1. Regulation CC – Availability of Funds and Collection of Checks
Understanding the Proposed Changes
Crystal Sides
Senior Vice President
Enterprise Risk Officer
Lisa Reynolds
Senior Vice President
Operations Officer
April 30, 2014
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2. Data Source 2014: Electronic Check Clearing House Organization
Disclaimer
Bankers’ Bank Northeast (BBN) has summarized the proposed changes to Regulation CC – Availability of Funds and Collection of Checks based upon the most current information available.
BBN will continue to monitor FRB communications and provide input to assist clients with the implementation of this Proposal.
*Please note: Terminology used in this presentation is taken directly from the Federal Regulations.
Data Source 2014: Electronic Check Clearing House Organization
This document is private, confidential, and proprietary
ECCHO® (Electronic Check Clearing House Organization™) is a not-for-profit, mutual benefit, national clearinghouse that is 100 percent owned by its member institutions. Any depository financial institution, regardless of its size, is eligible for membership i ECCHO. ECCHO was created in 1990 by banks as a cooperative venture to encourage the use of electronics to enhance the check collection system. In the early years the focus was on electronic check presentment (ECP). Since the passage of Check Clearing for the 21st Century Act (Check 21) ECCHO’s primary focus is now the use of image exchange to improve the efficiency of check payments.
ECCHO’s primary activities are 1) rules development and maintenance, 2) industry education and 3) industry advocacy. It is in this regard that they have allowed us to utilize their various data sources to construct this presentation for you today – so our thanks to ECCHO!
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3. Session Overview Background on Regulation CC and Federal Proposal
Electronic Check and Electronic Return Check
Definitions
Warranties
Timing of Returns for Paying Banks and Returning Banks
Alternatives 1 and 2
Exceptions and Considerations
New Indemnifications
Item Not Derived from Paper Check
Truncating Bank
Other Issues For Comment
Definition of RCC
Refer to Maker
Same Day Settlement
Presumption of Alteration
Rejected Deposit
Just a high level overview of topics we’re covering today, starting off with a big picture discussion of what is going on in general with this proposal and the check image exchange environment that is driving regulatory change. Start looking at various provisions of the proposal including new definitions around electronic check items and the fed’s proposal for new expeditious return tests which has been an issue that the industry has been looking at for over 3 years now. Then we’re going to look at new unique issues that the fed is proposing to address in the context of electronic check exchange including issues of relating truncating banks that are taking remote deposits check items from their customers. Lastly, we’ll spend just a few minutes on some other issues contained within the Fed’s proposal relating to remotely created checks, a discussion on refer to maker reason code and some other miscellaneous issues contained within the proposal.
Goal for today – Walk away with key bullet points and an understanding of some issues that may need to be reviewed at your bank - Homework
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4. Background Federal Reserve now has just one check processing site
All checks “local” for expeditious return timeframes under Regulation CC
Electronic return almost always meets this return test
Federal Reserve is seeking to address how paying banks can meet this expeditious return test for BOFD that cannot be reached by electronic return
New request for comment on changes to Regulation CC issued December 12, 2013 with comments due May 2,2014
Includes comments from 2011 proposal
Before we dig deep into the detail, I thought it might be helpful to provide a high level overview of what is going on in the industry and at the federal reserve that is driving this regulatory proposal. Reg CC is a fed reserve regulation which establishes various elements of the interbank check exchange process. Its primary purpose is to ensure expeditious return of the item and thereby reduce the risk to banks and their customers of unpaid items. The Reg has not been substantially rewritten since the revision in 2004 which implemented the Check 21 Act. In those 10 years since the revision to Reg CC the industry has moved to a full image exchange environment in the forward and return side. The Federal Reserve is recognizing the image exchange environment and how checks are now collected, that it is time to change how the regulation governs check exchange. The primary drover from the FRB is the fact that the FRB has moved to a single check processing site for the entire country sites, today- 1 – paper Cleveland and Atlanta electronic check processing. As a result of this, under current Reg CC provisions, all checks in the US are viewed as local checks and subject to the local check availability when they’re deposited by their customer and subject to the local test for expeditious return under Reg CC. As a practical matter, banks today are returning checks straight through the electronic channel and meeting the expeditious return test today and the FRB recognizes that within the proposal. However there are still a number of paper returns being generated and there is no guarantee that the expeditious return is actually being met thereby exposing paying banks and returning banks to a risk of a late return claim under Reg CC. The Fed is proposing two alternatives for handling electronic and paper returns within the proposal. Both alternatives are intended to encourage electronic returns.
Since 2011, fed has solicited industry views on how to come up with a new expeditious return test proposal which ECCHO, ICBA, ABA, commented on FRB proposed approaches to expeditious return. FRB reviewed comments and now has released a new proposal issued in December with comments due in May New proposal contains two new options for expeditious return and we will look in more detail at those later today. In addition to this concern of expeditious return, the FED is using this proposal to update provisions within Reg CC to expressly recognize electronic images across the exchange channel. Proposal does not provide all rules for image exchange, rather it recognizes in its proposal electronic agreements, operating circulars, will still be needed to establish details for how electronic elements relative to image exchange and leaving varying detail to clearing rules.
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5. Background Current Regulation CC Overview Subpart A – definitions
Subpart B – funds-availability provisions
Implements the Expedited Funds Availability Act of 1987
Due to Dodd-Frank now joint jurisdiction with CFPB
Subpart C – collection and return of checks provisions
Established expeditious return requirement
Subpart D – substitute check provisions
Implements Check 21 Act of 2003
Reg CC has 4 parts. First – Definitions – which contain minor changes in the proposal. Subpart b – funds availability provisions which govern when a bank must make funds available to a deposition from a check deposit. Those provisions are not discussed in this proposal. There is a pending proposal with CFPB and FRB pending which is expected to be released later this year. Subpart B was transferred to CFPB with joint jurisdiction with the FRB under the Dodd Frank Act. No changes. Subpart C governs the collection and return of checks, which we will discuss today. Subpart D deals with substitute check collection and there were only minor changes to that.
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6. Background Current Regulation CC does not address:
Exchange or return of electronic images of paper checks
Electronic items not derived from paper check (EPOs)
Responsibility for duplication in Remote Deposit Capture
It is important to note what the current Regulation CC does not address: specifically, reg CC does not address electronic images, or electronically created items, EPO electronic payment order, or duplication of rdc – not discussed in current reg and is addressed in certain sections with in the proposal, which we will discuss later.
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7. Electronic Check Definitions
Electronic image of check or electronic information related to check that:
- Depositor/Member sends to receiving bank pursuant to agreement
Electronic Returned Check
Electronic image of returned check or electronic information related to returned check that:
Depositing institution sends to receiving institution
pursuant to agreement
According to definitions within the proposal, these check images must be derived from paper checks
Within Subpart A, there are minor changes to the definitions. Two most important aspects of the definition changes are these two new definitions – an electronic check and an electronic returned check. An electronic check is an image of a check of the electronic or the electronic info related to a check. These can be created by a bank and send to a receiving bank pursuant to an agreement. Electronic information is typically micr date. In the same definition, electronic returned check, this definition mirrors nicely into electronic check definition the only difference is that is returned. According to these definitions, the check must have been an original piece of paper in order to conform to the definitions.
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8. Electronic Check Definitions
Electronic checks and electronic returned checks subject to this part (Subpart C) as if checks or returned checks
All obligations and requirements of Regulation CC Subpart C that apply generally to checks will apply to electronic checks
For example, Regulation CC warranties on encoding and RCCs apply to electronic checks directly
A bank does not have the right under Regulation CC to send electronic checks or electronic returned checks to any other bank without agreements
Agreement to send and receive check images is required
Most interesting part of new definitions is that the FRB is applying electronic checks and electronic returned checks to be subject to subpart C as if they were checks or returned checks. Subpart C deals with returns, warranties.
PLEASE NOTE a bank does not have the right under Reg CC to send electronic checks or electronic returned checks to any other bank. This electronic exchange of check images is allowed by agreement. For example, many banks participate with the FED or BBN OnWe network for the exchange of checks- there must be an agreement in place to send and receive check images. For example, in order to participate in the BBN OnWe network of image exchange, our client banks must be a member of ECCHO which allows for image exchange.
HOMEWORK – ensure that you know how your financial institution exchanges checks, are there agreements in place with the Fed, are you a member of ECCHO? How do you receive your returned checks today? Are they paper? How do you return your checks today? As we get deeper into the proposal, you will notice that there are possible risks for working with paper.
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9. Electronic Check Warranties
Each bank that transfers or presents electronic check or electronic returned check and receives settlement or other consideration for it warrants:
Electronic image accurately represents all information on front and back of original check at time original check was truncated
Electronic information contains accurate account of all MICR line information required for substitute check and the amount of check
No double debit warranty
Reg CC proposal establishes a new set of warranties that will apply uniquely to the forward or return of electronic check image between two banks.
There are three elements to these warranties 1) electronic image accurately represents all of the information on the front of the original check (paper) at the time original check was truncated (that is turned into the image) 2) electronic info (data file with image) contains accurate account of all micr line into required for substitute check creation and the dollar amount of check. 3) no double debit to drawers account from an electronic or paper representation of the item. These warranties are similar to warranties under Check 21 that are provided for substitute check exchange. FRB is clearly trying to align reg CC with experience and expectation of banks as it is today in our electronic exchange world.
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10. Warranties Warranties made by sending bank:
For collection or presentment, to transferee bank, any subsequent collecting bank, paying bank and drawer
For return, to transferee returning bank, any subsequent returning bank, depositary bank and owner
Warranties extend to other banks and to the drawer/owner of check
Other warranties under Regulation CC also apply to electronic checks
RCC warranty, encoding warranty, etc.
The one interesting element of these warranties is that the warranties are not just made between the banks for example, on the sending side, the warranty extends all the way to the drawing customer – that is your account holder – customer that writes the check. On the return side, the return warranties flow and go to the benefit of the owner of the check – that would be the depositing customer. This is different in how Reg J works today. Most warranties only go between the two banks that are parties to the check exchange. This is a change.
HOMEWORK –The potential impact of this is that the banks should take a closer look at their deposit account agreements for depositing and drawing customers and they may need to vary the warranties that their customers are receiving in order to line them up with this proposed regulation. Absolutely, positively consult with your attorney!
In addition to these special warranties for Check images, as a result of the proposed revision, the current warranties under Reg CC for unauthorized RCC, encoding warranties, will apply to check images going forward under the proposal.
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11. Reg CC Definitions BOFD (Bank of First Deposit aka Depositary Bank):
The first institution to which a check is transferred - A check deposited in an account is deemed to be transferred to the bank holding the account into which the check is deposited.
Paying Bank:
The bank at which a check is payable and to which it is sent for payment or collection.
Collecting Bank:
Any bank handling a check for forward collection (the process by which
a bank sends a check to a collecting bank for settlement or to the paying
bank for payment.
Returning Bank:
A bank (other than the paying or depositary bank) handling a returned check or notice in
lieu of return.
BOFD
Paying Bank
Collecting Bank
Subpart C – Collection and Return Check Provisions
Returning Bank
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12. Reg CC Definitions, continued
Truncate:
To remove an original check from the forward collection or return process and send to a recipient, in lieu of such original check, a substitute check (a paper reproduction of an original check that contains an image of the front and back of the original check; bears a MICR line that is suitable for automated processing in the same manner as the original check).
Truncating Bank:
The bank that truncates the original check; or if a person other than a bank truncates the original check, the first bank that transfers, presents, or returns, in lieu of such original check, a substitute check or, information relating to the original check (including data taken from the MICR line of the original check or an electronic image of the original check).
Remotely Created Check:
A check that is not created by the paying bank and that does not bear a signature applied, or purported to be applied, by the person on whose account the check is drawn.
Truncating Bank
Truncate
Remotely Created Check
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13. Two Proposed Return Alternatives
Two alternatives for handling electronic and paper returns
Both are intended to encourage electronic returns
While electronic returns almost always meet expeditious return requirements, the Fed is seeking a suitable solution for paper returns
Under the proposal, there are two alternatives proposed for handling electronic and paper returns. Both alternatives are intended to encourage electronic returns. While electronic returns almost always meet expeditious return requirements, the Fed is seeking a suitable solution for paper returns.
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14. Return Alternative 1
Eliminates expeditious return for both Paying Bank and Returning Bank regardless of whether electronic or paper
Paying Bank remains subject to UCC midnight deadline for return
Returning Bank subject to requirement of ordinary care under UCC in handling return
Imposes Notice of Non-Payment requirement for any check
returned by Paying Bank in paper form, regardless of dollar
amount of returned paper check
Notice must be received by Depositary Bank by 2:00 pm (local time of the Depositary Bank) on the second business day after presentment
Current regulation has delivery time of 4:00 pm
Reference – bankers online expeditious return test.
In alternative 1 the FRB is proposing to eliminate expeditious return test all together for paying bank and returning bank. The general idea, the fed is saying, we have achieved expeditious return for the vast majority of the items due to the electronic image exchange environment today. As a practical matter we don’t need the expeditious return test. Under the proposed alternative 1, the paying bank would remain subject to the UCC midnight deadline for returning the check, midnight of the following business day. The Returning bank would remain subject to the UCC requirement to move items in ordinary care to BOFD. Under this proposal, there would be a new requirement imposed on paying banks and that is when they send the item out of their shop in paper form such as substitute check, they would have to provide an electronic notice to the depository bank that the check is being returned, regardless of the dollar amount of the check. If a paper check is being returned, a notice must be sent to the depository bank.
It is important to note that the notice of non-payment requirement must be received by the depository bank by 2:00 pm versus the current regulation delivery time of 4:00 pm.
HOMEWORK – please make a note, that a review should be conducted of how your paper returns are processed and ensure time commitments are met under new proposal.
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15. Return Alternative 1
Notification of Non-Payment
Image Return or
Substitute Check Return
Substitute Check Return
Depository Bank
(BOFD)
Paying Bank
Returning Bank
No expeditious return requirement for return of paper check/check image
In this diagram, the paying bank is creating the paper as a substitute check – they would have an obligation to provide a notice of nonpayment to the depository bank. This is regardless of whether the depository bank is receiving this item electronically or not. The notice would still have to come from the paying bank to the depository bank and this notice is somewhat different from the current notice as the notice would be required for any amount. i.e. if check is for $5.00, and you’re sending back as a paper item, under this proposal you would be responsible to provide a notice to the depository bank. Following the scenario though, the returning bank in that case can send an image return or a substitute check return, to the depository bank, under this proposal, the returning bank does not have any requirement to provide a notice of non-payment.
In today’s environment, returning banks do not have the requirement for notice of non-payment because the paying bank always has that requirement for items over $2500. In this proposal, for example, if the returning bank got electronic return but needed to turn it into substitute check return, they still would not be required for providing notice of non-payment. What this alternative does is that there is no expeditious return requirement whether it is the return check or image of the check. What about late returns? – paying bank still responsible to get item out of their shop by midnight of the day after presentment, and the returning bank is still required to act reasonably in ordinary care, but that is obviously open to interpretation.
Notice of return – wont necessarily change from the way it is today. i.e. EARNS (Electronic Advance return notification system )notice, through Fedwire, phone call
Why would a bank want to accept an electronic ck when they can’t provide a substitute ch? If a bank gets an item and believe the customer wrote it and wants it paid, they will go ahead, regardless of the quality of the item, will want to post the item to the customer’s account. A way to keep the system transacting flowing. Volume of items where Quality of items is small and we hear repeatedly from banks that if they have a good micr line, they are going to post the item to their customers account.
Does the new warranties allow rejects in the Micr as read since with rejects you cannot create an ird. As long as you have an agreement (as with ECCHO agreement), and you determine that you have enough information to create an IRD, you would be allowed to continue to create ird.
Alt 1 – what happens if all returns are sent to the fed? Are you still required to send notice of non payment or is fed responsible? Notification of non-payment is responsible by paying bank if they’re sending paper, even if your sending to the fed, paying bank is responsible for notification.
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16. Return Alternative 2
Permits Paying Bank and Returning Bank to send returned check, subject to expeditious return obligation
To Depositary Bank or
To any other bank agreeing to handle returned check
Expeditious-return requirement on Paying Bank and Returning Bank for all items (paper and electronic check returns)
Apply current 2-day expeditious return test
Moves cutoff hour for Depositary Bank’s receipt of returned check from current 4:00 p.m. deadline to 2:00 p.m. deadline
Eliminates current 4 day and forward collection test
Eliminates Current Notice of Non-Payment for items of $2,500 or more
Alternative 2 is a more complicated test to apply – paying banks and returning banks would be permitted to send return checks in the same manner that they return today to the bofd but they would be subject to expeditious return obligation. For the paying bank, the expeditious return requirement would apply to all items, both paper and electronic – doesn’t matter how you send it. There is a single expeditious return test and it would be the current two day test, it would however change the cut off time for delivery to the depositary bank to 2:00 pm from the current 4:00 pm cutoff time. The FRB states by changing it to 2:00, a larger number of the returns would be able to be processed on that banking day at the depositary bank. Alternative 2 eliminates the current 4 day test and the forward collection test of for expeditious return test.
Return alternative 2 eliminates any notices ($2500 or more) and there will not be any notice of paper return as we saw in Alt 1.
This alternative as well as alternative 1 includes notices in lieu of return, if item is lost or destroyed.

17. Exception to Expeditious Return for Returning Bank
Exceptions for Return Alternative 2
Exception to Expeditious Return for Returning Bank
No expeditious return obligation if Paying Bank does not have agreement to send electronic returned checks:
Directly to Depositary Bank or
Indirectly To Returning Bank
If Paying Bank is subject to expeditious return obligation, it can choose to meet obligation by returning either paper or electronic returned check, but return must be expeditious
Paying Bank not obligated to use electronic returned check in all cases, so long as return is expeditious
Depositary Bank will not be entitled to expeditious return from any paying banks unless it has agreed to accept electronic returns from at least one Returning Bank
The more agreements for electronic return that Depositary Bank has, the greater the likelihood that it will receive expeditious return of most/all items
Understanding the general rule that Expeditious return applies, the fed has developed exceptions with in this test- there is no expeditious return obligation on the paying bank if the paying bank does not have an agreement to send electronic return checks.
If the paying bank is subject to the expeditious return, the paying bank can meet this obligation by either returning the paper check or electronic return check provided that it does so expeditiously. On a big picture level, this means the depository bank, as a result of this exception, is not entitled to expeditious return from any paying bank unless it is agreed to accept electronic return checks.
HOMEWORK: understand what agreements you have in place and if the agreement allows for electronic check exchange. As a depository bank, you want to ensure that you are entitled to expeditious return. For example, we have many banks today that utilize our IRD service. We can accept electronic returns on your behalf and push a file out to your institution to print IRD to either chargeback the check or redeposit.
Also, make a note, if you are sending your returns today via paper, substitute check documents, it won’t meet the expeditious return test.

18. Exception to Expeditious Return for Returning Bank
Exceptions for Return Alternative 2
Exception to Expeditious Return for Returning Bank
No expeditious return obligation on Returning Bank, if Returning Bank does not have agreement to send electronic returned checks:
Directly to Depositary Bank or
To another Returning Bank that is subject to expeditious return requirement
and
The Returning Bank has not otherwise agreed to handle returned check expeditiously
The other exception that the fed has developed relates to the returning bank. If the returning bank does not have an agreement to send electronic returned checks, there is no expeditious return requirement.
In essence, if financial institutions do not have agreements to process and accept electronic checks, you could be putting your financial institution at risk and you may not be entitled to expeditious return.

19. Return Alternative 2 Electronic Return Agreement Electronic Return
Substitute Check Return
Substitute Check Return or or
Image Return
Image Return
Depository Bank
(BOFD)
Paying Bank
Returning Bank OR
Image Return or
Substitute Check Return
As I mentioned earlier, in order to do electronic check exchange, you have to have an agreement. This particular scenario is showing agreements from the paying bank to the returning bank, returning bank to the depositary bank and this is also showing an electronic agreement between the paying bank and the depositary bank. If the paying bank sends either a substitute check or an image to the returning bank and then the returning bank sends a substitute check or an image to the depositary bank expeditious return will apply. Same thing whether then go direct and send an image or a substitute check because they have the electronic agreement, expeditious return will apply. There is no notification of nonpayment requirement.
But what happens if there isn’t an agreement for electronic check return? Break the connection! No electronic agreement – what happens – not entitled to expeditious return.
What if paying bank does not have any electronic agreements? Not subject to expeditious return. What if paying bank does have an agreement but the bofd does not have an electronic agreement to accept electronic checks? You can see how the return process would take longer and you could possibly find yourself at risk.
However, as long as there is a path to get to the depositary bank electronically, expeditious return will apply. What if paying bank has an electronic agreement with returning bank but returning bank does not have an agreement with the bofd and they send a substitute check document?
Alt 1 and 2 – Fed is not locked into these alternatives at this time. They request if there are variations to this alternatives or is there a return alternative that should be considered ECCHO group looking at other alternative.
What risk trade offs are there between Alt 1 and Alt 2? Initially we are seeing in alt 1, people are concerned that paying banks will select returning banks that create paper for larger number of items, either for cost or strategy reasons, there is a concern that there untimely is not requirement for expeditious return in alt 1. Benefit is that were removing the regulatory requirement – attractive to alt 1. in alt 2 the trade off seems to be how does a paying bank know that when it returns an item how does it know that there are multiple channels, whether its getting the item back whether the returning banks are going to get it back expeditiously and that may be a product development issue.
Electronic Return Agreement
Expeditious return requirement for return of paper check/check image
No notification of non-payment required
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20. Return Alternative Considerations
Important Points to Consider on Returns:
In Alternative 1, notice must be received by 2pm while in Alternative 2, the item must be
received by 2pm.
Electronic return is not mandated
Notice in lieu of return is retained for both Alternative 1 and 2 – must include MICR information
Some important points that I want you to identify
In alternative 1 NOTICE must be received by 2pm whereas in alternative 1, the ITEM must be received by 2pm
Again, electronic returns are not mandatory in the proposal, but you can see the ramifications if they are not utilized.
Notification of non payment in alternative 1 is for any amount and alternative 2 eliminates any notices.

21. New Indemnifications
Electronic Image or Electronic information not related to paper check
Also known as: Electronic Payment Order (EPO)
Proposed new indemnity:
Each bank that transfers or presents electronic image or electronic information not derived from paper check, indemnifies each transferee bank, any subsequent collecting bank, paying bank and any subsequent returning bank against any loss, claim, or damage that results from the fact that the electronic image or electronic information was not derived from a paper check
Fed is proposing two new indemnities. First is the indemnification for electronic image or electronic information that is not related to paper check. EPO has become more prevalent. EPO is an electronic payment order that never existed in paper form. In this proposal, the fed is providing an indemnity that if a bank sends an EPO then the bank is indemnifying any of the other banks along the chain for any losses that may occur because of the fact that they got this EPO transaction that never existed in paper form.
This is only a bank to bank indemnification Warranties on electronic ck and returned ck it would to to the owner or drawer of the item, this does not go to the drawer or owner on the item, this indemnification is only bank to bank. The fed does acknowledge in their commentary that these images cannot determine whether an image was derived from an EPO or a paper ck and when a bank sees these, they handle them as if they were derived from a paper ck and treats them like a ck.
Difference between remotely created ck v. EPO – fed does not distinguish. Remotely created ck definition in reg cc, it is a ck that was not created by the payee but has been authorized by the customer. The remotely created ck has to exist in paper form, It is possible that you have a remotely created EPO from someone’s computer instead of printing and scanning, they are going to take it off their computer and send it to their bank. A remotely created ck does not exist in paper form. Fed is not changing rules for paper remotely create cks and this indemnity does not apply to remotely created cks.
How can epo sending bank know they are not sending duplicate? If you do send a duplicate, there is an indemnity and you would be responsible for sending it twice. FRB Atlanta looking at epo issues and what we see here is the fed moving conservatively at the regulatory level as they study implementation.
Diff between a paper item and an epo is impossible to tell, then why different rules and warranties? It is your obligation to know what your customers are up to and where we see epos in large numbers is telemarketers, examiners would say it is your responsibility to know what your customers are bringing to the bank and that it is the negating function. Reg CC is not meant to establish functions around the deposit level.

22. New Indemnifications Proposed new Indemnity:
Any truncating depositary bank would indemnify another depositary bank that accepts the original check for deposit for that bank’s losses due to the check having already been paid. This would allow a depositary bank that accepts deposit of an original check to recover directly from a bank that permitted its customer to deposit the check through remote deposit capture.
Duplicates caused by customer or member error/fraud have continued
to increase.
The premise is that the first BOFD opened the door to risk by not properly controlling their RDC customer/member or the paper check.
Depositary bank’s liability arises because it permitted its customer to truncate the item and send the image. We all know we receive duplicates every day – we have allowed the customer to retain the original check and customer may have either mistakenly or intentionally deposited the paper ck in another bank. The fed allows the depositary bank that accepts the original paper ck to make a claim against the bofd bank.
Need to think about implications here. What happens if there are multiple truncating banks? What if crook went to bofd with a mobile and bofd b and did mobile again and deposited original ck in bofd bank c. The way the proposal is worded is that you can make a claim against any truncating bank even if there are multiple banks. Claim can only be made if the check is returned because it has already been paid. If it comes back NSF, a claim cannot be made. The only claim that can be made is if a bofd receives a duplicate return.

23. Indemnity- Truncating Bank
Depositary bank’s potential liability arises when it permits member to truncate check and deposit image
Member retains original check and may intentionally or mistakenly deposit paper check in another bank
This indemnity permits depositary bank that accepts original paper check to make claim against depositary bank that permitted member to truncate
Claim made to any truncating bank, even if multiple truncating banks
Claim only exists if check returned to bank that accepted original check due to fact check already paid
Allows truncating bank to allocate loss to its depositing member by agreement
Diagram shows our remote deposit customer, two bofd banks and our paying bank. In this example, the RDC customer truncates item and sends through a mobile device to paying bank, customer walks across the street and makes a deposit with the original ck. The way proposal is worded it says BOFD B has to have received the paper.
But the indemnity does apply in this scenario because the rdc customer deposited the original paper item in BOFD B. the item is returned as a duplicate – the proposal indicates if the item is returned, the bofd b would have an indemnification claim against bofd a. That is, assuming you know who bofd a is, how do you make your claim? We’re expecting the fed to make an adjustment claim process but that has yet to be determined.
HOMEWORK: Please review your RDC agreements and know your customer! This puts the burden of proof on the RDC customer bank. May want to have counsel monitor final ruling and enhance your RDC agreements with your customers. Expecting further guidance after commentary period.

24. Truncating Bank Indemnity
Image
Image
Bank A (BOFD A)
RDC Agreement
Indemnity
Claim
Image
Deposit Checks
Remote
Deposit
Customer
Return as Duplicate
Paying Bank
Agreement
The Fed is requesting comment on whether to narrow scope of definition to include only checks created by payee. Right now definition RCC is a check that was not created by the paying bank (or its agent). It is currently not specific to bring created by the payee.
Refer to maker – in 2011, fed proposed to eliminate the allowable reason of rtm. In comments from the 2011 proposal, almost all commenters opposed the elimination of rtm. In this proposal, the fed is giving some examples of permissible examples and uses of rtm versus impermissible uses of rtm. For example, permissible use would be when there is a positive pay instruction and you’re trying to return items to payee and who does need to get in contact with the maker and a non-permissible use when an item is being returned as a duplicate because obviously the maker has nothing to do with the duplicate. The payee needs to do something due to the duplicate item not the maker.
The next issue relates to same day settlement. In 2011, proposal was to allow electronic same day settlement. They were going to allow the paying bank to require electronic if that was the way they wanted to receive it. The industry responded and offered input relative to electronic same day settlement. The fed has now removed provisions from 2011 and recommend that they keep the current SDS rules only applies to paper and that any presentment of electronic checks would be governed by the agreement of the parties. There are many banks that would like to get rid of this right and require banks to use the electronic channel if the paying bank has an electronic channel.
Bank B (BOFD B)
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25. Other Issues for Comment
Definition of RCC
Requesting comment on whether to narrow scope of definition to include only checks created by payee (or payee’s agent)
Limiting use of “Refer to Maker”
In 2011 Fed proposed elimination of this return reason, stating it was not a reason but an instruction
Current Proposal would limit use
Permissible when drawer with positive pay arrangement instructs bank to return check
Not permissible when check is being returned due to paying bank having already paid item
Same Day Settlement (SDS)
Retains current SDS rule and only applies to paper presentment
Settlement or presentment of electronic checks governed by agreement of parties
Presumption of alteration – fed explains issue under UCC if a ck is counterfeit the paying bank has until midnight of the following day of presentment to return. If the ck is altered then a claim can be made against the depositary bank up to three years. With the advent of image, it has become much more difficult to determine an item is altered vs counterfeit. Whether the reg CC should adopt evidentiary of presumption of whether an item is altered versus counterfeit, and if so, which should be the preference. More research to determine this.
Rejected deposit- the scenario is a deposit is made with a ck at an atm, and the atm is serviced by a third party company and there is something wrong with the ck and it can’t be imaged, they want to give the ck back to the customer, rather than pull the ck from archive, they would just like to create substitute ck. Under the reg, the substitute ck must have been transmitted with value in this case it wasn’t it is just a rejected deposit. The fed is recognizing that this is an appropriate use of a substitute ck and the bank that does something like this, it makes the ck 21 warranties, they’re reconverting bank and makes the indemnification.
HOMEWORK Watch For development in these areas. You may need to alter your procedures, for example, in your return check process for when you use Refer to maker and how you handle rejected deposits.

26. Other Issues for Comment
Presumption of Alteration
Under UCC, it is assumed that with paper checks, paying banks are in the best position to judge if the drawer’s signature is authorized. By contrast, the BOFD is in a better position to inspect a check at the time of deposit and detect an alteration. Requests comment whether Regulation CC should adopt an evidentiary presumption as to whether, in cases of doubt, check should be presumed to be altered or forged.
Rejected Deposit
The proposal specifies that a bank that rejects a check submitted for deposit and sends customer substitute check, makes Check 21 warranties and provides indemnification, regardless of whether bank received consideration for substitute check.
BBN has been participating in industry trade group roundtables, such as with ECCHO and we are still reviewing the regulation, section by section, on a by-weekly basis.
ECCHO is focusing on understanding alternatives 1 and 2, and possibly working on proposing additional alternatives. It is important that if any of these points, raise your awareness or interest, that you take the time to submit a comment letter. These are due in May, Please stay tuned as BBN will continuously monitor any developments within this proposal and will be sending compliance notifications to our clients. If you are interested in receiving, please be sure to drop a business card with me.

27. New Return Reasons -T- Item cannot be re-presented -U- Unusable image
-Y- Duplicate Presentment
-4- RCC Warranty Breach (rule 8)
-5- Forged and Counterfeit Warranty Breach (rule 9)
-6- Retired/Ineligible Routing Number
BBN has been participating in industry trade group roundtables, such as with ECCHO and we are still reviewing the regulation, section by section, on a by-weekly basis.
ECCHO is focusing on understanding alternatives 1 and 2, and possibly working on proposing additional alternatives. It is important that if any of these points, raise your awareness or interest, that you take the time to submit a comment letter. These are due in May, Please stay tuned as BBN will continuously monitor any developments within this proposal and will be sending compliance notifications to our clients. If you are interested in receiving, please be sure to drop a business card with me.

28. Implications? Lower volumes in ‘Refer to Maker’
More clarity to facilitate expeditious processing
Return reason “Y” – Duplicate
Does not carry BOTH sets of source of receipt information
Is not intended to replace the use the adjustments channel to resolve disputes
BBN has been participating in industry trade group roundtables, such as with ECCHO and we are still reviewing the regulation, section by section, on a by-weekly basis.
ECCHO is focusing on understanding alternatives 1 and 2, and possibly working on proposing additional alternatives. It is important that if any of these points, raise your awareness or interest, that you take the time to submit a comment letter. These are due in May, Please stay tuned as BBN will continuously monitor any developments within this proposal and will be sending compliance notifications to our clients. If you are interested in receiving, please be sure to drop a business card with me.

29. New Return Reason Code Implementation
All new codes will be effective one year after the date of approval of this standard
*Date Approved: December 20, 2013
BBN has been participating in industry trade group roundtables, such as with ECCHO and we are still reviewing the regulation, section by section, on a by-weekly basis.
ECCHO is focusing on understanding alternatives 1 and 2, and possibly working on proposing additional alternatives. It is important that if any of these points, raise your awareness or interest, that you take the time to submit a comment letter. These are due in May, Please stay tuned as BBN will continuously monitor any developments within this proposal and will be sending compliance notifications to our clients. If you are interested in receiving, please be sure to drop a business card with me.

30. Regulation CC: Understanding the
Proposed Changes
Comments or Questions

31. Regulation CC: Understanding the
Proposed Changes
Thank You
Crystal Sides
Senior Vice President
Enterprise Risk Officer
Lisa Reynolds
Senior Vice President
Operations Officer