and
implemented by Sec. 229.52(b) of subpart D, which was intended to
protect parties outside the banking system from any undesirable
consequences resulting from check truncation. In particular, existing
laws, including the UCC, may not adequately protect drawers from harm
resulting from illegible images or incorrect MICR lines on electronic
checks or returned checks derived from original checks. For example, if
the image is illegible, a drawer may not be able to prove that a check
charged to the account for $1,500 was in fact written for $150.
Moreover, extending the warranties to drawers could protect drawers
against losses incurred from being asked to pay an item twice. Finally,
extending the warranties to drawers and owners of checks could help the
drawer or the owner, respectively, in the event of the failure of the
paying bank or depositary bank. The Board requests comment on whether
the drawer or owner of a check should be required to make a claim
against his or her bank before making a breach of warranty claim
against a prior collecting bank.
Under current Sec. 229.37, the banks exchanging electronic checks
may vary the effect of the warranties as between themselves, but not
with respect to subsequent transferees that are not bound by the
agreement. If, however, one of the parties to the agreement must create
a substitute check from the electronic check or electronic returned
check, such a reconverting bank would not be able to disclaim or vary
the substitute check warranties it makes.
6. Section 229.34(b)--Indemnity With Respect to an Electronic Image or
Electronic Information Not Related to a Paper Check
Proposed Sec. 229.34(b) would provide that a bank that transfers
an electronic image or electronic information that is not derived from
a paper check 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. This 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. For example, a paying bank that receives an
electronic check file that contains an eRCC might not know the eRCC was
not derived from a paper RCC. That paying bank might try to recover
losses from an unauthorized eRCC from prior banks that handled the item
through procedures offered by collecting banks and check
clearinghouses, or the paying bank might make a warranty claim. The
paying bank's claims might fail as invalid claims because the eRCC
never existed in paper form. The paying bank could seek to be
indemnified by the
[[Page 6696]]
depositary bank under the proposed indemnity in Sec. 229.34(b) for the
losses caused by the fact that the item was electronically created. The
proposed amount of this indemnity is set forth in proposed Sec.
229.34(i).
Indemnity recipients. The indemnity in proposed Sec. 229.34(b)
would not flow to the drawer, payee or depositary bank of the item. The
Board believes 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. For
electronically-created items, the payee should reasonably be aware that
the item was electronically created (either because the payee might
have created the item or because the payee received an image instead of
a paper check). The Board believes that a depositary bank that accepts
an item for deposit electronically should assume the risk that the item
was not derived from a paper check. The Board expects that the
depositary bank can contractually protect itself by, if necessary,
modifying the terms of its agreement with its depositor that permits
items to be deposited electronically. Additionally, for items
electronically created by the paying bank's customer, the customer
introduces the item into the check collection system. Therefore, the
Board does not believe it is appropriate for subsequent banks handling
the item to indemnify those parties for losses.
In the case of an eRCC, the paying bank's customer, whose account
will be debited, may not be aware that the payee created an electronic
item rather than a paper item. The warranties in proposed Sec.
229.34(b) would protect the person whose account will be debited
because the item never existed in paper. The paying bank's customer,
however, should normally be made whole by the paying bank for the
unauthorized debit in accordance with UCC 4-401 or Regulation E (12 CFR
part 1005), assuming either is applicable. The Board requests comment
on whether it is appropriate for the proposed indemnity to flow to the
person whose account will be debited.
7. Section 229.34(c)--Transfer and Presentment Warranties With Respect
to a Remotely Create Check
Proposed Sec. 229.34(c) sets forth without substantive change the
provisions of current Sec. 229.34(d) relating to the transfer and
presentment warranties made with respect to remotely created
checks.\94\ The proposed commentary to proposed Sec. 229.34(c) would
revise the current commentary to current Sec. 229.34(d) to correspond
to the Federal Trade Commission's proposed changes to its Telemarketing
Sales Rule, were the FTC to adopt the rule as proposed. Among other
things, the FTC's proposed amendments would bar sellers and
telemarketers from creating RCCs as payment for goods or services.\95\
Accordingly, the references in the commentary to the Telemarketing
Sales Rule's authorization requirements would be unnecessary if the FTC
were to adopt its proposed rule.
---------------------------------------------------------------------------
\94\ 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. See proposed Sec.
229.34(c) (current Sec. 229.34(d)).
\95\ The FTC's proposed rule is available on the FTC's Web site
at http://www.ftc.gov/os/2013/05/130521telemarketingsalesrulefrn.pdf.
---------------------------------------------------------------------------
8. Section 229.34(d)--Settlement Amount, Encoding, and Offset
Warranties
In the 2011 proposal, the Board proposed that the information
encoded after issue include information placed ``in the electronic
information'' of an electronic item. This change would have included
information in an electronic check or an electronic returned check
within the scope of the warranty. Two commenters, including the group
letter, supported that proposal. One Reserve Bank commenter noted,
however, that the language of the 2011 proposal might be too broad,
because it could be read to include data in portions of an item's
electronic information other than the MICR line, such as indorsement
records. Proposed Sec. 229.34(d)(3) would provide that the information
encoded after issue in the MICR line of a check--which is the
information to which the warranty applies--means any information that
could be encoded in the MICR line of a paper check.
The current proposal, like the 2011 proposal, would provide that a
bank warrants that the information encoded after issue is ``accurate,''
instead of ``correct.'' The Board does not intend this change to be
substantive.
9. Section 229.34(e)--Returned Check Warranties
Proposed Sec. 229.34(e), like the similar provisions of 2011
proposal, would remove the warranty in current Sec. 229.34(a)(1) that
the paying bank has returned a check within the deadline specified in
the Board's Regulation J (12 CFR part 210), because that deadline
applies only to checks returned through Reserve Banks, and need not be
specified in Regulation CC. The group letter supported this provision
of the 2011 proposal.
10. Section 229.34(f)--Notice of Nonpayment Warranties
Proposed Sec. 229.34(f) under Alternative 1 would retain
warranties similar to those set forth in current Sec. 229.34(b)
relating to notices of nonpayment. By contrast, the 2011 proposal would
have eliminated the notice of nonpayment requirement and related
warranties. Similar to the provisions of proposed Sec. 229.34(e),
proposed Sec. 229.34(f) would delete the paying bank's warranty that
it will return the check within its deadline under Regulation J,
because that deadline applies only to checks returned through Reserve
Banks and need not be specified in Regulation CC.
Proposed Sec. 229.34(f)(2) would state explicitly that the notice
of nonpayment warranties are not made with respect to checks drawn on
the Treasury of the United States or U.S. Postal Service money orders.
The U.S. Treasury and Postal Service are not ``paying banks'' for
purposes of subparts B and C of the regulation; therefore, the notice-
of-nonpayment, same-day settlement, and (current) expeditious-return
requirements do not apply to checks drawn on the U.S. Treasury or U.S.
Postal Service money orders.\96\ Proposed Sec. 229.34(f)(2) is
consistent proposed Sec. 229.34(e) and current Sec. 229.34(a),
providing that returned check warranties are not made with respect to
checks drawn on the Treasury of the United States or U.S. Postal
Service money orders.
---------------------------------------------------------------------------
\96\ See current commentary to the definition of ``paying bank''
in current Sec. 229.2(z). See also current Sec. 229.42.
---------------------------------------------------------------------------
Under Alternative 2, proposed Sec. 229.34(f) would be reserved,
because Alternative 2 does not include provisions relating to notice of
nonpayment.
11. Section 229.34(g)--Truncating Bank Indemnity
Proposed Sec. 229.34(g) would incorporate a new indemnity to be
provided by a depositary bank that accepts a deposit of an electronic
check related to an original check. If such a bank does not receive the
original check, receives settlement or other consideration for an
electronic check or substitute check related to the original check, and
does not receive the check returned unpaid, then that bank must
indemnify a depositary bank that accepts the original check for deposit
for
[[Page 6697]]
that depositary bank's losses due to the check having already been
paid.
The Board's reasons for proposing this new indemnity are set forth
in detail above in connection with the discussion on the framework for
electronic checks and returned checks within the Overview of the 2013
Proposal. In brief, the Board believes that a depositary bank that
receives the benefit of permitting its customers to use remote deposit
capture should also internalize any risk or cost to other banks
(specifically banks that accept original checks) that may result from
that practice.
12. Section 229.34(h)--Damages for Breach of Warranties
Proposed Sec. 229.34(h) sets forth without substantive change the
provisions of current Sec. 229.34(e) relating to damages for breach of
the warranties set forth in the section.
13. Section 229.34(i)--Indemnity Amounts
Proposed Sec. 229.34(i) would specify the maximum amounts of the
new indemnities in proposed Sec. 229.34(b) and (g). Specifically,
proposed Sec. 229.34(i) would 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 and reasonable attorney's
fees and other expenses of representation). In addition, proposed Sec.
229.34(i) would subject the indemnity to comparative negligence, i.e.,
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. Furthermore, proposed Sec. 229.34(i)
would provide that the indemnity not reduce the rights of a person
under the UCC or other applicable provision of state or federal law,
including Regulation E.
Proposed Sec. 229.34(i) is similar to the indemnity amount in
current Sec. 229.53(b)(1)(ii) of subpart D with respect to a
substitute-check indemnity claim in the absence of a substitute-check
warranty breach and the damages for breaches of warranties in Sec.
229.34. The Board requests comment on whether losses proximately caused
from not being able to make the warranty claim should be interpreted to
cover damages awarded for violations of Regulation E.
14. Section 229.34(j)--Tender of Defense
Proposed Sec. 229.34(j) would set forth, without change, the
provisions of current Sec. 229.34(f) relating to tender of defense.
15. Section 229.34(k)--Notice of Claim
Proposed Sec. 229.34(j) would set forth, without change, the
provisions of current Sec. 229.34(g) relating to notice of claim.
16. Section 229.35--Indorsements
Current Sec. 229.35(a) requires a bank (other than the paying
bank) that handles a check to indorse the check in a manner that
permits a person to interpret the indorsement 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.
In 2011, the Board proposed to amend Appendix D to require banks
that transfer electronic collection items or electronic returns to
other banks to apply their indorsements electronically in accordance
with ANS X9.100-187, unless the parties otherwise agree. The 2011
proposal would have amended the related commentary to provide that, if
a depositary bank included an email address or other electronic address
in its indorsement for delivery of electronic returns, and had agreed
to accept electronic returns from the paying bank or returning bank,
the paying bank or returning bank could send electronic returns to such
address. The 2011 proposal also would have clarified that if the
reconverting bank (the bank that creates a substitute check) is a bank
that rejected a check submitted for deposit, it must identify itself by
applying its routing number to the back of the check and that, in this
instance, the routing number would be for identification purposes only,
and not an indorsement or acceptance.
Two commenters, including the group letter, generally supported the
Board's proposed changes. One of these commenters supported using ANS
X9.100-187 as the standard for applying indorsements electronically;
the other stated that ANS X9.100-187 should merely be an example of a
permissible agreed-upon standard. Five commenters, including the group
letter, opposed the suggestion that a depositary bank might include an
email address or electronic address in its indorsement. One commenter
supported the clarification that a bank that rejects a check submitted
for deposit and creates a substitute check must identify itself as the
reconverting bank on the back of the check.
The current proposal would eliminate Appendix D. The current
proposal instead would incorporate the substance of the indorsement
standards by referring to them into proposed Sec. 229.35(a).
Specifically, proposed Sec. 229.35(a) would require a bank (other than
a paying bank) that handles a check during forward collection or a
returned check to indorse the check in accordance with American
National Standard Specifications for Check Indorsements, X9.100-111
(hereinafter ANS X9.100-111) for a paper check, ANS X9.100-140 for
creating a substitute check, and ANS X9.100-187 for an electronic check
or electronic returned check, unless the Board by rule or order
determines that different standards apply or the parties otherwise
agree. The current proposal would also delete substantial portions of
the commentary to current Sec. 229.35(a) discussing substantive
aspects of indorsements, such as the location and content of banks'
indorsements, because those specifics are set forth in the applicable
industry standard (or by the agreement of the parties). Proposed Sec.
229.35(d) would delete the reference to Appendix D in current Sec.
229.35(d). The current proposal would not amend current Sec. Sec.
229.35(b) or (c).
When the current indorsement standard in Appendix D became
effective in 2004 (concurrently with the Check 21 Act), substitute
checks were new and banks were in the early stages of establishing
processes and systems to create, indorse, and handle them. Banks were
also in the early stages of learning how to apply indorsements and bank
identifications electronically, such that they could later be applied
to any substitute check created. Since that time, however, banks'
processes related to substitute checks and applying indorsements and
identifications electronically have become well established. Further,
industry standards now set forth the specifics for how banks should
indorse, or identify themselves on, original checks and substitute
checks they handle, substitute checks that they create, and electronic
items they handle.
The proposed commentary to proposed Sec. 229.35(a) commentary
notes 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
[[Page 6698]]
information that conform to a different standard.
The proposed commentary to proposed Sec. 229.35(a) would also
remove the portions of the current commentary that discuss allocation
of liability under Sec. 229.38(d), because those matters are discussed
in the proposed commentary to proposed Sec. 229.38. Finally, the
proposed commentary to proposed Sec. 229.35(a) would move those
portions of the commentary that discuss reconverting banks' obligations
at the time they create a substitute check into the proposed commentary
to Sec. 229.51(b), which discusses reconverting-bank duties. For
example, as proposed in 2011, the proposed Sec. 229.51(b) commentary
notes that if the reconverting bank is a bank that rejected a check
submitted for deposit, then its routing number (with asterisks) on the
back of the check is for identification only, and is not an indorsement
or acceptance.
The current proposal would make clarifying changes throughout the
proposed commentary to proposed Sec. 229.35. For example, in paragraph
5 in the proposed commentary to Sec. 229.35(b), the Board is proposing
to clarify the regulation's use of the term ``final settlement.''
17. Section 229.36--Presentment and Issuance of Checks
The current proposal would amend current Sec. 229.36(a), (b) and
(f) and would eliminate current Sec. 229.36(e).
a. Section 229.36(a)--Receipt of Electronic Checks
Proposed Sec. 229.36(a) would provide that a paying bank's receipt
of an electronic check is governed by the paying bank's agreement with
the presenting bank. The proposed commentary to proposed Sec.
229.36(a) would state 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 does
not believe that banks' existing practices for electronic check
presentment need be changed as a result of the Board's proposal.
b. Section 229.36(b)--Receipt of Paper Checks
The current proposal would amend current Sec. 229.36(b) and its
commentary to make changes that are substantively identical to those
set forth in the 2011 proposal. The Board received no comments in
response to the changes in the 2011 proposal that are set forth in
proposed Sec. 229.36(b)(1) regarding the locations at which a check in
paper form is considered received by the paying bank. The Board also is
proposing to amend the commentary to delete the statement about the
tradeoff between including an address on a check, versus simply stating
the name of the bank to encourage wider currency of the check, because
the physical location of a bank no longer limits the acceptance of its
checks.
Proposed Sec. 229.36(b)(2) would permit a paying bank to require
that forward-collection checks be separated from returned checks, a
provision that is not in the current regulation but that was included
in the 2011 proposal. Two commenters supported that aspect of the 2011
proposal. One Reserve Bank commenter opposed it, stating that it
benefits a paying bank that requires presentment of paper checks in a
way that contradicts the broader intent of the proposal to encourage
banks to send and receive checks electronically. Proposed Sec.
229.36(b)(2) accordingly would permit a depositary bank to require that
returned checks be separated from forward-collection checks. A paying
bank that has agreed to accept electronic presentment might nonetheless
receive presentment in paper form (see proposed Sec. 229.36(d)), and
having the ability to require that paper forward-collection checks be
separated from paper returned checks may benefit the paying bank in
such cases. The Board requests comment on whether paying banks should
be permitted to require that forward-collection checks be separated
from returned checks, and consequently, whether depositary banks should
continue to be permitted to require that forward-collection checks be
separated from returned checks.
c. Section 229.36(d)--Same-Day Settlement
For the reasons discussed above in the Overview of the 2013
Proposal, the Board proposes to retain, without substantive change, the
current same-day settlement provisions. The Board proposes to clarify
throughout proposed Sec. 229.36(d) (current Sec. 229.36(f)) that the
same-day settlement provisions apply only to presentments of checks in
paper form. As described above under proposed Sec. 229.36(a),
electronic check presentment is governed by the paying bank's agreement
with the presenting bank.
Proposed Sec. 229.36(d)(1), like the 2011 proposal, would remove
the requirement in that a paying bank accept presentment for same-day
settlement at a location that is in the check-processing region
consistent with the routing number on the check, because there is only
one check-processing region and there are no longer any checks
considered nonlocal. The Board received no comments on this aspect of
the 2011 proposal.
Proposed Sec. 229.36(d)(2) would set forth the provisions of
current Sec. 229.36(f)(2) permitting a paying bank to require that
checks presented for same-day settlement be separated from other
forward-collection checks or returned checks. The 2011 proposal would
have deleted this provision and eight commenters, including the group
letter, objected to its removal. No commenters supported removing the
provision. The Board believes that retaining the provisions of proposed
Sec. 229.36(d)(2) is consistent with the proposal to retain Sec.
229.36(b)(2), which permits paying banks more generally to require that
forward-collection checks be separated from returned checks.
d. Current Sec. 229.36(e)--Issuance of Payable-Through Checks
The 2011 proposal would have deleted current Sec. 229.36(e) as
unnecessary because there is now a single national check-processing
region.\97\ The Board received no comments on this portion of the 2011
proposal, and the current proposal would also delete current Sec.
229.36(e) and reserve the paragraph.
---------------------------------------------------------------------------
\97\ The purpose of Sec. 229.36(e) was to alert the depositary
bank that it could not rely on the routing number in the MICR line
of the check for purposes of determining whether the check was local
or nonlocal.
---------------------------------------------------------------------------
18. Section 229.37--Variation by Agreement
Current Sec. 229.37 permits parties to vary by agreement the
effect of the provisions in subpart C, and the current commentary to
Sec. 229.37(a) provides examples of situations where variation by
agreement is permissible. In general, the Board is proposing to revise
the commentary to conform to the provisions of the current proposal
(for example, by referring to agreements varying the notice-of-
nonpayment timeframes in Alternative 1, rather than the timeframes for
return of checks).\98\
---------------------------------------------------------------------------
\98\ The Board proposes these changes in proposed paragraphs A
and C.5 in the commentary to Sec. 229.37. Alternative 2 would
continue to refer to the timeframes for expeditious return instead
of notice of nonpayment.
---------------------------------------------------------------------------
In 2011, the Board proposed to revise its examples in the
commentary to Sec. 229.37(a) related to returning and presenting
checks electronically in order to conform the examples to the 2011
proposal. The Board also proposed removing current comment C.7 related
to acceptance of checks presented for
[[Page 6699]]
same-day settlement at a location that is not in the same check-
processing region as the routing number on the checks. (See discussion
in connection with proposed Sec. 229.36(d)(1)). The two commenters
that addressed the proposed revisions to the examples, including the
group letter, both supported them, and the Board's revised proposal
includes them with non-substantive changes. The Board also proposes to
add, as an example of permissible variation by agreement. that a
depositary bank or returning bank may agree with another returning bank
or paying bank to set a cutoff hour earlier than 2 p.m. for receipt of
returned checks.
Two commenters, including the group letter, requested the Board
include an example providing that it would be permissible for banks to
agree to vary the warranties in proposed Sec. 229.34(a). One commenter
broadly opposed that approach because it could result in the risk
allocation under the proposed warranties not applying if collecting and
presenting banks agree to accept items not meeting the definition of an
electronic collection item or electronic return, which would create
uncertainty. As mentioned above, the proposed commentary to proposed
Sec. 229.34(a) that a sending bank and receiving bank may vary by
agreement 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 are sufficient for
creating a substitute check. Such variation by agreement, however,
would not extend to banks, drawers, and owners that are not bound by
the agreement.
The Board believes that the current proposal's provisions that
would broaden the definitions of ``electronic check'' and ``electronic
returned checks'' removes the uncertainty as to whether the proposed
risk-allocation framework will apply to a given electronic item.
Through its agreement with the sending bank, a receiving bank should be
able to determine whether the Board's proposed warranties apply to an
item.
One commenter on the 2011 proposal expressed concern with a
practice related to electronic presentment agreements. This commenter
believed that several banks have agreed to a practice described as
follows: The depositary bank and the paying bank agree (either directly
or through clearinghouse rules) to send electronic information related
to a check prior to sending the accompanying electronic image of the
check. Under the agreement, presentment would require receipt of both
the electronic information and the electronic image. The paying bank
debits its customer's account based on receiving the electronic
information.\99\ Further, the commenter stated that the depositary bank
and the paying bank agree to split between them the credit float that
is generated by debiting the paying bank's customer before the
depositary bank's customer is credited.\100\ The commenter stated that
the paying bank then places a portion of its customer's funds in a
suspense account on its books for the benefit of the depositary bank.
Then, once the electronic image of the check is sent to the paying
bank, the paying bank credits the remaining amount of the check to the
depositary bank. The commenter requested that the Board amend the
regulation to provide that such a practice would be an impermissible
variation by agreement of the effect of the provisions of subpart C of
the regulation.
---------------------------------------------------------------------------
\99\ The commenter noted that the paying bank's customer's
account was debited for a check at least one business day prior to
the day on which the depositary bank's customer's account is
credited for the check. Subpart B, which is not subject to this
proposal, governs the timeframes within which depositary banks must
credit its customer's account for deposited checks. Those timeframes
are not linked to the timing of the debit to the drawer's account.
\100\ The credit float is generated because the banks have the
benefit of the deposited funds overnight between those two days.
---------------------------------------------------------------------------
With respect to the amount of interest accrued by the depositary
bank's customer, the practice described by the commenter appears to be
governed by Sec. 229.14(a) of subpart B of the regulation, which
requires a depositary bank to begin to accrue interest or dividends on
funds deposited in an interest-bearing account not later than the
business day on which the depositary bank receives credit for the
funds.\101\
---------------------------------------------------------------------------
\101\ The commentary to that section explains that a depositary
bank that receives a bookkeeping entry that does not represent funds
actually available for the depositary bank's use is not credit for
purposes of Sec. 229.14(a).
---------------------------------------------------------------------------
The Board requests comment on the extent to which, and the
specifics of how, banks may be engaging in this practice. The Board
also requests comment on whether and how banks have modified their
account agreements with their customers to address such a practice.
Finally, the Board requests comment on whether it should consider the
practice to be an impermissible variation by agreement of the
provisions of subpart C of the regulation.
19. Section 229.38--Liability
a. Sec. 229.38(a)--Standard of Care, Liability, Damages
Proposed Sec. 229.38(a) sets forth the provisions of current Sec.
229.38(a) under Alternative 1. Proposed Sec. 229.38(a) under
Alternative 2 is the same as under under Alternative 1, except that the
reference to notice of nonpayment is deleted.
b. Current Sec. 229.38(b)--Paying Bank's Failure To Make Timely Return
Alternative 1. Proposed Alternative 1 would remove current Sec.
229.38(b) and its accompanying commentary. Current Sec. 229.38(b)
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 current Sec. 229.30(c) will be liable for one or the
other but not both. The Board believes this liability provision is no
longer necessary under Alternative 1 because Alternative 1 does not
contain an expeditious-return requirement, so that a paying bank will
be required to comply only with its return deadline under the UCC (or
as extended under current Sec. 229.30(c) or proposed Sec. 229.31(g)).
The Board requests comment on whether it is necessary to retain this
provision absent an expeditious-return requirement.
Alternative 2. The Board is proposing to retain an expeditious-
return requirement under Alternative 2. Therefore, under Alternative 2,
the Board would retain current Sec. 229.38(b).
c. Proposed Sec. 229.38(c)--Comparative Negligence
The proposed commentary to proposed Sec. 229.38(c) would revise
the examples in the commentary to current Sec. 229.38(c) to discuss
the comparative-negligence provision in the context of delay in
delivering a notice of nonpayment, as opposed to delay in delivering a
returned check. Under Alternative 2, the current examples in the
commentary would be retained because Alternative 2 retains the
expeditious-return requirement.
d. Section 229.38(d)--Responsibility for Certain Aspects of Checks
Proposed Sec. 229.38(d) would address banks' responsibilities for
certain aspects of checks. 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
in accordance with Sec. 229.35. By contrast, the depositary bank is
liable to the
[[Page 6700]]
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 in
accordance with Sec. 229.35. The current commentary provides examples
of these liabilities with multiple references to the indorsement
standard in Appendix D. In accordance with the proposed changes to
Sec. 229.35 (and the proposed elimination of appendix D), the Board
proposes to replace the references to Appendix D with a specific
reference to the appropriate industry standard. In addition, the Board
proposes to move the substance of paragraphs 12 and 13 in the current
commentary to Sec. 229.35(a) to a new paragraph in the proposed
commentary to proposed Sec. 229.38(d), and clarify the liability
framework when indorsements are unreadable due to markings on the check
at issuance, for example, to carbon bands on the checks.\102\ The Board
requests comment on whether its proposed revisions clarify liability
for unreadable indorsements, as well as whether any checks still bear
carbon bands.
---------------------------------------------------------------------------
\102\ The current commentary to Sec. 229.35(a) states that the
indorsement standard does not prohibit the use of a carbon band or
other printed or written matter on the backs of checks and does not
require banks to avoid placing their indorsements in these areas.
Nevertheless, checks will be handled more efficiently if depositary
banks design indorsement stamps so that the nine-digit routing
number avoids the carbon band area.
---------------------------------------------------------------------------
Current Sec. 229.38(d)(2) makes drawee banks liable to the extent
they issue payable-through checks that are payable through a bank
located in a different check-processing region and that circumstance
causes a delay in return. The 2011 proposal would have deleted this
liability provision and its commentary as obsolete, because there is
now only one check-processing region. The Board received no comments on
that aspect of its proposal, and the current proposal similarly would
delete current Sec. 229.38(d)(2).
The current proposal would make no changes to current Sec.
229.38(e), (f), (g) and (h).
20. Section 229.39--Insolvency of Bank
Current Sec. 229.39 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 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
under Sec. 229.39(a). In current Sec. 229.39(b), a bank that is prior
to the paying bank in the collection chain has a claim against a paying
bank that has finally paid 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. Current Sec. 229.39(c) 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.\103\
---------------------------------------------------------------------------
\103\ UCC 4-216, cmt. 1.
---------------------------------------------------------------------------
Proposed Sec. 229.39(b) would set forth amended provisions from
current Sec. 229.39(b) and (c) intended to clarify that the claims do
not give a bank a preferential position over depositors or other
creditors of the failed banks. The Board does not intend these changes
to be substantive.
Proposed Sec. 229.39(c), like current Sec. 229.39(c), would
provide a paying bank with a preferred claim against a presenting bank
that breaches a settlement amount or encoding warranties in Sec.
229.34. The Board intended that the claim in current Sec. 229.39(d),
set forth in proposed Sec. 229.39(c), be a preferred claim, putting
the paying bank in the position of a secured creditor.\104\ The Board
requests comment on whether the Board should continue to provide a
preferred claim against the presenting bank for breach of the
settlement amount and encoding warranties or whether it should provide
only a claim, but not a preferred claim.
---------------------------------------------------------------------------
\104\ 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).
---------------------------------------------------------------------------
21. Section 229.40--Effect of Merger Transaction
The current proposal retains the provisions of the 2011 proposal
that would delete as obsolete the provision in Sec. 229.40(b)
regarding mergers consummated on or after July 1, 1998, and before
March 1, 2000. The Board received no comments on this aspect of the
2011 proposal.
22. Section 229.43--Checks Payable in Guam, American Samoa, and the
Northern Mariana Islands
The current proposal, like the 2011 proposal, would modify Sec.
229.43 to reflect how the proposed warranties and indemnities in Sec.
229.34 would apply to checks payable in Guam, American Samoa, and the
Northern Mariana Islands (Pacific island checks). For example, a bank
that handles a Pacific island check in the same manner as other checks
may transfer an electronic image of or electronic information related
to a Pacific island check and would make the proposed warranties and
indemnities in proposed Sec. 229.34(a), (b), and (g) with respect to
the items. The Board received no comments on this aspect of the 2011
proposal.
The current proposal would also amend the commentary proposed Sec.
229.43 to state that bank offices in Guam, American Samoa, and the
Northern Mariana Islands are banks for purposes of subpart D (but not
subparts B or C) of the regulation, because the Check 21 Act uses a
broader definition of state than does the EFA Act.
F. Subpart D--Substitute Checks
23. Section 229.51--General Provisions Governing Substitute Checks
The current proposal would remove all references to Appendix D in
Sec. 229.51 and replace them with references to the specific industry
standard in the text of proposed Sec. 229.51, where applicable. As
discussed in connection with proposed Sec. 229.35, the current
proposal would move the portions of the commentary to current Sec.
229.35(a) that address indorsement standards for reconverting banks and
substitute checks to the
[[Page 6701]]
commentary to Sec. 229.51(b). In doing so, the Board intends no
substantive change.
24. Section 229.52--Substitute Check Warranties
For the reasons set forth in its 2011 proposal, the current
proposal would provide that a bank that rejects a check submitted for
deposit and sends back to its customer a substitute check (or a paper
or electronic representation of a substitute check) would make the
warranties in Sec. 229.52(a) regardless of whether the bank received
consideration for the substitute check.\105\ If a bank makes those
warranties, the substitute check provided to the customer would be the
legal equivalent of the original check that the bank rejected for
deposit, provided that the substitute check meets the requirements for
legal equivalence set forth in Sec. 229.51(a). If the substitute check
did not meet the requirements for legal equivalence, then the
substitute check recipient would have a Check 21 warranty claim against
the bank.
---------------------------------------------------------------------------
\105\ See 76 FR 16862, 16882-83 (Mar. 25, 2011). Two commenters,
including the group letter, supported the Board's March 2011
proposal. None opposed.
---------------------------------------------------------------------------
Because the bank is both the truncating bank and the reconverting
bank with respect to the check, the bank must identify itself on the
front of the substitute check as the truncating bank and on the front
and back of the check as the reconverting bank, in accordance with the
terms of Sec. 229.51(b). The bank is not, however, a depositary bank,
collecting bank, or returning bank with respect to the check. Moreover,
the bank's identification of itself on the back of the check as a
reconverting bank does not constitute the bank's indorsement of the
check. To address this point, the current proposal, like the 2011
proposal, would amend the commentary to Sec. 229.51(b).
The proposed commentary to proposed Sec. 229.52 would also provide
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(g).
25. Section 229.53--Substitute Check Indemnity
The current proposal, like the 2011 proposal, would provide that a
bank that rejects a check submitted for deposit and sends back to its
customer a substitute check provide the indemnity set forth in Sec.
229.53(a), regardless of whether the bank received consideration. The
proposed commentary would also provide that a bank that transfers and
receives consideration for an electronic check or electronic returned
check that is an electronic representation of a substitute check is
responsible for providing the indemnity in Sec. 229.53.
IV. Other Requests for Comment
A. Effective Date
Most commenters responding to the 2011 proposal generally supported
the Board's proposed six-month delayed effective date for the portions
of the proposal related to subpart C of the regulation.\106\ A few
commenters requested a twelve-month delayed effective date, emphasizing
in particular that the effective date of the proposed deletion of the
notice of nonpayment provision should be so delayed. One of the
commenters expressing opposition to the proposed new exception to the
expeditious-return requirement (that the requirement not apply if the
depositary bank had not agreed to accept an electronic return),
however, stated that 18 months between publication of the rule and its
effective date would give banks adequate time to make the operational
changes necessary to receive returns electronically so as to continue
to receive the returns expeditiously.
---------------------------------------------------------------------------
\106\ Some of these commenters conditioned their support for the
six-month delayed effective date on needing more time--e.g., 24
months--to deal with the then-proposed (1) elimination of the
``refer to maker'' reason for return; and (2) references to possible
inclusion of email addresses in depositary-bank indorsement records.
This proposal permits ``refer to maker'' to be used in certain
cases, such as when a drawer with a positive pay arrangement
instructs the paying bank to return the check. This proposal does
not refer to inclusion of email addresses in indorsements.
---------------------------------------------------------------------------
Under both Alternative 1 and Alternative 2, as under the 2011
proposal, depositary banks would not be required to receive returned
checks electronically. Instead, a depositary bank that agrees to
receive returns electronically would receive checks more quickly. This
approach, like the approach taken in the 2011 proposal, is intended to
allow each depositary bank that continues to require paper returned
checks to make the decision, based on its own internal cost-benefit
analysis, as to when the risk and cost associated with receiving paper
returned checks in a ``non-expeditious'' fashion begins to outweigh the
continually declining cost of transitioning to receive returns
electronically, such that it would then make business sense for that
depositary bank to begin to receive returns electronically.\107\
---------------------------------------------------------------------------
\107\ Under Alternative 1, however, the depositary bank would
receive notice of nonpayment within a two-day timeframe if the
paying bank sends a paper returned check.
---------------------------------------------------------------------------
Therefore, the Board proposes that the proposed amendments to
subparts A, C and D would become effective six months following
publication of a final rule. With respect to Alternative 1 (which would
impose a notice-of-nonpayment requirement on all checks returned as
paper), the Board requests comment on whether six months is sufficient
time for a paying bank to adjust its operations to accommodate sending
notices of nonpayment for checks under $2,500.
B. Definition of Remotely Created Check
1. Checks Created by Payee
Regulation CC sets forth transfer and presentment warranties
related to ``remotely created checks.'' Current Sec. 229.2(fff)
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. The
warranty in current Sec. 229.34(d) (set forth in proposed Sec.
229.34(c)) shifts liability for unauthorized remotely created checks to
the depositary bank, which is generally the bank for the person that
initially created and deposited the remotely created check.
Although the Board's 2011 proposal did not raise the issue, several
commenters, including the group letter, suggested that the Board
consider a revised definition of ``remotely created check'' that
distinguishes between those checks created by the payee (or payee's
agent) and those checks created by a third party (e.g., bill payment
service) on behalf of the person on whose account the check is
drawn.\108\ Specifically, these commenters suggested that only checks
created by the payee or payee's agent be considered remotely created
checks, instead of all checks that are not created by the paying bank.
These commenters believed that checks created by a third party on
behalf of the paying bank's customers raise different policy or
operational issues as those checks created by the payee or the payee's
agent and, thus, should be excluded from the definition of ``remotely
created checks.'' Commenters noted that in these types of situations,
the depositary bank and its customer (the payee) do not have a
contractual relationship with the entity that created the remotely
created
[[Page 6702]]
check, and that it is therefore difficult for the bank and its customer
to provide evidence, in response to a warranty claim, that the check
was authorized by the payor.
---------------------------------------------------------------------------
\108\ For example, a consumer may use a third-party bill payment
provider to make a payment to a biller (e.g., a utility company).
The provider, in turn, may pay create a check to pay the biller. The
biller then deposits the check with its bank.
---------------------------------------------------------------------------
The current proposal would narrow the range of items that come
within the definition of ``remotely created check.'' When the Board
amended Regulation CC in 2006 to add the definition of ``remotely
created check'' (as well as the related warranties), the Board declined
to adopt its proposed definition, which was essentially identical to
what commenters now suggest.\109\ Commenters on the 2011 proposal
stated that the definition proposed in 2005 was too narrow and should
be revised to encompass checks not created by the paying bank.\110\ In
2006, the Board determined to apply the warranty to checks that are not
created by the paying bank so that the paying bank would be able to
determine to which checks the warranty applied. The Board noted that
its definition covered certain checks created remotely by bill-payment
services (as well as checks that the drawer created but neglected to
sign) where there is a less compelling reason for shifting liability
for unauthorized checks to the payee's bank. At that time, however, the
Board believed that including these checks would be unlikely to result
in significantly greater liability for depositary banks as such checks
were generally less prone to fraud, and, therefore, less prone to
trigger a warranty claim than payee-created checks.
---------------------------------------------------------------------------
\109\ In 2005, the Board proposed to define ``remotely created
check'' to mean a check that is drawn on a customer account at a
bank, is created by the payee, and does not bear a signature in the
format agreed to by the paying bank and the customer'' (emphasis
added). See 70 FR 10509, 10513 (Mar. 4, 2005).
\110\ The supplementary information of the Federal Register
notice announcing the Board's final rule discussed this aspect of
the ``remotely created check'' definition in greater detail. See 70
FR 71218, 71221-71222 (Nov. 28, 2005).
---------------------------------------------------------------------------
The Board currently requests comment on whether it should narrow
the scope of the definition 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.'' As a general matter, such a
change would reduce the portion of checks with respect to which paying
banks could make an unauthorized-check warranty claim against the
depositary bank. The Board requests comment on the extent to which
banks, in their role as 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 also
requests comment on the extent to which banks, in their role as paying
banks, may be inadvertently making warranty claims for items the banks
believe to be ``remotely created checks,'' but that were actually
created by the paying bank, or its agent, such as through the bank's
Internet-banking platform. Finally, the Board requests comment on what
warranties should apply to checks created by neither the payee (or
payee's agent) nor the paying bank were the Board to adopt a more
limited definition of ``remotely created check'' as the commenters
suggest.
2. Form of Signature
The Board has recently received a comment raising a concern that
the spread of technology makes it more likely that the creator of an
RCC (or an eRCC) could apply a ``signature'' to the item that was
obtained electronically from the drawer and resembles the drawer's
handwritten signature. The commenter was concerned that such an item
might fall outside the definition of RCC because it bears a signature
that is purported to be applied by the drawer. The Board requests
comment on whether such items are currently being created and whether
the Board should revise the definition of RCC to include items bearing
such ``signatures.'' The Board also requests comment on how these
``signatures'' could be distinguished from more traditional ``pen-and-
ink'' drawer's signatures, for which paying banks do not have a
warranty claim on prior collecting banks under Regulation CC.
C. Presumption of Alteration
Under the UCC, an alteration is a change to the terms of a check
that is made after the check is issued and that modifies an obligation
of a party, for example, changing the payee's name or the amount of the
check.\111\ By contrast, a forged, or counterfeit, check is a check on
which the signature of the drawer (i.e., the actual customer of the
paying bank) was forged at the time of the check's issuance. In
general, under the UCC as enacted in a given state, the paying bank may
charge the drawer's account only for checks that are properly payable.
(UCC 4-401.) Neither altered checks nor forged checks are properly
payable. In the case of an altered check under the UCC, however, the
banks, including the paying bank, have warranty claims against the
banks that transferred the check (e.g., a collecting bank or the
depositary bank). In the case of a forged check, however, the UCC
typically does not provide the banks, including the paying bank, with
warranty claims against banks that transferred the forged check.\112\
Therefore, the depositary bank typically bears the loss related to an
altered check, whereas the paying bank bears the loss related to a
forged check.
---------------------------------------------------------------------------
\111\ UCC 3-407.
\112\ The presenting bank warrants to the paying bank only that
it has no knowledge of an unauthorized drawer's signature. See UCC
3-417 and 4-208.
---------------------------------------------------------------------------
These provisions of the UCC reflect the rule set forth in Price v.
Neal that the paying bank must bear the loss when a check it pays is
not properly payable by virtue of the fact that the drawer did not
authorize the item.\113\ The Price v. Neal rule reflects the policy
that the paying bank, rather than the depositary bank, is in the best
position to judge whether the drawer's signature on a check is the
authorized signature of its customer. By contrast, the depositary bank
is arguably in a better position than the paying bank to inspect the
check at the time of deposit and detect an alteration to the face of
the check, or determine that the amount of the check is unusual for the
depositary bank's customer.
---------------------------------------------------------------------------
\113\ Price v. Neal, 97 Eng. Rep. 871 (K.B. 1762).
---------------------------------------------------------------------------
In 2006, two United States Courts of Appeals, the Fourth Circuit
and the Seventh Circuit, addressed the issue of evidentiary burden
related to proving whether a check was altered or forged (or
counterfeit).\114\ These two courts reached opposite conclusions as to
whether a paid, but fraudulent, check should be presumed to be altered
or counterfeit in the absence of evidence (such as the original check).
In each of the cases, Wachovia Bank was the paying bank with respect to
a fraudulent check of more than $100,000, litigating with the
depositary bank about which bank should bear the loss represented by
the check. In both cases, the drawer issued a check in the amount at
issue, but the name of the payee on the check was different from that
on the check as issued. After paying the check, Wachovia then destroyed
the check in the ordinary course of business. At issue in both cases
was whether the changed payee name on the deposited check had resulted
from an alteration of the original check that the drawer issued--in
which case the depositary bank would bear the loss--or from the
creation of a new, counterfeit check identical to the original check in
all respects except that the payee name had
[[Page 6703]]
been changed--in which case the paying bank would bear the loss.
---------------------------------------------------------------------------
\114\ The two court cases are Chevy Chase Bank v. Wachovia Bank,
N.A., 208 Fed. App'x. 232, 235 (4th Cir. 2006) (``Chevy Chase'') and
Wachovia Bank, N.A. v. Foster Bancshares, Inc., 457 F.3d 619 (7th
Cir. 2006) (``Foster'').
---------------------------------------------------------------------------
In each case, the evidence presented regarding the disputed check
was insufficient to determine whether that check was altered or a
forgery. In Foster, the Fourth Circuit determined that alteration
should be presumed, because changing the payee's name was a ``classic''
alteration and there was no evidence that duplicating an entire check
was a common method of changing the payee's name. Wachovia (the paying
bank) prevailed, and the depositary bank bore the loss.\115\ In Chevy
Chase, the Seventh Circuit determined that Wachovia failed to present
any evidence that the check had been altered, and Wachovia (the paying
bank) bore the loss.\116\
---------------------------------------------------------------------------
\115\ Foster, 457 F.3d at 622-23.
\116\ Chevy Chase, 208 Fed. Appx. at 235.
---------------------------------------------------------------------------
Although the Board's proposal did not raise the issue, two
commenters requested that the Board address the uncertainty that
results from these divergent appellate court decisions by incorporating
into the regulation a ``presumption of alteration'' that would apply
when a fraudulent item is presented to the paying bank electronically
or as a substitute check and the paying bank pays the item.
Specifically, the commenter requested that the Board adopt the approach
taken in Fourth Circuit in Foster and presume alteration, such that the
depositary bank would bear the loss.\117\ The commenter noted that the
current UCC loss-allocation framework set forth above was established
when, in most cases, original checks were presented to paying banks for
payment (or were delivered to the paying bank subsequent to presentment
of an electronic image or information), and these checks were retained
by the paying bank or its customer such that, if necessary, the check
could be examined to determine whether the original check had been
altered or an entirely counterfeit check, with a changed payee name,
had been created. One commenter stated that in the current check-
processing environment, ushered in by Check 21 (in which the paying
bank no longer has the right to demand presentment of the original
check), it is likely to be the depositary bank or its customer that
truncates the original check. This commenter believed that the
depositary bank therefore should balance the cost of retaining the
original check in certain situations (e.g., a check of large dollar
amount), so as to be able to overcome, if necessary, a presumption of
alteration suggested.
---------------------------------------------------------------------------
\117\ Under section 611(f) of the EFA Act (12 U.S.C. 4010(f)),
the Board is authorized 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.
---------------------------------------------------------------------------
The Board believes that the substance of the UCC's loss-allocation
framework for altered and forged checks, under which the depositary
bank generally bears the loss for altered checks and the paying bank
generally bears the loss for forged checks, continues to be appropriate
in the current check-processing environment. With respect to the
evidentiary presumption, the Board requests comment on whether it
should adopt an evidentiary presumption in Regulation CC as to whether,
in cases of doubt, a check should be presumed to be altered or forged,
and, if yes, whether the presumption should be of alteration or of
forgery. In particular, the Board requests comment on whether banks are
aware of or have information pertaining to whether counterfeit checks
are a more common method of committing fraud than altering the payee
name or amount on the check. The Board is aware that the Electronic
Check Clearing House Organization has incorporated a presumption of
alteration into its rules and requests comment on banks' experience
with the presumption to date.
V. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (PRA) (44
U.S.C. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the proposed
rulemaking under the authority delegated to the Board by the Office of
Management and Budget (OMB). The collection of information that is
proposed by this rulemaking is found in 12 CFR 229. The Board may not
conduct or sponsor, and an organization is not required to respond to,
an information collection unless it displays a currently valid OMB
control number. The OMB control number for current information
collections under Regulation CC is 7100-0235. In addition, as permitted
by the PRA, the Board extends for three years the current disclosure
requirements in connection with Regulation CC.
The EFA Act and the Check 21 Act authorize the Board to issue
regulations to carry out the provisions of those Acts (12 U.S.C. 4008
and 12 U.S.C. 5014, respectively). The Board has implemented the EFA
Act and the Check 21 Act in Regulation CC.
Regulation CC applies to all banks, not just state member banks.
However, under the PRA, the Board accounts for the burden of the
paperwork associated with the regulation only for entities that are
supervised by the Federal Reserve: state member banks and uninsured
state branches and agencies of foreign banks. Other federal financial
agencies are responsible for estimating and reporting to OMB the total
paperwork burden for the institutions for which they have
administrative enforcement authority. Under the current requirements,
the annual burden to comply with the notice-of-nonpayment requirement
in Regulation CC is estimated to be 3,592 hours for the 1,025
institutions supervised by the Federal Reserve and that are deemed to
be respondents for the purposes of the PRA.
As discussed above, the Board proposes two alternatives to the
check-return requirements, including two alternatives to the notice-of-
nonpayment requirement imposed on paying banks that determine not to
pay checks. Under Alternative 1, a paying bank would be subject to the
notice-of-nonpayment requirement only if the paying bank sends the
returned check in paper form. Unlike the current rule, Alternative 1's
notice-of-nonpayment requirement would apply irrespective of the dollar
value of the check being returned. Under Alternative 2, the Board
proposes to eliminate the notice-of-nonpayment requirement. Finally,
irrespective of which alternative the Board adopts, the Board would
propose to require a depositary bank to notify its customer if the
depositary bank receives a notice of recovery under Sec. 229.35(b).
Under Alternative 1, the Board estimates that the proposed
amendments to the notice-of-nonpayment requirement will decrease the
number of notices that a paying bank must send. Paying banks would no
longer be required to provide notice of nonpayment for checks returned
electronically, which the Board estimates to be 99.0 percent of checks
returned. A paying bank would be subject to a new notice-of-nonpayment
requirement for most of its paper returned checks in amount under
$2,500. The Board, however, estimates that the size of the decrease in
required notices due to paying banks sending electronic returned checks
would outweigh the size of the increase in required notices due to
imposing the requirement on paper returned checks irrespective of the
dollar amount. Under Alternative 2, the notice-of-nonpayment
requirement would be eliminated; therefore eliminating the paperwork
burden associated with the requirement. Finally, the Board does not
believe that explicitly stating that a depositary bank must notify its
customer if the depositary bank receives notice of recovery under Sec.
229.35(b) will significantly affect the burden. That
[[Page 6704]]
requirement currently is set forth in the Board's Official Commentary
to Regulation CC.
Under the current notice-of-nonpayment requirements, the Board
estimates that the 1,025 respondents annually send 210 notices of
nonpayment under current Sec. 229.33(a) and (d). Under Alternative 1,
the Board estimates that the notices of nonpayment sent by paying banks
would be reduced. The annual burden for the notice-of-nonpayment
information collection in Regulation CC is estimated to decrease from
3,592 to 2,396 hours. Under Alternative 2, the information collection
burden attributable to the notice-of-nonpayment requirement would be
eliminated.
As is currently the case, the proposed information collection would
be mandatory. The Federal Reserve does not collect any of the proposed
information, and therefore no issue of confidentiality arises. If,
however, during a compliance examination of a financial institution, a
violation or possible violation of the EFA Act or the Check 21 Act is
noted then information regarding such violation may be kept
confidential pursuant to section (b)(8) of the Freedom of Information
Act. 5 U.S.C. 552(b)(8).
Comments are invited on: (1) Whether the proposed collection of
information is necessary for the proper performance of the Board's
functions; including whether the information has practical utility; (2)
the accuracy of the Board's estimate of the burden of the proposed
information collection, including the cost of compliance; (3) ways to
enhance the quality, utility, and clarity of the information to be
collected; and (4) ways to minimize the burden of information
collection on respondents, including through the use of automated
collection techniques or other forms of information technology.
You may submit comments by any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/apps/foia/proposedregs.aspx.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include OMB
number in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Robert deV. Frierson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
http://www.federalreserve.gov/apps/foia/proposedregs.aspx as submitted,
unless modified for technical reasons. Accordingly, your comments will
not be edited to remove any identifying or contact information. Public
comments may also be viewed electronically or in paper form in Room MP-
500 of the Board's Martin Building (20th and C Streets NW.) between 9
a.m. and 5 p.m. on weekdays.
VI. Regulatory Flexibility Act
The Regulatory Flexibility Act (the ``RFA'') (5 U.S.C. 601 et seq.)
requires agencies either to provide an initial regulatory flexibility
analysis with a proposed rule or to certify that the proposed rule will
not have a significant economic impact on a substantial number of small
entities. In accordance with section 3(a) of the RFA, the Board has
reviewed the proposed regulation. In this case, the proposed rule would
apply to all depository institutions. This Initial Regulatory
Flexibility Analysis has been prepared in accordance with 5 U.S.C. 603
in order for the Board to solicit comment on the effect of the proposal
on small entities. The Board will, if necessary, conduct a final
regulatory flexibility analysis after consideration of comments
received during the public comment period.
1. Statement of the Need for, Objectives of, and Legal Basis for, the
Proposed Rule
The Board is proposing the foregoing amendments to Regulation CC
pursuant to its authority under the EFA Act and the Check 21 Act. The
proposed rule is necessary to have Regulation CC reflect the
substantial transition in the collection of checks from a largely
paper-based process to one that is virtually all electronic. The
proposed rule reflects the prevalent manner in which checks are now
collected and returned. 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 proposed rule is to encourage
all banks to collect and return checks electronically.
2. Small Entities Affected by the Proposed Rule
The proposed rule would apply to all depository institutions
regardless of their size.\118\ Pursuant to regulations issued by the
Small Business Administration (13 CFR 121.201), a ``small banking
organization'' includes a depository institution with $500 million or
less in total assets. Based on call report data as of June 2013, there
are approximately 12,164 depository institutions that have total
domestic assets of $500 million or less and thus are considered small
entities for purposes of the RFA. Based on December 2012 data regarding
checks returned through the Reserve Banks, the Board estimates that 69
percent of small depository institutions had at that time made
arrangements to receive returned checks electronically, whereas 31
percent had not.\119\ Banks are steadily adopting electronic check
handling methods, however, and the Board expects that a substantially
higher percentage of small depository institutions will have made
arrangements to receive electronic check returns by the time the a
final rule becomes effective.
---------------------------------------------------------------------------
\118\ The proposed rule would not impose costs on any small
entities other than depository institutions.
\119\ In December 2010, 41 percent of small depository
institutions had made arrangements to receive returns
electronically, whereas 59 percent had not.
---------------------------------------------------------------------------
3. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
By removing the regulation's expeditious-return requirement in
Alternative 1 and conditioning the requirement on the ability of a
returned check to be returned electronically in Alternative 2, the
proposed rule would encourage, but not require, depositary banks to
accept check returns in electronic form. A depositary bank that
currently receives returned checks in paper form and that chooses, as
encouraged by the proposal, to begin to receive returned checks
electronically, will incur some cost associated with that transition.
The Board 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, as mentioned above, 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.\120\ To receive
returned checks in this fashion, a depositary bank may need to
establish and maintain an electronic connection to the Reserve
[[Page 6705]]
Banks, or another returning bank that offers a similar service, and to
purchase certain equipment, such as a printer capable of double-sided
printing and magnetic-ink toner cartridges. Depending on the volume of
returned checks that a small depositary bank receives, the Board
continues to estimate that this transition would cost a small
depositary bank approximately $5,000 in net-present-value terms.\121\ A
few commenters responding to the Board's March 2011 proposal stated
that this $5,000 estimate of the cost to receive electronic returns is
too low. Based upon its review of the comments, however, the Board
believes that these commenters misinterpreted the $5,000 figure as
being intended to cover costs associated with the portions of the March
2011 proposal that were related to subpart B of the regulation--for
example, the proposed revisions related to the model funds-availability
policy disclosures and provision of the hold notices. The $5,000
figure, however, represented an estimate of the net present value of
only the cost to a small depositary bank to transition to receive
returned checks electronically.
---------------------------------------------------------------------------
\120\ 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.
\121\ This estimate takes into account the cost to a small
depositary bank to establish and maintain an electronic connection
to the Reserve Banks, which is estimated to be $110 per month. See
78 FR 66715 (Nov. 6, 2013). This figure (i.e., the Reserve Banks'
fee) is unchanged since the March 2011 proposal. 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 different returning
bank, an electronic check clearinghouse, or a nonbank processor.
---------------------------------------------------------------------------
Conversely, a small depositary bank that does not choose to accept
returned checks electronically would, under the proposal, incur
additional risk associated with that decision. Specifically, a paper
returned check may not be delivered to the bank in a timely fashion,
which may result in the bank more frequently making funds available to
its depositors before learning whether a check has been returned
unpaid. Although this risk is difficult to quantify, it is reasonable
to expect that each small depositary bank will weigh the costs and
benefits of whether to accept returns electronically. If the bank
determines that the net present value of the risk is greater than the
cost to receive returned checks electronically, then the bank can
minimize its cost associated with the Board's proposal by accepting
returned checks electronically such that there is more likely to be an
all-electronic return path from the paying bank.
The Board is proposing changes to the regulation's provisions that
address depositary banks' handling of misrouted notices of nonpayment.
Under the proposal, a depositary bank receiving a misrouted written
electronic notice of nonpayment would be required to either promptly
send the notice to the correct depositary bank directly or by means of
a returning bank agreeing to handle it, or to send the notice back to
the bank from which it was received. Currently, depositary banks are
not required to take any action in response to a misrouted written
electronic notice of nonpayment that they receive. The Board requests
comment on any cost that may be imposed on small entities by this
portion of its proposal.
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. Further, as other banks with
which the small bank does business also begin to receive returned
checks electronically, the small bank, in its role as paying bank, may
experience lower costs associated with sending returned checks to other
banks, because a paying bank typically pays a higher fee to a returning
bank (or other service provider) to deliver a returned check in paper
form to a depositary bank, as compared to delivering a returned check
electronically to the depositary bank.
The regulation 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 proposed Alternative 1, a paying bank will only be required to
provide notice if the bank initiates return of the related check in
paper form, but the requirement would apply regardless of the dollar
amount of the check. (Return of the check itself would continue to
satisfy the notice requirement if the return meets the timeframe
requirement for notice.) With respect to checks handled by the Reserve
Banks, by the end of 2013, Reserve Banks estimate that paying banks
will initiate check returns electronically 99.0 percent of the time,
such that a notice would not be required with respect to those checks
under the Board's proposal. The Board therefore expects that its
proposal will substantially reduce the number of notices that paying
banks send. In Alternative 2, the requirement to send a notice of
nonpayment, as well as its associated costs, would be eliminated.
The Board proposes to require that the paying bank send a notice of
nonpayment, if required under Alternative 1 or a returned check under
Alternative 2 such that the notice or check reaches 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 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.
In connection with Alternative 1, any increase in a paying bank's
cost associated with sending a notice under Alternative 1 should
provide an increased incentive for a paying bank to send check returns
electronically, thereby avoiding the requirement to send the notice.
Over time, the proposal could reduce to zero the number of notices that
paying banks send and eliminate entirely paying banks' costs associated
with providing the notices.
The Board requests comment on the cost of its proposed rule to
small depository institutions.
4. Identification of Duplicative, Overlapping, or Conflicting Federal
Rules
The Board notes that subpart A of Regulation J overlaps with the
proposed rule with respect to checks collected or returned through the
Reserve Banks. The provisions of Regulation J supersede any
inconsistent provisions of Regulation CC, but only to the extent of the
inconsistency.\122\
---------------------------------------------------------------------------
\122\ See 12 CFR 210.3(f).
---------------------------------------------------------------------------
5. Significant Alternatives to the Proposed Rule
As discussed above in this Federal Register notice and in the 2011
proposal, the Board has extensively considered possible alternatives to
Alternative 1 and Alternative 2 in this proposed rule. The Board
believes that the other alternatives would either impose greater costs
on small entities than would this proposed rule, or would be less
preferable than this proposed
[[Page 6706]]
rule for other reasons. For example, some of the other alternatives
that the Board has considered might give undue preference in the
regulation to the Reserve Banks' returned-check services. Other
possibilities might be disruptive to banks' existing processes for
handling and routing returned checks.
List of Subjects in 12 CFR Part 229
Banks, Banking, Federal Reserve System, Reporting and recordkeeping
requirements.
Authority and Issuance
For the reasons set forth in the preamble, the Board proposes to
amend 12 CFR part 229 as follows:
PART 229--AVAILABILITY OF FUNDS AND 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, paragraphs (b)(5) through (10) are added to read as
follows:
Sec. 229.1 Authority and purpose; organization.
* * * * *
(b) * * *
(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), (vv), and (bbb) are revised and
paragraph (ggg) is 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 or
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 image of or electronic
information related to a 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 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, for purposes of subpart C and subpart D, contained in the
electronic image of and electronic information related to the check in
accordance with American National Standard Specifications for
Electronic Exchange of Check Image Data--Domestic, X9.100-187
(hereinafter ANS X9.100-187) for an electronic image of and electronic
information related to a check, unless the Board by rule or order
determines that different standards apply.
* * * * *
(bbb) Copy and sufficient copy. (1) A copy of a check means--
(i) Any paper reproduction of a check, including a paper printout
of an electronic image of the check, a photocopy of the 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 means 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.--(1)
Electronic check means an electronic image of a check or electronic
information related to a check that-
(i) A bank or a nonbank depositor sends to a receiving bank
pursuant to an agreement with the receiving bank; and
(ii) Conforms with ANS X9.100-187, unless the Board by rule or
order determines that a different standard applies or the parties
otherwise agree.
(2) Electronic returned check means an electronic image of a
returned check or electronic information related to a returned check
that--
(i) A bank sends to a receiving bank pursuant to an agreement with
the receiving bank; and
(ii) Conforms with ANS X9.100-187, unless the Board by rule or
order determines that a different standard applies or the parties
otherwise agree.
Subpart C--Collection of Checks
0
4. Section 229.30 is revised to read as follows:
Sec. 229.30 Electronic images and electronic information.
(a) Check under this subpart. Electronic checks and electronic
returned checks are subject to this subpart as if they were checks or
returned checks, unless otherwise provided in this subpart.
(b) Writings. If a bank is required to provide information in
writing or in written form under this subpart, the bank may satisfy
that requirement by providing the information in electronic form if the
receiving bank has agreed to receive that information electronically
from the sending bank.
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.
Alternative 1 for Paragraph (a).
(a) Return of checks. (1) 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 under 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.
[[Page 6707]]
(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).
Alternative 2 for Paragraph (a)
(a) Return of checks. (1) Subject to the requirement for
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).
Alternative 1 for Paragraph (b)
(b) [Reserved.]
Alternative 2 for Paragraph (b)
(b) Expeditious return of checks. (1) Except as provided in
paragraph (c) 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 on or before
the depositary bank's next banking day.
Alternative 1 for Paragraph (c)
(c) [Reserved.]
Alternative 2 for Paragraph (c)
(c) Exceptions to the expeditious return of checks. The expeditious
return requirement of paragraph (b) of this section does not apply if--
(1) The paying bank 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 under
Sec. 229.32(b);
(2) The check is deposited in a depositary bank that is not subject
to subpart B of this part; or
(3) A paying bank is unable to identify the depositary bank with
respect to the check.
Alternative 1 for Paragraph (d)
(d) Notice of nonpayment. (1) If a paying bank determines not to
pay a check and sends the returned check in paper form, it shall
provide notice of nonpayment such that the notice is received by the
depositary bank by 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 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 paying bank;
(B) Name of the payee(s);
(C) Amount;
(D) Date of the indorsement of the depositary bank;
(E) Account number of the customer(s) of the depositary bank;
(F) Branch name or number of the depositary bank from its
indorsement;
(G) The bank name, routing number, and trace or sequence number
associated with the indorsement of the depositary bank; and
(H) 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, 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.
(3) The requirements of this paragraph (d) do not apply if--
(i) The check is deposited in a depositary bank that is not subject
to subpart B of this part; or
(ii) A paying bank is unable to identify the depositary bank with
respect to the check.
Alternative 2 for Paragraph (d)
(d) [Reserved.]
(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.
Alternative 1 for Paragraph (f)
(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 (d)(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.
Alternative 2 for Paragraph (f)
(f) Notice in lieu of return. (1) 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
(f)(2) of this section.
[[Page 6708]]
(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 paying bank;
(B) Name of the payee(s);
(C) Amount;
(D) Date of the indorsement of the depositary bank;
(E) Account number of the customer(s) of the depositary bank;
(F) Branch name or number of the depositary bank from its
indorsement;
(G) The bank name, routing number, and trace or sequence number
associated with the indorsement of the depositary bank; and
(H) 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, 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.
(3) 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.
Alternative 1 for Paragraph (g)
(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(f)(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 applicable UCC) for the paying bank.
Alternative 2 for Paragraph (g)
(g) Extension of deadline. The deadline for return or notice of
dishonor under the UCC or Regulation J (12 CFR part 210), Sec.
229.36(f)(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 (e)(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 applicable UCC) for the paying bank.
(h) Payable-through and payable-at checks. Except for paragraph (e)
of this section, for purposes of this subpart, a check payable at or
through a paying bank is considered to be drawn on that bank.
(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.
Alternative 1 for Paragraph (a)
(a) Return of checks. (1) A returning bank may send the returned
check to the depositary bank, to any 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 returned 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 returned check to a qualified
returned check. A qualified returned check shall be encoded in magnetic
ink with the routing number of the depositary bank, the amount of the
returned check, and a ``2'' in the case of an original check (or a
``5'' in the case of a substitute check) in position 44 of the
qualified return MICR line as a return identifier. A qualified returned
original check shall be encoded in accordance with ANS X9.13, and a
qualified returned substitute check shall be encoded in accordance with
ANS X9.100-140.
Alternative 2 for Paragraph (a)
(a) Return of checks. (1) Subject to the requirement for
expeditious return in paragraph (b) of this section, a returning bank
may send the returned check to the depositary bank, to any 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 returned 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 returned check to a qualified
returned check. A qualified returned check shall be encoded in magnetic
ink with the routing number of the depositary bank, the amount of the
returned check, and a ``2'' in the case of an original check (or a
``5'' in the case of a substitute check) in position 44 of the
qualified return MICR line as a return identifier. A qualified returned
original check shall be encoded in accordance with ANS X9.13, and a
qualified returned substitute check shall be encoded in accordance with
ANS X9.100-140.
Alternative 1 for Paragraph (b)
(b) [Reserved.]
Alternative 2 for Paragraph (b)
(b) Expeditious return of checks. (1) Except as provided in
paragraph (c) of this section, a returning bank 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.
[[Page 6709]]
(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
check would normally be received by the depositary bank on or before
the depositary bank's next banking day.
Alternative 1 for Paragraph (c)
(c) [Reserved.]
Alternative 2 for Paragraph (c)
(c) Exceptions to the expeditious return of checks. (1) The
expeditious return requirement of paragraph (b) of this section does
not apply if--
(i) The returning bank does not have an agreement to send
electronic returned checks to the depositary bank or to another
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 under paragraph (b) of this
section;
(ii) The check is deposited in a depositary bank that is not
subject to subpart B of this part; or
(iii) The paying bank is unable to identify the depositary bank
with respect to the check.
Alternative 1 for Paragraph (d)
(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 copy is available, a written notice of
nonpayment containing the information specified in Sec. 229.31(d). 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.
Alternative 2 for Paragraph (d)
(d) Notice in lieu of return. (1) If a check is unavailable for
return, the returning bank may send in its place a copy of the front
and back of the returned check, or, if no copy is available, a written
notice of nonpayment containing the information specified in paragraph
(d)(2) of this section.
(2)(i) To the extent available to the returning bank, notice must
include the information contained in the check's MICR line when the
check is received by the returning bank, as well as--
(A) Name of the paying bank;
(B) Name of the payee(s);
(C) Amount;
(D) Date of the indorsement of the depositary bank;
(E) Account number of the customer(s) of the depositary bank;
(F) Branch name or number of the depositary bank from its
indorsement;
(G) The bank name, routing number, and trace or sequence number
associated with the indorsement of the depositary bank; and
(H) Reason for nonpayment.
(ii) If the returning 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, 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.
(3) 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.
0
7. Section 229.33 is revised to read as follows:
Sec. 229.33 Depositary bank's responsibility for returned checks and
notices of nonpayment.
Alternative 1 For Paragraph (a)
(a) Acceptance of electronic returned checks and electronic notices
of nonpayment. A depositary bank's agreement with the transferor bank
governs the acceptance of electronic returned checks and electronic
written notices of nonpayment.
Alternative 2 for paragraph (a)
(a) Acceptance of electronic returned checks. A depositary bank's
agreement with the transferor bank governs the acceptance of electronic
returned checks.
Alternative 1 for paragraph (b)
(b) Acceptance of paper returned checks and paper notices of
nonpayment. (1) A depositary bank shall accept paper returned checks
and paper written 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 forward collection checks.
Alternative 2 for Paragraph (b)
(b) Acceptance of paper returned checks. (1) A depositary bank
shall accept paper returned checks 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 forward collection checks.
Alternative 1 for Paragraph (c)
(c) 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.
Alternative 2 for Paragraph (c)
(c) [Reserved.]
[[Page 6710]]
(d) 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 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.
Alternative 1 for Paragraph (e)
(e) 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.
Alternative 2 for Paragraph (e)
(e) Misrouted returned checks. If a bank receives a returned check
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 to the depositary bank
directly or by means of a returning bank agreeing to handle the
returned check or notice, or send the check back to the bank from which
it was received.
(f) Charges. A depositary bank may not impose a charge for
accepting and paying checks being returned to it.
Alternative 1 for Paragraph (g)
(g) 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.
Alternative 2 for Paragraph (g)
(g) Notification to customer. If the depositary bank receives a
returned check 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 or notice of recovery, or within a longer reasonable time.
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
contains 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) Indemnity with respect to an electronic image or electronic
information not related to a paper check. Each bank that transfers or
presents an electronic image or electronic information that is not
derived from a paper check and for which it receives a settlement or
other consideration shall indemnify each transferee bank, any
subsequent collecting bank, the paying bank, and any subsequent
returning bank against losses as set forth in paragraph (i) of this
section that result from the fact that the electronic image or
electronic information is not derived from a paper check.
(c) 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
(c)(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 (c)(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.
(d) 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 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
[[Page 6711]]
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.
(e) 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.
Alternative 1 for Paragraph (f)
(f) 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.
Alternative 2 for Paragraph (f)
(f) [Reserved.]
(g) Truncating bank indemnity. (1) The indemnity described in
paragraph (g)(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 check 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 (g)(1) of this section shall
indemnify 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.
(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 (b) 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 (b) 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) reduces 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 bank, the
warranting 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 Standard (ANS)
Specifications for Physical Check Indorsements, X9.100-111 (ANS X9.100-
111) for a paper check, ANS X9.100-140 for a substitute check, and
American National Standard 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. In Sec. 229.36:
0
A. Paragraphs (a) and (b) are revised;
0
B. Paragraph (e) is removed and reserved; and
0
C. Paragraph (f) is revised.
The revisions read as follows:
Sec. 229.36 Presentment and issuance of checks.
(a) Receipt of electronic checks. A paying bank's receipt of an
electronic check is governed by the paying bank's agreement with the
presenting bank.
(b) Receipt of paper checks. (1) A check in paper form 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 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;
[[Page 6712]]
(iii) At an address of the bank associated with the routing number
on the check, whether contained in the MICR line or in fractional form;
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.
* * * * *
(e) [Reserved.]
(f) Same-day settlement. (1) A paper check is considered presented,
and a paying bank must settle for or return the check pursuant to
paragraph (f)(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 (f)--
(i) At a location designated by the paying bank for receipt of
paper checks under this paragraph (f) 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 (f)(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 (f)(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 (f)(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 (f)(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 (f)(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:
0
A. Paragraph (a) is revised;
0
B. Paragraph (b) is removed and reserved; and
0
C. Paragraphs (c) and (d) are revised.
The revisions read as follows:
Sec. 229.38 Liability.
Alternative 1 for Paragraph (a)
(a) Standard of care; liability; measure of damages. A bank shall
exercise ordinary care and act in good faith in complying with the
requirements of this subpart. A bank that fails to exercise ordinary
care or act in good faith under this subpart may be liable to the
depositary bank, the depositary bank's customer, the owner of a check,
or another party to the check. The measure of damages for failure to
exercise ordinary care is the amount of the loss incurred, up to the
amount of the check, reduced by the amount of the loss that party would
have incurred even if the bank had exercised ordinary care. A bank that
fails to act in good faith under this subpart may be liable for other
damages, if any, suffered by the party as a proximate consequence.
Subject to a bank's duty to exercise ordinary care or act in good faith
in choosing the means of return or notice of nonpayment, the bank is
not liable for the insolvency, neglect, misconduct, mistake, or default
of another bank or person, or for loss or destruction of a check or
notice of nonpayment in transit or in the possession of others. This
section does not affect a paying bank's liability to its customer under
the UCC or other law.
Alternative 2 for Paragraph (a)
(a) Standard of care; liability; measure of damages. A bank shall
exercise ordinary care and act in good faith in complying with the
requirements of this subpart. A bank that fails to exercise ordinary
care or act in good faith under this subpart may be liable to the
depositary bank, the depositary bank's customer, the owner of a check,
or another party to the check. The measure of damages for failure to
exercise ordinary care is the amount of the loss incurred, up to the
amount of the check, reduced by the amount of the loss that party would
have incurred even if the bank had exercised ordinary care. A bank that
fails to act in good faith under this subpart may be liable for other
damages, if any, suffered by the party as a proximate consequence.
Subject to a bank's duty to exercise ordinary care or act in good faith
in choosing the means of return, the bank is not liable for the
insolvency, neglect, misconduct, mistake, or default of another bank or
person, or for loss or destruction of a check in transit or in the
possession of others. This section does not affect a paying bank's
liability to its customer under the UCC or other law.
* * * * *
(b) [Reserved.]
Alternative 1 for Paragraph (c)
(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(a), (b), and (c)), 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.
Alternative 2 for Paragraph (c)
(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 (Sec.
229.33(a) and (b)), 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
[[Page 6713]]
(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 (b) 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 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(d)(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.
Alternative 1 for This Section
The notice-of-nonpayment (Sec. 229.31(d)) 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.
Alternative 2 for This Section
The expeditious return (Sec. Sec. 229.31(b) and 229.32(b)) 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) Includes an electronic image of or electronic information
related to a demand draft drawn on or payable through or at a Pacific
island bank that a bank sends to a receiving bank pursuant to an
agreement with the receiving bank, except as otherwise provided in this
section.
Alternative 1 for Paragraph (b)
(b) Rules applicable to Pacific island checks. To the extent a bank
handles a Pacific island check as if it were a check defined in Sec.
229.2(k), the bank is subject to the following sections of this part
(and the word ``check'' in each such section is construed to include a
Pacific island check)--
(1) Sec. 229.32;
(2) Sec. 229.33(a), (b), (c), (d), (e), and (f);
(3) Sec. 229.34(a), (b), (c), (d)(2), (d)(3), (g), (h), (i) and
(j);
(4) Sec. 229.35; for purposes of Sec. 229.35(c), the Pacific
island bank is deemed to be a bank;
(5) Sec. 229.36(d);
(6) Sec. 229.37;
(7) Sec. 229.38;
(8) Sec. 229.39(a), (b), and (d); and
(9) Sec. Sec. 229.40 through 229.42.
Alternative 2 for Paragraph (b)
(b) Rules applicable to Pacific island checks. To the extent a bank
handles a Pacific island check as if it were a check defined in Sec.
229.2(k), the bank is subject to the following sections of this part
(and the word ``check'' in each such section is construed to include a
Pacific island check)--
(1) Sec. 229.32;
(2) Sec. 229.33(a), (b), (c), (d), (e), and (f);
(3) Sec. 229.34(a), (b), (c), (d)(2), (d)(3), (g), (h), (i) and
(j);
(4) Sec. 229.35; for purposes of Sec. 229.35(c), the Pacific
island bank is deemed to be a bank;
(5) Sec. 229.36(d);
(6) Sec. 229.37;
(7) Sec. 229.38;
(8) Sec. 229.39(a), (b), (c) and (e); and
(9) Sec. Sec. 229.40 through 229.42.
Subpart D--Substitute Checks
0
16. In Sec. 229.51, paragraphs (b)(1) through (3) are revised to read
as follows:
Sec. 229.51 General provisions governing substitute checks.
* * * * *
(b) * * *
(1) Bears all indorsements applied by parties that previously
handled the check in any form (including the original check, a
substitute check, or another paper or electronic representation of such
original check or substitute check) for forward collection or return;
(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
[[Page 6714]]
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.
(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
1. Revise paragraph 2 under ``Z. 229.2(z) Paying Bank'';
0
2. Revise DD. 229(dd);
0
3. Revise VV. 229.2(vv);
0
4. Revise BBB. 229.2(bbb) and its examples; and
0
5. Add GGG. 229.2(ggg).
0
B. Remove:
0
1. ``XVI. Section 229.30 Paying Bank's Responsibility for Return of
Checks'';
0
2. ``XVII. Section 229.31 Returning Bank's Responsibility for Return of
Checks'';
0
3. ``XVIII. Section 229.32 Depositary Bank's Responsibility for
Returned Checks''; and
0
4. ``XIX. Section 229.33 Notice of Nonpayment.''
0
C. Add new:
0
1. ``XVI. Section 229.30 Electronic Images and Electronic
Information'';
0
2. ``XVII. Section 229.31 Paying Bank's Responsibility for Return of
Checks and Notices of Nonpayment'';
0
3. ``XVIII. Section 229.32 Returning Bank's Responsibility for Return
of Checks''; and
0
4. ``XIX. Section 229.33 Depositary Bank's Responsibility for Returned
Checks and Notices of Nonpayment''.
0
D. ``XX. Section 229.34 Warranties'' is revised.
0
E. ``XXI. Section 229.35 Indorsements'' is revised.
0
F. ``XXII. Section 229.36 Presentment and Issuance of Checks'' is
revised.
0
G. ``XXIV. Section 229.38 Liability'' is revised.
0
H. ``XXV. Section 229.39 Insolvency of Bank'' is revised.
0
I. ``XXVI Section 229.40 Effect on Merger Transaction'' is revised.
0
J. ``XXVII. Section 229.41 Relation to State Law'' is revised.
0
K. ``XXVIII. Section 229.42 Exclusions'' is revised.
0
L. ``XXIX Section 229.43 Checks Payable in Guam, American Samoa, and
the Northern Mariana Islands'' is revised.
0
M. In ``XXX. Sec. 229.51 General provisions governing substitute
checks,'' paragraph B is revised.
0
N. ``XXXI. Sec. 229.52 Substitute Check Warranties'' is revised.
0
O. ``XXXII. Sec. 229.53 Substitute Check Indemnity,'' paragraphs A,
B.1., B.1. Examples, and B.3. are revised.
0
P. In ``XXXIII. Section 229.54 Expedited Recredit for Consumers,''
paragraph A.2. is revised.
The revisions and additions read as follows:
Appendix E to Part 229--Commentary
* * * * *
II. Section 229.2 Definitions
* * * * *
Z. 229.2(z) Paying Bank
* * * * *
2. Allowing the payable-through bank additional time to forward
checks to the payor and await return or pay instructions from the
payor would delay the return of these checks, increasing the risks
to depositary banks. Subpart C of this part places on payable-
through and payable-at banks the requirements of expeditious return
based on the time the payable-through or payable-at bank received
the check for forward collection.
* * * * *
DD. 229.2(dd) Routing number
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 image
of a 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 case of electronic information related to a
check, the routing number of the paying bank is contained 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.)
* * * * *
VV. 229.2(vv) MICR Line
Information in the MICR line of a check must be printed in
accordance with ANS X9.13 for original checks and ANS X9.100-140 for
substitute checks, and must be contained in the electronic image of
and electronic information related to a check 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. The banks exchanging the
electronic check may determine the applicable standard for
electronic checks and electronic returned checks.
* * * * *
BBB. 229.2(bbb) Copy and Sufficient Copy
1. A copy must be a paper reproduction of a check, unless the
parties sending and receiving the copy otherwise agree. Therefore,
an electronic image is not a copy or a sufficient copy absent an
agreement. However, if a customer has agreed to receive such
information electronically, 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.
[[Page 6715]]
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 by sending an electronic image
of the check, electronic information related to the check (e.g.,
MICR line information), or both, instead of transferring, returning,
or presenting the paper check. The terms of the agreements may vary.
For example, an agreement may provide that an electronic image of
the check as well as other electronic information related to the
check (such as MICR line information) must be sent. Alternatively,
an agreement may provide that electronic information related to the
check is sufficient and an image is not required. 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 image of a check or electronic
information related to a 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 images of and electronic information related to checks
and 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 image of and
electronic information related the check or returned check.
Therefore, the banks exchanging electronic images and electronic
information may agree that a different standard applies to
electronic images and electronic information 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. These electronic checks and electronic returned checks are
subject to subpart C, except as otherwise provided in that subpart.
(See Sec. 229.30 and commentary thereto).
* * * * *
XVI. Section 229.30 Electronic Images and Electronic Information
Alternative 1 for XVI. Section 229.30 Electronic Images 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 image of a check or electronic information related to a
check or 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(d)
requires a paying bank to provide a notice of nonpayment only if the
paying bank returns a check in paper form. Additionally, Sec. Sec.
229.33(a) and 229.36(a) specify that the parties' agreements govern
the receipt of electronic returned checks and electronic checks,
respectively, rather than the provisions in Sec. 229.33(b)
(Acceptance of paper returned checks) and Sec. 229.36(b) (Receipt
of paper checks). Section 229.34(a) sets forth warranties that are
given only with respect to electronic checks and electronic returned
checks. 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. (See Sec. 229.37 and
commentary thereto).
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.
Alternative 2 for XVI. Section 229.30 Electronic Images 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 image of a check or electronic information related to a
check or 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. Sec.
229.33(a) and 229.36(a) specify that the parties' agreements govern
the receipt of electronic returned checks and electronic checks,
respectively, rather than the provisions in Sec. 229.33(b)
(Acceptance of paper returned checks) and Sec. 229.36(b) (Receipt
of paper checks). Section 229.34(a) sets forth warranties that are
given only with respect to electronic checks and electronic returned
checks. 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. (See Sec. 229.37 and
commentary thereto).
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
Alternative 1 for 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. 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
[[Page 6716]]
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.
b. If the paying bank elects to return the check directly to the
depositary bank, it is not necessarily required to return the check
to the branch of first deposit. A paper check may be returned to the
depositary bank at any physical location permitted under Sec.
229.33(b).
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.
The Board expects that these cases will be unusual 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 accept the returned check and send it to another
prior collecting bank in the path used for forward 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, 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(e), 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(d) Notice of Nonpayment
1. Requirement.
a. The paying bank must send a notice of nonpayment if it
decides not to pay a check and sends the returned check in paper
form. 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. A paying bank
that sends an electronic returned check instead of a paper returned
check, pursuant to an agreement to do so, is not required to send a
notice of nonpayment. The paying bank must send the notice of
nonpayment such that it is received by the depositary bank by 2 p.m.
local time of the depositary bank on the second business day
following presentment.
b. A bank identified by routing number as the paying bank is
considered the paying bank under this regulation 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 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(d)(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 will
not satisfy the notice requirement.
e. The requirement for notice does not affect the requirements
for return of the check under the UCC (or Sec. 229.31(e)). 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. This 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. If the paying bank cannot identify the depositary bank from
the check itself, it 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 generally applicable industry
standards, or as otherwise agreed to by the parties.
3. 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 need not comply with the availability requirements
of subpart B of Regulation CC. Thus, the notice of nonpayment
requirement of Sec. 229.31(d) does 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 notice of nonpayment requirement applies 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
[[Page 6717]]
of the EFA Act and therefore are not subject to the expedited-
availability requirements of subpart B of this regulation. Thus, the
notice of nonpayment requirement of this section would not apply to
a paying bank returning a check that was deposited in one of these
banks.
4. Unidentifiable depositary banks.
a. A paying bank that sends a paper 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 notice of nonpayment. Although the lack of requirement for
notice of nonpayment under this paragraph will create risks for the
depositary bank, in many cases the inability to identify the
depositary bank will be due to the depositary bank's, or a
collecting bank's, failure to indorse as required by Sec.
229.35(a). If the depositary bank failed to use the proper
indorsement, it should bear the risks of 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 not providing notice of nonpayment in accordance with
Sec. 229.31(d) in cases where the paying bank is itself responsible
for the inability to identify the depositary bank, such as when the
paying bank's customer has used a check with printing or other
material on the back in the area reserved for the depositary bank's
indorsement, making the indorsement unreadable. (See Sec.
229.38(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).
C. 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 permissible 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 not be permissible in cases where a check is being returned
due to the paying bank having already paid the item. In such cases,
the payee and not the drawer would 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.
D. 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
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, to
create a substitute check. 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(e)(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 paper
or electronic, if agreed to by the parties), 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(d). 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
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. For example, the notice of nonpayment requirement under
Sec. 229.31(d) may be satisfied by the notice in lieu of return if
the notice in lieu meets the time and information requirements of
Sec. 229.31(d).
5. If not all of the information required by Sec. 229.31(d) is
available, the paying bank may make a claim against any prior bank
handling the check as provided in Sec. 229.35(b).
E. 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(f)(3) and (4) of
this part 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(f)(3) or (4) of this part), 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(f)(3) and (f)(4) of this part.
3. If the paying bank has an agreement to do so with the
receiving bank, the paying bank may satisfy its midnight or other
return deadline by sending an electronic returned check prior to the
expiration of the deadline.
[[Page 6718]]
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.
F. 229.31(h) Payable Through and Payable at Checks
1. For purposes of subpart C, the regulation defines a payable-
through or payable-at bank (which could be designated the
collectible-through or collectible-at bank) as a paying bank. The
requirements of 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.
G. 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).
Alternative 2 for 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.
b. If the paying bank elects to return the check directly to the
depositary bank, it is not necessarily required to return the check
to the branch of first deposit. A paper check may be returned to the
depositary bank at any physical location permitted under Sec.
229.33(b).
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.
The Board expects that these cases will be unusual 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 accept the returned check and send it to another
prior collecting bank in the path used for forward 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, 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(c) 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(f)(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) of 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
such that it normally would reach the depositary bank by the
specified deadline, or sending an electronic returned check to a
returning bank within the returning bank's timeframe for delivering
electronic returned checks to the depositary
[[Page 6719]]
bank within the return deadline. A paying bank that sends a returned
check in paper form, even though it has an agreement to send
electronic returned checks to the receiving bank, 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 destined for the depositary
bank. The paying bank is not responsible for unforeseeable delays in
the return of the check, such as communication failures or
transportation delays. 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.
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 may 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 before the close of the depositary bank's next
banking day and the return will still be considered expeditious.
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. i. 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.
ii. 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. Consequently,
the paying bank, Returning Bank A, and Returning Bank B are subject
to the expeditious return requirement. 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) Exceptions to the Expeditious Return Requirement
1. This paragraph sets forth the circumstances under which a
paying bank is not required to return the check to the depositary
bank in accordance with Sec. 229.31(b).
2. Example--No direct or indirect electronic return agreement.
The paying bank has an agreement to send electronic returned checks
to Returning Bank A. Returning Bank A, however, does not have an
agreement to send electronic returned checks to the depositary bank
or to any returning bank that has an agreement to send electronic
returned checks to the depositary bank. Returning Bank A has not
otherwise agreed to handle the returned check expeditiously.
Consequently, Returning Bank A is not subject to the expeditious
return requirement under Sec. 229.32(b). Under these facts, the
paying bank would not be subject to the expeditious return
requirement under Sec. 229.31(b). The paying bank, however, must
comply with any deadlines under the UCC, Regulation J (12 CFR part
210), or Sec. 229.30(e).
3. Depositary banks not subject to subpart B.
a. Subpart B of this regulation applies only to ``checks''
deposited in transaction ``accounts.'' A depositary bank with only
time or savings accounts need not comply with the availability
requirements of subpart B of Regulation CC. Thus, the expedited
return requirement of Sec. 229.31(b) does 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. Returning banks also would
be required to exercise ordinary care when returning the checks (UCC
4-202).
b. The expeditious return requirement applies 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 expedited return requirement of this
section would not apply to a paying bank returning a check that was
deposited in one of these banks.
4. Unidentifiable depositary bank.
a. The sending of a check to a bank that handled the check for
forward collection under this paragraph is not subject to the
requirement for expeditious return by the paying bank. Although the
lack of a requirement of expeditious return will create risks for
the depositary bank, in many cases the inability to identify the
depositary bank will be due to the depositary bank's, or a
collecting bank's, failure to 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. 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 in cases where the
paying bank is itself responsible for the inability to identify the
depositary bank, such as when the paying bank's customer has used a
check with printing or other material on the back in the area
reserved for the depositary bank's indorsement, making the
indorsement unreadable. (See Sec. 229.38(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).
D. 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 permissible 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 not be permissible in cases where a check is being returned
due to the paying bank having already paid the item. In such cases,
the payee and not the drawer would 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.
[[Page 6720]]
E. 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
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, to
create a substitute check. 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(e)(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 paper
or electronic, if agreed to by the parties), 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(f)(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
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(f)(2)
is available, the paying bank may make a claim against any prior
bank handling the check as provided in Sec. 229.35(b).
F. 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(f)(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(f)(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(f)(3) and (4).
3. If the paying bank has an agreement to do so with the
receiving bank, 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.
G. 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.
H. 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 Return of
Checks
Alternative 1 for XVIII. Section 229.32 Returning Bank's Responsibility
for Return of 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).
[[Page 6721]]
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 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. 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(d)(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(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 the commentary to Sec. 229.31(f).)
C. 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(d) and commentary to Sec.
229.35(b).)
3. A returning bank may vary the settlement method it uses by
agreement with paying banks or other returning banks. Special rules
apply in the case of insolvency of banks. (See Sec. 229.39.) If
payment cannot be obtained from a depositary 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(d), a bank collecting a check remains liable to prior
collecting banks and the depositary bank's customer under the UCC.
D. 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.
E. 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 the
commentary to Sec. 229.31(i).)
Alternative 2 for XVIII. Section 229.32 Returning Bank's Responsibility
for Return of 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 forward collection, it
may send the returned check to any collecting bank that handled the
check for forward collection.
[[Page 6722]]
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. 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(d)(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 is subject to the expeditious return
requirement with respect to a returned check if it--
a. Has an agreement to send electronic returned checks directly
to the depositary bank, to another returning bank that has an
agreement to send electronic returned checks to the depositary bank;
or to another returning bank that otherwise agrees to handle the
returned check expeditiously under Sec. 229.32(b);
b. Publishes or distributes availability schedules for the
expeditious return of returned checks to the depositary bank and
accepts the returned check for return;
c. Agrees with the paying bank or returning bank to handle
returned checks sent by that bank for expeditious return to certain
depositary banks; or
d. Otherwise agrees to handle a returned check for expeditious
return.
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.
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. Under these facts, the returning bank would
be subject to the expeditious return requirement under Sec.
229.32(b). If a check is presented to the paying bank on Monday, the
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 Requirement
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. Example--No direct or indirect electronic return agreement.
The returning bank does not have an agreement to send electronic
returned checks to the depositary bank. The returning bank also does
not have an agreement to send electronic returned checks to any
returning bank from which the depositary bank accepts electronic
returned checks or to any returning bank that otherwise agrees to
handle the return expeditious. Under these facts, the returning bank
is not subject to the expeditious return requirement under Sec.
229.32(b). The returning bank nonetheless is required to exercise
ordinary care under UCC 4-202 when returning checks. (See definition
of returning bank in Sec. 229.2(cc).)
3. Depositary bank not subject to subpart B. This paragraph is
similar to Sec. 229.31(c)(2) 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 EFT Act. (See
the commentary to Sec. 229.31(b).)
4. Unidentifiable depositary bank
As in the case of paying banks under Sec. 229.31(c), a
returning bank that cannot identify the depositary bank is not
subject to the expeditious return requirements of Sec. 229.32(b).
D. 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.
E. 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 the
commentary to Sec. 229.31(i).)
XIX. Section 229.33 Depositary Bank's Responsibility for Returned
Checks and Notices of Nonpayment
Alternative 1 for XIX. Section 229.33 Depositary Bank's Responsibility
for Returned Checks and Notices of Nonpayment
A. 229.33(a) 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
[[Page 6723]]
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(d) 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.
B. 229.33(b) 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(c) 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 (b)(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.
4. In general, banks may vary by agreement the location at which
notices are received.
C. 229.33(c) Acceptance of Oral Notices of Nonpayment
1. 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.
D. 229.33(d) 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 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(g), and 229.35(b).)
E. 229.33(e) 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(e) (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(d), 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).
[[Page 6724]]
F. 229.33(f) 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.
G. 229.33(g) 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(g) 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).
Alternative 2 for XIX. Section 229.33 Depositary Bank's Responsibility
for Returned Checks and Notices of Nonpayment
A. 229.33(a) Acceptance of Electronic Returned Checks
The depositary bank's acceptance of electronic returned checks
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 electronically, as well as what constitutes
receipt of the returned checks. The agreement also may specify
whether electronic returned checks must be separated from electronic
checks sent for forward collection.
B. 229.33(b) Acceptance of Paper Returned Checks
This paragraph states where the depositary bank is required to
accept paper returned checks during its banking day. 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:
a. The depositary bank must accept paper returned checks 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
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 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.
Accordingly, a depositary bank may limit the locations at which it
must accept paper returned checks 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 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 (b)(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.
C. 229.33(d) Payment
1. As discussed in the commentary to Sec. 229.32(c), 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 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(g), and 229.35(b).)
E. 229.33(e) Misrouted Returned Checks
1. This paragraph permits a bank receiving a check (either in
paper form or electronic form) on the basis that it is the
depositary bank to send the misrouted returned check to the correct
depositary bank, if it can identify the correct depositary bank,
either directly or through a returning bank agreeing to handle the
check. 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 must
send the check 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(e) (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
[[Page 6725]]
be required to pay for the returned check under Sec. 229.33(d), 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).
F. 229.33(f) 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.
G. 229.33(g) Notification to Customer
1. This paragraph requires a depositary bank to notify its
customer of nonpayment upon receipt of a returned check. Notice also
must be given if a depositary bank receives a notice of recovery
under Sec. 229.35(b). A bank that chooses to provide the notice
required by Sec. 229.33(g) 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.
XX. Section 229.34 Warranties and Indemnities
Alternative 1 for XX. Section 229.34 Warranties and Indemnities
A. 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 (c), (d), (e), and (f) 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.
B. 229.34(b) Indemnity With Respect to an Electronic Image or
Electronic Information Not Derived From a Paper Check
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 image that was not derived from a paper check (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. The indemnity in
Sec. 229.34(b) enables a bank that receives the electronically-
created item to be compensated for losses the bank incurs due to the
fact that the electronic image was not derived from a paper check.
(See Sec. 229.34(i) and commentary thereto).
Examples.
a. 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(b) 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).
b. 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(b) 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.
C. 229.34(c) 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.
2. The transfer and presentment warranties shift liability to
the depositary bank only when the remotely created check is
unauthorized, and would not apply when the customer initially
authorizes a check but then experiences ``buyer's remorse'' and
subsequently tries to revoke the authorization by asserting a claim
against the paying bank under UCC 4-401. If the depositary bank
suspects ``buyer's remorse,'' it may obtain from its customer the
express verifiable authorization of the check by the paying bank's
customer and use that authorization as a defense to the warranty
claim.
3. The scope of the transfer and presentment warranties for
remotely created checks differs from that of the corresponding UCC
warranty provisions in two respects. The UCC warranties differ from
the Sec. 229.34(c) warranties in that they 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(c).
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(c) warranties
specifically cover the amount as well as the payee stated on the
check. Neither the UCC warranties, nor the Sec. 229.34(c)
warranties, apply to the date stated on the remotely created check.
4. A bank making the Sec. 229.34(c) 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.
5. 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(d) Settlement Amount, Encoding, and Offset Warranties
1. Paragraph (d)(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)
[[Page 6726]]
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 (d)(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 (d)(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 (d)(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 (d)(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 (d)(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 (d)(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 (d)(3) against
the presenting bank or any preceding bank that handled the
misencoded check.
5. Paragraph (d)(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(e) Returned Check Warranties
1. This paragraph includes warranties that a returned check,
including a notice in lieu of return and 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(e); 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 the commentary to Sec. 229.31(f).) 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(f) 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(d). The
requirements of Sec. 229.31(d) 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 returns
the check. (See commentary on Sec. 229.31(d).)
G. 229.34(g) Truncating Bank Indemnity
1. This indemnity provides for a depositary bank's potential
liability when it permits a customer 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(k) provides the depositary bank that
accepts the original check for deposit with a claim against the
depositary bank that permitted its customer to truncate the original
check, did not receive the original check, receives settlement or
other consideration for the check, and does 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.
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. 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; however, Depositary Bank B also offers a remote deposit
capture service to its customer. The customer uses Depositary Bank
B's remote 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 also deposits the original check
into Depositary Bank C. 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 or
Depositary Bank B.
2. 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(h) Damages
1. This paragraph adopts for the warranties in Sec. 229.34(a),
(c), (d), (e), and (f) the damages provided in UCC 4-207(c) and 4A-
506(b). (See definition of interest compensation in Sec.
229.2(oo).)
I. 229.34(i) Indemnity Amounts
1. This paragraph adopts for the amount of the indemnities
provided for in Sec. Sec. 229.34(b) 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).
J. 229.34(j) Tender of Defense
1. This paragraph adopts for this regulation the vouching-in
provisions of UCC 3-119.
K. 229.34(k) Notice of Claim
1. This paragraph adopts the notice provisions of UCC sections
4-207(d) and 4-208(e). The time limit set forth in this
[[Page 6727]]
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.
Alternative 2 for XX. Section 229.34 Warranties and Indemnities
A. 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 (c), (d), (e), and (f) 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.
B. 229.34(b) Indemnity With Respect to an Electronic Image or
Electronic Information Not Derived from a Paper Check
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 image that was not derived from a paper check (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. The indemnity in
Sec. 229.34(b) enables a bank that receives the electronically-
created item to be compensated for losses the bank incurs due to the
fact that the electronic image was not derived from a paper check.
(See Sec. 229.34(i) and commentary thereto).
Examples.
a. 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(b) 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).
b. 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(b) 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.
C. 229.34(c) 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.
2. The transfer and presentment warranties shift liability to
the depositary bank only when the remotely created check is
unauthorized, and would not apply when the customer initially
authorizes a check but then experiences ``buyer's remorse'' and
subsequently tries to revoke the authorization by asserting a claim
against the paying bank under UCC 4-401. If the depositary bank
suspects ``buyer's remorse,'' it may obtain from its customer the
express verifiable authorization of the check by the paying bank's
customer and use that authorization as a defense to the warranty
claim.
3. The scope of the transfer and presentment warranties for
remotely created checks differs from that of the corresponding UCC
warranty provisions in two respects. The UCC warranties differ from
the Sec. 229.34(c) warranties in that they 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(c).
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(c) warranties
specifically cover the amount as well as the payee stated on the
check. Neither the UCC warranties, nor the Sec. 229.34(c)
warranties, apply to the date stated on the remotely created check.
4. A bank making the Sec. 229.34(c) 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.
5. 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(d) Settlement Amount, Encoding, and Offset Warranties
1. Paragraph (d)(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 (d)(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 (d)(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 (d)(3)
applies to all MICR-line encoding on a paper check, substitute
check,
[[Page 6728]]
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 (d)(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 (d)(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 (d)(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 (d)(3) against
the presenting bank or any preceding bank that handled the
misencoded check.
5. Paragraph (d)(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(e) Returned Check Warranties
1. This paragraph includes warranties that a returned check,
including a notice in lieu of return and 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(e); 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 the commentary to Sec. 229.31(c).) 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(g) Truncating Bank Indemnity
1. This indemnity provides for a depositary bank's potential
liability when it permits a customer 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(g) provides the depositary bank that
accepts the original check for deposit with a claim against the
depositary bank that permitted its customer to truncate the original
check, did not receive the original check, receives settlement or
other consideration for the check, and does 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.
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. 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; however, Depositary Bank B also offers a remote deposit
capture service to its customer. The customer uses Depositary Bank
B's remote 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 also deposits the original check
into Depositary Bank C. 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 or
Depositary Bank B.
2. 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.
G. 229.34(h) Damages
1. This paragraph adopts for the warranties in Sec. 229.34(a),
(c), (d), (e), and (f) the damages provided in UCC 4-207(c) and 4A-
506(b). (See definition of interest compensation in Sec.
229.2(oo).)
H. 229.34(i) Indemnity Amounts
1. This paragraph adopts for the amount of the indemnities
provided for in Sec. 229.34(b) 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).
I. 229.34(j) Tender of Defense
1. This paragraph adopts for this regulation the vouching-in
provisions of UCC 3-119.
J. 229.34(k) Notice of Claim
1. This paragraph adopts the notice provisions of UCC sections
4-207(d) and 4-208(e). 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. A bank must indorse paper checks in accordance with ANS
X9.100-111. At the time a reconverting bank creates a substitute
check it must apply indorsements to the check in accordance with ANS
X9.100-140. For electronic checks, banks must apply indorsements 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 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
[[Page 6729]]
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(b) 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(b). (See Sec. 229.33(b)
and commentary thereto.)
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, 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, checks will be handled more efficiently if
depositary banks design indorsement stamps so that the nine-digit
routing number avoids pre-existing matter on the back of the check,
for example, a carbon band. 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
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 the
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 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
timely notice of nonpayment, 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(g) and
229.32(e) (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 4-213 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(d), and 229.36(d) 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(g).)
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 depositary
[[Page 6730]]
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 accepting paper checks under Sec. 229.33(b)). 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.
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 item 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 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 of a
number of legal decisions that the processing center acts as the
agent of the paying bank to accept presentment and to begin the time
for processing of the check. (See also UCC 4-204(c).) If a bank
designates different locations for the presentment of forward
collection checks bearing different routing numbers, for purposes of
this paragraph it requests presentment of checks bearing a
particular routing number only at the location designated for
receipt of forward collection checks bearing that routing number.
b. If the check specifies the name and address of a branch or
head office, or other location (such as a processing center), the
check may be delivered to that office or other location. If the
address is too general to identify a particular office, delivery may
be made at any office consistent with the address. For example, if
the address is ``San Francisco, California,'' each office in San
Francisco must accept presentment. The designation of an address on
the check generally is in the control of the paying bank.
c. i. Delivery 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. 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 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 the checks by more specific branch addresses that might be
printed on the checks, and to deliver the checks to each branch. A
collecting bank normally would deliver all checks to one location.
In cases where checks are delivered to a branch other than the
branch on which they may be drawn, computer and courier
communication among branches should permit the paying bank to
determine quickly whether to pay the check.
d. If the check specifies the name of the paying bank but no
address, the bank must accept delivery at any office. Where delivery
is made by a person other than a bank, or where the routing number
is not readable, delivery will be made based on the name and address
of the paying bank on the check. If there is no address, delivery
may be made at any office of the paying bank. This provision is
consistent with 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.
3. 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) Issuance of Payable Through Checks
E. 229.36(e) [Reserved]
F. 229.36(f) Same-Day Settlement
1. Section 229.36(d) 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 check on the
same day the check is presented in order to avail itself of the
ability to return the check on its next banking day under UCC 4-301
and 4-302. This paragraph does not apply to checks presented for
immediate payment over the counter. Settling for a check under this
paragraph does not constitute final payment of the check under the
UCC. This paragraph does not supersede or limit the rules governing
collection and return of checks through Federal Reserve Banks that
are contained in subpart A of Regulation J (12 CFR part 210).
2. Presentment requirements
a. Location and time
i. For presented checks to qualify for mandatory same-day
settlement, information accompanying the checks must indicate that
presentment is being made under this paragraph--e.g. ``these checks
are being presented for same-day settlement''--and
[[Page 6731]]
must include a demand for payment of the total amount of the checks
together with appropriate payment instructions in order to enable
the paying bank to discharge its settlement responsibilities under
this paragraph. In addition, the check or checks must be presented
at a location designated by the paying bank for receipt of checks
for same-day settlement by 8:00 a.m. local time of that location.
The designated presentment location must be a location at which the
paying bank would be considered to have received a check under Sec.
229.36(b). The paying bank may not designate a location solely for
presentment of checks subject to settlement under this paragraph; by
designating a location for the purposes of Sec. 229.36(d), the
paying bank agrees to accept 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 for same-day settlement at any
location identified in Sec. 229.36(b), i.e., at an address of the
bank associated with the routing number on the check, at any branch
or head office if the bank is identified on the check by name
without address, or at a branch, head office, or other location
consistent with the name and address of the bank on the check if the
bank is identified on the check by name and address. A paying bank
and a presenting bank may agree that 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 check payable through a bank but payable
by another bank, this paragraph does not authorize direct
presentment to the bank by which the check is payable. The
requirements of same-day settlement under this paragraph would apply
to a payable-through or payable-at bank to which the check is sent
for payment or collection.
b. Reasonable delivery requirements. A check is considered
presented when it is delivered to and payment is demanded at a
location specified in paragraph (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 checks presented, such as use of a
night depository. If a presenting bank fails to follow reasonable
delivery requirements established by the paying bank, it runs the
risk that it will not have presented the checks. However, if no
reasonable delivery requirements are established or if the paying
bank does not make provisions for accepting delivery of checks
during its non-business hours, leaving the checks at the presentment
location constitutes effective presentment.
c. Sorting of checks. A paying bank may require that checks
presented to it for same-day settlement be sorted separately from
other forward collection checks it receives as a collecting bank or
returned checks it receives as a returning bank or depositary bank.
For example, if a bank provides correspondent check collection
services and receives unsorted checks from a respondent bank that
include checks for which it is the paying bank and that would
otherwise meet the requirements for same-day settlement under this
section, the collecting bank need not make settlement in accordance
with paragraph (d)(3). If the collecting bank receives sorted checks
from its respondent bank, consisting only of checks for which the
collecting bank is the paying bank and that meet the requirements
for same-day settlement under this paragraph, the collecting bank
may not charge a fee for handling those checks and must make
settlement in accordance with this paragraph.
3. Settlement
a. If a bank presents a check in accordance with the time and
location requirements for presentment under paragraph (d)(1), the
paying bank either must settle for the check on the business day it
receives the check without charging a presentment fee or return the
check prior to 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). The
presenting bank may agree with the paying bank to accept settlement
in another form (e.g., credit to an account of the presenting bank
at the paying bank or debit to an account of the paying bank at the
presenting bank). The settlement must occur by the close of Fedwire
on the business day the check is received by the paying bank. Under
the provisions of Sec. 229.34(d), a settlement owed to a presenting
bank may be set off by adjustments for previous settlements with the
presenting bank. (See also Sec. 229.39(d).)
b. Checks that are presented after the 8 a.m. (local time of the
location at which the 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 checks as presented for same-day settlement on the next
business day in lieu of accepting settlement by cash or other means
on the business day the checks are presented to the paying bank.
Checks presented after the paying bank's cut-off hour or on non-
business days, but otherwise in accordance with this paragraph, are
considered presented for same-day settlement on the next business
day.
4. Closed Paying Bank
a. There may be certain business days that are not banking days
for the paying bank. Some paying banks may continue to settle for
checks presented on these days (e.g., by opening their back office
operations). In other cases, a paying bank may be unable to settle
for checks presented on a day it is closed. If the paying bank
closes on a business day and checks are presented to the paying bank
in accordance with paragraph (d)(1), the paying bank is accountable
for the checks unless it settles for or returns the checks by the
close of Fedwire on its next banking day. In addition, checks
presented on a business day on which the paying bank is closed are
considered received on the paying bank's next banking day for
purposes of the UCC midnight deadline (UCC 4-301 and 4-302).
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 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(d) or UCC 4-109(b).
5. Good faith. Under Sec. 229.38(a), both presenting banks and
paying banks are held to a standard of good faith, defined in 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 checks for
same-day settlement might not be considered good faith on the part
of the paying bank. Similarly, presenting a large volume of checks
without prior notice could be viewed as not meeting reasonable
commercial standards of fair dealing and therefore may not
constitute presentment in good faith. In addition, if banks, in the
general course of business, regularly agree to certain practices
related to same-day settlement, it might not be considered
consistent with reasonable commercial standards of fair dealing, and
therefore might not be considered good faith, for a bank to refuse
to agree to those practices if agreeing would not cause it harm.
6. 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
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 checks
presented under this paragraph is limited to a credit to an account
at a Federal Reserve Bank and that, for checks presented after the
deadline for same-day settlement and before the paying bank's cut-
off hour, the presenting bank may require settlement on the next
business day in accordance with this paragraph rather than accept
settlement on the business day of presentment by cash.
c. Section 4-301(a), in that, to preserve the ability to
exercise deferred posting, the time limit specified in that section
for settlement or return by a paying bank on the banking day a check
is received is superseded by the requirement to settle for checks
presented under this paragraph by the close of Fedwire.
d. Section 4-302(a), in that, to avoid accountability, the time
limit specified in that section for settlement or return by a paying
bank on the banking day a check is received is superseded by the
requirement to
[[Page 6732]]
settle for checks presented under this paragraph by the close of
Fedwire.
* * * * *
XXIV. Section 229.38 Liability
Alternative 1 for 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(e), 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(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 sending a notice of
nonpayment because of difficulty in identifying the depositary bank.
Some examples will illustrate liability in such cases. In each
example, it is assumed that the returned check is received by the
depositary bank after it has made funds available to its customer,
that it may no longer recover the funds from its customer, and that
the inability to recover the funds from the customer is due to a
delay in receiving notice of nonpayment of the check contrary to the
standard established by Sec. 229.31(d).
Examples.
a. If a depositary bank fails to use the indorsement required by
this regulation, and this failure is caused by a failure to exercise
ordinary care, and if a paying bank or returning bank is delayed in
sending notice of nonpayment of the check because additional time is
required to identify the depositary bank or find its routing number,
the paying bank's liability to the depositary bank would be reduced
or eliminated.
b. If the depositary bank uses the indorsement required by this
regulation, but that indorsement is obscured by a subsequent
collecting bank's indorsement, and a paying bank or returning bank
is delayed in sending notice of nonpayment of the check because
additional time was required to identify the depositary bank or find
its routing number, the paying bank may not be liable to the
depositary bank because the delay was not due to the paying bank's
negligence. Nonetheless, the collecting bank may be liable to the
depositary bank to the extent that its negligence in indorsing the
check caused the paying bank's or returning bank's delay.
c. If a depositary bank accepts a check that has printing, a
carbon band, or other material on the back of the check that existed
at the time the check was issued, and the depositary bank's
indorsement is obscured by the printing, carbon band, or other
material, and a paying bank or returning bank is delayed in
returning the check because additional time was required to identify
the depositary bank, the returning bank may not be liable to the
depositary bank because the delay was not due to its negligence.
Nonetheless, the paying bank may be liable to the depositary bank to
the extent that the printing, carbon band, or other material caused
the delay.
C. 229.38(d) Responsibility for Certain Aspects of Checks
1. Responsibility for back of check. The indorsement standards
set forth in Sec. 229.35 are most effective if the back of the
check remains clear of other matter that may obscure bank
indorsements. Because banks' indorsements are usually applied by
automated systems without visual inspection of the back of the check
or the related electronic image, it is not always practical to avoid
pre-existing matter on the back of the check, for example, a carbon
band or printed, stamped, or written terms or notations on the back
of the check. Section 229.38(c) allocates responsibility for loss
resulting from a delay in a notice of nonpayment due to indorsements
that are not readable because of material on the back of the check.
2. The paying bank is responsible for loss resulting from a
delay in a notice of nonpayment caused by indorsements that are not
readable because of other material on the back of the check at the
time that it was issued. For example, the backs of some checks bear
pre-printed information or blacked out areas for various reasons.
The payee of the check may, therefore, place its indorsement or
other information in the area specified for the depositary bank
indorsement, thus making the depositary bank indorsement unreadable.
The depositary bank, by contrast, is responsible for a loss
resulting from a delay in return caused by the condition of the
check arising after its issuance until its acceptance by the
depositary bank that made the depositary bank's indorsement
illegible. Depositary banks and paying banks may shift these risks
to their customers by agreement. (See Sec. 229.37(a) and commentary
thereto.)
3. 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.
Example.
A depositary bank sprays its indorsement onto a business-sized
original check in a location specified in accordance with ANS
X9.100-111. The check's conversion to electronic form and subsequent
reconversion to paper form by the reconverting bank causes the
location of the depositary bank indorsement, now contained within
the image of the original check, to change such that it is closer to
the leading edge of the substitute check than it otherwise should
be. A subsequent collecting bank sprays its indorsement onto the
substitute check in accordance with ANS X9.100-111 and that location
happens to be on top of the shifted depositary bank indorsement. If
the check is
[[Page 6733]]
returned unpaid and the notice of nonpayment is not received within
the time requirements of Sec. 229.31(d) because of the illegibility
of the depositary bank indorsement, and the depositary bank incurs a
loss that it would not have incurred had the notice of nonpayment
been received in accordance with Sec. 229.31(d), the reconverting
bank bears the liability for that loss.
4. Responsibility under paragraph (c)(1) is treated as
negligence for comparative negligence purposes, and the contribution
to damages under paragraph (c)(1) is treated in the same way as the
degree of negligence under paragraph (b) of this section.
D. 229.38(d) Timeliness of Action
1. This paragraph excuses certain delays. It adopts the standard
of UCC 4-109(b).
E. 229.38(e) Exclusion
1. This paragraph provides that the civil liability and class
action provisions, particularly the punitive damage provisions of
sections 611(a) and (b), and the bona fide error provision of 611(c)
of the EFA Act (12 U.S.C. 4010(a), (b), and (c)) do not apply to
regulatory provisions adopted to improve the efficiency of the
payments mechanism. Allowing punitive damages for delays in the
return of checks where no actual damages are incurred would only
encourage litigation and provide little or no benefit to the check
collection system. In view of the provisions of paragraph (a), which
incorporate traditional bank collection standards based on
negligence, the provision on bona fide error is not included in
subpart C.
F. 229.38(f) Jurisdiction
1. The EFA Act confers subject matter jurisdiction on courts of
competent jurisdiction and provides a time limit for civil actions
for violations of this subpart.
G. 229.38(g) Reliance on Board Rulings
1. This provision shields banks from civil liability if they act
in good faith in reliance on any rule, regulation, or interpretation
of the Board, even if it were subsequently determined to be invalid.
Banks may rely on the commentary to this regulation, which is issued
as an official Board interpretation, as well as on the regulation
itself.
Alternative 2 for 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.
229.31, to a returning bank under Sec. 229.32, to a depositary bank
under Sec. 229.33, to a bank erroneously receiving a returned check
as depositary bank under Sec. 229.33(e), 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(c) Comparative Negligence
1. This paragraph establishes a ``pure'' comparative negligence
standard for liability under subpart C of this regulation.
c. If a depositary bank accepts a check that has printing, a
carbon band, or other material on the back of the check that existed
at the time the check was issued, and the depositary bank's
indorsement is obscured by the printing, carbon band, or other
material, and a paying bank or returning bank is delayed in
returning the check because additional time was required to identify
the depositary bank, the returning bank may not be liable to the
depositary bank because the delay was not due to its negligence.
Nonetheless, the paying bank may be liable to the depositary bank to
the extent that the printing, carbon band, or other material caused
the delay.
C. 229.38(d) Responsibility for Certain Aspects of Checks
1. Responsibility for back of check. The indorsement standards
set forth in Sec. 229.35 are most effective if the back of the
check remains clear of other matter that may obscure bank
indorsements. Because banks' indorsements are usually applied by
automated systems without visual inspection of the back of the check
or the related electronic image, it is not always practical to avoid
pre-existing matter on the back of the check, for example, a carbon
band or printed, stamped, or written terms or notations on the back
of the check.
2. ANS X9.100-140 provides that an image of an original check
must be reduced in size when placed on the first substitute check
associated with that original check. (The image thereafter would be
constant in size on any subsequent substitute check that might be
created.) Because of this size reduction, the location of an
indorsement, particularly a depositary bank indorsement, applied to
an original paper check likely will change when the first
reconverting bank creates a substitute check that contains that
indorsement within the image of the original paper check. If the
indorsement was applied to the original paper check in accordance
with 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.
3. Responsibility under paragraph (c)(1) is treated as
negligence for comparative negligence purposes, and the contribution
to damages under paragraph (c)(1) is treated in the same way as the
degree of negligence under paragraph (b) of this section.
D. 229.38(d) Timeliness of Action
1. This paragraph excuses certain delays. It adopts the standard
of UCC 4-109(b).
E. 229.38(e) Exclusion
1. This paragraph provides that the civil liability and class
action provisions, particularly the punitive damage provisions of
sections 611(a) and (b), and the bona fide error provision of 611(c)
of the EFA Act (12 U.S.C. 4010(a), (b), and (c)) do not apply to
regulatory provisions adopted to improve the efficiency of the
payments mechanism. Allowing punitive damages for delays in the
return of checks where no actual damages are incurred would only
encourage litigation and provide little or no benefit to the check
collection system. In view of the provisions of paragraph (a), which
incorporate traditional bank collection standards based on
negligence, the provision on bona fide error is not included in
subpart C.
F. 229.38(f) Jurisdiction
1. The EFA Act confers subject matter jurisdiction on courts of
competent jurisdiction and provides a time limit for civil actions
for violations of this subpart.
[[Page 6734]]
G. 229.38(g) Reliance on Board Rulings
1. This provision shields banks from civil liability if they act
in good faith in reliance on any rule, regulation, or interpretation
of the Board, even if it were subsequently determined to be invalid.
Banks may rely on the commentary to this regulation, which is issued
as an official Board interpretation, as well as on the regulation
itself.
XXV. Section 229.39 Insolvency of Bank
A. Introduction
1. These provisions cover situations where a bank becomes
insolvent during collection or return. 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 in the collection
process at which collection or return of an item 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 item 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), 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(d)(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
required before their operations are consolidated. To allow for this
adjustment period, the regulation provides that the merged banks may
be treated as separate banks for a period of up to one year after
the consummation of the transaction. The term merger transaction is
defined in Sec. 229.2(t). This rule affects the status of the
combined entity in a number of areas in this subpart. For example:
1. The paying bank's responsibility for notice of nonpayment
(Sec. 229.31).
2. Where the depositary bank must accept returned checks (Sec.
229.33(b)).
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 checks (Sec.
229.36(b)).
XXVII. Section 229.41 Relation to State Law
A. This section specifies that state law relating to the
collection of checks is preempted only to the extent that it is
inconsistent with this regulation. Thus, this regulation is not a
complete replacement for state laws relating to the collection or
return of checks.
XXVIII. Section 229.42 Exclusions
Alternative 1 for XXVIII. Section 229.42 Exclusions
Checks drawn on the United States Treasury, U.S. Postal Service
money orders, and checks drawn on states and units of general local
government that are presented directly to the state or unit of
general local government and that are not payable through or at a
bank are excluded from the coverage of the notice-of-nonpayment and
same-day settlement requirements of subpart C of this part. Other
provisions of this subpart continue to apply to the checks. This
exclusion does not apply to checks drawn by the U.S. government on
banks.
Alternative 2 for XXVIII. Section 229.42 Exclusions
A. Checks drawn on the United States Treasury, U.S. Postal
Service money orders, and checks drawn on states and units of
general local government that are presented directly to the state or
unit of general local government and that are not payable through or
at a bank are excluded from the coverage of the same-day settlement
requirements of subpart C of this part. Other provisions of this
subpart continue to apply to the checks. This exclusion does not
apply to checks drawn by the U.S. government on banks.
XXIX. Section 229.43 Checks Payable in Guam, American Samoa, and
the Northern Mariana Islands
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.
Alternative 1 for Paragraph B
B. 229.43(b) Rules Applicable to Pacific Island Checks
1. When a bank handles a Pacific island check as if it were a
check as defined in Sec. 229.2(k), the bank is subject to certain
provisions of 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(b) with respect to its application
to notices of nonpayment, Sec. 229.33(c) (acceptance of oral
notices of nonpayment), and Sec. 229.33(g) (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(d) (regarding time and manner of
settlement for returned checks) do not apply, because the
[[Page 6735]]
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(d) apply.
The depositary bank is not subject to the provisions in Sec.
229.33(b) with respect to notices of nonpayment for Pacific island
checks, but is subject to Sec. 229.33(b) with respect to 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(d)(2) regarding
accurate cash letter totals and the encoding warranty in Sec.
229.34(d)(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(e). 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(f), and
the presentment warranties in Sec. 229.34(c)(1) and (d)(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(d), 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.
Alternative 2 for Paragraph B
B. 229.43(b) Rules Applicable to Pacific Island Checks
1. When a bank handles a Pacific island check as if it were a
check as defined in Sec. 229.2(k), the bank is subject to certain
provisions of 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(b) with respect to its application
to notices of nonpayment, and Sec. 229.33(g) (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(d) (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(d) apply.
The depositary bank is not subject to the provisions in Sec.
229.33(b) with respect to notices of nonpayment for Pacific island
checks, but is subject to Sec. 229.33(b) with respect to 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(d)(2) regarding
accurate cash letter totals and the encoding warranty in Sec.
229.34(d)(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(e). 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(f), and
the presentment warranties in Sec. 229.34(c)(1) and (d)(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(d), 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
* * * * *
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 the 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 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
[[Page 6736]]
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, parties may, by
agreement, allocate liabilities associated with the exchange of
electronic check information. 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(g) and commentary thereto).
Example.
A bank that receives check information electronically and uses
it to create substitute checks is the reconverting bank and, when it
transfers, presents, or returns that substitute check, becomes the
first warrantor. However, that bank may protect itself by including
in its agreement with the sending bank provisions that specify the
sending bank's warranties and responsibilities to the receiving
bank, particularly with respect to the accuracy of the check image
and check data transmitted under the agreement.
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 section 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 section
229.34(a)(1)(ii).)
Example.
A nonbank depositor truncates a check and in lieu of the check
sends an electronic check 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, 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(g) 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
[[Page 6737]]
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)
related to 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 section
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 amount loss attributable to the indemnified
person's negligence or bad faith. This comparative-negligence
standard is intended to allocate liability in the same manner as the
comparative-negligence provision of section 229.38(b).
* * * * *
XXXIII. Section 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 (e),
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, December 11, 2013.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2013-30024 Filed 2-3-14; 8:45 am]
BILLING CODE 6210-01-P