2013 Regulation CC Proposal (Check Collection and Return Rules)

Executive Summary

 
Executive Summary

•  The Federal Reserve Board (Fed) recently issued proposed changes to Regulation CC (Reg CC), which applies to the availability of funds and collection of checks. These proposed changes are intended to address comments received on the Fed’s 2011 Reg CC proposal (2011 proposal), which has not been finalized.

•  Specifically, the Fed is proposing two alternative approaches to modify the current expeditious-return and notice of nonpayment requirements to encourage institutions that currently request paper returns to transition to electronic returns. Also, the proposal would retain, without change, the current same-day settlement rule for paper checks, and would make other changes related to electronic checks and returns, electronically-created items that are not derived from paper checks (i.e., electronic payment orders (EPOs)), remote deposit capture (RDC), and other related items.

•  CUNA is interested in how these proposed changes would affect credit union operations, check and payment processing, and payment providers.

•  Comments for the proposed rules are due to the Fed by May 2, 2014; please submit your comments to CUNA by March 24, 2014.

•  If you have any questions or comments, please contact CUNA Assistant General Counsel for Regulatory Research Dennis Tsang at dtsang@cuna.com.

•  For further details, please see the Fed’s 2013 proposed Reg CC changes.


Summary of Proposed Changes

Return Requirements – The proposal provides two alternative frameworks for return requirements to encourage institutions that currently request paper returns to transition to electronic returns:

              •   Proposed Alternative 1: The expeditious-return requirement currently imposed on paying financial institutions and returning financial institutions for returned checks would be eliminated. Also, there would be a notice-of-nonpayment requirement only for paying financial institutions that send a paper return.

              •   Proposed Alternative 2 : The current expeditious-return requirement— using the current two-day test— would be retained only for checks returned to a depositary financial institution electronically via another financial institution, but the notice-of-nonpayment requirement would be eliminated for all types of checks.

Currently, under Reg CC’s expeditious-return provisions, a paying financial institution that determines not to pay a check must return the check in an expeditious manner, under the “two-day test” or “forward-collection test.” To meet the current two-day test, a paying financial institution must send a returned check such that the check would normally be received by the depositary financial institution no later than 4:00 p.m. (local time of depositary financial institution) on the second business day following the banking day on which the check was presented to the paying institution. To meet the current forward-collection test, a paying financial institution must send the returned check in a manner that a similarly situated financial institution would send a check of similar amount as the returned check, drawn on the depositary institution, and deposited for forward collection in the similarly situated institution by noon on the banking day following the banking day on which the check was presented to the paying institution. Reg CC also permits a paying institution to send a returned check either directly to the depositary institution or to any financial institution agreeing to handle the return expeditiously.

In addition, Reg CC currently requires a paying financial institution that determines not to pay a check in the amount of $2,500 or more to provide a notice of nonpayment to the depositary financial institution such that the notice is received by the depositary institution by 4:00 p.m. (local time of the depositary financial institution) on the second business day following the banking day on which the check was presented. Return of the check itself would also satisfy the notice of nonpayment if the return meets the timeframe requirement for a notice of nonpayment.

Remote Deposit Capture - Remote deposit capture is where a financial institution permits its member or customer to make a deposit by sending an electronic image of the front and back of a check. For remote deposit capture, the proposal would allow a depositary financial institution that accepts deposit of an original check to recover directly from a financial institution that permitted its member or customer to deposit the check through remote deposit capture. The Fed believes the depositary financial institution that accepts an original paper check should not bear the loss if that check has been deposited multiple times. The proposal also provides for a new indemnity relating to remote deposit capture to cover depositary financial institutions that receive deposit of an original paper check returned unpaid, because it was previously deposited (and paid) using remote deposit capture.

Same Day Settlement for Electronic Checks - Also, the proposal would retain, without change, Reg CC’s current same-day settlement rule for paper checks. Section 229.36(f) of Reg CC currently requires a paying financial institution to provide same-day settlement for checks presented in accordance with reasonable delivery requirements established by the paying financial institution and presented at a location designated by the paying institution by 8 a.m. (local time of the paying institution) on a business day. The Fed no longer believes it is necessary to specify terms for electronic same-day settlement in Reg CC because almost all financial institutions currently use electronic check presentment and the terms of electronic presentment can be determined by agreement. The 2011 proposal would have incorporated electronic same-day settlement provisions into Reg CC.

Electronic Checks and Returns under Reg CC - Also, under the proposal, electronic checks and electronic returned checks that financial institutions exchange by agreement would be subject to the check collection and return provisions under Reg CC, unless otherwise agreed by the sending and receiving institutions. Currently, the check collection and return 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, because collection and return of electronic checks is governed by agreements between financial institutions. The proposal would apply Check-21-like warranties to electronic images and electronic information.

Electronically Created Items (Items Not Derived from Paper Checks) - Electronically-created items are electronic images that resemble images of the fronts and backs of paper checks but that were created electronically and not from, for example, scanning a paper check to create the electronic image. Electronically-created items may also be referred to as “electronic payment orders” or “EPOs.” The proposal would also require a financial institution sending an electronically-created item to indemnify subsequent transferees for losses caused by the fact the item was not derived from a paper check.

The proposal would add indemnities related to electronically-created items, rather than to expand existing § 229.34 warranties to those items. Proposed § 229.34(b) would provide that a financial institution that transfers an electronic image or electronic information not derived from a paper check (i.e., an electronically-created item) indemnifies each transferee financial institution, any subsequent collecting financial institution, the paying financial institution, and any subsequent returning financial institution against any loss, claim, or damage that results from the fact that the image or information was not derived from a paper check. An electronically-created item cannot be used to create a substitute check that meets the legal requirements of the Check 21 Act and Reg CC because an electronically-created item is not derived from a paper check. The indemnity in proposed § 229.34(b) would protect a financial institution 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.

Effective Date – The proposed effective date is six months following publication of a final rule.


Questions to Consider Regarding the Proposal
1. Return Requirements - Does your credit union support either Alternative 1 or 2, or another approach, for the proposed return requirement changes to encourage institutions that currently request paper returns to transition to electronic returns? Also, would eliminating the expeditious-return requirement result in a slower check-return process?
2. Remote Deposit Capture – Does your credit union agree with the proposed change to permit a depositary financial institution that accepts deposit of an original check to recover directly from a financial institution that permitted its customer to deposit the check through remote deposit capture?
3. Remote Deposit Capture – Also, do you support the new proposed indemnity relating to remote deposit capture that would cover depositary financial institutions that receive deposit of an original paper check returned unpaid because it was previously deposited (and paid) using a remote deposit capture service?
4. Same Day Settlement – Do you agree that Reg CC’s current same-day settlement rule for paper checks should remain unchanged and should not be extended to electronic checks? Do presenting financial institutions that generally use electronic check-collection methods still present checks in paper form to paying financial institutions?
5. Electronic Checks and Returns – Under the proposal, electronic checks and electronic returned checks that financial institutions exchange by agreement would also be subject to the check collection and return provisions under Reg CC, unless otherwise agreed by the sending and receiving institutions. Does your credit union agree with these proposed changes?
6. Electronically Created Items or Electronic Payment Orders (EPOs) – These items are electronic images that resemble images 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. Does your credit union agree with the proposed change to require a financial institution sending an electronically-created item to indemnify subsequent transferees for losses caused by the fact the item was not derived from a paper check? Any other comments on the treatment of electronically created items or EPOs?
7. Effective Date – Do you believe the proposed effective date of six months would be sufficient for your credit union to make the necessary changes to implement these proposed changes for Reg CC?
8. Any other concerns, comments, or suggestions with Reg CC?
9. (Optional) What is your credit union's asset size?
10. (Optional) Please provide information about yourself and your credit union.
Thank you for your input and time - CUNA Regulatory Advocacy Team