I. INTRODUCTION
Regulation CC allows the direct return of unpaid checks covered under the regulation to the depositary bank by either the payor bank or a returning bank (i.e., a bank that has agreed to handle the returned check). An alternative procedure to direct return is “direct notification” (i.e., direct notice of nonpayment to the depositary bank) whereby the unpaid check itself may be simultaneously returned through normal banking channels or may be directly returned to the depositary bank.
Historically, direct notification was mandatory, with respect to checks of $2,500 or more if handled for collection through a Federal Reserve Bank, when Regulation J was amended in 1985. Regulation CC replaced the Regulation J provision. The direct notice of nonpayment requirement applies to any return of an unpaid check of $2,500 or more that is coveredunder the regulation. (Note: the provisions do not cover checks drawn on the U.S. Treasury, postal money orders or checks drawn on a state or local government or governmental unit not payable through or at a bank.) See, 12 C.F.R. § 229.42.
II. NOTICE PROVISIONS
Under 12 C.F.R. § 229.33, the notice of direct return is given so that it will be received by the depositary bank by 4:00 p.m. (local time) on the second business day following the banking day on which the check was presented to the payor (paying) bank. The notice may be given by any “reasonable means” (e.g., sending the returned check itself; sending a copy of the check; use of telephone, Fedwire, telex or telegraph). Note that the check itself may be returned directly to the depositary bank. This may serve as notice of nonpayment if the check is received by the deadline described above. See, 12 C.F.R. § 229.33. Any notice should not be sent until the payor bank decides not to pay the check.
The notice must include the following information:
Other useful identifying information regarding the check and the customer may be included. In a written notice, the name and routing number of the depositary bank, taken from its indorsement, must be included. According to 12 C.F.R. § 229.33(b), if the payor bank cannot identify the depositary bank, the notice can be sent to the earliest identifiable collecting bank indicating that the notice is not being sent to the depositary bank.
A notice may be telephoned to the depositary bank at the location where such bank receives returned checks or nonpayment notices, sent via telegraph to the telegraph number of such bank’s return-check unit as indicated on its indorsement or a general purpose telephone or telegraph number as indicated, or delivered to any other number that the bank holds out for receipt of nonpayment notices. See, 12 C.F.R. § 229.33(c).
When the depositary bank receives a returned check or notice of nonpayment, it must deliver the notice to its customer by midnight of the bank day following the banking day of receiving the returned check or notice (i.e., midnight deadline) or within a longer reasonable time. Failure to give the customer timely notice of nonpayment could expose the depositary bank to liability for customer incurred damages. See, 12 C.F.R. § 229.339(d). Note that the expedited return rules do not apply to a return to a depositary bank without accounts.
The notice of nonpayment that applies to the nonpayment of checks of $2,500 or more is not the same as the written notice in lieu of return of the check (allowed elsewhere in Regulation CC). It appears that a notice in lieu of return may also satisfy the notice of nonpayment provisions if the check is $2,500 or more and it (the notice) contains all of the requirements for both notices.
III. CONCLUSION
To minimize potential liability to a depositary bank that allows its customer to withdraw from the customer’s account, a payor bank should exercise care in sending its notice so that the notice is timely, specific, precise and certain, in compliance with the notice provisions of Regulation CC and given to the proper responsible person at the depositary bank.