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Reg CC Final Rule
Story ID:8415  
Date Posted:  June 15, 2017

by Amy Kleinschmit, VP Compliance 

The Federal Reserve Board (FRB) recently announced final amendments to the check collection and return provisions in Regulation CC (Availability of Funds and Collection of Checks) and also requested further public comment on an additional proposed amendment to Regulation CC's liability provisions. Back in 2011 the FRB had issued their proposed rule. Based on comments received they revised their proposal in 2014 and reissued it for comments - so this is one of those rules we knew was coming, but thought it would have been a while ago.

The FRB is not amending subpart B of Regulation CC at this time – specifically, Availability of Funds and Disclosure of Funds Availability Policies. Section 1086 of the Dodd-Frank Act amended the EFA Act to make the FRB’s authority for the EFA Act’s provisions implemented in subpart B joint with the Consumer Financial Protection Bureau (CFPB).
The final rule can be found here, and is effective July 1, 2018.
This final rule updates subparts A, C, and D of Regulation CC, Availability of Funds and Collection of Checks (12 CFR part 229), which implements the Expedited Funds Availability Act of 1987 (EFA Act), the Check Clearing for the 21st Century Act of 2003 (Check 21 Act), and the official staff commentary to the regulation to reflect the evolution of the nation's check collection system from one that is largely paper-based to one that is virtually all electronic. The amendments create a framework for electronic check collection and return and create new warranties for electronic checks, which will result in a consistent warranty chain regardless of the check's form. As with existing rules for paper checks, the parties may, by mutual agreement, vary the effect of the amendments' provisions as they apply to electronic checks and electronic returned checks. The final amendments also modify the expeditious-return and notice of nonpayment requirements to create incentives for electronic presentment and return.

To summarize some of the changes under this final rule, the final rule modifies collection of check rules. Under this rule, all returned checks, both paper and electronic, are subject to a modified version of the “two-day test,” meaning that they must be returned in an expeditious manner, such that the check would normally be received by the depositary bank not later than 2 p.m. (local time of the depositary bank) on the second business day following the banking day on which the check was presented to the paying bank. The final rule also added a new section that prevents a depositary bank from asserting a claim against a paying bank or returning bank for failure to return a check in an expeditious manner unless the depositary bank has arrangements in place such that the paying bank or returning bank could return the check to the depositary bank electronically, directly or indirectly, through commercially reasonable means.

In addition, if a paying bank determines not to pay a check in the amount of $5,000 or more (increased from $2,500), it must provide a notice of nonpayment such that the notice would normally be received by the depositary bank not later than 2 p.m. (local time of the depositary bank) on the second business day following the banking day on which the check was presented to the paying bank. The Federal Reserve Board revised the content of the notice of nonpayment.

Similar to the notice of nonpayment noted above, the final rule revised the notice in lieu of return with clarification that the account number of the depositing customer, the branch name or number of the depositary bank from its indorsement, and the name of the paying bank is not required. The final rule also revised the commentary to clarify examples of when notice in lieu of return is permissible.

With regard to remote deposit capture, the final rule also added a new indemnity. The Federal Reserve Board proposed to add a new indemnity for remote deposit capture that would indemnify a depositary bank that received a deposit of an original paper check that was returned unpaid because the check was previously deposited using a remote deposit capture service and paid. Commenters expressed concern that as proposed, the indemnity would deter financial institutions from offering remote deposit capture service, thereby inhibiting its growth. Many of these commenters believed that the indemnity should not apply to checks bearing a restrictive indorsement.
The Board believes that the indemnity places appropriate incentives on the parties best positioned to prevent multiple deposits of the same item and has adopted the proposed indemnity. Based on comments received, the Board has added an exception to the indemnity that would prevent an indemnified bank from making an indemnity claim if it accepted an original check containing a restrictive indorsement that is inconsistent with the means of deposit, such as “for mobile deposit only.”
Effective July 1, 2018, section 229.34(f) will be revised to Remote deposit capture indemnity. As explained in the commentary to this revised section, “This indemnity provides for a depositary bank’s potential liability when it permits a customer to deposit checks by remote deposit capture (i.e., to truncate checks and deposit an electronic image of the original check instead of the original check). Because the depositary bank’s customer retains the original check, that customer might, intentionally or mistakenly, deposit the original check in another depositary bank. The depositary bank that accepts the original check, in turn, may make funds available to the customer before it learns that the check is being returned unpaid and, in some cases, may be unable to recover the funds from its customer. Section 229.34(f) provides the depositary bank that accepts the original check for deposit with a claim against the depositary bank that did not receive the original check because it permitted its customer to truncate it, received settlement or other consideration for the check, and did not receive a return of the check unpaid. This claim exists only if the check is returned to the depositary bank that accepted the original check due to the fact that the check had already been paid.”
As noted above, a depositary bank may not make an indemnity claim under this section paragraph if the original check it accepted for deposit bore a restrictive indorsement inconsistent with the means of deposit.
The final rule also addresses electronically-created items. In the final rule, the Board has adopted two additional indemnities along with the previously proposed indemnity for electronically-created items. The newly adopted indemnities are for losses caused by the fact that (1) the person on whose account the electronically-created item is drawn did not authorize the issuance of the item in the amount stated on the item or to the payee stated on the item, and (2) a person receives a transfer, presentment, or return of, or otherwise is charged for an electronically-created item such that the person is asked to make payment based on an item or check it has already paid. Each bank that transfers or presents an electronically-created item and receives settlement indemnifies the transferee bank, any subsequent collecting bank, the paying bank, and any subsequent returning bank.
The final rules adds a cap on the indemnity amounts for electronically-created items and remote deposit capture. The amount of the indemnity for electronically-created items and remote deposit capture 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). The final rule also adopted provisions that if the a loss for electronically-created items and remote deposit capture results in whole or in part from the indemnified bank’s negligence or failure to act in good faith, then the indemnity amount shall be reduced in proportion to the amount of negligence or bad faith attributable to the indemnified bank. However, this provision does not affects rights of a person under the UCC or other state and/or federal laws.