The Federal Reserve Board has amended Reg. CC—Availability of Funds and Collection of Checks (12 CFR Part 229) in an effort to encourage banks to collect and return checks electronically. Among the changes is the creation of new warranties and indemnities covering checks that are processed electronically. The amendments will take effect July 1, 2018.
The Fed says that the interbank clearing process has become almost entirely electronic. By the beginning of the year, the Federal Reserve Banks received nearly all checks electronically from more than 99 percent of routing numbers and presented nearly all checks to 99.76 percent of routing numbers. However, some returns still rely on paper—the FRBanks still returned paper checks to about 7 percent of routing numbers.
The final rule amends three of Reg. CC’s four Subparts: Subpart A—General; Subpart C—Collection of Checks; and Subpart D—Substitute Checks. Subpart B—Availability of Funds and Disclosure of Funds Availability Requirements is not affected.
The final rule separates the amendment effects into three categories:
- return requirements;
- same-day settlement; and
- electronic check collection and return framework.
Return requirements. Currently, a bank that decides not to pay a check must return that check expeditiously. This means satisfying one of two standards:
- the "two-day test," under which a paying bank must return the check in a way that the check normally would be received by the depository bank no later than 4:00 p.m. on the second business day after the banking day on which the check was presented to the paying bank; or
- the "forward-collection test," under which a paying bank must return the check in the way a similarly-situated bank would return a check for a similar amount, drawn on the same depository bank, and deposited for forward collection in that similarly-situated bank by noon on the banking day following the banking day on which the check was presented to the paying bank.
In addition, if the check is for $2,500 or more, the paying bank must notify the depository bank that the check will not be paid in a way that meets the two-day test.
Under the final rule, all checks must be returned in a way that satisfies what the Fed calls a modified version of the two-day test. Also, an expeditious return liability restriction is being added. A paying or returning bank will be liable to a depository bank for failing to return a check expeditiously only if the depository bank has made arrangements to accept electronic returns in a commercially reasonable manner. These changes apply to all checks, whether they are returned electronically or by paper.
The notice requirement for larger checks is being changed in two ways. First, the threshold is being doubled to $5,000. Second, the deadline for the notice is being advanced to 2:00 p.m., rather than 4:00 p.m.
Same-day settlements. Saying that electronic presentment terms are better set by agreements between banks, the Fed is not changing the same-day settlement rule set by Reg. CC. This means that paying banks still will be required to provide same-day settlement for checks that are presented by 8:00 a.m. on a banking day in a way that meets the bank’s reasonable delivery requirements. Presentment fees may not be charged if those delivery requirements are satisfied.
According to the Fed, maintaining the current rule for paper checks while allowing banks to negotiate rules for electronic checks will be "a valuable incentive" for banks to work out electronic settlement agreements.
Check collection and return. Since Reg. CC, Subpart C—Collection of Checks currently applies only to paper checks, its warranty provisions do not apply to electronic information, the notice says. Agreements between banks govern this. The amendments will establish a "regulatory framework" for the collection and return of electronic images and information.
The amended Subpart C warranties will cover electronic checks just as if they were paper checks, unless Reg. CC’s provisions have been superseded by an agreement between the sending and receiving banks. Also, warranties like those that cover paper checks and substitute checks created under the Check 21 Act will cover electronic and electronic returned checks.
In addition, new warranties are being created for "electronically-created items"—electronic check-like instruments that never existed in paper form at all. A bank that transfers such an item will be required to indemnify all "down-stream" banks against any loss that results from the fact that no paper check existed. Liability will be limited to the amount of the indemnified bank’s loss, plus interest and costs such as attorney fees.
Indemnification also will be required if: the item was unauthorized by the account-holder; a transferee bank pays an item that previously was paid; or a paper check is returned because it previously was deposited by remote deposit capture.
Proposed further amendment. In addition to adopting the amendments, the Fed is proposing to amend the current Reg. CC liability provisions that apply to a substitute or electronic check when an original paper check is unavailable. Under the proposal, if there is a dispute about whether a check is a forgery or has been altered, an alteration would be presumed if the dispute concerns:
- the amount of the check;
- the name of the payee; or
- whether the substitute or electronic check was derived from a forged original check.
According to the Fed, the increasing use of electronic or substitute checks means that original paper checks rarely are available for inspection today.
The proposal will be subject to a 60-day comment period after it is published in the Federal Register.
MainStory: TopStory BankingOperations ChecksElectronicTransfers FederalReserveSystem
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