National Check Payments Certification

Regulations – Reg CC Part I 2018-2019

NCP 2019 Exam Cycle Core Training Series Session 3

Regulation CC – Part I General Provisions

NOTICES

This training series is designed to provide an introduction to and/or summary of various aspects of check payments and the legal and rules framework for electronic check exchange. Responsibility for compliance with electronic check exchange rules, and/or the legal, operational and regulatory requirements applicable to electronic check exchange, remains at all times with the financial institution participating in the exchange and/or the individual or company using an exchange service provider.

This presentation and the information contained herein is not intended as legal or compliance advice or recommendation to any person or company. This document could include technical inaccuracies or typographical errors and individual users are responsible for verifying any information found in this presentation and related “live” webinar or webinar playback.

Financial institutions should consult with their legal counsel regarding legal and operational requirements applicable to any electronic check exchange program they may offer or in which they may participate.

These materials may not be reproduced or published, in whole or in part, without the express permission of The Clearing House Payments Company L.L.C. Copyright© 2018 by The Clearing House Payments Company L.L.C.

(Certain contributed content subject to third party copyrights)

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Exam Registration

• Register on ECCHO website • Free NCP study aids upon registration: – JumpStart Reading Program – NCP Roadmap: Establish personalized study plan – P.R.E.P. Guide: Training, glossary, quizzes & more – Question of the Day & Summary

• Exam Fees: $400 ECCHO member $500 non-member – Not sure about ECCHO membership? ✓Check current status at: www.eccho.org/memberships ✓Or, contact program administration: [email protected]

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P.R.E.P. Guide

• Payments Resource and Exam Preparation – 300+ pages of training and study materials – Sample multiple-choice exam – End-of-section suggestions for further study (sample below) – Quiz questions with answer keys in Guide Exhibits

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Topics – This Session

• Regulation CC Overview • General Provisions –Definitions –Indorsement Requirements –Availability of Funds and Disclosures –Subpart B Proposal –Check 21 and Substitute Check

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Regulation CC – Overview

Background

• Federal regulation that establishes various provisions in support of interbank check exchange – Issued by the Board of Governors of the Federal Reserve System – Subpart B joint jurisdiction with CFPB – Implements following Federal legislation: ✓Expedited Funds Availability Act (EFA Act) ✓Check Clearing for the 21st Century Act (Check 21 Act) • Originally written to ensure expeditious return of checks – Reduces risk to banks and customers of unpaid items • Later incorporated Check 21 Act – Subpart D with provisions for the substitute check • Federal Reserve Board proposed updates (2011 & 2014) – Finalized with effective date of July 1, 2018 – Final amendment addressing presumption of alteration approved Sept 2018 effective Jan 1, 2019

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Overview

• Divided into four Subparts – General / Definitions – Subpart A – Availability of Funds and Disclosure of Funds Availability Policy – Subpart B – Collection of Checks – Subpart C – Substitute Checks – Subpart D • Appendices A – F (updated 2018): – Appendix A: Routing Number Guide to Next-Day Availability Checks and Local Checks – Appendix B: Reserved – Appendix C: Model Availability Policy Disclosures, Clauses, and Notices; Model Substitute Check Policy Disclosure and Notices – Appendix D: Removed and Reserved – Appendix E: Commentary – Appendix F: Official Board Interpretations

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General Provisions

Bank Definitions

• Several definitions of “bank” in this section: – Bank – Collecting Bank – Depositary Bank – Indemnifying Bank – Paying Bank – Returning Bank – Reconverting Bank – Truncating Bank • Term “bank” is used generically to mean a bank, credit union, savings association, etc. • May be a repeat/review of what we’ve covered in a prior session; but – Understanding which “bank role” represents your FI in a given exchange can help resolve questions should there be a dispute

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Bank Definitions

• Bank – Insured bank – Mutual savings bank and Savings bank – Insured credit union – Member; as defined in FHLB Act – Savings association – Agency or a branch of a foreign bank as defined in section International Banking Act • Collecting Bank – Any bank handling a check for forward collection, except the Paying Bank • Depositary Bank – First bank (depository financial institution) to which a check is transferred even though it may also be the Paying Bank ✓May be referred to as “BOFD” or Bank of First Deposit

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Bank Definitions

• Indemnifying Bank – Bank that provides an indemnity under § 229.34 with respect to remote deposit capture or an electronically-created item, or – Bank that provides an indemnity under § 229.53 with respect to a substitute check • Paying Bank – Bank by which a check is payable, and – To which it is sent for payment or collection; – Federal Reserve Bank or Federal Home Loan Bank by which a check is payable; – Bank through which a check is payable, if the check is not payable by a bank; or – State or unit of general local government on which a check is drawn and to which it is sent for payment or collection • Returning Bank – Bank (other than Paying or Depositary bank) handling a returned check or notice in lieu of return ✓Also a collecting bank for purposes of UCC 4–202(b)

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Bank Definitions

• Reconverting Bank –Bank that creates a substitute check; or –For substitute check created by a non-bank ✓First bank that transfers, presents, or returns that substitute check • Truncating Bank –Bank that removes the original check from the check collection process; or –If non-bank removes original check from the check collection process, then the first bank that transfers, presents, or returns a substitute check in lieu of original check, or by agreement, information relating to the original check

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Reg CC – Definitions

• Account: Deposit accounts at a bank from which the account holder makes transfers or withdrawals by negotiable instrument or other similar means to make payments or transfers funds to third persons – Such as DDA or share draft accounts • Availability: Time period from the day of deposit until the funds are available to the account holder for withdrawal or other use – May include funds from an overdraft/line of credit product as well as funds classified as available balance such as from cleared and existing deposits • Available for Withdrawal: Funds deposited available for all uses generally permitted to customer under the bank’s account agreement or policies

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Reg CC – Definitions

• Banking day: Business day on which office of bank is open to public for substantially all banking functions • Business day: Calendar day other than a Saturday or a Sunday, or Federal Reserve legal holidays • Cashier's check: Check that is— – Drawn on a bank; – Signed by an officer or employee of the bank on behalf of the bank as drawer; – Direct obligation of the bank; and – Provided to a bank’s customer or acquired from the bank for remittance purposes

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Reg CC – Definitions

• Check and Demand Draft –Check definition covers several categories of instruments including: ✓Negotiable demand draft drawn on: o Or payable through or at, an office of a bank; o Federal Reserve Bank or FHLB; o US Treasury; ✓Demand draft drawn on: o State or unit of general local government not payable through or at a bank; ✓U.S. Postal Service money order; ✓Traveler's check; and ✓An original check and a substitute check

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Reg CC – Definitions

• Electronic Check and Electronic Returned Check – Electronic image of and electronic information derived from a paper check or paper returned check; that: ✓Is sent pursuant to an agreement between sender and receiving bank; and ✓Conforms with X9.100-187 standard – Must have both the image of the item and the MICR line information to meet the definition – Definition does not include noncash item ✓Would otherwise be a check except for special conditions; or ✓Item is payable in a medium other than United States money ✓Item not derived from a paper check • Electronically-created Item – Electronic image that has all the attributes of an electronic check or electronic returned check but was created electronically not derived from a paper check – ECI not considered a check under Reg CC

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Reg CC – Definitions

• Magnetic ink character recognition line and MICR line –Numbers (e.g.; routing number, account number, check number, check amount, and other info) that are printed: ✓Near the bottom of check in magnetic ink ✓In accordance with following ANS standards: o X9.13 (X9.100-160) for original check o X9.100-140 for a substitute check o X9.100-187 for an Electronic Check/Electronic Returned Check (for purposes of subpart C and subpart D)

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Reg CC – Definitions

• Noncash item: Item that would otherwise be a check, except that— –Passbook, certificate, or other document is attached; –Accompanied by special instructions, such as request for special advice of payment or dishonor; –Consists of more than a single thickness of paper, except a check that qualifies for handling by automated check processing equipment; or –Not preprinted or post-encoded in magnetic ink with the routing number of the paying bank

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Reg CC – Definitions

• Remotely Created Check (RCC) – Check not created by the paying bank – Does not bear a signature applied, or purported to be applied, by the person on whose account the check is drawn – May be referred to as an unsigned draft • Routing Number – Number printed on the face of a check in fractional form or in nine-digit form; – Number in a bank’s indorsement in fractional or nine-digit form; or – Bank-identification number contained in an electronic check or electronic returned check, for purposes of subpart C and subpart D

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Reg CC – Indorsements

• Requirement for bank (other than a paying bank) that handles a check during forward collection or return to indorse check in accordance with standards – Standards now listed in body of the regulation and include: ✓Specifications for Physical Check Endorsements (X9.100-111): for paper check other than substitute check ✓Specifications for Image Replacement Document (X9.100-140): for substitute check; and ✓Electronic Exchange of Check and Image Data – Domestic (X9.100-187): for an electronic check • Liability of bank handling check – Is liable to any bank that subsequently handles check to extent subsequent bank does not receive payment for check ✓Paragraph applies whether or not a bank has placed its indorsement on the check

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Reg CC – Indorsements

• Indorsement and Holder – After check indorsed by bank, only bank may acquire the rights of a holder— ✓Until the check has been returned to person initiating collection; or ✓Until the check has been indorsed by the bank to a person who is not a bank; Example: o Bank is holding the item but is unable to charge back o May assign the check to a debt collection service • Depositary Bank Indorsement – May arrange with another bank to apply other bank's indorsement as depositary bank indorsement ✓Used in a centralized return environment ✓Must avoid area reserved for depositary bank indorsement as specified in indorsement standard applicable to check under paragraph (a) of this section o Physical check, substitute check, electronic check

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Forward Collecting / Presenting / Paying Banks

Depositary Bank

• Depositary Bank indorsement includes: – ABA routing number bracketed by arrow points (physical) or ✓ Appropriate X9.100-187 electronic record (image) – Bank’s name and location – Indorsement date; May contain optional trace or sequence number

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Forward Collecting / Presenting / Paying Banks

Subsequent Collecting Bank(s)

• Subsequent Bank indorsement(s) must include: – ABA routing number without arrow points (physical) or ✓Appropriate X9.100-187 electronic record (image) – Indorsement date; May contain optional trace or sequence number

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Forward Collecting / Presenting / Paying Banks

Reconverting Bank

• Reconverting Bank indorsement based on X9.100–140 standard; Must include: – ABA routing number (without arrows) and asterisk at each end; On front of check, outside the image – ABA routing number (without arrow points) and asterisk at each end; On back of check – Truncating bank's ABA routing number (without arrow points) and bracket at each end; On front of check, outside the image

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Physical Indorsements

Back – Paper Check

1. Subsequent Payee

collecting bank Indorsement

X ENDORSEHERE: FIRST UNION FIRST UNION NATIONAL BANK

Depositary ACCOUNT 1234567890123

DO NOT SIGN / WRITE / STAMP BELOW BELOW THIS / LINE WRITE STAMP / SIGN DO NOT

>031000011< 01/02/2002 >031000011<

FOR FOR DEPOSIT ONLY O IACA INSTITUTION FOR FINANCIALONLY USAGE

Bank NORTH POLE, INC.

BOFD

7815830233

2. Subsequent 2. Subsequent collectingbank

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Physical Indorsements

Front – Paper Substitute Check Creating Institution (*Reconverting Bank*)

Routing Number, Creation Date & Truncating Institution [Truncating Bank] Sequence Number ABA routing number,

Date & Sequence

1800539446 1800539446 [053000183] [053000183] 01/04/2002

MICR Line from Notes: Original Check • Creating (Reconverting) bank, Truncating bank and Depositary bank not necessarily the same • Identify each institution as defined in Reg CC Appendix D and X9.100-140 standard

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Physical Indorsements

Back – Paper Substitute Check (Forward Original IRD)

Notes: • Creating Bank (Reconverting Bank): Identified by asterisks (*) on each end of ABA routing number − On front and back of IRD • Truncating Bank:Institution identified by brackets ( [ ] ) on each end of ABA routing number − On front of IRD only

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Reg CC – Availability of Funds

• Next-Day Availability (§229.10) – For certain check deposits, depositary bank makes funds available next business day after the banking day on which the funds are deposited for: ✓Check drawn on the Treasury of the United States ✓US Postal Service money order ✓Check drawn on Federal Reserve Bank or Federal Home Loan Bank ✓Check drawn by a state or local government ✓Cashier's, certified, or teller's check • Checks not listed above, next day amount available is lesser of $200, or – Aggregate amount deposited by check on any one banking day to all accounts of the customer ✓$200 requirement to be inflation-adjusted every 5 years after December 31, 2011 (Dodd-Frank Act)

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Availability of Funds

• Availability schedule (§229.12) –Two-Day Availability: Depositary bank shall make funds available for withdrawal no later than second business day after the banking day on which checks were deposited in person ✓Applies to all local checks • Note: All checks considered “local” today based on Fed office consolidations –Atlanta remaining FRB check processing location

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Availability of Funds

• Extension of schedule (§229.12) – Applies to certain deposits in Alaska, Hawaii, Puerto Rico, and the U.S. Virgin Islands; Depositary Bank may add one business day if: ✓Deposited in an account at a branch of depositary bank if it’s located in Alaska, Hawaii, Puerto Rico, or the U.S. Virgin Islands; and ✓Deposited by a check drawn on or payable at or through a paying bank not located in the same state as the depositary bank • Deposits at nonproprietary ATMs – Depositary bank must make funds available no later than fifth business day after the banking day on which check was deposited

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Availability of Funds

• Exceptions – Eligible for extended holds (§229.13 ) – New Accounts ✓Deposits into new accounts; Open less than 30 days – Large deposits (greater than $5,000) ✓First $5,000 covered under normal “availability” requirements o Remainder of deposit may be held for the extended period – Re-deposited checks ✓May be held unless the check was returned because of missing endorsement or postdating – Deposits to accounts that are repeatedly overdrawn ✓If during the previous 6 months, account was negative: o Six or more banking days » Two or more banking days in the amount of $5,000 or more – Reasonable cause to doubt the collectability of a check ✓Must have legitimate reasons – Checks deposited during emergency conditions ✓Beyond the control of the financial institution o Ex: Natural disasters or communications malfunctions

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Availability Examples

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Reg CC – Disclosures

• General Disclosures (§229.15): Form of disclosures must be: –Clear, conspicuous and in writing –In a form that the customer may keep; other than those posted: ✓At locations where employees accept consumer deposits; ✓At ATMs; and ✓On preprinted deposit slips –Grouped together and not contain any information not related to disclosures required by regulation National Check Payments Certification 34

Reg CC – Disclosures

• General information (§229.16): Disclosures must reflect policy followed by the bank in most cases –Describe information that banks must provide in initial disclosures –Disclosure provided must reflect availability policy followed in most cases ✓Even though bank may in some cases make funds available sooner or impose a longer delay

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Reg CC – Damages

• Damages – Shall not exceed amount of item plus interest compensation and expenses • Tender of defense – May give prior bank in collection or return chain written notice of litigation • Notice of claim – Must be made within 30 days after claimant has reason to know of breach and identity of warranting bank – Warranting bank discharged to the extent of any loss caused by the delay in giving notice of the claim

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Reg CC – Subpart B Proposal

• Background –Subpart B of Regulation CC addresses funds availability and related disclosures –In March 2011, FRB requested comment on proposed amendments to Subpart B along with other Subparts of Regulation CC –In July 2011, the Dodd-Frank Act became effective, providing FRB and CFPB with joint rule-making authority for Reg CC Subpart B –FRB did not move forward with Subpart B amendments at same time as final amendments to Subparts A, C and D

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Potential Areas for Proposed Changes

• Maximum hold time periods – Time period within which depositary bank reasonably expects to learn of nonpayment of most items for each category of checks, recognizing that virtually all checks are now collected and returned via image exchange. • Exceptions to maximum hold time periods – Costs/operational considerations or issues raised by changes to Reg CC exceptions • Disclosure requirements – Costs/operational considerations or issues raised by changes to Reg CC Subpart B disclosure requirements • RDC deposits – Issues raised by the application of funds availability requirements to remote deposit capture (RDC) deposits. Does depositary bank need extra time to process and/or learn of nonpayment of most RDC items compared to other items? • Statutory requirement to adjust for inflation the dollar amounts in the EFA Act

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Reg CC – Presentment

• Presentment & Issuance of Checks (229.36) – Receipt of Electronic checks – Terms by which paying bank accepts electronic checks governed by agreement between presenting and paying banks • Receipt of Paper checks: Considered received by the paying bank when it is received– – (i) At a location to which delivery is requested by the paying bank; – (ii) At an address of the bank associated with the routing number on the check, whether contained in the MICR line or in fractional form; – (iii) At a branch, head office, or other location consistent with the name and address of the bank on the check if the bank is identified on the check by name and address; or – (iv) At any branch or head office, if the bank is identified on the check by name without address. • Paying bank may require that checks presented be separated from returned checks

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Reg CC – Same-Day Settlement

• Same-Day Settlement – Paper check is considered presented, and paying bank must settle for or return check if presenting bank delivers check, under delivery requirements established by paying bank, and demands payment: ✓At a location designated by paying bank for receipt of checks; ✓By 8 a.m. on a business day (local time) – Paying bank may require same day settlement checks be separated from other forward-collection checks or returned checks – Paying bank accountable to presenting bank for amount of check unless, by the close of Fedwire on business day of receipt, it: ✓Settles for the amount of the check or returns the check

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Check 21 and Substitute Check

• Successfully encouraged check truncation by removing key barrier to truncation – Allowed unilateral decisions to truncate checks; not required to obtain agreements from all parties • Provided for replacement of paper check with substitute paper check – Did not mandate receipt of electronic (image) but supported and facilitated that transition • Substitute check is legal equivalent of original paper check (defined Reg CC 229.2 aaa) – Paper reproduction of an original check that: ✓ Contains image of front and back of original check ✓ Bears a MICR line that contains all information appearing in MICR line of original check as issued ✓ Conforms to industry standards (X9.100-140) and is suitable for automated processing same as original check • Subpart D provisions for substitute check state: – Legal equivalent of original check for all purposes – Accurately represents all information on original check – Bears legal legend – Must include all indorsements; identifies Reconverting and Truncating banks in each substitute check • Reconverting Bank Indorsement (see X9.100–140 standard); must include: – ABA routing number (without arrows) and an asterisk at each end of the number (front of IRD) – ABA routing number (without arrows) and an asterisk at each end of the number (back of IRD) – Truncating bank's ABA routing number (without arrows) and a bracket at each end of the number (front of IRD - outside the image • Examples follow: front / back views of forward presentment substitute check National Check Payments Certification 41

Forward Substitute Check – Front View

Creating Institution Clipped Routing Number, Area Creation Date & Original Truncating Original Legal Sequence Number Institution Routing Scanned Legend Number, Date & Front Image

Sequence

1800539446 1800539446 [053000183] [053000183] 01/04/2002

MICR Line from Optional Area Substitute Check Original Check Identifier No branding or marketing Notes: • Creating, truncating and BOFD Institution is not necessarily the same. • Truncating Institution is not necessarily the BOFD or Return Location; Look at Endorsement on back for Return Location. • Date & Sequence numbers may not be available for Truncating Institution. National Check Payments Certification 42

Forward Substitute Check – Back View

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Copy and Sufficient Copy

• Copy of an original check means any: – Paper reproduction of an original check, including a paper printout of an electronic image of the check, a photocopy of the original check, or substitute check; or – Electronic reproduction of a check that a recipient has agreed to receive from the sender instead of a paper reproduction • Sufficient copy of an original check that: – Accurately represents all of the information on the front and back of the original check as of the time the original check was truncated or – Is otherwise sufficient to determine whether or not a claim is valid

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Check 21 Expedited Recredit

120 Calendar Days Consumer Paying Bank to make Statement recredit claim to 40 Calendar Days prior bank to make claim 10 10 CLAIM CLAIM Days Days

Provide Paying Bank Provide Consumer with: with: Check, Copy Check, Copy Substitute RECONVERTING Check or $$$ or $$$ BANK PAYING BANK For consumer items only – Consumer can make claim within 40 calendar days after receipt of statement with the item 1) Paying Bank must provide Consumer with original check, sufficient copy of original check or recredit within 10 days of claim a) If Recredit Pending Investigation: Provide up to $2,500 within10 days of claim; then must recredit remainder to Consumer by 45 calendar days of receipt of claim 2) Paying Bank claim to recover from Reconverting Bank a) Must be made within 120 calendar days of transaction that gave rise to claim 3) Reconverting Bank must provide recredit, original check or sufficient copy by 10th business day of Paying Bank claim

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Consumer Awareness – Disclosures

• Describe substitute check is legal equivalent of original check and recredit rights / how they apply if consumer believes substitute check not properly charged to account • Disclosure required to consumers who: – Receive paid checks with periodic statements or on an occasional basis – Provide disclosure to consumer customer who requests original or copy or when receives a substitute check at the time of request ✓Example: Financial institution returns a substitute check to depositing customer (return item for NSF item)

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Questions

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Recommended Resources

• Regulation CC (12 CFR – Part 229) • Visit Electronic Code of Federal Regulations (e-cfr) website – Access all Title 12 Banks and Banking (Chapter II) federal regulations: http://www.ecfr.gov/cgi-bin/text- idx?SID=942b94b5cd556e12a997d012c0dba6d2&node=pt12.3.229&rgn=div5

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Regulation CC – Part I General Provisions Thank You!

ECCHO|The Clearing House 3710 Rawlins Street; Suite 1075 Dallas, Texas 75219 www.eccho.org

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