I. INTRODUCTION
The Federal Reserve Board (FRB) issued a final rule amending Regulation CC to specifically include electronic checks and electronic processing in the rule; seeks to expedite check processing and returns; and extends the regular Regulation CC warranties and indemnities to electronic and remotely-deposited checks. The final rule makes no changes to the funds availability requirements which are included in Subpart B of Regulation CC. The final rule became effective on July 1, 2018.
II. UPDATED DEFINITIONS
The final rule updates a number of definitions as part of the overall update to include electronic checks. Electronic checks are included under the definition of checks pursuant to the final rule except where the regulation specifies that it’s referring only to paper checks. Thus, when a requirement just says “checks”, that requirement will extend to both paper and electronic checks as of the effective date.
In addition, the definitions are amended to explain when an electronic check or image will be appropriate. For example, “sufficient copy” is updated to explain that while electronic copies are included in the rule, an electronic image of a check is not a “sufficient copy” unless a customer has agreed to receive that information electronically. Also, it’s important to note in the commentary to the definition of “electronically-created item”, that you can’t have a substitute check of an electronically created item because there was no paper item to begin with. In addition, if a bank needs to provide written information in subpart C, the final rule specifically states that it can be sent electronically if the receiving bank agrees.
III. EXPEDITIOUS RETURN REQUIREMENT
The “expeditious return” provisions are being revised to require all returned checks, including electronic checks, to be returned by 2 p.m. on the second business day following check presentment. The 2 p.m. deadline relates to the local time of the depositary bank and not the paying bank.
Under the final rule, a depositary bank may asset a claim against a paying bank or returning bank for failure to return a check in an expeditious manner only if the depositary bank has “commercially reasonable” means in place for allowing the paying bank or returning bank to return the check to the depositary bank electronically-either directly or indirectly. The burden of proof is on the depositary bank to show that the arrangement is commercially reasonable. The final rule does, however, specifically require acceptance of paper checks during the banking day at any location requested or at branches/main offices listed on the check.
The final rule also provides that if a paying bank determines not to pay a check in the amount of $5,000 or more (raised from the current $2,500 threshold), it must provide a notice of nonpayment such that the notice would normally be received by the depositary bank by 2 p.m. (rather than the current deadline of 4 p.m.) on the second business day following the banking day on which the check was presented to the paying bank.
Check returns can be sent to the depositary bank and any other bank agreeing to handle the returned check. If the returning bank can’t identify the bank of first deposit, the check can be returned to any bank that handed the forward collection but the returning bank does have to give notice that the paying bank couldn’t determine who the bank of first deposit was.
IV. WARRANTIES AND INDEMNITIES
Currently, Regulation CC contains existing paper-check warranties-returned check warranties; notice of nonpayment warranties; settlement amount, encoding, and offset warranties; and transfer and presentment warranties-as well as Check 21-like 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. Each of these warranties are extended to electronic returned checks under the trial rule. As with the warranties for paper checks, these new warranties for electronic returned checks may be varied by agreement of the exchanging banks.
The final rule also extends Check 21-like warranties to remotely deposited checks (RDC). A depositary bank that receives a deposit of an original paper check that was returned unpaid because the check was previously deposited via RDC would be indemnified unless the original check deposited with the depositary bank contains a restrictive endorsement consistent with the means of deposit (e.g., “for mobile deposit only”). In a shift from existing allocation of liability, this change to Regulation CC now places the risk of multiple deposits of the same item on the financial institution accepting the item through RDC. Commentary to the new rule indicates that a depositary bank can, by agreement, allocate liability for loss incurred from subsequent deposit of the original check to the bank’s customer that deposited the item through RDC.