Wednesday, August 4, 2004

Part IV

Federal Reserve System 12 CFR Part 229 Availability of Funds and Collection of Checks; Final Rule

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FEDERAL RESERVE SYSTEM paying banks and the unwillingness of agreement to do so. The New York some paying banks to receive electronic collecting bank then could create a 12 CFR Part 229 presentment.2 The requirement that substitute check to present to the New [Regulation CC; Docket No. R–1176] banks present the original check absent York paying bank. The New York agreement to the contrary and the paying bank would be required to take Availability of Funds and Collection of difficulty of obtaining alternate presentment of a substitute check that Checks presentment agreements with all paying met all the legal equivalence banks impedes the ability of banks that requirements. Thus, instead of AGENCY: Board of Governors of the want to process checks electronically to processing and transporting the original Federal Reserve System. take full advantage of that technology. check across the country, the California ACTION: Final rule. As a result, the payment system as a bank could collect the substitute check whole has not achieved the efficiencies using only local New York SUMMARY: The Board of Governors is and potential cost savings associated transportation. publishing final amendments to with handling checks electronically. Regulation CC that add a new subpart D, By authorizing the use of a new II. How the Check 21 Act Affects Banks with commentary, to implement the negotiable instrument called a substitute A. In General Check Clearing for the 21st Century Act. check, the Check Clearing for the 21st These amendments set forth the Century Act (the Check 21 Act or the Although the Check 21 Act is requirements of the Act that apply to Act) facilitates the broader use of designed to enable more efficient use of banks, a model consumer awareness electronic check processing without electronic check processing by allowing disclosure and other model notices, and mandating that any bank change its use of one piece of paper in place of indorsement and identification current check collection practices.3 A another, the law does not require any requirements for substitute checks. The substitute check is a paper reproduction bank to use electronic check processing, final amendments also clarify some of an original check that contains an receive electronic presentment, or create existing provisions of the rule and image of the front and back of the a substitute check. The Check 21 Act commentary. original check, is suitable for automated also does not make electronic check images or electronic check information DATES: This rule is effective on October processing in the same manner as the the legal equivalent of an original check. 28, 2004, except for model form C–5A original check, and meets other Moreover, the Check 21 Act does not in appendix C, which is effective technical requirements. A bank that for alter existing arrangements under which August 4, 2004, and paragraph (4) of consideration transfers, presents, or banks agree to return paid paper checks appendix D, which is effective on returns a substitute check (or a paper or to account holders with periodic January 1, 2006. electronic representation of a substitute check) warrants that (1) the substitute account statements. However, after the FOR FURTHER INFORMATION CONTACT: Jack effective date of the Check 21 Act, K. Walton, II, Assistant Director ((202) check contains an accurate image of the front and back of the original check and account holders that receive paid checks 452–2660), or Joseph P. Baressi, Senior with their statements may receive a mix Financial Services Analyst ((202) 452– a legend stating that it is the legal equivalent of the original check, and (2) of original checks and substitute checks. 3959), Division of Reserve Bank The characteristics of a substitute Operations and Payment Systems; or no depositary bank, drawee, drawer, or indorser will be asked to pay a check check are such that a bank receiving a Stephanie Martin, Associate General substitute check would be able to Counsel ((202) 452–3198), or Adrianne that it already has paid. A substitute check that meets the Check 21 Act’s process that substitute check to the G. Threatt, Counsel ((202) 452–3554), same extent that it could process the Legal Division; for users of requirements regarding accuracy, bears the legend, and for which a bank has original check. As a result, banks would Telecommunication Devices for the Deaf made the substitute check warranties is not be required to change their check (TDD) only, contact (202) 263–4869. the legal equivalent of the original check processing equipment because of the SUPPLEMENTARY INFORMATION: for all purposes and all persons. Check 21 Act, and, except as described Background The use of legally equivalent in the next section, there would be no substitute checks should facilitate need for a bank to treat original checks I. The Need for and General Provisions collection and return of checks in and substitute checks differently during of the Check 21 Act electronic form. For example, a the check collection and return process. Under current law, a bank must depositary bank in California that Because a legally equivalent substitute present the original paper check for receives a check drawn on a bank in check contains an accurate payment unless the paying bank has New York now must send the original representation of the information on the agreed to accept presentment in some paper check for collection unless it, or original check and all indorsement other form.1 Sections 3–501(b)(2) and 4– an intermediary collecting bank that information associated with the check, 110 of the Uniform Commercial Code presents checks sent by it, has an drawers and other persons should be (U.C.C.) specifically authorize banks electronic presentment agreement with able to rely on a substitute check just as and other persons to agree to alternative the paying bank. Under the Check 21 they would an original check for other means of presentment, such as Act, by contrast, the California bank purposes, such as proof of payment. could transfer check information electronic presentment. However, to B. Provisions Affecting All Banks engage in broad-based electronic electronically to a collecting bank in presentment, a presenting bank would New York with which it had an Certain provisions of the Check 21 need electronic presentment agreements Act will affect all banks, even those that with each bank to which it presents 2 Some paying banks and bank customers prefer do not choose to create substitute checks. This has proven impracticable to receive checks in paper form for operational or checks. For example, any bank that other reasons. transfers, presents, or returns a because of both the large number of 3 Pub. L. 108–100, 117 Stat. 1177 (codified at 12 U.S.C. 5001–5018). The Check 21 Act was enacted substitute check (or a paper or 1 See, e.g., section 3–501(b) of the Uniform on October 28, 2003, and takes effect on October 28, electronic representation of a substitute Commercial Code. 2004. check) for consideration would make

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the substitute check warranties and reconverting bank.6 The Check 21 Act sought general comment on several would be responsible for indemnifying also requires the reconverting bank to issues, including whether it should any person that suffered a loss due to identify itself as such and to preserve include in Regulation CC a new U.C.C. the receipt of a substitute check instead the indorsements of parties that warranty regarding the drawer’s of the original check. A bank that previously handled the check in any authorization of remotely-created transferred a substitute check to a form. demand drafts. consumer who incurred a loss III. Overview of the Board’s Proposed associated with the substitute check also Overview of Comments on the Proposed Rule might be required to provide an Rule expedited recredit to that consumer. A The Board in January 2004 proposed The Board received comments on the bank that provides paid checks to to implement the Check 21 Act by proposed rule from 168 commenters, consumer customers with periodic adding to Regulation CC a new subpart including 107 depository institutions account statements or that otherwise D that would incorporate the and organizations representing provides a substitute check to a requirements of the Act applicable to depository institutions, 35 consumers consumer customer must provide a banks that create, receive, or provide and consumer groups, 14 nonbank disclosure that describes substitute substitute checks or paper or electronic service providers, and 12 other 7 checks and substitute check rights. representations of substitute checks. organizations and persons (including Although the Check 21 Act does not The Board proposed that subpart D one United States Senator). The vast require banks to make processing would contain provisions concerning majority of these commenters generally changes to receive substitute checks, a requirements a substitute check must approved of the Check 21 Act and the bank will be required to qualify a meet to be the legal equivalent of an Board’s proposed rule but expressed substitute check for return differently original check, reconverting bank views about how the Board could than it does an original check. A bank duties, the warranties and indemnity change specific provisions of the rule. must place a ‘‘2’’ in position 44 of the associated with substitute checks, Specific substantive comments are MICR line of a qualified returned expedited recredit procedures for discussed in more detail in the portions consumers and banks, liability for original check. A bank that qualifies a of the Section-by-Section Analysis that violations of subpart D, and the substitute check for return instead must analyze the commented-upon interaction between subpart D and encode position 44 of the substitute provisions. check’s qualified return MICR line with existing federal and state laws. The a ‘‘5.’’ Board proposed new model notices in I. Comments Expressing General appendix C for the consumer awareness Concerns C. Provisions Affecting Banks That disclosure and other consumer notices Create Substitute Checks regarding substitute checks. Several commenters expressed Although the foregoing provisions of The Board also proposed amendments general disapproval of the Check 21 Act the Check 21 Act would apply to all to implement the Check 21 Act that and the Board’s proposed rule. These banks, the law is designed so that losses would affect some existing provisions of commenters expressed concern that the associated with a substitute check Regulation CC and its commentary. For use of substitute checks would increase ultimately would be borne by the party example, the Board proposed to fraud, benefit banks at the expense of that first transferred, presented, or supplement some existing defined terms consumers, and confuse consumers and 8 returned the substitute check (the in § 229.2 for which the Check 21 Act bank employees. reconverting bank).4 A bank that paid a had slightly different definitions and to The commenters concerned about warranty claim or provided an define several new terms used in consumer harm argued that the Check indemnity or expedited recredit for a subpart D. The Board also proposed to 21 Act would shorten the time needed substitute check that it received from amend the magnetic ink character to collect checks and would not reduce another bank could, in turn, bring a recognition (MICR) line requirements fees for consumers.9 The Board expects warranty, indemnity, or interbank for qualified returned checks to allow that the Check 21 Act ultimately will expedited recredit claim against the for differences to facilitate the decrease the time needed to collect bank that transferred the substitute processing of substitute checks and to checks, which is an outcome that the check to it and thereby pass the amend § 229.35 and appendix D to Board deems desirable, and will result associated loss back to the reconverting include indorsement and identification in other benefits to banks and their bank.5 Thus, if there is a duplicative standards for substitute checks. check payment involving a substitute The Board also proposed revisions to 8 Some commenters argued that banks would be check, a substitute check indemnity several other provisions of Regulation unable to make an informed decision about whether claim, or a breach of the legal to process checks physically or switch to electronic CC and its commentary that were processing because of uncertainty about the relative equivalence warranty, the Check 21 Act unrelated to the Check 21 Act. For costs of each option. There are a variety of factors places ultimate responsibility on the example, the Board proposed amending in determining the relative costs of check the commentary to clarify that a processing options, some of which are institution- 4 A reconverting bank is (1) the bank that creates returned check notice need not be specific. The Board expects that most banks should a substitute check or (2) the first bank that receives be able to analyze their own cost structures and a substitute check created by a person that is not written, clarify the application of the make informed processing decisions. a bank and transfers either that substitute check or Electronic Signatures in Global and 9 Some commenters also expressed concern that in lieu thereof the first paper or electronic National Commerce Act (the E-Sign Act) existing hold periods for deposited checks were representation of that substitute check. to consumer disclosures that Regulation either too long or too short. The existing hold 5 Banks may further allocate liability amongst periods in subpart B of Regulation CC are those set themselves as part of their agreements to handle CC requires to be in writing, and clarify forth in the Expedited Funds Availability Act, and checks electronically. A reconverting bank that the time by which a paying bank may the Board is required to shorten (but may not received a check in electronic form therefore could, extend the return or notice of lengthen) those hold periods as the time periods for by agreement, pass back to the sender of that item nonpayment deadline. The Board also clearing local and nonlocal checks improve on a some or all of the losses the reconverting bank widespread basis. The Board will adjust the hold incurred if it used the electronic item to create a periods in subpart B if and when the check clearing substitute check that gave rise to a Check 21 Act 6 But see footnote 5. timeframes for checks improve substantially enough warranty, indemnity, or expedited recredit claim. 7 69 FR 1470 (Jan. 8, 2004). to warrant such adjustments.

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customers.10 For example, processing Another commenter opined that the III. Comments That Misunderstood the changes that a bank makes in reliance costs of using substitute checks should Check 21 Act or the Board’s Proposed on the Check 21 Act could enable the be borne by paying banks and bank Rule bank to offer its depositors later cutoff customers that demand paper checks. The Board received numerous times for certain deposits or to make This would be at odds with the Act’s comments that indicated confusion check images available to consumers intent to allow banks that choose to about the scope, requirements, or effects online. These changes would allow process checks electronically to do so of the Check 21 Act or the proposed consumers faster access to deposited and create substitute checks in a manner rule. funds and to records relating to their that is transparent to banks and other Fourteen individuals expressed check payments, respectively. persons that require paper checks. concern that the Act would preclude Several commenters noted that people them from receiving paper checks with Several commenters expressed already are confused because some their periodic account statements, and checks are used to obtain information to particular concern that the use of four individuals stated that consumers initiate an automated clearing house substitute checks would make the should be able to stop banks from (ACH) debit rather than to effect the original check more difficult to obtain, converting their checks to substitute payment transaction by check. These which in turn would impede law checks. The Check 21 Act does not commenters expressed concern that enforcement’s ability to obtain physical preclude arrangements whereby adding substitute checks to the payment evidence, such as fingerprints, pen customers receive paid checks, although system would exacerbate confusion pressure analysis, and other forensic it does make a substitute check about the rights associated with checks. evidence from paper checks.13 These acceptable for that purpose. The Board agrees with commenters that commenters requested that the Board Two other commenters argued that substitute checks could increase impose original check retention the Act and the proposed rule would confusion about the ways in which requirements in subpart D. Original make it more difficult to comply with checks can be used to process payments checks are truncated in today’s requirements to produce original checks and the legal rights associated with each environment, and the U.C.C. requires and suggested that the Board confirm processing choice. The Board plans to the person that truncates the check to that the Internal Revenue Service (IRS) prepare guidance on these topics. give the original check to the drawer, would accept substitute checks or full- sized photocopies for tax purposes. II. Comments Urging Action keep the original check, or destroy the original check but maintain the ability Substitute checks that meet the legal Inconsistent With the Check 21 Act equivalence requirements of the Check to provide a legible copy for a specified Several commenters suggested that 21 Act can, by the terms of the Act, be period of time (usually seven years). the Board take actions that would be used wherever an original check is The Board expects that, after the Check inconsistent with the language or intent required. The Board also notes that the of the Check 21 Act. 21 Act takes effect, more checks IRS currently allows documents other Three commenters suggested that the potentially will be truncated and than original checks to be used for tax Board delay the effective date of the rule destroyed. The Check 21 Act does not purposes.14 beyond the effective date of the statute. impose any additional requirements on Three commenters asked the Board to However, to implement the Check 21 original check retention, and the Board ensure that banks’ implementation of Act effectively, the rule generally must is not imposing any such requirements electronic check processing services as take effect no later than the effective by regulation. Rather, the choice of contemplated by the Check 21 Act date of the statute.11 whether, and after what period of time, would not impede nonbanks’ ability to One commenter suggested that the to destroy a check will remain a arrange for checks deposited at Board establish standards for the business decision for the bank or other disparate locations to be returned to a exchange of electronic check images. person that removes the check from the single location. A check is returned to This would go beyond the scope of the collection or return process. Banks and the bank whose routing number appears provisions of the Check 21 Act, which other persons that destroy checks may in the depositary bank indorsement on only relate to substitute checks. take fraud risks into account when the back of the check. To facilitate Electronic presentment will continue to deciding whether to destroy a truncated banks’ ability to receive returned checks be governed, as it is today, by check. For example, some banks may at a centralized location, § 229.35(d) of agreements between the paying bank choose to keep original checks above a Regulation CC permits banks to agree 12 and the presenting bank. certain dollar amount due to the that the depositary bank indorsement potentially greater risks associated with applied to the back of the check can be 10 The more time needed to collect a check, the those items. the indorsement of a bank other than the greater the risk that the depositary bank will make bank into which the check was funds deposited by check available for withdrawal deposited. The Check 21 Act and the before it knows whether the paying bank will pay Reserve Banks and other collecting banks may or return the check. The Board’s policies therefore publish lists of banks that accept electronic Board’s final rule do not affect seek to reduce, rather than preserve, the time for presentment from them. However, any such lists § 229.35(d), and the Board accordingly collecting checks. See, e.g., the Board’s Policy will reflect only the agreements of the listed banks expects centralized returned check Statement on Delayed Disbursement, Fed. Res. Reg. to receive presentment electronically from that Service ¶ 9–750, p. 9–247. arrangements to function with respect to particular collecting bank and would not indicate 11 Model disclosure C–5A in appendix C takes substitute checks just as they do with a general agreement of the receiving bank to receive effect immediately so that banks need not delay respect to original checks today. The presentment electronically. their use of that model in preparing the consumer Board also notes that industry standards 13 The commenters did not quantify how often or awareness disclosure required by § 229.57. The include fields within electronic check requirement in appendix D that all indorsements be how many checks are used for forensic purposes by printed in black ink does not take effect until law enforcement; however, the Board understands records that are specifically designed to January 1, 2006, to give banks a transition period from staff of the Financial Management Service of to make necessary processing changes. the Department of Treasury that cases in which 14 See, e.g., IRS Publication 552—Recordkeeping 12 One commenter suggested that the Federal examination of an original Treasury check is for Individuals, which discusses the permissibility Reserve Banks publish a list of banks that have necessary to determine a fraud or forgery are of account statements to prove payments made by agreed to send or receive checks in electronic form. relatively rare. check, credit card, or electronic fund transfers.

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facilitate centralized check return similar to the corresponding provision notes that interbank deposits are programs. of the proposed rule and on which the included in the account definition for Another commenter was concerned Board received no substantive comment. purposes of subparts C and D. that the Act and subpart D would Regarding the Board’s reasoning for To determine when a consumer impede banks’ ability to use ‘‘positive those provisions, the section-by-section awareness notice would be necessary, pay’’ and ‘‘positive payee’’ programs to analysis of the Board’s proposed rule is one commenter asked whether the term detect fraud. Under a positive pay incorporated by reference. consumer account included an omnibus program, a bank compares the check clearing account held by a brokerage I. Amendments To Implement the Check number and amount of a presented firm at a bank for purposes of allowing 21 Act check against a list of check numbers the brokerage firm to pay checks drawn and amount information provided by A. Definitions and Word Usage by consumers. The commentary to the the drawer. The use of a substitute 1. In General. Three commenters final rule clarifies that this type of check should not affect this program. In suggested that the final rule should use account is not a consumer account. The a positive payee program, the drawer terms that are defined in Articles 3 and commentary to the consumer account identifies the payee of a check, and the definition also clarifies that a credit card bank scans the payee field of a 4 of the U.C.C. in a manner consistent with the U.C.C.’s usage of those terms. account or home equity line of credit presented check to verify that the payee that a consumer can access by check is information is correct. The payee The commenters argued that to do otherwise would produce uncertainty not a consumer account for purposes of information on a substitute check will Regulation CC because in those cases appear in a different location than on an and increase the likelihood of litigation. In particular, these commenters stated the consumer’s relationship with the original check, because the image of the bank is a loan rather than a deposit original check is reduced and shifted that the commentary of the proposed rule used the terms accept and party in relationship. when it is placed on a substitute check. 3. Section 229.2(m) Check Processing However, position 44 of the MICR line ways not contemplated by the U.C.C. The Board agrees that subpart D’s word Region. One commenter stated that the of a substitute check is required to bear commentary to § 229.2(m) erroneously a ‘‘4’’ for forward collection or a ‘‘5’’ for usage should be consistent with the U.C.C. The final rule and commentary states that there are 46 check processing qualified return. This information regions. A check processing region is should allow the paying bank’s check- therefore replace the word accept with more appropriate verbs, such as take or defined as the area served by a Reserve processing equipment to identify the Bank’s main office, branch, or other document being scanned as a substitute receive, and replace the word party with office for check processing purposes. check and to adjust the location at person where subpart D contemplates a Because the number of Reserve Bank which it scans the payee field meaning of the term party that is locations that process checks is not accordingly. different from the meaning in the U.C.C. 2. Section 229.2(a) Account; Section static, the final rule omits any numerical Overview of the Board’s Final Rule 229.2(n) Consumer Account. Four reference. The Board’s final rule is substantially commenters expressed concern about 4. Section 229.2(z) Paying Bank. One similar to the rule that the Board aspects of the Board’s proposed commenter expressed concern that the proposed for comment. However, the definitions of account and consumer proposed rule’s definition of paying Board has made a number of clarifying account. bank stated that the Treasury of the changes in response to comments One commenter suggested that the United States or the U.S. Postal Service received and its own further analysis. Board’s expansion of the definition of was a paying bank for a check payable These changes include adjustments to account to include any deposit account by that entity and sent to that entity for certain definitions, particularly at a bank for purposes of subpart D was collection, whereas the statutory regarding how MICR-line variations inappropriately broad. The broad definition states that these entities are affect a document’s status as a substitute account definition for purposes of the paying banks to the extent that they act check. The commentary to the final rule Check 21 Act and subpart D is statutory, as payors. The commenter expressed provides further clarification about the and the final rule retains it. Although concern that the proposed rule’s flow of responsibility for the warranties the Board has not substantively definition could be read to exclude and indemnity. In addition, the final modified the account definition, it has Treasury checks and postal service rule clarifies the scope of, and revised the language of the rule and money orders that are sent to Federal timeframes that apply to, expedited commentary to distinguish more clearly Reserve Banks for collection rather than recredit claims and the general accounts for purposes of subpart D from sent directly to the Treasury or the U.S. consumer awareness notice accounts for purposes of the other Postal Service. requirement. The Board also has subparts of Regulation CC. The proposed amendment to the provided additional commentary in One commenter expressed confusion paying bank definition was intended to response to comments that indicated about when interbank deposits would parallel the construction of the existing confusion about the interaction between be excluded from the account definition and not to alter the meaning particular provisions of the Check 21 definition. Existing Regulation CC of the Check 21 Act’s definition. The Act and particular provisions of the excludes interbank accounts for final rule retains the proposed U.C.C. purposes of all subparts of Regulation definition. The Board has amended the CC. However, the context in which commentary to the definition to clarify Section-by-Section Analysis subpart C uses the term account clearly that, because the Federal Reserve Banks This section-by-section analysis indicates that interbank accounts are act as fiscal agents for the Treasury and focuses on the provisions of the rule meant to be included within that term. U.S. Postal Service, Treasury checks and that the Board changed or considered The final rule retains the proposed U.S. Postal Service money orders that changing in light of comments or the rule’s exclusion of interbank accounts are sent to the Reserve Banks for Board’s further consideration. This for purposes of only subpart B and, in collection are deemed to be sent to the analysis does not discuss provisions of connection therewith, subpart A. The Treasury or the U.S. Postal Service, the final rule that are substantially commentary to the final rule explicitly respectively.

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5. Section 229.2(ww) Original Check. check. The final rule therefore defines indemnity will flow back to the bank One commenter expressed confusion the phrase, and the commentary to the that received the substitute check from about the proposed definition of original new definition provides examples to the nonbank. Without this provision, if check and stated that the definition illustrate its scope. a bank received a substitute check but could be read to mean that only one 8. Section 229.2(zz) Reconverting instead transferred an electronic substitute check could be created with Bank (corresponding to Section representation of that substitute check respect to any original check. As 229.2(yy) of the proposed rule). Several and a subsequent bank created a second indicated in the proposed rule and commenters expressed concern about substitute check, that second bank commentary, the Board defined the term the proposed definition of reconverting would not be able to pass back losses original check to distinguish the first bank and the accompanying under the Act to the initial depositary paper item authorized by the drawer commentary.15 Most of these comments bank. The final rule therefore retains the from any later electronic file or focused on the portion of the definition proposed provision. substitute check that represents that describing the identity of the Several commenters expressed item. The Board has left the definition reconverting bank when a nonbank concern about the potential for a bank unchanged but has provided created the substitute check. to become a reconverting bank without commentary to clarify that multiple A few commenters opined that the its knowledge and consent. For substitute checks could be created at rule should prohibit a person other than example, commenters were concerned various points in the collection and a bank from creating a substitute check. that a nonbank customer could create return process to represent the same However, the statutory text defining a and deposit a substitute check without original check. reconverting bank explicitly first consulting the bank about its 6. Section 229.2(vv) MICR Line. The contemplates nonbank creation of a willingness to accept substitute checks final rule identifies the applicable substitute check, because it states that a in lieu of original checks. The first bank industry standards for MICR-line bank can be a reconverting bank if it is that transfers, presents, or returns a printing and adds a sentence to the the first bank to transfer or present a substitute check created by a nonbank commentary to highlight that those substitute check created by a person (or in lieu therefore the first paper or standards can vary the technical aspects other than a bank. The legislative electronic representation of that of printing the MICR line. This would history also explicitly states that substitute check) is the reconverting include, for example, the circumstances Congress intended to allow nonbanks to bank regardless of whether it explicitly under which magnetic ink is not create substitute checks.16 The Board agreed to do so. However, generally only required. This revision responds to therefore has retained the portion of the large corporate depositors would be comments suggesting that a bank not be definition pertaining to nonbank equipped to create and deposit required to use magnetic ink when creation of substitute checks. substitute checks. Banks therefore printing a paid substitute check solely One commenter was confused by the should be able to address this issue for the purpose of providing it to the provision in the proposed rule that a through their deposit agreements. account holder. bank receiving a substitute check for One commenter requested that the 7. Section 229.2(xx) Paper or deposit from a nonbank would be the commentary to the reconverting bank Electronic Representation of a reconverting bank if, in lieu of the definition provide an example about the Substitute Check. The phrase ‘‘paper or substitute check, that bank transferred identity of the reconverting bank if a electronic representation of a substitute the first paper or electronic bank used a nonbank service provider to check’’ was used at many points of the representation of the substitute check. create a substitute check on its behalf. proposed rule and commentary, This provision ensures that ultimate The proposed rule already had such an particularly with respect to the flow of responsibility under the Act for the example and the final rule retains it the warranties and indemnity. Several substitute check warranties and with minor revisions. The Board also commenters expressed confusion about has revised the proposed commentary to the need for this phrase or asked that 15 One commenter was confused that the rule describe more clearly how to identify the Board provide more detail about used the term reconverting, rather than converting, the reconverting bank for a check bank. Reconverting bank is the statutory term and what types of documents or files were reflects the fact that the original check is converted created by a nonbank and to provide included within its scope. to electronic form and then later reconverted back additional examples about when a bank The statute intends that the chain of to a paper substitute check. would or would not be a reconverting banks that make the warranties and 16 When discussing circumstances under which bank. indemnity will flow uninterrupted from the substitute check warranties are made, the House Report on the Check 21 Act states as follows: 9. Section 229.2(aaa) Substitute Check the first reconverting bank to the The Committee intends that this language allow (corresponding to Section 229.2(zz) of claimant regardless of how many times depositing customers of a bank to create substitute the proposed rule). the form of the item changed after checks with the same legal protections for a. General Comments. One creation of the first substitute check. recipients under this legislation as if they had been commenter stated that the industry converted by a financial institution at the point of The phrase ‘‘paper or electronic first deposit. If a bank allows its depositing standard for substitute checks supported representation of a substitute check’’ customer to create substitute checks, the bank is substitute checks as well as other types ensures that responsibility for the warrantor for the substitute checks created by its of ‘‘image replacement documents,’’ warranties and indemnity will flow depositing customer. For example, if a grocery store such as photocopies in lieu of the creates a substitute check, the bill makes the from the reconverting bank to the last grocery store’s bank, and not the grocery store, original check. The commenter bank that for consideration transfers, responsible for the section 4 warranties. A bank requested clarification about whether presents, or returns the substitute check may choose to pass along, by agreement with the the other types of documents or representation thereof. The phrase depositor that creates the substitute check, any liability it may incur due to the depositor in this contemplated by the standard would be also ensures, as contemplated by the regard. The Committee believes that requiring a substitute checks. statute, that drawers will have the bank’s credit to stand behind a substitute check will At the time of the proposed rule, the ability to make a warranty claim under provide strong protections when paper checks are draft standard developed by the the Check 21 Act even if they received removed from the system at the point of sale or Accredited Standards Committee X9 purchase before they are deposited at, or presented a paper or electronic representation of a to a financial institution. H.R. Rep. No. 108–132, at and approved for trial use by the substitute check instead of a substitute 17 (2003). American National Standards Institute

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was labeled ANS X9.90 and previous substitute check. Persons Regulation CC, and a bank cannot create contemplated three different types of wishing to obtain detailed information a substitute check from that document. documents, one of which was the regarding the layout of a substitute c. MICR-line Requirement. The substitute check that the Check 21 Act check should consult ANS X9.100–140. Board’s proposed rule adopted the authorizes. Going forward, this standard This standard generally provides that statutory definition of substitute check will be known as ANS X9.100–140 and the images of the front and back of the without substantive change, although apply only to substitute checks. original check will be reduced so that the commentary provided extensive However, any document that met all the they can be placed on the first substitute discussion of how the MICR line of a requirements of 229.2(aaa) would be a check. A subsequent substitute check substitute check could vary from the substitute check. would not contain an image of the entire MICR line of the original check. Nine commenters expressed concerns first substitute check. Rather, a Specifically, the proposed commentary about the image standards and other subsequent substitute check would clarified that (1) position 44 of the MICR quality standards that apply to contain the image of the original check line must contain a ‘‘4’’ or a ‘‘5,’’ (2) a substitute checks. Three commenters as that image appeared at the time the bank could correct an encoding error suggested that the Board identify or give previous substitute check was converted that appeared on the original check examples of industry standards for to electronic form, and the remainder of when applying a MICR line to the substitute checks, and one commenter the front of the second substitute check substitute check, (3) a bank could suggested that the industry standards for would contain identification, MICR- encode an amount on the substitute substitute checks that the Board line, and legend information applied by check if the original check’s MICR line identified should not disrupt existing the second reconverting bank. By did not contain that information, and (4) industry standards for checks. The contrast, the back of a subsequent no other variation from the original proposed commentary to the substitute substitute check would contain an check’s MICR line would be permitted. check definition identified ANS X9.90 image of the full length of the back of The proposed commentary highlighted as the industry standard for substitute the previous substitute check in order to that an impermissible error could be checks. Because that standard was preserve previous indorsements. The caused, for example, if a check reader- renamed, the final rule identifies the commentary to the substitute check sorter misread or failed to read the industry standard for substitute checks definition and the commentary to MICR line of the original check, causing as ANS X9.100–140 (unless the Board § 229.35 regarding indorsement the MICR line applied to the substitute by rule or order determines that a requirements explain image and check to contain an error that did not different standard applies), notes that indorsement requirements for later- appear on the original check. The that standard is exclusive standard, and generation substitute checks in detail. proposed rule further provided that a document that failed to meet the further notes that ANS X9.100–140 b. Substitute Checks and ACH Debits. incorporates by reference other existing substitute check definition only because Several commenters requested generally applicable industry standards of a MICR-line error (i.e., a document clarification about how, if at all, checks for checks. The Board has included the that ‘‘purported’’ to be a substitute that are used as source documents to ‘‘unless the Board by rule or order check) would be treated as if it were a create ACH debits are covered under the determines that a different standard substitute check for purposes of the Check 21 Act, particularly whether such applies’’ language to indicate liability and consumer-related checks can be used to create substitute specifically that the Board ultimately provisions of subpart D but would not checks. determines what standard applies to be the legal equivalent of the original substitute checks. The Board does not A substitute check must be a check. expect to change the identified representation of an original check. The Board received comments on its standard. In the unlikely event that the Therefore, something that is not an proposed treatment of the MICR-line Board does identify a different standard, original check cannot be reconverted to component of the substitute definition it almost certainly would do so by a substitute check. The final rule defines from numerous commenters, most of amending Regulation CC. The Board in an original check as the first paper which were depository institutions or no case would change the standard check issued with respect to a particular organizations representing depository without providing notice of such payment transaction. Under U.C.C. 3– institutions. Some of these commenters change. 105, a check is issued when it is generally approved of the MICR-line Three commenters requested that the delivered by a drawer with the purpose clarifications and the related purported Board establish standards regarding of giving rights on the check to any substitute check provision proposed by image quality for substitute checks. In person. the Board. However, the vast majority of particular, these commenters suggested The drawer’s authorization regarding commenters on these issues disagreed that substitute checks should be the use of a check it provides to initiate with the proposed approach. required to use gray-scale, as opposed to an ACH debit will determine whether Commenters that disagreed with the black-and-white, images. The Board the drawer has issued the check within proposed rule expressed concern that believes that this level of detail is more the meaning of Regulation CC and thus the proposed commentary would create appropriately left to industry standards. whether the check may be used to create confusion because it would allow Although ANS X9.100–140 does not a substitute check. If the drawer substitute check MICR lines to contain prescribe image standards, that standard authorizes the check only to be used as some variations from the original check may evolve as the industry gains more a source document for an ACH debit but not others. These commenters also experience with substitute checks. and does not authorize the check to be expressed concern that paying banks A few commenters had particular collected as a check, then the check has could not charge a customer’s account questions about how the image of the not been issued because it has not been for a document that was not a substitute original check would be applied to a delivered in a manner that gives any check because of a MICR-line error and substitute check. Two of these person rights on the check. Therefore, a therefore not the legal equivalent of the commenters erroneously believed that a check authorized for use solely as an original check. These commenters second substitute check would contain ACH debit source document is not an advocated that a document with any an image of the full front and back of the original check within the meaning of MICR-line error should be a substitute

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check that could be the legal equivalent information in each field of the MICR substitute check definition has been of the original check. Commenters also line that was encoded on the original created, banks may apply MICR- stated that the proposed rule provided check at any time before an image of the encoded strips to that document as insufficient guidance about (1) the original check was captured. This necessary to complete the collection and requirement for encoding position 44 of would include all of the information return process. the MICR line on a qualified return preprinted on the original check, plus 10. Section 229.2(bbb) Sufficient Copy substitute check, (2) whether a bank that any additional information, such as the and Copy (corresponding to § 229.2(aaa) failed to encode a substitute check amount, that was encoded prior to the of the proposed rule). The final rule’s properly would be liable under the time the image of the original check was definition of sufficient copy more Check 21 Act or existing encoding captured. closely tracks the statutory language in warranties, and (3) which bank In light of the highly technical nature the indemnity section of section 6(d)(1) ultimately would bear liability for of the MICR line and its important of the Check 21 Act than did the substitute check encoding errors. Many operational role in check processing, the proposed rule. The Board also has of these commenters suggested that Board’s final rule leaves the details reorganized and revised the encoding of substitute checks should be regarding permissible MICR-line commentary to illustrate more clearly covered by existing encoding variations up to ANS X9.100–140 the definitions of copy and sufficient warranties. Commenters opposing the instead of identifying them in the rule copy. Board’s proposed treatment of the and commentary. The Board believes Several commenters were confused MICR-line requirement also expressed that allowing the MICR line of a about the relationship between copy concern that the proposed rule substitute check to vary from the and sufficient copy, which are defined inadequately addressed the extent to original check’s MICR line as specified as paper documents, and § 229.58, which banks could repair a MICR-line in ANS X9.100–140 is appropriate which allows banks to provide error. These commenters generally because the full range of issues relating information electronically if the indicated that the rules for repairing the to MICR-line errors and the most recipient agrees. Although the terms MICR line of a substitute check should practical solutions to those issues will copy and sufficient copy, as well as the parallel as closely as possible the rules be revealed through operational term original check, refer only to for repairing the MICR line of an experience with substitute checks. particular pieces of paper, a bank that is original check.17 The Board expects that the variations required to provide a paper check or The MICR-line component of the from the original check’s MICR line copy may satisfy that requirement by substitute check definition in the Check permitted by ANS X9.100–140 would be instead providing an electronic image of 21 Act provides that a substitute check kept to the minimum necessary to the check or copy in accordance with is a paper representation of an original facilitate substitute check processing in § 229.58. check that ‘‘bears a MICR line the same manner as the original checks. 11. Section 229.2(ccc) Transfer and containing all the information appearing Such variations could include, for consideration (corresponding to Section on the MICR line of the original check, example, allowing reconverting banks to 229.2(bbb) of the proposed rule). In except as provided under generally correct errors appearing on the MICR- response to a comment, the Board has applicable industry standards for line of the original check. The revised the definition of consideration substitute checks to facilitate the commentary to the final rule clarifies, to clarify that a bank receives processing of substitute checks.’’ however, that industry standards cannot consideration for the substitute check ANS X9.100–140 requires a substitute allow a substitute check MICR line to (or paper or electronic representation check used for forward collection to omit a field that, at any time prior to thereof) that it transfers to a nonbank if bear a ‘‘4’’ in position 44 and a qualified truncation, was encoded on the original the bank has received value for the returned substitute check to bear a ‘‘5’’ check’s MICR line. The Board further check in that or any other form. in that position. Proper encoding of expects that, in determining what The proposed rule contained an position 44 ensures that downstream variations from the original check’s exception from the consideration banks will be on notice that the MICR line should be permitted, the definition stating that a bank would not document they have received is a standards committee will incorporate receive consideration for a substitute substitute check and can, if converting the overriding goal of the Check 21 Act check solely in response to a warranty, such an item to electronic form or that substitute checks should function indemnity, expedited recredit, or other qualifying it for return, handle it as much as possible like original checks claim with respect to the substitute appropriately. The final commentary to so that paying banks and other persons check. The Board proposed this the substitute check definition therefore that demand paper checks will not bear exception so that a bank could respond clarifies that a reconverting bank or a costs associated with receiving a to an indemnity or expedited recredit bank qualifying a substitute check for substitute check instead of an original claim by providing a substitute check return must encode position 44 with a check. If the Board concludes that the without a legal equivalence legend as a ‘‘4’’ or a ‘‘5,’’ as appropriate. variations permitted by ANS X9.100– sufficient copy without automatically The final rule clarifies that a 140 are inconsistent with this or other breaching the legal equivalence substitute check MICR line must have purposes of the Check 21 Act, the Board warranty. Several commenters were will consider identifying permissible confused about the operation of this 17 In response to the many concerns expressed MICR-line variations by rule or order exception. The Board has deleted the about the Board’s proposed treatment of the MICR- instead of relying on ANS X9.100–140. exception from the final rule. Because line replication requirement, the Board’s staff Through revisions to § 229.34(c)(3) industry standards require application invited commenters that addressed MICR-line issues to a meeting to explore these issues further. and its commentary, the final rule of the legal equivalence legend to a The meeting took place on May 3, 2004, at the provides that application of MICR-line substitute check, the problem that the Board, and representatives of 53 commenters information to a substitute check is exception was designed to address is attended in person or by conference call. A subject to Regulation CC’s encoding not likely to arise in practice. Moreover, summary of this meeting, including a list of participants, is available at www.federalreserve.gov/ warranties. The commentary to the on further consideration, the Board SECRS/2004/May/20040625/R–1176/R– substitute check definition also notes believes that it would be appropriate for 1176_150_1.pdf. that, once a document that meets the a substitute check provided in response

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to a claim to carry full warranty, The Board received a number of mandatory compliance date until indemnity, and recredit rights. comments relating to its proposed January 1, 2006. 12. Section 229.2(ddd) Truncate; treatment of indorsements. Several of Three commenters stated that name Section 229.2(eee) Truncating Bank these commenters generally questioned and location information in the (corresponding to sections 229.2(ccc) whether the proposed changes would indorsement should be optional, while and 229.2(ddd) of the proposed rule, improve the legibility of indorsements, three others stated that many banks respectively). Several commenters particularly because some indorsements relied on that information and expressed concern about the definitions on substitute checks would be preserved recommended that it remain mandatory. of and commentary to truncate and through images of a previous item. The Three other commenters indicated that truncating bank. For example, one Board believes that it is too early to electronic indorsement standards did commenter expressed concern that the determine how the use of substitute not provide for name/location definition of truncate would preclude checks ultimately will affect the information and suggested that the banks from truncating items that are not legibility of indorsements. It is likely, as Board make name/location information handled on a cash basis. Another commenters stated, that more mandatory for physically-applied commenter suggested that the Board indorsements will be preserved through indorsements but optional for clarify that a truncating bank does not images of previous items. It also is likely electronically-applied indorsements. make the substitute check warranties that, as the efficiency of the collection The final rule adopts this suggested and indemnity under §§ 229.52 and process improves through wider use of approach. 229.53, but that a bank receiving a check electronic processing and substitute A few commenters opined that electronically could by agreement pass checks, fewer banks will handle and indorsement on the front of the check back to the truncating bank losses that thus be required to indorse a check. A would be useful under some the recipient bank incurred under those reduction in the number of circumstances, although they differed sections. indorsements on an item should on what those circumstances would be. The proposed rule used the statutory contribute to greater legibility of the By contrast, the majority of commenters definition of truncate, and the final rule indorsements that are applied. that addressed this issue stated that any retains that definition. However, the indorsement on the front of the check Board has amended the commentary to A few commenters stated that, in would clutter the front of the check and truncating bank to clarify that a bank some cases, check-handling equipment potentially obscure other necessary receiving a check electronically from the would first capture an image of a check information. To reduce the risk of truncating bank may pass back losses by and then spray a physical indorsement obscuring information on the front of agreement. on the check. These commenters the check, the final rule provides that all requested that the Board clarify that in indorsements must appear on the back B. Section 229.30(d) Identification of such cases the indorsement applied of the check. Returned Checks after the check image was captured A few commenters stated that the new Section 229.30(d) requires a paying would be conveyed as an electronic indorsement and identification bank to identify its reason for returning indorsement rather than an image of the standards with which a reconverting a check unpaid on the front of the physical indorsement. The Board agrees bank must comply when creating a returned check but does not require a with these commenters’ analysis of how substitute check were too detailed. The specific location for that information. such an indorsement would be carried Board notes that, in general, the level of The Board has revised this section and forward and has revised the detail for indorsement location the accompanying commentary to commentary to the substitute check information for substitute checks at the clarify that a paying bank that returns a definition and § 229.35 accordingly.18 time of creation parallels that for substitute check must place the reason The Board has made additional existing paper checks. The Board for return within the image of the clarifying changes to these portions of therefore has retained specific original check. This requirement the commentary to address questions indorsement location information for ensures that the reason for return would posed by commenters regarding the newly-created substitute checks. be retained on any subsequent application and preservation of However, the Board has removed substitute check. indorsements. specific location information for the Commenters generally agreed with the reconverting and truncating bank C. Issues Relating to Indorsement and Board’s proposal to require identifications that appear on the front Identification Standards—Sections indorsements to be in black ink, of the check and simply provided that 229.35 and 229.38 and Appendix D although several indicated that such identifications must be outside the The Board proposed to require all requiring banks to switch from purple to image of the original check. For indorsements to be in black ink and to black ink immediately would be purposes of the Check 21 Act, make depositary bank name/location burdensome and requested a grace reconverting banks should be required information optional as opposed to period.19 The final rule retains the black to place this information on the front of mandatory. The Board requested ink requirement but delays the the check in a manner that does not comment about whether returning banks obscure necessary MICR-line and should retain the option to indorse a 18 One commenter requested clarification about payment information. The Board check on the front. The Board proposed how a second depositary bank should indorse a believes that the precise location of that applying to existing substitute checks substitute check that was returned and redeposited. information is best left to industry the indorsement standards in § 229.35 Substitute checks in such a case would be indorsed standards. just as a redeposited original check is indorsed and appendix D, with proposed today. A few commenters expressed concern amendments, that would apply to 19 One commenter suggested that the Board that the reconverting bank and original checks. The Board proposed should delay the effective date for all the new truncating bank identifications applied separate indorsement and identification reconverting bank indorsement and identification to the front of substitute checks would requirements. The requirement that a substitute requirements that would apply to check contain a reconverting bank identification is be considered acceptances or reconverting banks at the time they statutory and takes effect on the effective date of the indorsements of such checks under the create substitute checks. Check 21 Act. U.C.C. The Board therefore has clarified

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in the commentary that identifications D. Section 229.51 General Provisions further suggested that, if the back of the applied to the front of the check are not Governing Substitute Checks original check contained no acceptances or indorsements. A 1. Legal Equivalence. Section 229.51 indorsement information, only an image reconverting bank that is a paying bank combined the legal equivalence and of the front of that item should be must place its routing number on the warranty concepts in sections 4(a) and required for a substitute check back of the check to ensure that its 4(b) of the Check 21 Act by stating that associated with that item. The Check 21 identification as a reconverting bank is a substitute check would be the legal Act defines a substitute check as a not lost if there is a subsequent equivalent of the original check for all representation of an original checks that substitute check.20 The Board also has purposes and all persons if (1) a bank bears ‘‘an image of the front and back of clarified in the commentary to had made the substitute check the original check.’’ A bank that creates §§ 229.35(a) and 229.51(b) that this use warranties in § 229.52 and (2) the a document without an image of the of the paying/reconverting bank’s substitute check accurately represented back of the original check and sends that document as if it were a substitute routing number is for identification only all the information on the front and back check therefore bears the associated risk and is not an indorsement. of the original check as of the time of truncation and bore the required legal of doing so. The proposed rule contained equivalence legend. Several commenters raised specific amendments to the text of and a. General Comments about Legal concerns about the proposed commentary to § 229.38(d) to clarify a Equivalence. The Board received several commentary to the accuracy reconverting bank’s liability for general comments about legal requirement. The commentary to that indorsements that, although applied in equivalence. One commenter agreed requirement generally stated that ‘‘all accordance with § 229.35 and appendix with the concept that a substitute check the information’’ on the original check D, were illegible because of the should not be legally equivalent to an that must be retained includes the reduction in size of the original check original check unless the substitute information preprinted on the original image that appeared on the first check were subject to bank warranties. check, payment information added to substitute check and the corresponding Two commenters opined that a the check, and other required shifting in the placement of substitute check created by a nonbank information added to the check. indorsements preserved within the should not be a legal equivalent unless Requiring features that do not survive image of the original check. Several the first bank to transfer that substitute the image capturing process to appear commenters requested clarification check explicitly agreed to do so. on a substitute check as a condition of legal equivalence would preclude the about how this provision would work in However, the definition of reconverting use of substitute checks, thus practice. The final rule clarifies that the bank indicates that a bank that transfers a substitute check created by a nonbank undermining the primary purpose of the reconverting bank is liable if the Check 21 Act. The proposed reduction in size and placement of the thereby becomes the reconverting bank, even if that bank did not explicitly agree commentary therefore noted that original check image on the substitute watermarks, micro printing, and other check caused an indorsement to accept the item. If such a substitute check met the accuracy and legend security features that cannot survive the previously applied to the original check imaging process need not be represented in accordance with § 229.35 and requirements for legal equivalence, it would become a legally equivalent on a substitute check as a condition of appendix D to be rendered illegible by substitute check as of the time the bank legal equivalence. a subsequent indorsement that also was transferred it for consideration and Some commenters expressed concern applied to the substitute check in thereby made the substitute check about the loss of security features during accordance with those standards. The warranties. As discussed in the analysis the creation of a legally equivalent final rule also clarifies that the of the reconverting bank definition, substitute check. Although the loss of reconverting bank is liable if the shift in banks should be able to work with some paper-based security features will placement on a substitute check of an customers that wish to create and be inevitable, the Board expects that the indorsement that was applied to the deposit substitute checks so that the industry will develop additional original check in accordance with security features that can survive the banks do not become reconverting banks 22 § 229.35 and appendix D precluded the unwittingly. image capturing process. Other subsequent bank from legibly applying b. Accuracy of Information and Image commenters expressed concern about its indorsement to the substitute check Quality. Commenters generally whether the accuracy requirement for in accordance with those standards.21 supported the concept that a substitute legal equivalence would be met if the check must contain an accurate drawer or a bank applied payment 20 One commenter questioned why a reconverting representation of all the information on 22 bank must apply its routing number twice to a One commenter expressed concern because the the original check as a condition of legal proposed commentary indicated that a latent substitute check. The routing number on the front equivalence. One commenter requested security feature that became clearer after an image of the substitute check identifies the bank as the clarification that a substitute check need was captured (such as a void watermark that is faint reconverting bank for that particular check. The on an original check but is revealed clearly on a front of a subsequent substitute check thus would not be more legible than an original photocopy or other image) would not cause a bear the routing number of the reconverting bank check to meet the legal equivalence substitute check to fail the accuracy requirement, for that substitute check but not the routing number requirements. The Board agrees that a provided that it did not render any of the required of the reconverting bank for the previous substitute substitute check is not held to a higher information illegible. The presence of the void check. A reconverting bank’s routing number on the standard of accuracy in order to satisfy language on the substitute check is problematic to back of the check therefore serves both as its the extent that the recipient of the substitute check indorsement (except when the reconverting bank the legal equivalence requirements. The is unable to determine if the substitute check also is the paying bank) and also, because it is set Board has clarified in the commentary reproduced a fraudulent original item that off by asterisks, preserves its identity as a that an accurate image of an illegible contained clear void language before it was reconverting bank on subsequent substitute checks. original check would, if all other truncated or a legitimate original check on which 21 Subsequent substitute checks will contain an the void language was latent. A person that suffered image of the entire back of the previous substitute requirements for legal equivalence were a loss because of this uncertainty would have an check and therefore should not perpetuate the satisfied, be a legally equivalent indemnity claim under § 229.53 and possibly an shifting indorsement problem. substitute check. This commenter expedited recredit claim under § 229.54.

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information to the check using an ink addition, amends the check definition to ANS X9.100–140 is a substitute check color or ink type that would not survive state specifically that the term check that is legally equivalent to the original the image capturing process. The includes an original check and a check (provided all the other commentary to the final rule clarifies substitute check. requirements for substitute checks and that payment information always must 3. Purported Substitute Checks. In the legal equivalency are met). be accurately represented on a proposed rule, the Board recognized Regardless of how ANS X9.100–140 substitute check because that that some banks attempting to create a addresses permissible MICR-line information is an essential element of a substitute check would instead create a variations and other substitute check negotiable instrument. If a substitute document that failed to satisfy the requirements, there inevitably will be check failed the legal equivalence MICR-line replication requirement to be instances where a document intended to requirement because of ink choice or a substitute check. The proposed rule be a substitute check will fail one or some other feature, such as check color referred to these documents as more components of the substitute or a decorative image, the reconverting purported substitute checks. In many check definition and thus will not be a bank would be responsible for cases, a purported substitute check substitute check. associated liabilities. However, a would be processed just like a check but The Board notes that there are cases reconverting bank could attempt to because of the MICR-line error would in the current check-processing address this issue through agreements cause a loss. For example, a document environment where documents that are with its depositors and the banks that with a MICR-line error only in the not checks or the legal equivalent send checks to it. amount field or the account number thereof (for example, photocopies and Several commenters expressed field likely would go through the entire image replacement documents) concern about the lack of uniform collection process but may be charged nonetheless go through the collection standards that apply to the image for the wrong amount or to the wrong and return process and ultimately are requirements for substitute checks. The account, respectively. Because paid, resulting in a charge to a Board understands that some banks purported substitute checks would not customer’s account. It is uncertain how intend to capture black and white be subject to the Check 21 Act, a person often a bank attempting to create a images of items converted to electronic suffering such a loss would not have the substitute check instead will create a form, while other banks intend to Act’s rights and protections regarding document with a MICR line that does capture gray scale images that contain a substitute checks. To fill this gap and not satisfy the substitute check wider range of tones. Any substitute protect persons who collect, pay, or definition. The Board therefore has check that is subject to bank warranties, otherwise receive a purported substitute removed the purported substitute check contains an accurate representation of check, § 229.51(d) of the proposed rule provision from the final rule. If the the front and back of the original check, provided that a purported substitute purported substitute check problem and bears the legal equivalence legend check would be subject to the warranty, appears broad in scope, creates is the legal equivalent of the original indemnity, and consumer-related uncertainty for paying banks regarding check regardless of whether the image is provisions of the Check 21 Act and whether to make payments, or is black and white or gray scale. If issues subpart D. detrimental to drawers, the Board will relating to capturing images of checks Several commenters generally consider addressing those problems by prove problematic in the creation of supported the concept of the purported rule or order. substitute check, although some of these substitute checks, the Board expects that E. Section 229.52 Substitute Check commenters suggested specific revisions industry standards would evolve to Warranties address those issues. to this provision or clarifications about 2. Section 229.51(c) Applicable Law. its application. A few commenters that The Check 21 Act provides that any One commenter requested clarification supported the provision requested that bank that transfers, presents, or returns about whether a substitute check that it be expanded to apply to a document a substitute check for consideration represented a fraudulent original check that failed any of the four substitute warrants that the substitute check meets would have legal equivalence. The check requirements. One commenter the requirements for legal equivalence commentary to the final rule clarifies neither supported nor opposed the and that no depositary bank, drawee, that such a substitute check, if it met the purported substitute check concept but drawer, or indorser will be asked to legal equivalence requirements, would requested clarification about how a make a duplicative payment. be legally equivalent to the underlying document would purport to be a Section 229.52 of the proposed rule check but as such would be treated in substitute check. reorganized the statutory language and the same manner as the original The majority of commenters, clarified that the responsibility for the fraudulent item for purposes of other however, suggested that the Board warranties flows with the substitute law. For example, a bank could not delete the purported substitute check check and with a paper or electronic properly charge a customer’s account for provision. These commenters suggested representation of that substitute check. a substitute check that represented a that a document should be a substitute The proposed commentary also clarified fraudulent original check. check and a legal equivalent if it that warranties associated with the first This commenter also enquired about contained any MICR-line error, thus substitute check continue to flow if a the legal status of a substitute check that obviating the purported substitute check second substitute check is created. did not meet the legal equivalence provision. These clarifications were intended to requirements. An item that meets the The final rule leaves the scope of ensure that the warranty chain would substitute check definition is a check permissible MICR-line variations to continue from the first reconverting even if it does not meet the additional ANS X9.100–140. The Board expects bank all the way through to the final requirements for legal equivalence. The this standard to identify the recipient of a substitute check or proposed commentary to the check circumstances under which a substitute representation thereof. The proposed definition acknowledged that such check’s MICR line may vary from the commentary also clarified that a bank’s substitute checks would be subject to original check in order to facilitate responsibility for the warranties would the U.C.C. and Regulation CC. The final processing of substitute checks. An item run only to subsequent parties that rule retains this sentence and, in that satisfies all the requirements of received a substitute check or a paper or

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electronic representation thereof, not to would be liable for breach of the ensure that, if an indemnity recipient parties that handled only the original duplicative payment warranty even if a makes a claim for a loss caused by check or that handled the substitute duplicative payment was caused by a receipt of a substitute check, that loss check or representation prior to the fraud of which the bank was unaware. would be passed back to the first warranting bank. However, some of these commenters reconverting bank regardless of the The final rule adopts the text of suggested that the reconverting bank number of times the item changed proposed § 229.52 without revision. should not be liable for a warranty forms. The proposed rule and However, the Board has revised the breach under these circumstances. commentary also attempted to clarify commentary to clarify further the issues Responsibility under the Check 21 Act that, unlike a warranty claim, which can identified in the previous paragraph and for the duplicative payment warranty be triggered by receipt of a substitute additional issues identified by does not depend upon the warranting check or a representation of a substitute commenters. bank’s knowledge or fault, although a check, an indemnity claim is triggered 1. Legal Equivalence Warranty. bank can further allocate such liability in the first instance only by a loss that Several commenters expressed concern by agreement or under provisions of is due to receipt of a substitute check about a reconverting bank being held otherwise applicable check law. The instead of the original check. The liable for breaching the legal final rule therefore contains a fraudulent proposed commentary further clarified equivalence warranty because of duplicative payment example. the scope of losses recoverable under something that was beyond its control, The Board’s proposed rule did not the indemnity. The Board has adopted for example if the drawer wrote directly address whether a payment the regulatory text of the proposed payment information on the original made through an ACH debit, as opposed indemnity section and the check in a type of ink that did not to a check payment made by electronic accompanying commentary with survive the image capturing process presentment, would be subject to the changes, discussed in the following well. One commenter suggested that the duplicative payment warranty. The paragraphs, designed to further clarify paying bank should bear the loss for Board noted that the language of the operation of that provision. breach of the legal equivalence warranty warranty, which states that a person One commenter indicated that the in such cases because it can control for will not be asked to pay a check it Board should more clearly distinguish ink type and the use of security features already has paid, could be read to between the flow of responsibility for by agreements with its depositors. This exclude a payment made by ACH debit. making the indemnity and the flow of commenter also suggested that the The Board specifically requested an indemnity claim back up the chain drawer in such cases should not be comment on this issue. of indemnifying banks. In particular, the permitted to make an indemnity claim Several commenters stated that an commenter requested that the Board or expedited recredit claim if the legal ACH debit should be covered under the better articulate that an indemnity claim equivalence defect was attributable to duplicative payment warranty because must be based on a loss due to any the drawer’s action. Another commenter recipients of such debits were not person’s receipt of a substitute check. requested clarification about whether a adequately protected by Regulation E The proposed commentary noted that an bank would have an obligation not to and the NACHA rules. Approximately indemnity claim must be ‘‘ultimately convert a check that would not legibly 60 commenters stated that the traceable’’ to the receipt of a substitute survive the image capturing process. duplicative payment warranty should check, but another commenter objected The Check 21 Act contemplates that not apply to ACH debits because such to that language and preferred that the a bank can create a substitute check to debits are already adequately covered by Board return to the statutory ‘‘due to’’ represent any check as defined in existing laws and rules. language. The commentary to the final § 229.2(k) and use that substitute check The statutory language indicates that rule addresses these concerns. instead of the original check. However, the duplicative payment warranty Several commenters requested the statute also attempts to place as little applies to charges initiated by check, clarification about the interaction burden as possible on those that receive and ACH debits are not checks. The between the substitute check indemnity substitute checks, such as a drawer that Board therefore believes that the best and other law. Two commenters receives paid checks or a paying bank reading of the Check 21 Act is to suggested clarification about the that demands presentment of a paper exclude ACH debits from coverage measure of damages under the check. Because the reconverting bank under the Act’s duplicative payment indemnity section and the general chose to use a substitute check instead warranty. The Board notes that the liability provision (§ 229.56). The of the original check, the Check 21 Act U.C.C. applies to unauthorized check proposed commentary contained allocates liability to the reconverting payments and the NACHA rules apply examples of the indemnity amount with bank for a substitute check that, at the to unauthorized ACH debits. In and without a warranty breach, and the time of its creation, did not meet the addition, Regulation E applies to final rule further clarifies this legal equivalence requirements. unauthorized ACH debits to consumer distinction. The Board also has added a However, a reconverting bank may by accounts. paragraph describing how production of agreement pass this liability back to the the original check or a sufficient copy F. Section 229.53 Substitute Check party that sent the electronic check by the indemnifying bank will limit that Indemnity image to it. bank’s damages under § 229.53. 2. Duplicative Payment Warranty. The Check 21 Act indemnity protects Production of that item, however, would One commenter stated that the against losses that any recipient of a not absolve the indemnifying bank from duplicative payment warranty should substitute check suffers due to receipt of warranty claims under any other law. In apply regardless of the order in which a substitute check instead of an original response to a comment, the Board has duplicative payment requests occur. check. The Board’s proposed rule and clarified that Regulation CC and the The commentary to the final rule makes commentary clarified that, like the U.C.C. are sources of such other this point explicitly. Check 21 warranties, all banks that warranties. Several commenters acknowledged transfer a substitute check or a paper or Three commenters suggested that the that the commentary to the proposed electronic representation of a substitute Board establish a time limit for bringing rule stated that a reconverting bank check make the indemnity. This is to an indemnity claim. The liability

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provisions of the Check 21 Act, as 21 Act, which states that a consumer check was returned to the consumer implemented at § 229.56 of Regulation may make an expedited recredit claim if unpaid in the form of a substitute check CC, already establish a one-year statute he or she can assert in good faith that, for which the bank debited the of limitations for claims under the among other things, ‘‘the bank charged consumer’s account. A consumer who Check 21 Act. the consumer’s account for a substitute did not have an expedited recredit right Several commenters indicated that the check that was provided to the for a substitute check that he or she examples the Board provided in the consumer’’ (emphasis added).24 When wrote but that was not charged to his or commentary to § 229.53 to illustrate the the Check 21 Act gives rights to a person her account nonetheless might have a application of the indemnity provision that received a paper or electronic substitute check warranty or indemnity were useful, although some commenters representation of a substitute check, it claim or a U.C.C. claim with respect to requested that the Board include explicitly so indicates. For example, that item. The Board has clarified these additional examples. Although the section 5 states that the warranties are points in the commentary to § 229.54(a). Board has clarified the existing given to the listed persons ‘‘regardless of Several commenters objected to the examples, the final rule does not whether the warrantee receives the portion of the proposed commentary to provide additional examples. If substitute check or another paper or § 229.54 stating that any warranty claim, experience indicates that there are electronic form of the substitute check not just a claim for a substitute check particular aspects of the indemnity that or original check.’’ The consumer warranty provided in § 229.52, could call for greater clarification, the Board expedited recredit provision contains no trigger an expedited recredit right. The may add examples. language to indicate that receipt of Board notes that the returned check something other than a substitute check warranties in § 229.34(b) of Regulation G. Section 229.54 Expedited Recredit is meant to trigger the right. In addition, for Consumers CC would run to the drawer of the only those consumers who receive check. In addition, the Check 21 Act substitute checks are entitled to the The Board’s proposed rule states that a consumer may use the consumer awareness disclosure that reorganized the structure of the expedited recredit procedure to recover explains expedited recredit rights, consumer expedited recredit provision for ‘‘a warranty claim’’ and does not which further demonstrates that the and clarified how to calculate the time limit such claims to the substitute check right applies only to recipients of periods that applied for consumer and warranties. The final commentary substitute checks. bank action. The proposed commentary therefore retains the concept that losses provided a number of examples about The expedited recredit procedure is intended to place consumers who associated with any warranty breach are how the expedited recredit provision recoverable under § 229.54, although the would work in practice. receive substitute checks in the same position to the extent practicable as if Board has provided more detail about 1. General Comments. Numerous the additional warranties contemplated. commenters, including consumers and they had received the original check. consumer groups, stated that the The right is not intended to apply to Several commenters suggested that, if expedited recredit provision should consumers who already have agreed not a consumer requests an original check, apply even if the consumer was not to receive paper checks. Giving then the bank should be required to provided a substitute check. These consumers an expedited recredit right in provide either the original check or a commenters argued that the Check 21 the additional situations suggested by legally equivalent substitute check. Act produces this result because the the commenters thus would exceed both Such a requirement is beyond the scope information a consumer must provide to the text and the underlying intent of the of the Check 21 Act, which does not make a claim does not include a statute. The Board therefore has not establish requirements for when an statement that the consumer received a expanded the scope of § 229.54. original check or substitute check must Several commenters requested substitute check. These commenters be given but rather establishes the clarification about whether the also suggested that the legislative circumstances under which a substitute expedited recredit right would apply to history indicated a congressional intent check may be used as the legal checks that are not drawn on a that the expedited recredit apply any equivalent of the original check. Such a consumer account, such as travelers’ time a substitute check was used to requirement also would go beyond the checks, credit card checks, and checks process a check. Several of these scope of U.C.C. 4–406, which, as used to access a home equity line of commenters further suggested that, if adopted in most states, does not require credit. The statute specifically states the Board retained the requirement that a bank to provide original checks to that a substitute check is subject to the 25 a consumer must receive a substitute consumers or to retain original checks. expedited recredit right if the bank check as a condition of the expedited The Board therefore has not adopted the holding the consumer’s account charged commenters’ suggestion. recredit right, then provision of a the account for that substitute check. substitute check or a paper or electronic The Board also has clarified in the The Act specifically defines the term commentary that the amount a representation of a substitute check account to be a deposit account. should meet that requirement.23 consumer may claim as a loss under the Therefore, a consumer generally would consumer expedited recredit section The requirement that a consumer not have an expedited recredit right must receive a substitute check to have includes the amount of the improper associated with a check that was not charge as well as any resulting fees that an expedited recredit claim comes drawn on his or her deposit account. directly from section 7(a) of the Check the consumer believes were improper, However, the consumer could have an up to the amount of the substitute expedited recredit right for such a check 23 check. The commentary provides Another commenter understood the rule to deposited into his or her account if the mean that the expedited recredit procedure would examples about the amount a consumer apply if a consumer received a substitute check that could claim. was returned unpaid to the consumer’s account but 24 Section 7(h) further provides that ‘‘a consumer was concerned that the introductory paragraph to who was provided a substitute check may make a the model consumer awareness disclosure (which claim for an expedited recredit under this section 25 However, State law in New York and focused on checks written by consumers) might with regard to a transaction involving the substitute Massachusetts requires banks to give their obscure that point. The Board has amended the check whether or not the consumer is in possession customers the option of receiving paid paper checks model notice to address this concern. of the substitute check’’ (emphasis added). with periodic account statements.

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2. Time Period for Consumer Action. by § 229.54 to bring a substitute check warranty or indemnity claim under The Check 21 Act states that the claim. § 229.52 or § 229.53, respectively, or a consumer must make a claim within 40 Several commenters asked for further claim under the U.C.C. The Board has days of the later of two dates: either the clarification about what constituted made this clarification in the date on which the relevant account extenuating circumstances that would commentary. statement was mailed (or delivered by require a bank to extend the consumer’s 3. Form of Claim and Time Period for other means to which the consumer 40-day period for making a claim. The Bank Action on Consumer Claims. The agreed) or the date on which the proposed rule paralleled the approach statute provides that a bank must act on problematic substitute check was made in Regulation E by stating the existence a consumer expedited recredit claim available to the consumer. The proposed of the extenuating circumstances within 10 business days after the rule combined these concepts by stating extension in the rule text but moving to business day on which the consumer that the claim was due within 40 days the commentary the statutory examples submits the claim. The proposed rule of the date that the relevant account of what might justify an extension. The changed the latter occurrence of statement or substitute check was Board is unaware of any problems in business day to banking day to parallel mailed or delivered. The accompanying applying the Regulation E extension other provisions of Regulation CC. The commentary clarified that the term provision and does not expect problems Board received numerous comments on delivery includes making the account applying the corresponding provision in this clarification, all but four of which statement or substitute check available § 229.54. The Board therefore is not supported the adjustment. The final rule through various means agreed to by the further clarifying the extenuating retains the proposed rule’s use of the consumer, including in-person delivery. circumstances provision at this time. term banking day. The final rule also The Board received numerous Several commenters requested further clarifies that the 10-day period within comments expressing concerns about clarification about what action by the which the bank must act on the the events that should trigger the 40-day consumer would satisfy the requirement consumer’s claim does not begin until time period within which a consumer to ‘‘submit’’ a claim within the specified the bank receives the claim. The Board must make an expedited recredit claim period. These commenters noted that believes that it is appropriate to focus and what a consumer must do to some portions of the rule and on the bank’s receipt, rather than the constitute timely action within that commentary referred to a consumer’s date of the consumer’s mailing or period. A few commenters suggested making the claim, while others delivery to provide certainty to the bank that the final rule’s construction should appeared to focus on the bank’s receipt about the time period within which it parallel that of the statute. of the claim. Other commenters must take action. The Board has retained the ‘‘mailed or requested further clarification about the The final rule retains, with some delivered’’ language in the rule text interaction between the consumer’s revisions, the proposed rule’s provision because the Board believes this ability to make an oral claim and the stating that the time period for bank construction clarifies rather than bank’s right to require a consumer to action is measured from the bank’s changes the statute’s meaning. The submit a claim in writing. receipt of the written claim if the bank Board has amended the final The Board has clarified in the final requires a consumer to submit an initial commentary to clarify that delivery rule that a consumer must submit his or oral claim in writing. The final rule and includes making the statement or check her claim such that the bank receives it commentary also clarify, in response to available at the bank for the customer’s within the 40-day time period (extended a comment, that a bank that requires a retrieval pursuant to the customer’s if necessary) described in the regulation. claim to be in writing must state that request. The final rule also clarifies that, if a requirement in the consumer awareness Several commenters suggested that consumer submits a claim orally and the disclosure it provides under § 229.57 the Board adjust the 40-day time period bank requires a written claim, the bank and always must inform a consumer for consumer action to parallel must inform the consumer of the written who makes a claim orally of the Regulation E (which gives consumers a claim requirement at that time and may requirement at the time of the oral 60-day period to make a claim for a require the consumer to submit that claim. disputed electronic fund transfer) or the written claim such that the bank 4. Bank Action on Consumer Claims. U.C.C. (which gives consumers a receives it within 10 business days of a. Bank Action Generally. The reasonable period to examine a bank the oral claim. This time period proposed rule reorganized and clarified statement for errors). These commenters parallels the corresponding period in the provisions of the Check 21 Act were concerned that having three Regulation E for written confirmation of related to the bank’s options for different yet somewhat related timing oral claims. In such a case, the responding to consumer claims and the requirements for consumer action consumer’s claim would be timely if the notices associated with each of those would be confusing. Some commenters bank received the oral claim within the options. Commenters that addressed the also were concerned that a consumer 40-day period and the written claim Board’s reorganization strongly might receive a substitute check that within the 10-day period. In addition, supported it. The final rule therefore triggered the time period for making a the final rule and commentary provide retains the proposed organization of the claim well after the underlying that if a consumer attempts to submit a bank action and notice provisions, but transaction, which could compromise claim in any form and does not provide with some specific revisions suggested the bank’s ability to make a timely all the information required to by commenters. interbank expedited recredit claim constitute a claim, the bank must inform b. A Bank’s Choices for Responding to under § 229.55. the consumer that the claim is a Consumer Claim. Under the Act and The 40-day period in the proposed incomplete and identify what final rule, a bank may grant or deny a rule comes directly from the statute, and information is missing. consumer’s claim or provisionally the Board has retained it in the final One commenter requested that the recredit a consumer’s account pending rule. A bank concerned about Board clarify that a consumer who fails further investigation. The bank may differences between Regulation E and to bring a timely expedited recredit reverse a recredit if it later determines § 229.54 could choose to give a claim under § 229.54 nonetheless might the claim was invalid. A bank must consumer a longer period than required have claims under other law, such as a provide a specific notice for each of

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these actions. In addition, a bank that recredit ‘‘at any time.’’26 The Board has 7. Other Claims Not Affected. One denies a claim must demonstrate to the removed the quoted language from the commenter questioned the need for consumer why the claim is not valid text of the final rule and clarified in the § 229.54(f) of the proposed rule, which and provide the original check or a commentary that the time period for the stated that providing a consumer sufficient copy. One commenter asked bank’s reversal is subject to the expedited recredit under § 229.54 does whether a bank must retain a copy of applicable statute of limitations. not absolve a bank from liability under expedited recredit claims that it 5. Delayed Availability. In response to other law. This provision of the Board’s receives. The Check 21 Act does not comments, the commentary to the final proposed rule came directly from the contain a retention requirement, rule clarifies that the rule allows a bank statute. A consumer may recover only although other record retention laws to delay the availability of both the base up to the amount of the substitute check and regulations to which the bank is amount of the recredit and any interest under § 229.54, although the consumer’s subject might apply. on that amount. The Board in response losses associated with the substitute Regarding provisional recredits, one to comments also has clarified in the check may exceed that amount. commenter requested that the Board commentary that the new account and Paragraph (f) is intended to clarify that clarify that the interest due on a repeated overdraft exceptions in subpart a consumer may be able to recover those provisional recredit would be interest D apply as described in the commentary additional losses under other provisions only on the amount of the recredit, to the corresponding exceptions in that allow for proximately-caused rather than on the entire amount subpart B. damages exceeding the amount of the check, such as the substitute check claimed by the consumer if that amount 6. Notice Requirements. Several is greater than the recredit. The Board indemnity or U.C.C. 4–402. The Board commenters suggested that a bank has added a reference to the U.C.C. in agrees that this is the correct result should not be required to notify a the rule text and a paragraph in the under the rule and therefore has not consumer of a recredit if the bank commentary that explains the intent and revised the final rule or commentary to affirmatively determines that the application of § 229.54(f). address this point. consumer’s claim is valid. Section 8. Sufficiency of Commentary and A few commenters expressed concern 7(f)(2) requires a notice for all recredits, Examples. The Board specifically that the Board had diminished the not just those that are made requested comment on whether requirement that the bank ‘‘demonstrate provisionally pending further additional commentary to § 229.54 was to the consumer that the claim is not investigation. The Board therefore has needed. Commenters’ reactions to this valid’’ because the proposed rule retained the requirement in § 229.54 request were mixed. Thirteen instead stated that the bank must that a bank always notify the consumer commenters requested more explain to the consumer the basis for its of a recredit. commentary. Some of these were denial. The Board did not intend to Notices regarding expedited recredit general requests, while other deviate from the statutory requirement claims are deemed to be given on the commenters offered specific examples but rather to describe more specifically business day that they are mailed or that they wanted the Board to include. how a bank would satisfy it. These otherwise delivered in a manner agreed By contrast, ten commenters argued that commenters also suggested that the to by the consumer. One commenter no additional examples were needed, consumer, rather than the bank, is the suggested that electronic delivery of the and some of these commenters even person that should determine whether a consumer expedited recredit notices suggested that the Board omit certain of copy provided with a denied claim was should be subject to the E-Sign Act. The the proposed examples. sufficient to determine that the claim E-Sign Act applies to notices that other The Board has retained the examples was not valid. In response to these law requires to be in writing (rather than from the commentary to the proposed comments, the text of the final rule uses in electronic form) and requires a rule with some clarifying changes. The the statutory language, and the consumer to affirmatively consent to Board has not, however, added commentary provides more detail about electronic delivery of a written notice examples or commentary except as how a bank would demonstrate to the after the bank provides a detailed notice noted in the preceding paragraphs. The consumer that a claim is not valid. concerning electronic delivery. The Board expects that use of the consumer In describing the bank’s ability to Check 21 Act specifically states that a expedited recredit provision will be reverse a recredit on a later bank may provide the expedited recredit relatively rare and that the commentary determination that a claim was not notices through any means to which the addresses the most likely questions that valid, the proposed rule clarified that consumer has agreed. The Board banks might have regarding practical the bank could reverse the basic amount believes that because the Check 21 Act application of that provision. The Board of the recredit plus interest on that specifically addresses alternative means will consider adding or deleting amount. All commenters that addressed of providing written information commentary and examples if experience this point supported allowing a bank to required by that Act, the E-Sign Act indicates that the level of detail in the reverse associated interest, although does not apply. A bank therefore need commentary is inappropriate. some suggested that the Board further not comply with E-Sign when providing H. Section 229.55 Expedited Recredit clarify that the interest to be reversed materials electronically under the Check Procedures for Banks 21 Act, although a bank voluntarily may included both the interest component of Several banks expressed concern that choose to do so. the initial recredit and the interest that the interbank recredit right would not accrued on the entire recredited work well in practice and identified 26 amount. The final rule and commentary One commenter suggested that the Board various reasons for that concern. For make this clarification. clarify that a bank cannot use the recredit reversal provision as a blanket right of set off to recover example, some commenters stated that a Several commenters expressed amounts from the consumer that are unrelated to bank that received an interbank concern about the provision of the the recredit claim. The recredit reversal provision expedited recredit claim might not proposed rule allowing the bank to of the rule only allows a bank to reverse a previously-provided recredit and does not apply to know within the 10-day period for reverse a recredit, particularly the other amounts that the consumer might owe the acting on that claim whether it could statement that the bank may reverse a bank. produce an original check or sufficient

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copy. Such a bank might seek to obtain sued as an element of accrual of a cause with that substitute check ‘‘unless [the] the original check or sufficient copy by of action under § 229.56. The Board bank already has provided the submitting its own interbank recredit included this clarification in the disclosure’’ to a consumer who receives claim, which also would be subject to a proposed rule to make the standard for paid checks. Some commenters 10-day response time. One commenter accrual parallel to the standard for understood the proposed rule to mean requested that the Board identify which making a timely claim. The final rule that a bank that already had provided transaction gave rise to a bank’s claim therefore retains the proposed accrual the notice to a consumer who received and thus started the clock for making an language regarding the identity of the paid checks with account statements interbank expedited recredit claim. A party to be sued. would not be required to provide an commenter also requested that the Two commenters expressed concern additional notice when responding to a Board specify a particular method for or confusion about the interaction of consumer’s request for a check. Other calculating interest on a claim.27 Other § 229.54, which requires a consumer to commenters believed that notice upon commenters requested additional bring an expedited recredit claim within provision of a substitute check always clarification about who would enforce 40 days of the delivery of the relevant would be required. the interbank recredit process. Still account statement or substitute check, The final rule provides that a bank another commenter asked how a with the timing requirements of always is required to provide the consumer’s receipt of an extension to § 229.56. One commenter noted that disclosure when responding to a request make a consumer expedited recredit § 229.56 generally states that a claim for a check by providing a substitute claim would affect the timing must be made within 30 days of accrual check. This approach more closely requirements for the interbank recredit to be timely, whereas § 229.54 provides parallels the statutory language, which process. that a consumer has 40 days from does not provide an exception to the The Board has amended the time delivery of the relevant account requirement to provide a disclosure periods in § 229.55(b)–(c) for making statement or substitute check to make a when providing a substitute check on an and responding to an interbank claim to timely expedited recredit claim. This occasional basis. Moreover, the time parallel the Board’s amendments to the commenter suggested that a consumer that a consumer receives a substitute corresponding provisions of the be allowed this same 40-day period to check in response to a particular request consumer expedited recredit section. In make a timely claim for purposes of is likely when the disclosure will be response to a comment, the final § 229.56. The Board notes that the most useful. commentary also clarifies which statute and rule produce this result by One commenter suggested that a bank transaction triggers the claimant bank’s providing that a timely consumer should not be required to provide the 120-day period for making a claim. recredit claim under § 229.54 satisfies substitute check disclosure in a separate Aside from those changes, the Board has the timing requirement of § 229.56. mailing but rather should be allowed to adopted § 229.55 and the accompanying provide the disclosure along with other J. Section 229.57 and Appendix C commentary as proposed. The interbank account information. The rule would Consumer Awareness and the Board’s recredit section may be varied by permit a bank to combine the substitute Model Language agreement. If banks determine that check disclosure with other particular provisions of § 229.55 are 1. Consumer Awareness Disclosure in information. problematic, they may agree to modify General. The Board has amended the One commenter suggested that the those provisions by agreement as they text of § 229.57 of the rule to parallel the consumer awareness disclosure should deem appropriate. statutory text more closely by providing be required based on the consumer that the consumer awareness disclosure relationship rather than the account I. Section 229.56 Liability required by subpart D must be brief. relationship, such that a bank need not The Board has adopted the provisions The proposed rule required banks to provide an additional disclosure if an of proposed § 229.56 with some minor provide the disclosure to consumers existing consumer customer opened a changes suggested by commenters. who received paid checks and new account. The text of the final rule In response to a comment, consumers who received substitute incorporates this interpretation. Another § 229.56(a)(1)(i) now contains language checks on an occasional basis. Several commenter suggested that the Board that parallels § 229.53(b)(1)(ii) when commenters suggested that banks explain how the consumer awareness describing that losses recoverable under should be required to provide the disclosure would apply in the context of subpart D are, in the absence of a disclosure to all consumers, not just joint account relationships. This warranty and indemnity claim, limited those who receive substitute checks. commenter stated that notice to one to the amount of the substitute check Requiring notice for consumers who do account holder on a joint account plus interest and expenses. not receive substitute checks would go should suffice as notice to each Several commenters expressed beyond the requirements of the statute consumer on the account. The final rule concern that the Board’s proposed rule and could confuse consumers who includes language similar to that in included the identity of the party to be receive a notice describing rights that § 229.15(c) regarding notice to joint they do not have. The Board therefore account holders. 27 Another commenter questioned why banks had has not altered the basic scope of the 2. Timing for a Disclosure Provided in 120 days to make a claim when the corresponding provision of § 229.54 gives consumers only 40 days. consumer disclosure requirement. Response to a Consumer’s Request for a As the commentary to the proposed rule explained, However, the final rule and commentary Check. The statute requires a bank that the 120-day period for a bank to make a claim clarify that the reference to paid checks provides a substitute check in response allows time for the statement to be delivered to the means paid original checks and paid to a consumer’s request for a check to consumer and for the consumer to make a timely claim, plus it allows for multiple interbank claims substitute checks and does not refer to provide the consumer awareness with respect to the same substitute check. The a statement that contains multiple check disclosure to the consumer ‘‘at the time Board thinks this explanation is more appropriate images per page. of the request.’’ There are some cases in in the preamble, which discusses the basis for the The proposed rule stated that a bank which a bank would be able to provide rule’s provisions, than in the commentary, which clarifies the application of those provisions. The responding to a request for a check by the notice at the time of the consumer’s Board accordingly has omitted this text from the providing a substitute check must request in a manner that is useful to the commentary to the final rule. provide the disclosure in connection consumer, while other requests may

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present practical difficulties for banks. proposed disclosure. By contrast, five has provided these models to help For example, a bank may not know at commenters suggested that the model banks to comply with the rule. the time of the request what it will disclosure should provide consumers provide in response. Ultimately, the with more detail about expedited K. Section 229.58 Mode of Delivery of bank might provide something other recredit rights.28 Many commenters Information Required by This Subpart than a substitute check to the consumer. made specific wording suggestions for One commenter suggested that the If that bank had given the substitute the Board’s consideration. Board should delete § 229.58, which check disclosure to the consumer at the The final model disclosure, published contains the rule for electronic delivery time of the request, the consumer might as model 5A in appendix C, is shorter of documents that applies to all of be confused by receipt of a disclosure than the proposed model. In crafting subpart D, and instead discuss explaining rights that did not apply to this model disclosure, the Board has electronic delivery of documents in the document (s)he received. Moreover, attempted to balance the requirement each place in the rule where that the consumer may make his or her that the disclosure be brief and the need concept is relevant. The Board has request in such a manner (such as by for the disclosure to contain enough retained the proposed organization telephone) that the bank is unable to information to enable a consumer to because it believes that discussing the provide the disclosure at the time of the understand and, if necessary, exercise request. issue of electronic delivery in one the expedited recredit right in § 229.54. section and cross-referencing that In light of the foregoing difficulties, The Board’s revisions also reflect its the Board proposed two alternatives for section when appropriate is consideration of the specific wording straightforward and efficient. when a bank must provide the concerns expressed by commenters. disclosure to a consumer who requests 4. Additional Model Language for L. Section 229.60 Variation by a substitute check and requested Consumer Expedited Recredit Notices. Agreement comment on which alternative was Although not required to do so by preferable. The first alternative used the The Check 21 Act and final rule statute, the Board published for statutory language, while the second provide that the only provision that may comment model notices that banks would have allowed the bank in all be varied by agreement is the interbank could use to respond to consumer cases to provide the disclosure at the recredit provision at section 8 of the Act expedited recredit claims under time it provided a substitute check in and § 229.55 of the rule. The final rule § 229.54(e). The Check 21 Act does not response to the consumer’s request. provides commentary clarifying that provide a safe harbor for appropriate use Commenters overwhelmingly preferred this provision does not prevent a bank of these model notices, and the Board the second alternative. from taking action that is more favorable requested comment on whether having The final rule takes an approach that to the consumer than required by the model language would be useful for combines elements from the first and Check 21 Act or the final rule. second alternatives. The final rule states banks in the absence of a safe harbor. that a bank must provide the disclosure Commenters strongly supported II. Changes Unrelated to the Check 21 to a consumer who requests a check or inclusion of the model notices, although Act check copy at the time of the request if many requested that the Board either In addition to the changes necessary feasible and otherwise must provide the give the language safe harbor status or to implement the Check 21 Act, the disclosure no later than the time at specifically state that appropriate use of Board also proposed changes to a which the bank provides a substitute the models in the Board’s view would number of existing provisions in check in response to the request. The constitute compliance with the Check Regulation CC based on a general review commentary provides examples of when 21 Act. it would not be feasible to provide the The Board has retained the model of the rule. Commenters generally disclosure at the time of the request. consumer expedited recredit notices in supported these proposed changes, 3. Model Language for the Disclosure appendix C but has revised them. The although some expressed particular Required by § 229.57. The Check 21 Act proposed models focused on responding concerns as noted in the following requires the Board to publish model to claims for an improper charge to a paragraphs. With the exception of the language that banks could use to satisfy consumer account, but the final models changes discussed in the following the consumer awareness disclosure instead focus on whether the paragraphs, the Board is adopting the requirement and that, when used consumer’s claim is or is not valid. proposed revisions to existing appropriately, would be deemed to These revisions will allow banks to use provisions in substantially the same comply with that requirement. The the model notices to respond to a form as in the Board’s proposed rule. Board requested comment on the model consumer’s claim regarding an improper A. Section 229.15 General Disclosure language that it proposed to include in charge to his or her account or regarding Requirements existing appendix C. a warranty breach. Because the statute The Board received numerous does not provide safe harbor status to The Board proposed to amend the comments on the proposed model these model notices, the Board has not commentary to § 229.15 to require that disclosure. Several commenters indicated that appropriate use of the disclosures under subpart B be clear and generally opined that the proposed notice constitutes compliance with the conspicuous. The Board proposed this language was adequate, although some rule. However, the Board has revised the change in Regulation CC to parallel of these commenters suggested that the language discussing the status of the proposed changes to its consumer model disclosure could be more model notices to indicate that the Board regulations.29 However, the Board concise. Numerous commenters received numerous comments opposing expressed concern that the proposed 28 These commenters also suggested that the the proposed changes to the consumer language was so detailed that it would Board should require banks to respond accurately rules, and several commenters opposed discourage consumers from reading the to consumer enquiries about how a particular check inclusion of clear and conspicuous was processed. The Check 21 Act does not contain disclosure. These commenters suggested such a requirement. However, banks have a a specific, alternative model disclosure business incentive to respond appropriately to 29 See 68 FR 68786, 68788, 68791, 68793, 68799 that was much shorter than the Board’s consumer enquiries on this and other topics. (all dated Dec. 10, 2003).

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language in the Regulation CC following the otherwise applicable opposed to the ‘‘send or give’’ language commentary. deadline by the earlier of the close of proposed by the Board. This commenter In response to concerns expressed that banking day or a cutoff hour of 2 was concerned that the Board’s regarding the proposed consumer p.m. or later set by the receiving bank proposed language might be read to regulations, the Board recently under U.C.C. 4–108.’’ This approach exclude providing notice by e-mail. The withdrew all the proposed amendments should provide the certainty of Board believes that the send or give to the consumer rules.30 In connection identifying a specific cutoff hour but language is sufficiently broad to allow with that action, the Board determined also allow the receiving bank to set a notice in any form, and the proposed that the goal of ensuring that consumers cutoff hour of 2 p.m. or later or to close commentary explicitly stated that receive noticeable and understandable before 2 p.m. electronic notice would suffice if sent to information should be achieved by the address specified by the recipient C. Other Comments Concerning Non- developing proposals that focus on for that purpose. The Board therefore Check 21-Related Changes improving individual disclosures rather has adopted the language as proposed. than the adoption of general definitions 1. Manner of Providing Subpart B Another commenter suggested that and standards applicable across all notices. Commenters generally the Board amend § 229.33 to provide regulations. supported the proposed changes to the that a bank could provide notice in the The existing notice requirements in commentary to §§ 229.13 and 229.15 form of a substitute check or another subparts B and C of Regulation CC have that clarified the application of the E- paper or electronic representation of a been in effect since 1988, and the Board Sign Act to notices and disclosures that check. The Board believes that the text is not aware that recipients of those subpart B requires to be in writing. of § 229.33(a), when combined with the notices have expressed concerns However, one commenter expressed revised commentary addressing the regarding the manner in which banks concern about existing language in the form of the nonpayment notice, already provide them. The Board therefore has commentary stating that a notice is in a produces this result. determined that adding a clear and form that the consumer can keep if it conspicuous requirement is unnecessary can be ‘‘downloaded or printed.’’ This III. Responses to Specific Requests for at this time and has not amended the commenter suggested that the standard Comment commentary as proposed. The Board be changed to ‘‘downloaded and In addition to proposing Check 21- will reevaluate this issue in connection printed.’’ The Board is not aware of related and non-Check 21-related with its future periodic reviews of consumer problems associated with this changes, the Board also requested Regulation CC. requirement and notes that comment on several specific issues. downloading information on a computer B. Section 229.30(c)(1) Paying Bank’s allows the recipient to access and use A. Remotely-Created Demand Drafts Responsibility for Return of Checks the information later. The Board also The Board requested comment on Section 229.30(c)(1) currently believes that it would be unusual for a whether Regulation CC should provides that a paying bank’s midnight bank to send an electronic notice such incorporate a U.C.C. warranty that deadline for returning a check is that it could not be printed. The Board would shift liability for an unauthorized extended if it uses a means of delivery therefore has retained the existing remotely-created demand draft from the that ordinarily would result in receipt language. paying bank to the depositary bank, by the receiving bank’s next banking Another commenter expressed although the Board did not propose day. In response to a case holding that concern about the requirement that specific regulatory language. Reserve Banks have a 24-hour banking notices and disclosures required by Approximately 76 commenters day for processing checks (see Oak §§ 229.13(g), 229.16(c)(2), and 229.33(a)- addressed this issue, all but two of Brook v. Northern Trust, 256 F.3d 638 (b) must include an account number, which strongly supported the general (7th Cir., 2001)), the Board proposed to which the commenter interpreted to idea of covering liability for remotely- amend § 229.30(c)(1) to provide that the mean the entire account number. The created demand drafts in Regulation CC. deadline would be extended if a paying commenter suggested that a bank should However, many commenters advocated bank used a means of delivery that be permitted to redact all but the last changes from the uniform version of the ordinarily would result in the receiving four digits for information security warranty. For example, some bank’s receipt of the check before the purposes. The Board has amended commenters stated that the warranty cutoff hour for its next processing cycle §§ 229.13(g) and 229.16(c)(2) to allow should apply to all remotely-created if sent to a returning bank or before its for the proposed redaction. The Board demand drafts instead of only those next banking day if sent to a depositary has not amended § 229.33(a)–(b) drafts drawn on consumer accounts, and bank. because the notice required by that others suggested that the warranty The Board received several comments section is an interbank notice, and the should extend to all the draft’s terms on this proposed change, most of which receiving bank likely would need full instead of the amount only. Many indicated that using the cutoff hour for account information for the notice to commenters encouraged the Board to the next processing cycle would be serve its intended purpose. propose specific language for comment confusing and difficult to apply. These 2. Section 229.33 Notice of in a separate rulemaking. The Board commenters noted that some banks have Nonpayment. The Board received intends to issue a separate proposal more than one such cutoff hour and that eleven comments concerning its request regarding remotely-created demand paying banks might not know the for comment on whether the time period drafts later this year. relevant times for each of the banks to for giving the notice of nonpayment B. Treatment of Industry Standards which they return checks. should be reduced. Only two In response to these comments, the commenters opined that an adjustment The Board also received comments final rule provides that a paying bank was necessary. The Board therefore has regarding whether it should identify must return a check ‘‘on or before the left the time period unchanged. One specific industry standards in the rule receiving bank’s next banking day commenter suggested that the Board text or the commentary. The vast amend this section to state that the bank majority of commenters on this issue 30 See 69 FR 35541 (June 25, 2004). must ‘‘provide or give’’ the notice, as preferred the Board’s proposed

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approach of placing a general reference awareness notice in § 229.57. However, Reserve’s proposed paperwork burden to industry standards in the text of the the extent to which this collection of estimates in its proposed rule were too rule and identifying specific standards information affects a particular low. However, that commenter did not in the commentary. However, depository institution will depend on suggest specific revisions to those particularly with respect to substitute whether and under what circumstances estimates. checks, many commenters preferred that that depository institution provides The first notice, described in the Board should indicate that a substitute checks to consumers. For § 229.54(b)(2), is the information a particular standard is exclusive. example, institutions that do not consumer would provide when making In cases where the Board intends that provide paid checks with account an expedited recredit claim in writing. an exclusive industry standard apply, statements or provide substitute checks The Federal Reserve estimates that each such as the standards relating to MICR- in response to consumers’ occasional respondent regulated by the Federal line printing and substitute checks, the requests for paid checks will have Reserve will receive, on average, 25 of Board has identified a specific standard significantly fewer consumer awareness these claims per year. The Federal in the text of the final rule. The Board disclosures and expedited recredit Reserve estimates that it will take believes that this approach is more notices than will depository institutions consumers, on average, 15 minutes to transparent for the reader and will better that routinely provide paid checks to complete and send this claim. The facilitate compliance with the rule. consumers. Federal Reserve estimates that the total The collection of information in this annual burden for consumers C. Plain Language regulation is a new requirement for submitting claims to respondents The Board received four comments which the Federal Reserve has no direct regulated by the Federal Reserve is about whether the proposed rule and method for estimating burden. The 7,775 hours. Using the Federal Reserve’s commentary were in plain language. following average burden estimates for methodology, the total annual burden Two of these commenters opined that respondents regulated by the Federal for consumers submitting claims to all the rule and commentary were in plain Reserve therefore are based on the depository institutions would be language, especially in light of the Federal Reserve’s experience under approximately 67,300 hours. complexity of some provisions of the similar, existing regulations with The second notice, described in law. Another commenter suggested that respect to the 1,244 state member banks § 229.54(e), is required when a the rule could be shortened if some and uninsured U.S. branches and depository institution validates the elements were moved to an appendix agencies of foreign banks for which the consumer’s claim, denies a consumer’s but did not identify specific changes it Federal Reserve has administrative recredit claim, or reverses a consumer’s would make. Another commenter enforcement authority (collecting recredit claim. The Federal Reserve requested that the rule better clarify the referred to in the following paragraphs estimates that each respondent application or non-application of the as respondents regulated by the Federal regulated by the Federal Reserve will Check 21 Act to non-consumer Reserve) and for consumers who submit send, on average, 35 of these notices per accounts. The Board has addressed this claims to those depository institutions. year. The Federal Reserve estimates that concern through its revisions to the The following average burden estimates it will take each such respondent, on account and consumer account for respondents regulated by the Federal average, 15 minutes to prepare and definitions and through revisions to Reserve also represent an average across distribute these notices (the Board has certain parts of the commentary. all such respondents and reflect provided a model disclosure that depository institutions may use for this Paperwork Reduction Act variations between institutions based on their size, complexity, and practices. purpose). The estimated total annual In accordance with the Paperwork The Federal Reserve also has estimated burden for the respondents regulated by Reduction Act of 1995 (PRA) (44 U.S.C. the total annual burden associated with the Federal Reserve to respond to 3506; 5 CFR 1320 Appendix A.1), the each notice both for respondents consumer claims is 10,885 hours. Using Board reviewed the final rule under the regulated by the Federal Reserve and for the Federal Reserve’s, the total annual authority delegated to the Board by the all affected depository institutions. The burden for all depository institutions Office of Management and Budget Federal Reserve estimates that half of all would be approximately 94,200 hours. (OMB). The final rule contains depository institutions affected by this The third notice, described in requirements subject to the PRA. The rule do not provide paid checks with § 229.55 (b)(2), is required for each collection of information that is account statements or provide substitute depository institution that is required to required by this final rule is found in 12 checks and thus would have little or no make a written claim against an CFR 229.54, 229.55, and 229.57. This burden for these requirements. The indemnifying depository institution for information is required to obtain a Federal Reserve has taken this fact into a substitute check. The Federal Reserve benefit for consumers and mandatory account by estimating total burden for estimates that each respondent for depository institutions. all affected depository institutions on a regulated by the Federal Reserve will All depository institutions, of which weighted basis. The other banking submit, on average, 15 of these claims there are approximately 19,280, agencies are responsible for estimating per year. The Federal Reserve estimates potentially are affected by this and reporting to OMB the total that it will take each such respondent, collection of information, and thus are paperwork burden for the depository on average, 15 minutes to complete and respondents for purposes of the PRA, institutions for which they have send each claim. The estimated total because all depository institutions may administrative enforcement authority. annual burden for respondents respond to and make expedited recredit They may, but are not required to, use regulated by the Federal Reserve to claims under §§ 229.54 and 229.55, the Federal Reserve’s burden estimates. submit interbank recredit claims is respectively. In addition, all depository Except as noted in the following 4,665 hours. Using the Federal Reserve’s institutions that provide paid checks to paragraphs, the burden estimates for the methodology, the total annual burden consumer customers with periodic final rule are the same as those the for all depository institutions would be account statements or that otherwise Federal Reserve identified for the approximately 40,400 hours. provide substitute checks to consumer proposed rule. One commenter Finally, § 229.57 describes the customers must provide the consumer expressed concern that the Federal requirements for depository institutions

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to provide consumer awareness institutions by approximately 293,400 ‘‘small bank’’ if it has $150 million or disclosures to consumers who receive hours. less in assets. Based on March 2004 call paid checks with their periodic The Federal Reserve may not conduct report data, the Board estimates that statements, who receive a substitute or sponsor, and an organization is not there are approximately 14,251 check in response to a request for a required to respond to, this information depository institutions with assets of check, and who receive a returned collection unless it displays a currently $150 million or less. check in the form of a substitute check. valid OMB control number. The OMB The Check 21 Act does not require A model disclosure that depository control number is 7100–0235. any depository institution to create substitute checks or change its general institutions may use is provided in Regulatory Flexibility Act appendix C–5A. check collection procedures, although The proposed rule contained an The Board has prepared a final after the Act’s effective date any exception to the disclosure requirement regulatory flexibility analysis as depository institution may receive a for a depository institution that required by the Regulatory Flexibility substitute check instead of an original provided a substitute check on an Act (see 12 U.S.C. 604). check. The provisions of the Check 21 Act and the final rule potentially apply occasional basis to a consumer who I. Need for and Objective of Rule already had received the disclosure. The to all depository institutions regardless The Board is adopting this rule to final rule, by contrast, requires that a of their size. However, the extent to implement the Check 21 Act. The Act depository institution always provide which any depository institution will be requires the Board to publish a model the disclosure when providing a economically affected by the final rule disclosure that depository institutions substitute check on an occasional basis. depends on several variables, including may use to satisfy their consumer The Federal Reserve believes that how many substitute checks a awareness disclosure requirements. The provision of a substitute check on an depository institution handles and Act also authorizes the Board to adopt occasional basis in response to a whether it creates those substitute rules necessary to implement, prevent consumer’s request will be rare and thus checks. Even though all depository circumvention or evasion of, or facilitate does not expect that elimination of the institutions that handle a substitute compliance with the Act. The final rule proposed rule’s exception will check for value make the substitute adopts the text of the Check 21 Act with appreciably increase the number of check warranties and indemnity and clarifying changes and commentary disclosures. The final rule’s paperwork potentially are responsible for providing designed to aid depository institutions’ burden estimate for notices provided on expedited recredit for a substitute check understanding of and compliance with an occasional basis therefore is only to a consumer or another depository the Act. The final rule is incorporated slightly higher than that in the proposed institution, the final rule allocates most into existing Regulation CC so that all associated losses to the reconverting rule. the Board’s generally applicable check depository institution that first The Federal Reserve estimates that collection requirements will be transferred, presented, or returned the each respondent regulated by the contained within one rule. substitute check for value. Thus, a Federal Reserve will, on average, depository institution’s costs associated II. Summary of Issues Raised by provide 510 disclosures per year (as with substitute check-related problems Comments in Response to the Initial compared with 500 disclosures per year primarily will depend on whether it Regulatory Flexibility Analysis in the proposed rule) and that, on chooses to create substitute checks. In average, it will take one minute to The Board received two comments on addition, whether a depository prepare and distribute the disclosure to its initial regulatory flexibility analysis. institution must provide the consumer each consumer. The one-minute One commenter opined that the impact awareness disclosure contained in the estimate is a change from the proposed of the rule on small depository final rule will depend on the depository rule due to further analysis. The institutions should be proportional to institution’s specific practices regarding consumer awareness disclosures are that on larger depository institutions providing checks to consumers. standardized and machine-generated and should not be adverse to either. The Due to current uncertainty about each and do not substantively change from other commenter expressed concern that of the foregoing variables, aside from the one individual account to another; thus, the use of substitute checks could burden estimates in the Paperwork the average time for providing the increase fraud and that small depository Reduction Act section, the Board cannot disclosure to all consumers who are institutions would not have sufficient at this time determine the number of entitled to receive it should be small. resources to develop fraud prevention small depository institutions that will The Federal Reserve estimated that the techniques to respond to such increased be directly affected by the final rule or estimated total annual burden for risks. This commenter acknowledged the rule’s overall economic impact on respondents regulated by the Federal that additional fraud risks associated small depository institutions. Reserve to provide the consumer with substitute checks could not yet be IV. Recordkeeping, Reporting, and awareness disclosure is 10,574 hours. quantified but expressed concern that Compliance Requirements Using the Federal Reserve’s these risks would be burdensome. These methodology, the total annual burden comments did not provide specific The final rule does not contain for all depository institutions would be information about the impact of the recordkeeping or reporting approximately 91,500 hours. proposed rule on affected small requirements. However, a depository The final rule would increase the total depository institutions. The Board has institution that provides paid checks to burden under Regulation CC for not made regulatory changes based on consumer customers with account respondents regulated by the Federal the comments. statements or otherwise provides a Reserve and consumers submitting substitute check to a consumer must claims to those respondents by 33,899 III. Description of Affected Small provide consumer awareness hours, from 327,052 to 360,951. Using Entities disclosures. In addition, a depository the methodology explained above, the Under section 3 of the Small Business institution that receives an expedited final rule would increase total burden Act, as implemented at 13 CFR part 121, recredit claim from a consumer or other under Regulation CC for all depository a bank is considered a ‘‘small entity’’ or depository institution must comply with

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the requirements of the relevant and § 229.57 of the final rule. The Board I B. Designate paragraph (a) as expedited recredit provision, including believes that delaying the effective date paragraph (a)(1) and revise the first the requirements regarding timing for of model disclosure C–5A would sentence of that paragraph; and notification of the depository undermine the Act’s intent that banks I C. Designate the undesignated institution’s determination regarding the be able to rely on the model language as paragraph as paragraph (2) and revise claim. The final rule allows depository soon as the Board publishes it. that paragraph; and institutions to vary by agreement the I D. Add a new paragraph (3). 12 CFR Chapter II terms of the interbank recredit The revisions and addition read as provision, but not the consumer List of Subjects in 12 CFR Part 229 follows: expedited recredit provision. Banks, Banking, Federal Reserve (a) Account. (1) Except as provided in V. Steps Taken To Minimize the System, Reporting and recordkeeping paragraphs (a)(2) and (a)(3) of this Economic Impact on Small Entities requirements. section, account means a deposit as defined in 12 CFR 204.2(a)(1)(i) that is The requirements of the Check 21 Act Authority and Issuance a transaction account as described in 12 that potentially affect small depository I For the reasons set forth in the CFR 204.2(e). * * * institutions are statutory. The Board has (2) For purposes of subpart B of this minimal flexibility to vary those preamble, the Board is amending 12 CFR part 229 to read as follows: part and, in connection therewith, this requirements by regulation, but when subpart A, account does not include an possible it has indicated steps PART 229—AVAILABILITY OF FUNDS account where the account holder is a depository institutions may take to bank, where the account holder is an minimize risks under the Act. The AND COLLECTION OF CHECKS (REGULATION CC) office of an institution described in substitute check warranties and paragraphs (e)(1) through (e)(6) of this indemnity are made as a matter of law I 1. The authority citation for part 229 is section or an office of a ‘‘foreign bank’’ when a depository institution transfers, amended to read as follows: as defined in section 1(b) of the presents, or returns a substitute check, International Banking Act (12 U.S.C. but the final rule and commentary Authority: 12 U.S.C. 4001–4010, 12 U.S.C. 5001–5018. 3101) that is located outside the United clarify in various places that depository States, or where the direct or indirect institutions may further allocate liability § 229.1 [Amended] account holder is the Treasury of the amongst themselves by agreement. The I 2. In § 229.1, revise paragraph (a) and United States. maximum periods for acting on claims add a new paragraph (b)(4) to read as (3) For purposes of subpart D of this and the notices and other follows: part and, in connection therewith, this documentation that depository (a) Authority and purpose. This part subpart A, account means any deposit, institutions must provide in connection is issued by the Board of Governors of as defined in 12 CFR 204.2(a)(1)(i), at a with providing an expedited recredit to the Federal Reserve System (Board) to bank, including a demand deposit or a consumer are specifically prescribed implement the Expedited Funds other transaction account and a savings by the statute, but § 229.60 of the Availability Act (12 U.S.C. 4001–4010 ) deposit or other time deposit, as those Board’s final rule and the associated (the EFA Act) and the Check Clearing terms are defined in 12 CFR 204.2. commentary clarify that a depository for the 21st Century Act (12 U.S.C. institution may choose to act in a * * * * * 5001–5018) (the Check 21 Act). manner more favorable to the consumer I 5. In § 229.2(e), remove the phrase (b) Organization. *** than the Act requires. Although the final ‘‘subpart C’’ from the last, undesignated (4) Subpart D of this part contains rule also uses the statute’s requirements paragraph and add the phrase ‘‘subparts rules relating to substitute checks. These regarding interbank expedited recredits, C and D’’ in its place, and after the rules address the creation and legal § 229.60 specifically notes that undesignated paragraph add a new status of substitute checks; the depository institutions themselves may paragraph to read as follows: substitute check warranties and vary any of those requirements by (e) * * * indemnity; expedited recredit agreement. Finally, the statute procedures for resolving improper Note: For purposes of subpart D of this part specifically sets forth the events that charges and warranty claims associated and, in connection therewith, this subpart A, trigger provision of and the timing with substitute checks provided to bank also includes the Treasury of the United requirements that apply to the consumer States or the United States Postal Service to consumers; and the disclosure and awareness disclosure, but the extent that the Treasury or the Postal notices that banks must provide. § 229.57(b)(2)(i) gives depository Service acts as a paying bank. institutions flexibility to provide § 229.2 [Amended] * * * * * disclosures for a substitute check given I 3. In § 229.2, revise the introductory I in response to specific request for a 6. In § 229.2(k): sentence to read as follows: I check at a later date when necessary. A. After paragraph (6), add a new As used in this part, and unless the paragraph (7) to read as follows: Administrative Procedure Act context requires otherwise, the (k) * * * In accordance with 12 U.S.C. following terms have the meanings set (7) The term check includes an 553(d)(3), the Board for good cause finds forth in this section, and the terms not original check and a substitute check. that model disclosure C–5A in appendix defined in this section have the I B. Designate the undesignated C is effective immediately. The Check meanings set forth in the Uniform paragraph with the word ‘‘Note’’ 21 Act requires the Board to publish Commercial Code: followed by a colon and remove the model disclosure C–5A three months * * * * * phrase ‘‘subpart C’’ from the last before the Act’s effective date. A bank’s I 4. In § 229.2(a): sentence of that paragraph and add the appropriate use of model C–5A would I A. Redesignate existing paragraphs (1), phrase ‘‘subparts C and D’’ in its place. constitute compliance with the (2), (3), (4), and (5) as paragraphs (a)(1)(i), I 7. In § 229.2(q), add the phrase ‘‘to a consumer awareness disclosure (a)(1)(ii), (a)(1)(iii), (a)(1)(iv), and collecting bank for settlement or’’ requirements in section 12 of the Act (a)(1)(v), respectively; between the words ‘‘basis’’ and ‘‘to.’’

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I 8. In § 229.2(z), remove the phrase Document—IRD, X9.100–140 (ccc) Transfer and consideration. The ‘‘subpart C’’ from the undesignated (hereinafter ANS X9.100–140) for a terms transfer and consideration have paragraph and add the phrase ‘‘subparts substitute check (unless the Board by the meanings set forth in the Uniform C and D’’ in its place, and after the rule or order determines that different Commercial Code and in addition, for undesignated paragraph add a new standards apply). purposes of subpart D— paragraph to read as follows: (ww) Original check means the first (1) The term transfer with respect to * * * * * paper check issued with respect to a a substitute check or a paper or particular payment transaction. electronic representation of a substitute Note: For purposes of subpart D of this part (xx) Paper or electronic representation check means delivery of the substitute and, in connection therewith, this subpart A, of a substitute check means any copy of paying bank also includes the Treasury of the check or other representation of the United States or the United States Postal or information related to a substitute substitute check by a bank to a person Service for a check that is payable by that check that a bank handles for forward other than a bank; and entity and that is sent to that entity for collection or return, charges to a (2) A bank that transfers a substitute payment or collection. customer’s account, or provides to a check or a paper or electronic person as a record of a check payment representation of a substitute check * * * * * made by the person. directly to a person other than a bank I 9. In § 229.2(ff), add a new sentence (yy) Person means a natural person, has received consideration for the after the first sentence to read as follows: corporation, unincorporated company, substitute check or other paper or (ff) * * * For purposes of subpart D partnership, government unit or electronic representation of the of this part and, in connection instrumentality, trust, or any other substitute check if it has charged, or has therewith, this subpart A, state also entity or organization. the right to charge, the person’s account means Guam, American Samoa, the (zz) Reconverting bank means— or otherwise has received value for the Trust Territory of the Pacific Islands, the (1) The bank that creates a substitute original check, a substitute check, or a Northern Mariana Islands, and any other check; or representation of the original check or territory of the United States. (2) With respect to a substitute check substitute check. * * * * * that was created by a person that is not (ddd) Truncate means to remove an I 10. In § 229.2, revise paragraph (qq) to a bank, the first bank that transfers, original check from the forward read as follows: presents, or returns that substitute check collection or return process and send to or, in lieu thereof, the first paper or * * * * * a recipient, in lieu of such original electronic representation of that (qq) Claimant bank means a bank that check, a substitute check or, by substitute check. agreement, information relating to the submits a claim for a recredit for a (aaa) Substitute check means a paper original check (including data taken substitute check to an indemnifying reproduction of an original check that— bank under § 229.55. (1) Contains an image of the front and from the MICR line of the original check I 11. In § 229.2, after paragraph (qq) add back of the original check; or an electronic image of the original the following new paragraphs (rr) (2) Bears a MICR line that, except as check), whether with or without the through (eee), to read as follows: provided under ANS X9.100–140 subsequent delivery of the original * * * * * (unless the Board by rule or order check. (rr) Collecting bank means any bank determines that a different standard (eee) Truncating bank means— handling a check for forward collection, applies), contains all the information (1) The bank that truncates the except the paying bank. appearing on the MICR line of the original check; or (ss) Consumer means a natural person original check at the time that the (2) If a person other than a bank who— original check was issued and any truncates the original check, the first (1) With respect to a check handled additional information that was bank that transfers, presents, or returns, for forward collection, draws the check encoded on the original check’s MICR in lieu of such original check, a on a consumer account; or line before an image of the original substitute check or, by agreement with (2) With respect to a check handled check was captured; the recipient, information relating to the for return, deposits the check into or (3) Conforms in paper stock, original check (including data taken cashes the check against a consumer dimension, and otherwise with ANS from the MICR line of the original check account. X9.100–140 (unless the Board by rule or or an electronic image of the original (tt) Customer means a person having order determines that a different check), whether with or without the an account with a bank. standard applies); and subsequent delivery of the original (uu) Indemnifying bank means a bank (4) Is suitable for automated check. that provides an indemnity under processing in the same manner as the § 229.3 [Amended] § 229.53 with respect to a substitute original check. check. (bbb) Sufficient copy and copy. (1) A I 12. In § 229.3, remove the phrase ‘‘the (vv) Magnetic ink character sufficient copy is a copy of an original Act’’ from paragraphs (b)(1) and (c)(2)(ii) recognition line and MICR line mean the check that accurately represents all of and add the phrase ‘‘the EFA Act’’ in its numbers, which may include the the information on the front and back of place. routing number, account number, check the original check as of the time the § 229.13 [Amended] number, check amount, and other original check was truncated or is information, that are printed near the otherwise sufficient to determine I 13. Revise § 229.13(g)(1)(i)(A) to read bottom of a check in magnetic ink in whether or not a claim is valid. as follows: accordance with American National (2) A copy of an original check means (g) * * * Standard Specifications for Placement any paper reproduction of an original (1) * * * and Location of MICR Printing, X9.13 check, including a paper printout of an (i) * * * (hereinafter ANS X9.13) for an original electronic image of the original check, a (A) A number or code, which need check and American National Standard photocopy of the original check, or a not exceed four digits, that identifies the Specifications for an Image Replacement substitute check. customer’s account;

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§ 229.16 [Amended] reason for return. If the check is a § 229.38 [Amended] I 14. Revise § 229.16(c)(2)(i)(A) to read substitute check, the paying bank shall I 22. In § 229.38(d)(1), designate the last as follows: place this information within the image sentence with the word ‘‘Note’’ and (c) * * * of the original check that appears on the revise it, and add a new sentence after (2) * * * front of the substitute check. the second sentence to read as follows: (i) * * * * * * * * (d) Responsibility for certain aspects (A) A number or code, which need of checks—(1) * * * A reconverting § 229.31 [Amended] not exceed four digits, that identifies the bank is responsible for damages under customer’s account. I 18. In the undesignated paragraph after paragraph (a) of this section to the § 229.31(a)(2)(iii), remove the third extent that the condition of the back of § 229.20 [Amended] sentence and add the following a substitute check transferred, I 15. In § 229.20, remove the phrase ‘‘the sentences in its place: presented, or returned by it— Act’’ wherever it appears and add the (a) * * * (i) Adversely affects the ability of a phrase ‘‘the EFA Act’’ in its place. (2) * * * subsequent bank to indorse the check (iii) * * * legibly in accordance with § 229.35; or § 229.21 [Amended] * * * A qualified returned check (ii) Causes an indorsement that I 16. In § 229.21(g)(2), remove the phrase shall be encoded in magnetic ink with previously was applied in accordance ‘‘the Act’’ and add the phrase ‘‘the EFA the routing number of the depositary with § 229.35 to become illegible. Act’’ in its place. bank, the amount of the returned check, and a ‘‘2’’ in the case of an original Note: Responsibility under this paragraph § 229.30 [Amended] (d) shall be treated as negligence of the check (or a ‘‘5’’ in the case of a paying bank, depositary bank, or I 17. In § 229.30: substitute check) in position 44 of the reconverting bank for purposes of paragraph I A. In the undesignated paragraph after qualified return MICR line as a return (c) of this section. paragraph (a)(2)(iii), remove the next-to- identifier. A qualified returned original last sentence and add two new sentences check shall be encoded in accordance * * * * * in its place; and with ANS X9.13, and a qualified I 23. In § 229.38(f), remove the phrase I B. Revise paragraphs (c)(1) and (d). returned substitute check shall be ‘‘the Act’’ and add the phrase ‘‘the EFA The revisions and addition read as encoded in accordance with ANS Act’’ in its place. follows. X9.100–140. * * * I 24. Add a new subpart D to read as (a) * * * * * * * * follows: (2) * * * Subpart D—Substitute Checks (iii) * * * § 229.33 [Amended] * * * A qualified returned check I Sec. 19. In § 229.33: 229.51 General provisions governing shall be encoded in magnetic ink with I A. In paragraph (b), remove the phrase the routing number of the depositary substitute checks. ‘‘with question marks’’ from the last 229.52 Substitute check warranties. bank, the amount of the returned check, sentence of the undesignated paragraph; 229.53 Substitute check indemnity. and a ‘‘2’’ in the case of an original and 229.54 Expedited recredit for consumers. check (or a ‘‘5’’ in the case of a I B. In paragraph (d), add the phrase ‘‘or 229.55 Expedited recredit for banks. substitute check) in position 44 of the give’’ between the words ‘‘send’’ and 229.56 Liability. qualified return MICR line as a return ‘‘notice.’’ 229.57 Consumer awareness. identifier. A qualified returned original 229.58 Mode of delivery of information. check shall be encoded in accordance § 229.34 [Amended] 229.59 Relation to other law. with ANS X9.13, and a qualified I 20. In § 229.34(c), add a new sentence 229.60 Variation by agreement. returned substitute check shall be at the end of paragraph (3) to read as Authority: 12 U.S.C. 5001–5018. encoded in accordance with ANS follows: X9.100–140. * * * (c) * * * Subpart D—Substitute Checks * * * * * (3) * * * For purposes of this § 229.51 General provisions governing (c) * * * paragraph, the information encoded substitute checks. (1) On or before the receiving bank’s after issue on the check or returned (a) Legal equivalence. A substitute next banking day following the check includes any information placed check for which a bank has provided the otherwise applicable deadline by the in the MICR line of a substitute check warranties described in § 229.52 is the earlier of the close of that banking day that represents that check or returned legal equivalent of an original check for or a cutoff hour of 2 p.m. or later set by check. all persons and all purposes, including the receiving bank under U.C.C. 4–108, * * * * * any provision of federal or state law, if for all deadlines other than those § 229.35 [Amended] the substitute check— described in paragraph (c)(2) of this (1) Accurately represents all of the section; this deadline is extended I 21. In § 229.35, revise paragraph (a) to information on the front and back of the further if a paying bank uses a highly read as follows: original check as of the time the original expeditious means of transportation, (a) Indorsement standards. A bank check was truncated; and even if this means of transportation (other than a paying bank) that handles (2) Bears the legend, ‘‘This is a legal would ordinarily result in delivery after a check during forward collection or a copy of your check. You can use it the the receiving bank’s next cutoff hour or returned check shall indorse the check same way you would use the original banking day referred to above; or in a manner that permits a person to check.’’ * * * * * interpret the indorsement, in (b) Reconverting bank duties. A bank (d) Identification of returned check. A accordance with the indorsement shall ensure that a substitute check for paying bank returning a check shall standard set forth in appendix D of this which it is the reconverting bank— clearly indicate on the front of the check part. (1) Bears all indorsements applied by that it is a returned check and the * * * * * parties that previously handled the

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check in any form (including the representation of a substitute check for liability under any warranty that the original check, a substitute check, or which it receives consideration shall bank has provided under § 229.52 or another paper or electronic indemnify the recipient and any other applicable law. representation of such original check or subsequent recipient (including a (c) Subrogation of rights—(1) In substitute check) for forward collection collecting or returning bank, the general. An indemnifying bank shall be or return; depositary bank, the drawer, the subrogated to the rights of the person (2) Identifies the reconverting bank in drawee, the payee, the depositor, and that it indemnifies to the extent of the a manner that preserves any previous any indorser) for any loss incurred by indemnity it has provided and may reconverting bank identifications, in any recipient of a substitute check if attempt to recover from another person accordance with ANS X9.100–140 and that loss occurred due to the receipt of based on a warranty or other claim. appendix D of this part; and a substitute check instead of the original (2) Duty of indemnified person for (3) Identifies the bank that truncated check. subrogated claims. Each indemnified the original check, in accordance with (b) Indemnity amount—(1) In general. person shall have a duty to comply with ANS X9.100–140 and appendix D of this Unless otherwise indicated by all reasonable requests for assistance part. paragraph (b)(2) or (b)(3) of this section, from an indemnifying bank in (c) Applicable law. A substitute check the amount of the indemnity under connection with any claim the that is the legal equivalent of an original paragraph (a) of this section is as indemnifying bank brings against a check under paragraph (a) of this follows: warrantor or other person related to a section shall be subject to any provision, (i) If the loss resulted from a breach check that forms the basis for the including any provision relating to the of a substitute check warranty provided indemnification. protection of customers, of this part, the under § 229.52, the amount of the U.C.C., and any other applicable federal indemnity shall be the amount of any § 229.54 Expedited recredit for consumers. or state law as if such substitute check loss (including interest, costs, (a) Circumstances giving rise to a were the original check, to the extent reasonable attorney’s fees, and other claim. A consumer may make a claim such provision of law is not inconsistent expenses of representation) proximately under this section for a recredit with with the Check 21 Act or this subpart. caused by the warranty breach. respect to a substitute check if the (ii) If the loss did not result from a consumer asserts in good faith that— § 229.52 Substitute check warranties. breach of a substitute check warranty (1) The bank holding the consumer’s (a) Content and provision of substitute provided under § 229.52, the amount of account charged that account for a check warranties. A bank that transfers, the indemnity shall be the sum of— substitute check that was provided to presents, or returns a substitute check (A) The amount of the loss, up to the the consumer (although the consumer (or a paper or electronic representation amount of the substitute check; and need not be in possession of that of a substitute check) for which it (B) Interest and expenses (including substitute check at the time he or she receives consideration warrants to the costs and reasonable attorney’s fees and submits a claim); parties listed in paragraph (b) of this other expenses of representation) related (2) The substitute check was not section that— to the substitute check. properly charged to the consumer (1) The substitute check meets the (2) Comparative negligence. (i) If a account or the consumer has a warranty requirements for legal equivalence loss described in paragraph (a) of this claim with respect to the substitute described in § 229.51(a)(1)–(2); and section results in whole or in part from check; (2) No depositary bank, drawee, the indemnified person’s negligence or (3) The consumer suffered a resulting drawer, or indorser will receive failure to act in good faith, then the loss; and presentment or return of, or otherwise indemnity amount described in (4) Production of the original check or be charged for, the substitute check, the paragraph (b)(1) of this section shall be a sufficient copy is necessary to original check, or a paper or electronic reduced in proportion to the amount of determine whether or not the substitute representation of the substitute check or negligence or bad faith attributable to check in fact was improperly charged or original check such that that person will the indemnified person. whether the consumer’s warranty claim be asked to make a payment based on (ii) Nothing in this paragraph (b)(2) is valid. a check that it already has paid. reduces the rights of a consumer or any (b) Procedures for making claims. A (b) Warranty recipients. A bank makes other person under the U.C.C. or other consumer shall make his or her claim the warranties described in paragraph applicable provision of state or federal for a recredit under this section with the (a) of this section to the person to which law. bank that holds the consumer’s account the bank transfers, presents, or returns (3) Effect of producing the original in accordance with the timing, content, the substitute check or a paper or check or a sufficient copy— and form requirements of this section. electronic representation of such (i) If an indemnifying bank produces (1) Timing of claim. (i) The consumer substitute check and to any subsequent the original check or a sufficient copy, shall submit his or her claim such that recipient, which could include a the indemnifying bank shall— the bank receives the claim by the end collecting or returning bank, the (A) Be liable under this section only of the 40th calendar day after the later depositary bank, the drawer, the for losses that are incurred up to the of the calendar day on which the bank drawee, the payee, the depositor, and time that the bank provides that original mailed or delivered, by a means agreed any indorser. These parties receive the check or sufficient copy to the to by the consumer— warranties regardless of whether they indemnified person; and (A) The periodic account statement received the substitute check or a paper (B) Have a right to the return of any that contains information concerning or electronic representation of a funds it has paid under this section in the transaction giving rise to the claim; substitute check. excess of those losses. or (ii) The production by the (B) The substitute check giving rise to § 229.53 Substitute check indemnity. indemnifying bank of the original check the claim. (a) Scope of indemnity. A bank that or a sufficient copy under paragraph (ii) If the consumer cannot submit his transfers, presents, or returns a (b)(3)(i) of this section shall not absolve or her claim by the time specified in substitute check or a paper or electronic the indemnifying bank from any paragraph (b)(1)(i) of this section

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because of extenuating circumstances, requirements of paragraph (b) of this section available for withdrawal no later the bank shall extend the 40-calendar- section shall act as follows: than the start of the business day after day period by an additional reasonable (1) Valid consumer claim. If the bank the banking day on which the bank amount of time. determines that the consumer’s claim is provides the recredit. (iii) If a consumer makes a claim valid, the bank shall— (2) Safeguard exceptions. A bank may orally and the bank requires the claim (i) Recredit the consumer’s account delay availability to a consumer of a to be in writing, the consumer’s claim for the amount of the consumer’s loss, recredit provided under paragraph is timely if the oral claim was received up to the amount of the substitute (c)(3)(i) of this section until the start of within the time described in paragraphs check, plus interest if the account is an the earlier of the business day after the (b)(1)(i)–(ii) of this section and the interest-bearing account, no later than banking day on which the bank written claim was received within the the end of the business day after the determines the consumer’s claim is time described in paragraph (b)(3)(ii) of banking day on which the bank makes valid or the 45th calendar day after the this section. that determination; and banking day on which the bank received (2) Content of claim. (i) The (ii) Send to the consumer the notice the oral or written claim, as required by consumer’s claim shall include the required by paragraph (e)(1) of this paragraph (b) of this section, if— following information: section. (i) The consumer submits the claim (A) A description of the consumer’s (2) Invalid consumer claim. If a bank during the 30-calendar-day period claim, including the reason why the determines that the consumer’s claim is beginning on the banking day on which consumer believes his or her account not valid, the bank shall send to the the consumer account was established; was improperly charged for the consumer the notice described in (ii) Without regard to the charge that substitute check or the nature of his or paragraph (e)(2) of this section. gave rise to the recredit claim— her warranty claim with respect to such (3) Recredit pending investigation. If (A) On six or more business days check; the bank has not taken an action during the six-month period ending on (B) A statement that the consumer described in paragraph (c)(1) or (c)(2) of the calendar day on which the suffered a loss and an estimate of the this section before the end of the 10th consumer submitted the claim, the amount of that loss; business day after the banking day on balance in the consumer account was (C) The reason why production of the which the bank received the claim, the negative or would have become negative original check or a sufficient copy is bank shall— if checks or other charges to the account necessary to determine whether or not (i) By the end of that business day— had been paid; or the charge to the consumer’s account (A) Recredit the consumer’s account (B) On two or more business days was proper or the consumer’s warranty for the amount of the consumer’s loss, during such six-month period, the claim is valid; and up to the lesser of the amount of the balance in the consumer account was (D) Sufficient information to allow the substitute check or $2,500, plus interest negative or would have become negative bank to identify the substitute check on that amount if the account is an in the amount of $5,000 or more if and investigate the claim. interest-bearing account; and checks or other charges to the account (ii) If a consumer attempts to make a (B) Send to the consumer the notice had been paid; or claim but fails to provide all the required by paragraph (e)(1) of this (iii) The bank has reasonable cause to information in paragraph (b)(2)(i) of this section; and believe that the claim is fraudulent, section that is required to constitute a (ii) Recredit the consumer’s account based on facts that would cause a well- claim, the bank shall inform the for the remaining amount of the grounded belief in the mind of a consumer that the claim is not complete consumer’s loss, if any, up to the reasonable person that the claim is and identify the information that is amount of the substitute check, plus fraudulent. The fact that the check in missing. interest if the account is an interest- question or the consumer is of a (3) Form and submission of claim; bearing account, no later than the end particular class may not be the basis for computation of time for bank action. of the 45th calendar day after the invoking this exception. The bank holding the account that is the banking day on which the bank received (3) Overdraft fees. A bank that delays subject of the consumer’s claim may, in the claim and send to the consumer the availability as permitted in paragraph its discretion, require the consumer to notice required by paragraph (e)(1) of (d)(2) of this section may not impose an submit the information required by this this section, unless the bank prior to overdraft fee with respect to drafts section in writing. A bank that requires that time has determined that the drawn by the consumer on such a written submission— consumer’s claim is or is not valid in recredited funds until the fifth calendar (i) May permit the consumer to accordance with paragraph (c)(1) or day after the calendar day on which the submit the written claim electronically; (c)(2) of this section. bank sent the notice required by (ii) Shall inform a consumer who (4) Reversal of recredit. A bank may paragraph (e)(1) of this section. submits a claim orally of the written reverse a recredit that it has made to a (e) Notices relating to consumer claim requirement at the time of the oral consumer account under paragraph expedited recredit claims—(1) Notice of claim and may require such consumer (c)(1) or (c)(3) of this section, plus recredit. A bank that recredits a to submit the written claim such that interest that the bank has paid, if any, consumer account under paragraph (c) the bank receives the written claim by on that amount, if the bank— of this section shall send notice to the the 10th business day after the banking (i) Determines that the consumer’s consumer of the recredit no later than day on which the bank received the oral claim was not valid; and the business day after the banking day claim; and (ii) Notifies the consumer in on which the bank recredits the (iii) Shall compute the time periods accordance with paragraph (e)(3) of this consumer account. This notice shall for acting on the consumer’s claim section. describe— described in paragraph (c) of this (d) Availability of recredit—(1) Next- (i) The amount of the recredit; and section from the date on which the bank day availability. Except as provided in (ii) The date on which the recredited received the written claim. paragraph (d)(2) of this section, a bank funds will be available for withdrawal. (c) Action on claims. A bank that shall make any amount that it recredits (2) Notice that the consumer’s claim receives a claim that meets the to a consumer account under this is not valid. If a bank determines that a

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substitute check for which a consumer (2) The claimant bank is obligated to (ii) Shall inform a claimant bank that made a claim under this section was in provide an expedited recredit with submits a claim orally of the written fact properly charged to the consumer respect to such substitute check under claim requirement at the time of the oral account or that the consumer’s warranty § 229.54 or otherwise has suffered a claim; and claim for that substitute check was not resulting loss; and (iii) Shall compute the 10-day time valid, the bank shall send notice to the (3) The production of the original period for acting on the claim described consumer no later than the business day check or a sufficient copy is necessary in paragraph (c) of this section from the after the banking day on which the bank to determine the validity of the charge date on which the bank received the makes that determination. This notice to the consumer account or the validity written claim. shall— of any warranty claim connected with (c) Action on claims. No later than the (i) Include the original check or a such substitute check. 10th business day after the banking day sufficient copy, except as provided in (b) Procedures for making claims. A on which the indemnifying bank § 229.58; claimant bank shall send its claim to the receives a claim that meets the (ii) Demonstrate to the consumer that indemnifying bank, subject to the requirements of paragraph (b) of this the substitute check was properly timing, content, and form requirements section, the indemnifying bank shall— charged or the consumer’s warranty of this section. (1) Recredit the claimant bank for the claim is not valid; and (1) Timing of claim. The claimant amount of the claim, up to the amount (iii) Include the information or bank shall submit its claim such that the of the substitute check, plus interest if documents (in addition to the original indemnifying bank receives the claim by applicable; check or sufficient copy), if any, on the end of the 120th calendar day after (2) Provide to the claimant bank the which the bank relied in making its the date of the transaction that gave rise original check or a sufficient copy; or (3) Provide information to the determination or a statement that the to the claim. claimant bank regarding why the consumer may request copies of such (2) Content of claim. The claimant indemnifying bank is not obligated to information or documents. bank’s claim shall include the following information— comply with paragraph (c)(1) or (c)(2) of (3) Notice of a reversal of recredit. A (i) A description of the consumer’s this section. bank that reverses an amount it claim or the warranty claim related to (d) Recredit does not abrogate other previously recredited to a consumer the substitute check, including why the liabilities. Providing a recredit to a account shall send notice to the bank believes that the substitute check claimant bank under this section does consumer no later than the business day may not be properly charged to the not absolve the indemnifying bank from after the banking day on which the bank consumer account; liability for claims brought under any made the reversal. This notice shall (ii) A statement that the claimant bank other law or from additional damages include the information listed in is obligated to recredit a consumer under § 229.53 or § 229.56. paragraph (e)(2) of this section and also account under § 229.54 or otherwise has (e) Indemnifying bank’s right to a describe— suffered a loss and an estimate of the refund. (1) If a claimant bank reverses a (i) The amount of the reversal, amount of that recredit or loss, recredit it previously made to a including both the amount of the including interest if applicable; consumer account under § 229.54 or recredit (including the interest (iii) The reason why production of the otherwise receives reimbursement for a component, if any) and the amount of original check or a sufficient copy is substitute check that formed the basis of interest paid on the recredited amount, necessary to determine the validity of its claim under this section, the if any, being reversed; and the charge to the consumer account or claimant bank shall provide a refund (ii) The date on which the bank made the warranty claim; and promptly to any indemnifying bank that the reversal. (iv) Sufficient information to allow previously advanced funds to the (f) Other claims not affected. the indemnifying bank to identify the claimant bank. The amount of the Providing a recredit in accordance with substitute check and investigate the refund to the indemnifying bank shall this section shall not absolve the bank claim. be the amount of the reversal or from liability for a claim made under (3) Requirements relating to copies of reimbursement obtained by the claimant any other provision of law, such as a substitute checks. If the information bank, up to the amount previously claim for wrongful dishonor of a check submitted by a claimant bank under advanced by the indemnifying bank. under the U.C.C., or from liability for paragraph (b)(2) of this section includes (2) If the indemnifying bank provides additional damages, such as damages a copy of any substitute check, the the claimant bank with the original under § 229.53 or § 229.56 of this claimant bank shall take reasonable check or a sufficient copy under subpart or U.C.C. 4–402. steps to ensure that the copy cannot be paragraph (c)(2) of this section, mistaken for the legal equivalent of the § 229.55 Expedited recredit for banks. § 229.53(b)(3) governs the indemnifying check under § 229.51(a) or sent or bank’s entitlement to repayment of any (a) Circumstances giving rise to a handled by any bank, including the amount provided to the claimant bank claim. A bank that has an indemnity indemnifying bank, for forward that exceeds the amount of losses the claim under § 229.53 with respect to a collection or return. claimant bank incurred up to that time. substitute check may make an expedited (4) Form and submission of claim; recredit claim against an indemnifying computation of time. The indemnifying § 229.56 Liability. bank if— bank may, in its discretion, require the (a) Measure of damages—(1) In (1) The claimant bank or a bank that claimant bank to submit the information general. Except as provided in the claimant bank has indemnified— required by this section in writing, paragraph (a)(2) or (a)(3) of this section (i) Has received a claim for expedited including a copy of the paper or or § 229.53, any person that breaches a recredit from a consumer under electronic claim submitted by the warranty described in § 229.52 or fails § 229.54; or consumer, if any. An indemnifying bank to comply with any requirement of this (ii) Would have been subject to such that requires a written submission— subpart with respect to any other person a claim if the consumer account had (i) May permit the claimant bank to shall be liable to that person for an been charged for the substitute check; submit the written claim electronically; amount equal to the sum of—

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(i) The amount of the loss suffered by a consumer under § 229.54 constitutes recipient has agreed to receive that the person as a result of the breach or timely notice under this paragraph. information electronically. failure, up to the amount of the substitute check; and § 229.57 Consumer awareness. § 229.59 Relation to other law. (ii) Interest and expenses (including (a) General disclosure requirement The Check 21 Act and this subpart costs and reasonable attorney’s fees and and content. Each bank shall provide, in supersede any provision of federal or other expenses of representation) related accordance with paragraph (b) of this state law, including the Uniform to the substitute check. section, a brief disclosure to each of its Commercial Code, that is inconsistent (2) Offset of recredits. The amount of consumer customers that describes— with the Check 21 Act or this subpart, damages a person receives under (1) That a substitute check is the legal but only to the extent of the paragraph (a)(1) of this section shall be equivalent of an original check; and inconsistency. reduced by any amount that the person (2) The consumer recredit rights that § 229.60 Variation by agreement. receives and retains as a recredit under apply when a consumer in good faith § 229.54 or § 229.55. believes that a substitute check was not Any provision of § 229.55 may be (3) Comparative negligence. (i) If a properly charged to his or her account. varied by agreement of the banks person incurs damages that resulted in (b) Distribution—(1) Disclosure to involved. No other provision of this whole or in part from that person’s consumers who receive paid checks subpart may be varied by agreement by negligence or failure to act in good faith, with periodic account statements. A any person or persons. then the amount of any damages due to bank shall provide the disclosure 25. In appendix C, revise the title and that person under paragraph (a)(1) of described in paragraph (a) of this introductory paragraph and amend the this section shall be reduced in section to a consumer customer who table of contents by adding the new proportion to the amount of negligence receives paid original checks or paid entries to read as follows: or bad faith attributable to that person. substitute checks with his or her Appendix C to Part 229—Model (ii) Nothing in this paragraph (a)(3) periodic account statement— Availability Policy Disclosures, reduces the rights of a consumer or any (i) No later than the first regularly Clauses, and Notices; Model Substitute other person under the U.C.C. or other scheduled communication with the Check Policy Disclosure and Notices applicable provision of federal or state consumer after October 28, 2004, for law. each consumer who is a customer of the This appendix contains model availability policy and substitute check policy (b) Timeliness of action. Delay by a bank on that date; and bank beyond any time limits prescribed disclosures, clauses, and notices to facilitate (ii) At the time the customer compliance with the disclosure and notice or permitted by this subpart is excused relationship is initiated, for each requirements of Regulation CC (12 CFR part if the delay is caused by interruption of customer relationship established after 229). Although use of these models is not communication or computer facilities, October 28, 2004. required, banks using them properly (with suspension of payments by another (2) Disclosure to consumers who the exception of models C–22 through C–25) bank, war, emergency conditions, receive substitute checks on an to make disclosures required by Regulation failure of equipment, or other occasional basis. CC are deemed to be in compliance. circumstances beyond the control of the (i) The bank shall provide the Model Disclosures bank and if the bank uses such diligence disclosure described in paragraph (a) of * * * * * as the circumstances require. this section to a consumer customer of C–5A Substitute Check Policy Disclosure (c) Jurisdiction. A person may bring the bank who requests an original check * * * * * an action to enforce a claim under this or a copy of a check and receives a subpart in any United States district substitute check. If feasible, the bank Model Notices court or in any other court of competent shall provide this disclosure at the time * * * * * jurisdiction. Such claim shall be of the consumer’s request; otherwise, C–22 Expedited Recredit Claim, Valid brought within one year of the date on the bank shall provide this disclosure Claim Refund Notice which the person’s cause of action no later than the time at which the bank C–23 Expedited Recredit Claim, Provisional accrues. For purposes of this paragraph, provides a substitute check in response Refund Notice a cause of action accrues as of the date to the consumer’s request. C–24 Expedited Recredit Claim, Denial Notice on which the injured person first learns, (ii) The bank shall provide the or by which such person reasonably C–25 Expedited Recredit Claim, Reversal disclosure described in paragraph (a) of Notice should have learned, of the facts and this section to a consumer customer of * * * * * circumstances giving rise to the cause of the bank who receives a returned I action, including the identity of the substitute check, at the time the bank 26. In appendix C, after model C–5 add warranting or indemnifying bank provides such substitute check. the following new model C–5A to read against which the action is brought. (3) Multiple account holders. A bank as follows: (d) Notice of claims. Except as need not give separate disclosures to * * * * * otherwise provided in this paragraph each customer on a jointly held account. C–5A—Substitute Check Policy Disclosure (d), unless a person gives notice of a claim under this section to the § 229.58 Mode of delivery of information. Substitute Checks and Your Rights— warranting or indemnifying bank within A bank may deliver any notice or [Important Information About Your 30 calendar days after the person has other information that it is required to Checking Account] reason to know of both the claim and provide under this subpart by United Substitute Checks and Your Rights the identity of the warranting or States mail or by any other means What Is a Substitute Check? indemnifying bank, the warranting or through which the recipient has agreed To make check processing faster, federal indemnifying bank is discharged from to receive account information. If a bank law permits banks to replace original checks liability in an action to enforce a claim is required to provide an original check with ‘‘substitute checks.’’ These checks are under this subpart to the extent of any or a sufficient copy, the bank instead similar in size to original checks with a loss caused by the delay in giving notice may provide an electronic image of the slightly reduced image of the front and back of the claim. A timely recredit claim by original check or sufficient copy if the of the original check. The front of a substitute

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check states: ‘‘This is a legal copy of your • A copy of the substitute check [and/or] posted, the signature is authentic, there was check. You can use it the same way you the following information to help us identify no warranty breach). As a result, we have would use the original check.’’ You may use the substitute check: (identifying reversed the refund to your account [plus a substitute check as proof of payment just information, for example the check number, interest that we have paid you on that like the original check. the name of the person to whom you wrote amount] by withdrawing (amount) from your Some or all of the checks that you receive the check, the amount of the check). account on (date). back from us may be substitute checks. This * * * * * [We have also enclosed a copy of the other information we used to make our decision.] notice describes rights you have when you I receive substitute checks from us. The rights 27. In appendix C, after model C–21 [Upon your request, we will send you a copy in this notice do not apply to original checks add new models C–22 through C–25 to of the information we used to make our or to electronic debits to your account. read as follows: decision.] However, you have rights under other law * * * * * I with respect to those transactions. 28. In appendix D, revise the title and C–2—Expedited Recredit Claim, Valid Claim text to read as follows: What Are My Rights Regarding Substitute Refund Notice Checks? Appendix D to Part 229—Indorsement, In certain cases, federal law provides a Notice of Valid Claim and Refund Reconverting Bank Identification, and special procedure that allows you to request We have determined that your substitute Truncating Bank Identification a refund for losses you suffer if a substitute check claim is valid. We are refunding Standards check is posted to your account (for example, (amount) [of which [(amount) represents if you think that we withdrew the wrong fees] [and] [(amount) represents accrued (1) The depositary bank shall indorse an amount from your account or that we interest]] to your account. You may withdraw original check or substitute check according withdrew money from your account more these funds as of (date). [This refund is the to the following specifications: than once for the same check). The losses you amount in excess of the $2,500 [plus interest] (i) The indorsement shall contain— (A) The bank’s nine-digit routing number, may attempt to recover under this procedure that we credited to your account on (date).] may include the amount that was withdrawn set off by an arrow at each end of the number and pointing toward the number, and, if the from your account and fees that were charged C–23—Expedited Recredit Claim, depositary bank is a reconverting bank with as a result of the withdrawal (for example, Provisional Refund Notice respect to the check, an asterisk outside the bounced check fees). Notice of Provisional Refund arrow at each end of the routing number to The amount of your refund under this In response to your substitute check claim, identify the bank as a reconverting bank; procedure is limited to the amount of your we are refunding (amount) [of which (B) The indorsement date; and loss or the amount of the substitute check, [(amount) represents fees] [and] [(amount) (C) The bank’s name or location, if the whichever is less. You also are entitled to depositary bank applies the indorsement interest on the amount of your refund if your represents accrued interest]] to your account, physically. account is an interest-bearing account. If your while we complete our investigation of your claim. You may withdraw these funds as of (ii) The indorsement also may contain— loss exceeds the amount of the substitute (A) A branch identification; check, you may be able to recover additional (date). [Unless we determine that your claim is not valid, we will credit the remaining (B) A trace or sequence number; amounts under other law. (C) A telephone number for receipt of If you use this procedure, you may receive amount of your refund to your account no later than the 45th calendar day after we notification of large-dollar returned checks; up to (amount, not lower than $2,500) of your and refund (plus interest if your account earns received your claim.] If, based on our investigation, we (D) Other information, provided that the interest) within (number of days, not more inclusion of such information does not than 10) business days after we received your determine that your claim is not valid, we will reverse the refund by withdrawing the interfere with the readability of the claim and the remainder of your refund (plus indorsement. interest if your account earns interest) not amount of the refund [plus interest that we have paid you on that amount] from your (iii) The indorsement, if applied to an later than (number of days, not more than 45) existing paper check, shall be placed on the calendar days after we received your claim. account. We will notify you within one day of any such reversal. back of the check so that the routing number We may reverse the refund (including any is wholly contained in the area 3.0 inches interest on the refund) if we later are able to C–24—Expedited Recredit Claim, Denial from the leading edge of the check to 1.5 demonstrate that the substitute check was Notice inches from the trailing edge of the check.31 correctly posted to your account. (iv) When printing its depositary bank Denial of Claim How Do I Make a Claim for a Refund? indorsement (or a depositary bank Based on our review, we are denying your If you believe that you have suffered a loss indorsement that previously was applied substitute check claim. As the enclosed (type relating to a substitute check that you electronically) onto a substitute check at the of document, for example original check or time that the substitute check is created, a received and that was posted to your sufficient) shows, (describe reason for denial, reconverting bank shall place the account, please contact us at (contact for example the check was properly posted, indorsement on the back of the check information, for example phone number, the signature is authentic, there was no between 1.88 and 2.74 inches from the mailing address, e-mail address). You must warranty breach). leading edge of the check. The reconverting contact us within (number of days, not less [We have also enclosed a copy of the other bank may omit the depositary bank’s name than 40) calendar days of the date that we information we used to make our decision.] and location from the indorsement. mailed (or otherwise delivered by a means to [Upon your request, we will send you a copy (2) Each subsequent collecting bank or which you agreed) the substitute check in of the other information that we used to make returning bank indorser shall protect the question or the account statement showing our decision.] identifiability and legibility of the depositary that the substitute check was posted to your bank indorsement by indorsing an original account, whichever is later. We will extend C–25—Expedited Recredit Claim, Reversal check or substitute check according to the this time period if you were not able to make Notice following specifications: a timely claim because of extraordinary Reversal of Refund (i) The indorsement shall contain only— circumstances. (A) The bank’s nine-digit routing number Your claim must include— In response to your substitute check claim, (without arrows) and, if the collecting bank • A description of why you have suffered we provided a refund of (amount) by

a loss (for example, you think the amount crediting your account on (date(s)). We now 31 withdrawn was incorrect); have determined that your substitute check The leading edge is definded as the right side of the check looking at it from the front. The trailing • An estimate of the amount of your loss; claim was not valid. As the enclosed (type of • edge is defined as the left side of the check looking An explanation of why the substitute document, for example original check or at it from the front. See American National check you received is insufficient to confirm sufficient copy) shows, (describe reason for Standards Specifications for the Placement and that you suffered a loss; and reversal, for example the check was properly Location of MICR Printing, X9.13.

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or returning bank is a reconverting bank with Act is intended to apply only to accounts that the account is used by the brokerage firm to respect to the check, an asterisk at each end permit unlimited third party transfers. facilitate the clearing of its customers’ of the number to identify the bank as a * * * * * checks. Because for purposes of Regulation reconverting bank; 3. Interbank deposits, including accounts CC the term account includes only deposit (B) The indorsement date, and of offices of domestic banks or foreign banks accounts, a consumer’s revolving credit (C) An optional trace or sequence number. located outside the United States, and direct relationship or other line of credit with a (ii) The indorsement, if applied to an and indirect accounts of the United States bank is not a consumer account, even if the existing paper check, shall be placed on the Treasury (including Treasury General consumer draws on such credit lines by back of the check from 0.0 inches to 3.0 Accounts and Treasury Tax and Loan using a check. * * * inches from the leading edge of the check. deposits) are exempt from subpart B and, in * * * * * (iii) When printing its collecting bank or connection therewith, subpart A. However, I 34. In appendix E, paragraph II.Q.1., returning bank indorsement (or a collecting interbank deposits are included as accounts bank or returning bank indorsement that revise the first sentence to read as for purposes of subparts C and D and, in follows: previously was applied electronically) onto a connection therewith, subpart A. substitute check at the time that the 4. The Check 21 Act defines account to II. * * * substitute check is created, a reconverting mean any deposit account at a bank. Q. * * * bank shall place the indorsement on the back Therefore, for purposes of subpart D and, in 1. Forward collection is defined to mean of the check between 0.25 and 2.50 inches connection therewith, subpart A, account the process by which a bank sends a check from the trailing edge of the check. means any deposit, as that term is defined by to the paying bank for collection, including (3) A reconverting bank shall comply with § 204.2(a)(1)(i) of Regulation D, at a bank. sending the check to an intermediary the following specifications when creating a Many deposits that are not accounts for collecting bank for settlement, as substitute check: purposes of the other subparts of Regulation distinguished from the process by which the (i) If it is a depositary bank, collecting CC, such as savings deposits, are accounts for check is returned unpaid. * * * bank, or returning bank with respect to the purposes of subpart D. * * * * * substitute check, the reconverting bank shall * * * * * I place its own indorsement onto the back of 35. In appendix E, revise paragraph I the check as specified in this appendix. 30. In appendix E, paragraph II.F., II.S.1.b. and add a new paragraph (ii) A reconverting bank that also is the remove the phrase ‘‘subpart C’’ wherever II.S.1.c. to read as follows: paying bank with respect to the substitute it appears and add the phrase ‘‘subparts II. * * * check shall so identify itself by placing on C and D’’ in its place and add a new S. * * * the back of the check, between 0.25 and 2.50 paragraph 4 to read as follows: 1. * * * b. The location of the depositary inches from the trailing edge of the check, its II. * * * bank is determined by the physical location nine-digit routing number (without arrows) F. * * * of the branch or proprietary ATM at which and an asterisk at each end of the number. 4. For purposes of subpart D and, in a check is deposited, regardless of whether (iii) The reconverting bank shall place on connection therewith, subpart A, the term the deposit is made in person, by mail, or the front of the check, outside the image of bank also includes the Treasury of the United otherwise. For example, if a branch of the the original check, its nine-digit routing States and the United States Postal Service to depositary bank located in one check- number (without arrows) and an asterisk at the extent that they act as paying banks processing region sends a check that was each end of the number, in accordance with because the Check 21 Act includes these two deposited at that branch to the depositary ANS X9.100–140. entities in the definition of the term bank to bank’s central facility in another check- (iv) The reconverting bank shall place on the extent that they act as payors. processing region, and the central facility is the front of the check, outside the image of in the same check-processing region as the the original check, the truncating bank’s * * * * * paying bank, the check is still considered nine-digit routing number (without arrows) I 31. In appendix E, paragraph II.K., nonlocal. (See the commentary to the and a bracket at each end of the number, in remove the phrase ‘‘subpart C’’ in definition of ‘‘paying bank.’’) accordance with ANS X9.100–140. paragraph 8. and add the phrase c. If a person deposits a check to an (4) Any indorsement, reconverting bank ‘‘subparts C and D’’ in its place, account by mailing or otherwise sending the identification, or truncating bank redesignate paragraph 9. as paragraph check to a facility or office that is not a bank, identification placed on an original check or 10., and add a new paragraph 9. to read the check is considered local or nonlocal substitute check shall be printed in black ink. depending on the location of the bank whose as follows: indorsement appears on the check as the I 29. In appendix E, paragraph II.B., II. * * * depositary bank. revise the first, second, third, and last K. * * * * * * * * sentences of paragraph 1., revise 9. A substitute check as defined in I § 229.2(aaa) is a check for purposes of 36. In appendix E, paragraph II.Z., paragraph 3., and add a new paragraph revise the second and third sentences of 4., to read as follows: Regulation CC and the U.C.C., even if that substitute check does not meet the paragraph 1., remove the phrase II. * * * requirements for legal equivalence set forth ‘‘subpart C’’ in paragraph 3. and add the B. 229.2(a) Account in § 229.51(a). phrase ‘‘subparts C and D’’ in its place, and add a new paragraph 6. to read as 1. The EFA Act defines account to mean * * * * * ‘‘a demand deposit account or similar I 32. In appendix E, paragraph II.M., follows: transaction account at a depository remove the number ‘‘46’’ in the second II. * * * institution.’’ The regulation defines account, sentence. Z. * * * for purposes other than subpart D, in terms I 33. In appendix E, paragraph II.N.1., 1. * * * For purposes of all subparts of of the definition of ‘‘transaction account’’ in add new sentences between the second Regulation CC, the term paying bank the Board’s Regulation D (12 CFR part 204). includes the bank by which a check is This definition of account, however, and third sentences to read as follows: payable, the payable-at bank to which a excludes certain deposits, such as II. * * * check is sent, or, if the check is payable by nondocumentary obligations (see 12 CFR N. * * * a nonbank payor, the bank through which the 204.2(a)(1)(vii)), that are covered under the 1. * * * A clearing account maintained at check is payable and to which it is sent for definition of ‘‘transaction account’’ in a bank directly by a brokerage firm is not a payment or collection. For purposes of Regulation D. * * * The Board believes that consumer account, even if the account is subparts C and D, the term paying bank also it is appropriate to exclude these accounts used to pay checks drawn by consumers includes the payable-through bank and the because of the reference to demand deposits using the funds in that account. The bank’s bank whose routing number appears on the in the EFA Act, which suggests that the EFA relationship is with the brokerage firm, and check, regardless of whether the check is

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payable by a different bank, provided that the a particular payment transaction from a Examples. check is sent for payment or collection to the substitute check or other paper or electronic a. Bank A, by agreement, sends an payable through bank or the bank whose representation that is derived from an electronic check file for collection to Bank B. routing number appears on the check. original check or substitute check. There is Bank B chooses to use that file to print a * * * * * only one original check for any particular substitute check that meets the requirements 6. In accordance with the Check 21 Act, for payment transaction. However, multiple of § 229.2(aaa). Bank B is the reconverting purposes of subpart D and, in connection substitute checks could be created to bank as of the time it prints the substitute therewith, subpart A, paying bank includes represent that original check at various check. the Treasury of the United States or the points in the check collection and return b. Company A, which is not a bank, by United States Postal Service with respect to process. agreement receives check information a check payable by that entity and sent to XX. 229.2(xx) Paper or Electronic electronically from Bank A. Bank A becomes that entity for payment or collection, even Representation of a Substitute Check the reconverting bank when Company A prints a substitute check on behalf of Bank though the Treasury and Postal Service are 1. Receipt of a paper or electronic not defined as banks for purposes of subparts representation of a substitute check does not A in accordance with that agreement. B and C. Because the Federal Reserve Banks trigger indemnity or expedited recredit c. A depositary bank’s customer, which is act as fiscal agents for the Treasury and the rights, although the recipient nonetheless a nonbank business, receives a check for U.S. Postal Service and in that capacity are could have a warranty claim or a claim under payment, truncates that original check, and designated as presentment locations for other check law with respect to that creates a substitute check to deposit with its Treasury checks and U.S. Postal Service document or the underlying payment bank. The depositary bank receives that money orders, a Treasury check or U.S. transaction. A paper or electronic substitute check from its customer and is the Postal Service money order presented to a representation of a substitute check would first bank to handle the substitute check. The Federal Reserve Bank is considered to be include a representation of a substitute check depositary bank becomes the reconverting presented to the Treasury or U.S. Postal that was drawn on an account, as well as a bank as of the time that it transfers or Service, respectively. representation of a substitute traveler’s presents the substitute check (or in lieu * * * * * check, credit card check, or other item that thereof the first paper or electronic I meets the substitute check definition. The representation of the substitute check) for 37. In appendix E, paragraph II.BB.1. forward collection. remove the last two sentences and add following examples illustrate the scope of the definition. d. A bank is the payable-through bank for the following new sentence in their place checks that are drawn on a nonbank payor, to read as follows: Examples. which is the bank’s customer. When the II. * * * a. A bank receives electronic presentment customer decides not to pay a check that is BB. * * * of a substitute check that has been converted payable through the bank, the customer 1. * * * Qualified returned checks are to electronic form and charges the customer’s creates a substitute check for purposes of identified by placing a ‘‘2’’ in the case of an account for that electronic item. The periodic return. The payable-through bank becomes original check (or a ‘‘5’’ in the case of a account statement that the bank provides to the reconverting bank when it returns the substitute check) in position 44 of the the customer includes information about the substitute check (or in lieu thereof the first qualified return MICR line as a return electronically-presented substitute check in a paper or electronic representation of the identifier in accordance with American line-item list describing all the checks the substitute check) to a returning bank or the National Standard Specifications for bank charged to the customer’s account depositary bank. Placement and Location of MICR Printing, during the previous month. The electronic e. A paying bank returns a substitute check X9.13 (hereinafter ‘‘ANS X9.13’’) for original file that the bank received for presentment to the depositary bank, which in turn gives checks or American National Standard and charged to the customer’s account would that substitute check back to its nonbank Specifications for an Image Replacement be an electronic representation of a substitute customer. That customer then redeposits the Document—IRD, X9.100–140 (hereinafter check, and the line-item appearing on the substitute check for collection at a different ‘‘ANS X9.100–140’’) for substitute checks. customer’s account statement would be a bank. Because the substitute check was paper representation of a substitute check. already transferred by a bank, the second * * * * * b. A paying bank receives and settles for depositary bank does not become a I 38. In appendix E to part 229, add new a substitute check and then realizes that its reconverting bank when it transfers or paragraphs II.QQ. through II.EEE. to read settlement was for the wrong amount. The presents that substitute check for collection. as follows: paying bank sends an adjustment request to 2. In some cases there will be one or more the presenting bank to correct the error. The banks between the truncating bank and the II. Section 229.2 Definitions adjustment request is not a paper or reconverting bank. electronic representation of a substitute * * * * * check under the definition because it is not Example. QQ. 229.2(qq) [Reserved] being handled for collection or return as a A depositary bank truncates the original check. Rather, it is a separate request that is check and sends an electronic representation RR. 229.2(rr) [Reserved] related to a check. As a result, no substitute of the original check for collection to an SS. 229.2(ss) [Reserved] check warranty, indemnity, or expedited intermediary bank. The intermediary bank recredit rights attach to the adjustment. sends the electronic representation of the TT. 229.2(tt) [Reserved] YY. 229.2(yy) [Reserved] original check to the presenting bank, which UU. 229.2(uu) [Reserved] creates a substitute check to present to the ZZ. 229.2(zz) Reconverting Bank paying bank. The presenting bank is the VV. 229.2(vv) MICR Line 1. A substitute check is ‘‘created’’ when reconverting bank. 1. Information in the MICR line of a check and where a paper reproduction of an 3. A check could move from electronic must be printed in accordance with ANS original check that meets the requirements of form to substitute check form several times X9.13 for original checks and ANS X9.100– § 229.2(aaa) is physically printed. A bank is during the collection and return process. It 140 for substitute checks. These standards a reconverting bank if it creates a substitute therefore is possible that there could be could vary the requirements for printing the check directly or if another person by multiple substitute checks, and thus multiple MICR line, such as by indicating agreement creates a substitute check on the reconverting banks, with respect to the same circumstances under which the use of bank’s behalf. A bank also is a reconverting underlying payment. magnetic ink is not required. bank if it is the first bank that receives a substitute check created by a nonbank and AAA. 229.2(aaa) Substitute Check WW. 229.2(ww) Original Check transfers, presents, or returns that substitute 1. ‘‘A paper reproduction of an original 1. The definition of original check check or, in lieu thereof, the first paper or check’’ could include a reproduction created distinguishes the first paper check signed or electronic representation of such substitute directly from the original check or a otherwise authorized by the drawer to effect check. reproduction of the original check that is

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created from some other source that contains by the subsequent reconverting bank, such as collection. Because a reconverting bank must an image of the original check, such as an its reconverting bank identification, the encode position 44 of a substitute check’s electronic representation of an original check MICR line, the legal equivalence legend, and forward collection MICR line with a ‘‘4,’’ the or substitute check, or a previous substitute optional security information. reconverting bank must vary any character check. that appeared in position 44 of the forward- Examples. 2. Because a substitute check must be a collection MICR line of the original check. A piece of paper, an electronic file or electronic a. The back of a subsequent substitute bank that misencodes or fails to encode check image that has not yet been printed in check would contain the following position 44 at the time it attempts to create accordance with the substitute check indorsements, all of which would be a substitute check has failed to create a definition is not a substitute check. preserved through the image of the back of substitute check. A bank that receives a 3. Because a substitute check must be a the previous substitute check: (1) The properly-encoded substitute check may representation of a check, a paper indorsements that were applied physically to further encode that item but does so subject reproduction of something that is not a check the original check before an image of the to the encoding warranties in Regulation CC cannot be a substitute check. For example, a original check was captured; (2) a physical and the U.C.C. savings bond or a check drawn on a non-U.S. representation of indorsements that were 8. A substitute check’s MICR line could branch of a foreign bank cannot be applied electronically to the original check contain information in addition to the reconverted to a substitute check. after an image of the original check was information required at the time the 4. As described in § 229.51(b) and the captured but before creation of the first substitute check is created. For example, if commentary thereto, a reconverting bank is substitute check; and (3) indorsements that the amount field of the original check was required to ensure that a substitute check were applied physically to the previous not encoded and the substitute check contains all indorsements applied by substitute check. In addition, the therefore did not, when created, have an previous parties that handled the check in reconverting bank for the subsequent encoded amount field, the MICR line of the any form. Therefore, the image of the original substitute check must overlay onto the back substitute check later could be amount- check that appears on the back of a substitute of that substitute check a physical encoded. check would include indorsements that were representation of any indorsements that were 9. A bank may receive a substitute check physically applied to the original check applied electronically after the previous that contains a MICR-line variation but before an image of the original check was substitute check was converted to electronic nonetheless meets the MICR-line replication captured. An indorsement that was applied form but before creation of the subsequent requirements of § 229.2(aaa)(2) because that physically to the original check after an substitute check. variation is permitted by ANS X9.100–140. If image of the original check was captured b. Because information could have been such a substitute check contains a MICR-line would be conveyed as an electronic physically added to the image of the front of error, a bank that receives it may, but is not indorsement (see paragraph 3 of the the original check that appeared on the required to, repair that error. Such a repair commentary to § 229.35(a)). The back of the previous substitute check, the original check must be made in accordance with ANS substitute check would contain a physical image that appears on the front of a X9.100–140 for repairing a MICR line, which representation of any indorsements that were subsequent substitute check could contain generally allows a bank to correct an error by applied electronically to the check after an information in addition to that which applying a strip that may or may not contain image of the check was captured but before appeared on the original check at the time it information in all fields encoded on the creation of the substitute check. was truncated. check’s MICR line. A bank’s repair of a 6. The MICR line applied to a substitute MICR-line error on a substitute check is Example. check must contain information in all fields subject to the encoding warranties in Bank A, which is the depositary bank, of the MICR line that were encoded on the Regulation CC and the U.C.C. captures an image of an original check, original check at any time before an image of 10. A substitute check must conform to all indorses it electronically and, by agreement, the original check was captured. This the generally applicable industry standards transmits to Bank B an electronic image of includes all the MICR-line information that for substitute checks set forth in ANS the check accompanied by the electronic was preprinted on the original check, plus X9.100–140, which incorporates other indorsement. Bank B then creates a substitute any additional information that was added to industry standards by reference. Thus, check to send to Bank C. The back of the the MICR line before the image of the original multiple substitute check images contained substitute check created by Bank B must check was captured (for example, the amount on the same page of an account statement are contain a representation of the indorsement of the check). The information in each field not substitute checks. previously applied electronically by Bank A of the substitute check’s MICR line must be and Bank B’s own indorsement. (For more the same information as in the corresponding BBB. 229.2(bbb) Sufficient Copy and Copy information on indorsement requirements, field of the MICR line of the original check, 1. A copy must be a paper reproduction of see § 229.35, appendix D, and the except as provided by ANS X9.100–140 a check. An electronic image therefore is not commentary thereto.) (unless the Board by rule or order determines a copy or a sufficient copy. However, if a 5. Some substitute checks will not be that a different standard applies). Industry customer has agreed to receive such created directly from the original check, but standards may not, however, vary the information electronically, a bank that is rather will be created from a previous requirement that a substitute check at the required to provide an original check or substitute check. The back of a subsequent time of its creation must bear a full-field sufficient copy may satisfy that requirement substitute check will contain an image of the MICR line. by providing an electronic image in full length of the back of the previous 7. ANS X9.100–140, provides that a accordance with § 229.58 and the substitute check. ANS X9.100–140 requires substitute check must have a ‘‘4’’ in position commentary thereto. preservation of the full length of the back of 44 and that a qualified returned substitute 2. A bank under § 229.53(b)(3) may limit its the previous substitute check in order to check must have a ‘‘4’’ in position 44 of the liability for an indemnity claim and under preserve previous indorsements and forward-collection MICR line as well as a ‘‘5’’ §§ 229.54(e)(2) and 229.55(c)(2) may respond reconverting bank identifications. By in position 44 of the qualified return MICR to an expedited recredit claim by providing contrast, the front of a subsequent substitute line. The ‘‘4’’ and ‘‘5’’ indicate that the the claimant with a copy of a check that check will not contain an image of the entire document is a substitute check so that the accurately represents all of the information previous substitute check. Rather, the image size of the check image remains constant on the front and back of the original check field of the subsequent substitute check will throughout the collection and return process, as of the time the original check was contain the image of the front of the original regardless of the number of substitute checks truncated or that otherwise is sufficient to check that appeared on the previous created that represent the same original determine the validity of the claim against substitute check at the time the previous check (see also §§ 229.30(a)(2) and the bank. substitute check was converted to electronic 229.31(a)(2) and the commentary thereto form. The portions of the front of the regarding requirements for qualified returned Examples. subsequent substitute check other than the substitute checks). An original check a. A copy of an original check that image field will contain information applied generally has a blank position 44 for forward accurately represents all the information on

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the front and back of the original check as of b. The expanded definitions also operate notice might be posted at the point where the the time of truncation would constitute a such that a paying bank that pays an original line forms for teller service in the lobby. The sufficient copy if that copy resolved the check (or a representation thereof) and then notice is not required at any drive-through claim. For example, if resolution of the claim creates a substitute check to provide to the teller windows nor is it required at night required accurate payment and indorsement drawer with a periodic statement transfers depository locations, or at locations where information, an accurate copy of the front the substitute check for consideration and consumer deposits are not accepted. * * * and back of a legible original check thereby provides the warranties and (including but not limited to a substitute indemnity. * * * * * check) would be a sufficient copy. c. The expanded definitions ensure that a I 40. In appendix E, paragraph b. A copy of the original check that does bank that receives a returned check in any VII.H.1.a., revise the third sentence and not accurately represent all the information form and then provides a substitute check to add a new fifth sentence to read as on both the front and back of the original the depositor gives the substitute check follows: check also could be a sufficient copy if such warranties and indemnity to the depositor. copy contained all the information necessary d. The expanded definitions apply to VII. * * * to determine the validity of the relevant substitute checks representing original H. * * * claim. For instance, if a consumer received checks that are not drawn on deposit 1. * * * a substitute check that contained a blurry accounts, such as checks used to access a a. * * * For a customer that is not a image of a legible original check, the credit card or a home equity line of credit. consumer, a depositary bank satisfies the consumer might seek an expedited recredit written-notice requirement by sending an DDD. 229.2(ddd) Truncate because his or her account was charged for electronic notice that displays the text and is $1,000, but he or she believed that the check 1. Truncate means to remove the original in a form that the customer may keep, if the was written for only $100. If the amount that check from the forward collection or return customer agrees to such means of notice. appeared on the front of the original check process and to send in lieu of the original * * * For a customer who is a consumer, a was legible, an accurate copy of only the check either a substitute check or, by depositary bank satisfies the written-notice front of the original check that showed the agreement, information relating to the requirement by sending an electronic notice amount of the check would be sufficient to original check. Truncation does not include in compliance with the requirements of the determine whether or not the consumer’s removal of a substitute check from the check Electronic Signatures in Global and National claim regarding the amount of the check was collection or return process. Commerce Act (12 U.S.C. 7001 et seq.), valid. EEE. 229.2(eee) Truncating Bank which include obtaining the consumer’s affirmative consent to such means of notice. CCC. 229.2(ccc) Transfer and Consideration 1. A bank is a truncating bank if it 1. Under §§ 229.52 and 229.53, a bank is truncates an original check or if it is the first * * * * * responsible for the warranties and indemnity bank to transfer, present, or return another I 41. In appendix E, paragraph IX.A.1., when it transfers, presents, or returns a form of an original check that was truncated substitute check (or a paper or electronic by a person that is not a bank. remove the third and fourth sentences representation thereof) for consideration. and add new sentences in their place to Drawers and other nonbank persons that Example. read as follows: receive checks from a bank are not a. A bank’s customer that is a nonbank IX. * * * transferees that receive consideration as business receives a check for payment and A. * * * those terms are defined in the U.C.C. deposits either a substitute check or an 1. * * * A disclosure is in a form that the However, the Check 21 Act clearly electronic representation of the original customer may keep if, for example, it can be contemplates that such nonbank persons that check with its depositary bank instead of the downloaded or printed. For a customer that receive substitute checks (or representations original check. That depositary bank is the is not a consumer, a depositary bank satisfies thereof) from a bank will receive the truncating bank when it transfers, presents, the written-disclosure requirement by or returns the substitute check or electronic warranties and indemnity from all previous sending an electronic disclosure that displays representation in lieu of the original check. banks that handled the check. To ensure that the text and is in a form that the customer these parties are covered by the substitute That bank also would be the reconverting may keep, if the customer agrees to such check warranties and indemnity in the bank if it were the first bank to transfer, means of disclosure. For a customer who is manner contemplated by the Check 21 Act, present, or return a substitute check that it a consumer, a depositary bank satisfies the § 229.2(ccc) incorporates the U.C.C. received from (or created from the written-notice requirement by sending an definitions of the term transfer and information given by) its nonbank customer electronic notice in compliance with the consideration by reference and expands those (see § 229.2(yy) and the commentary thereto). requirements of the Electronic Signatures in definitions to cover a broader range of 2. A truncating bank does not make the Global and National Commerce Act (12 situations. Delivering a check to a nonbank subpart D warranties and indemnity unless it U.S.C. 7001 et seq.), which include obtaining that is acting on behalf of a bank (such as a also is the reconverting bank. Therefore, a the consumer’s affirmative consent to such third-party check processor or presentment bank that truncates the original check and point) is a transfer of the check to that bank. sends an electronic file to a collecting bank means of notice. does not provide subpart D protections to the * * * * * Examples. recipient of that electronic item. However, a I a. A paying bank pays a substitute check recipient of an electronic item may protect 42. In appendix E, paragraph IX.A., and then provides that paid substitute check itself against losses associated with that item add a new paragraph 4. to read as (or a representation thereof) to a drawer with by agreement with the truncating bank. follows: a periodic statement. Under the expanded IX. * * * definitions, the paying bank thereby transfers * * * * * A. * * * the substitute check (or representation I 39. In appendix E, paragraph IV.D.6.e. 4. A bank may, by agreement or at the thereof) to the drawer for consideration and is amended by adding new sentences consumer’s request, provide any disclosure makes the substitute check warranties between the second and third sentences or notice required by subpart B in a language described in § 229.52. A drawer that suffers to read as follows: other than English, provided that the bank a loss due to receipt of a substitute check makes a complete disclosure available in may have warranty, indemnity, and, if the IV. * * * English at the customer’s request. drawer is a consumer, expedited recredit D. * * * rights under the Check 21 Act and subpart D. 6. * * * I 43. In appendix E, add a new sentence A drawer that suffers a loss due to receipt of e. * * * Such notice need not be posted at the end of paragraph XVI.A.7. to read a paper or electronic representation of a at each teller window, but the notice must be substitute check would receive the substitute posted in a place where consumers seeking as follows: check warranties but would not have to make deposits are likely to see it before XVI. * * * indemnity or expedited recredit rights. making their deposits. For example, the A. * * *

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7. * * * A check that is converted to a XIX. * * * electronic indorsements and their own qualified returned check must be encoded in B. * * * indorsements and identifications onto a accordance with ANS X9.13 for original 3. A bank must identify an item of substitute check at the time that the checks or ANS X9.100–140 for substitute information if the bank is uncertain as to that substitute check is created. If a subsequent checks. item’s accuracy. A bank may make this substitute check is created in the course of identification by setting the item off with collection or return, that substitute check * * * * * question marks, asterisks, or other symbols will contain, in its image of the back of the I 44. In appendix E, revise paragraphs designated for this purpose by generally previous substitute check, reproductions of XVI.C.1.a. and XVI.D.1. to read as applicable industry standards. indorsements that were sprayed or overlaid follows: onto the previous item. For purposes of the I 47. In appendix E, paragraph XIX.D.1., indorsement standard set forth in appendix XVI. * * * add a new sentence between the next-to- D, a reproduction of a previously applied C. * * * last and last sentences and revise the last sprayed or overlaid indorsement contained 1. * * * sentence to read as follows: within an image of a check does not a. A paying bank may have a courier that constitute ‘‘an indorsement that previously leaves after midnight (or after any other XIX. * * * was applied electronically.’’ To applicable deadline) to deliver its forward- D. * * * accommodate these two indorsement collection checks. This paragraph removes 1. * * * A bank that chooses to provide scenarios, the appendix includes two the constraint of the midnight deadline for the notice required by § 229.33(d) in writing indorsement location specifications: one returned checks if the returned check reaches may send the notice by e-mail or facsimile if standard applies to banks spraying the receiving bank on or before the receiving the bank sends the notice to the e-mail indorsements onto existing paper original bank’s next banking day following the address or facsimile number specified by the checks and substitute checks, and another otherwise applicable deadline by the earlier customer for that purpose. The notice to the applies to reconverting banks overlaying of the close of that banking day or a cutoff customer required under this paragraph also indorsements that previously were applied hour of 2 p.m. or later set by the receiving may satisfy the notice requirement of electronically and their own indorsements bank under U.C.C. 4–108. The extension also § 229.13(g) if the depositary bank invokes the onto substitute checks at the time the applies if the check reaches the bank to reasonable-cause exception of § 229.13(e) due substitute checks are created. which it is sent later than the time described to the receipt of a notice of nonpayment, 3. A bank might use check processing in the previous sentence if highly provided the notice meets all the equipment that captures an image of a check expeditious means of transportation are used. requirements of § 229.13(g). prior to spraying an indorsement onto that For example, a West Coast paying bank may * * * * * item. If the bank truncates that item, it use this further extension to ship a returned should ensure that it also applies an check by air courier directly to an East Coast I 48. In appendix E, paragraph XX.C., indorsement to the item electronically. A returning bank even if the check arrives after add new sentences at the end of reconverting bank satisfies its obligation to the returning bank’s cutoff hour. This paragraph 3. to read as follows: preserve all previously applied indorsements paragraph applies to the extension of all by overlaying a bank’s indorsement that midnight deadlines except Saturday XX. * * * C. * * * previously was applied electronically onto a midnight deadlines (see paragraph XVI.C.1.b substitute check that the reconverting bank of this appendix). 3. * * * Paragraph (c)(3) applies to all MICR-line encoding on a substitute check. creates. * * * * * 4. The location of an indorsement applied D. * * * * * * * * to an original paper check in accordance with 1. The reason for the return must be clearly I 49. In appendix E, paragraph XXI.A.1., appendix D may shift if that check is indicated. A check is identified as a returned truncated and later reconverted to a check if the front of that check indicates the remove the phrase ‘‘are legible’’ from the substitute check. If an indorsement applied reason for return, even though it does not fourth sentence and add the phrase ‘‘can to the original check in accordance with specifically state that the check is a returned be interpreted by any person’’ in its appendix D is overwritten by a subsequent check. A reason such as ‘‘Refer to Maker’’ is place. indorsement applied to the substitute check permissible in appropriate cases. If the I 50. In appendix E, paragraph XXI.A:, in accordance with appendix D, then one or returned check is a substitute check, the I A. Remove paragraphs 2. through 6. both of those indorsements could be reason for return must be placed within the rendered illegible. As explained in image of the original check that appears on and paragraph 8; I § 229.38(d) and the commentary thereto, a the front of the substitute check so that the B. Redesignate paragraph 7. as paragraph 10. and redesignate reconverting bank is liable for losses information is retained on any subsequent associated with indorsements that are substitute check. If the paying bank places paragraphs 9. through 13. as paragraphs rendered illegible as a result of check the returned check in a carrier envelope, the 11. through 15., respectively; substitution. I carrier envelope should indicate that it is a C. Add new paragraphs 2. through 9; 5. To ensure that indorsements can be returned check but need not repeat the and easily read and would remain legible after an reason for return stated on the check if it in I D. Revise redesignated paragraph 15. image of a check is captured, the standard fact appears on the check. by adding the phrase ‘‘collecting banks requires all indorsements applied to original * * * * * and’’ between the phrases ‘‘standard for’’ checks and substitute checks to be printed in I 45. In appendix E, add a new sentence and ‘‘returning banks’’ in the first black ink as of January 1, 2006. sentence and adding a new sentence at 6. The standard requires the depositary at the end of paragraph XVII.A.7.a. to bank’s indorsement to include (1) its nine- read as follows: the end of the paragraph. These additions and revisions read as digit routing number set off by an arrow at XVII. * * * each end of the routing number and, if the A. * * * follows: depositary bank is a reconverting bank with 7. * * * XXI. * * * respect to the check, an asterisk outside the a. * * * A check that is converted to a A. * * * arrow at each end of the routing number to qualified returned check must be encoded in 2. Banks generally apply indorsements to identify the bank as a reconverting bank; (2) accordance with ANS X9.13 for original a paper check in one of two ways: (1) banks the indorsement date; and (3) if the checks or ANS X9.100–140 for substitute print or ‘‘spray’’ indorsements onto a check indorsement is applied physically, name or checks. when the check is processed through the location information. The standard also banks’’ automated check sorters (regardless of permits but does not require the indorsement * * * * * whether the checks are original checks or to include other identifying information. The I 46. In appendix E, add a new substitute checks), and (2) reconverting banks standard requires a collecting bank’s or paragraph XIX.B.3. to read as follows: print or ‘‘overlay’’ previously applied returning bank’s indorsement to include only

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(1) the bank’s nine digit routing number substitute check that contains that Examples. (without arrows) and, if the collecting bank indorsement within the image of the original a. A presenting bank presents a substitute or returning bank is a reconverting bank with paper check. If the indorsement was applied check that meets the legal equivalence respect to the check, an asterisk at each end to the original paper check in accordance requirements to a paying bank. The paying of the number to identify the bank as a with appendix D’s location requirements for bank cannot refuse presentment of the reconverting bank, (2) the indorsement date, indorsements applied to existing paper substitute check on the basis that it is a and (3) an optional trace or sequence checks, and if the size reduction of the image substitute check, because the substitute number. causes the placement of the indorsement to check is the legal equivalent of the original 7. Depositary banks should not include no longer be consistent with the appendix’s check. information that can be confused with requirements, then the reconverting bank b. A depositor’s account agreement with a required information. For example, a nine- bears the liability for any loss that results bank provides that the depositor is entitled digit zip code could be confused with the from the shift in the placement of the to receive original cancelled checks back nine-digit routing number. indorsement. Such a loss could result either with his or her periodic account statement. 8. A depositary bank may want to include because the original indorsement applied in The bank may honor that agreement by an address in its indorsement in order to accordance with appendix D is rendered providing original checks, substitute checks, limit the number of locations at which it illegible by a subsequent indorsement that or a combination thereof. However, a bank must receive returned checks. In instances later is applied to the substitute check in may not honor such an agreement by where this address is not consistent with the accordance with appendix D, or because the providing something other than an original routing number in the indorsement, the subsequent bank cannot apply its check or a substitute check. depositary bank is required to receive indorsement to the substitute check legibly in c. A mortgage company argues that a returned checks at a branch or head office accordance with appendix D as a result of the consumer missed a monthly mortgage consistent with the routing number. Banks shift in the previous indorsement. payment that the consumer believes she should note, however, that § 229.32 requires made. A legally equivalent substitute check Example. a depositary bank to receive returned checks concerning that mortgage payment could be at the location(s) at which it receives In accordance with appendix D’s used in the same manner as the original forward-collection checks. specifications, a depositary bank sprays its check to prove the payment. 9. In addition to indorsing a substitute indorsement onto a business-sized original 2. A person other than a bank that creates check in accordance with appendix D, a check between 3.0 inches from the leading a substitute check could transfer, present, or reconverting bank must identify itself and the edge of the check and 1.5 inches from the return that check only by agreement unless truncating bank by applying its routing trailing edge of the check. The check’s and until a bank provided the substitute number and the routing number of the conversion to electronic form and subsequent check warranties. truncating bank to the front of the check in reconversion to paper form causes the 3. To be the legal equivalent of the original accordance with appendix D and ANS location of the depositary bank indorsement, check, a substitute check must accurately X9.100–140. Further, if the reconverting bank now contained within the image of the represent all the information on the front and is the paying bank, it also must identify itself original check, to change such that it is less back of the check as of the time the original by applying its routing number to the back than 3.0 inches from the leading edge of the check was truncated. An accurate of the check in accordance with appendix D. substitute check. In accordance with representation of information that was In these instances, the reconverting bank and appendix D’s specifications, a subsequent illegible on the original check would satisfy truncating bank routing numbers are for collecting bank sprays its indorsement onto this requirement. The payment instructions identification purposes only and are not the substitute check between the leading placed on the check by, or as authorized by, indorsements or acceptances. edge of the check and 3.0 inches from the the drawer, such as the amount of the check, * * * * * leading edge of the check and the the payee, and the drawer’s signature, must 15. * * * With respect to the identification indorsement happens to be on top of the be accurately represented, because that of a paying bank that is also a reconverting shifted depositary bank indorsement. If the information is an essential element of a bank, see the commentary to § 229.51(b)(2). check is returned unpaid and the return is negotiable instrument. Other information that * * * * * not expeditious because of the illegibility of must be accurately represented includes (1) I the depositary bank indorsement, and the the information identifying the drawer and 51. In appendix E, paragraph XXIII.A., depositary bank incurs a loss that it would the paying bank that is preprinted on the remove the last sentence. not have incurred had the return been check, including the MICR line; and (2) other I 52. In appendix E, paragraph XXIV.D., expeditious, the reconverting bank bears the information placed on the check prior to the revise the last sentence of paragraph 1., liability for that loss. time an image of the check is captured, such redesignate paragraphs 2. and 3. as * * * * * as any required identification written on the paragraphs 3. and 4., respectively, and front of the check and any indorsements I 53. In appendix E, redesignate add a new paragraph 2. to read as applied to the back of the check. A substitute commentary XXX as commentary check need not capture other characteristics follows: XXXVIII and add new commentaries of the check, such as watermarks, XXIV. * * * XXX through XXXVII to read as follows: microprinting, or other physical security D. * * * features that cannot survive the imaging 1. Responsibility for back of check. * * * * * * * * process or decorative images, in order to Accordingly, this provision places XXX. § 229.51 General provisions governing meet the accuracy requirement. Conversely, responsibility on the paying bank, depositary substitute checks some security features that are latent on the bank, or reconverting bank, as appropriate, original check might become visible as a for keeping the back of the check clear for A. § 229.51(a) Legal Equivalence result of the check imaging process. For bank indorsements during forward collection 1. Section 229.51(a) states that a substitute example, the original check might have a and return. check for which a bank has provided the faint representation of the word ‘‘void’’ that 2. ANS X9.100–140 provides that an image substitute check warranties is the legal will appear more clearly on a photocopied or of an original check must be reduced in size equivalent of the original check for all electronic image of the check. Provided the when placed on the first substitute check purposes and all persons if it meets the inclusion of the clearer version of the word associated with that original check. (The accuracy and legend requirements. Where the on the image used to create a substitute check image thereafter would be constant in size on law (or a contract) requires production of the did not obscure the required information any subsequent substitute check that might original check, production of a legally listed above, a substitute check that be created.) Because of this size reduction, equivalent substitute check would satisfy contained such information could be the the location of an indorsement, particularly that requirement. A person that receives a legal equivalent of an original check under a depositary bank indorsement, applied to an substitute check cannot be assessed costs § 229.51(a). However, if a person suffered a original paper check likely will change when associated with the creation of the substitute loss due to receipt of such a substitute check the first reconverting bank creates a check, absent agreement to the contrary. instead of the original check, that person

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could have an indemnity claim under 3. The reconverting bank must place the way through to the ultimate recipient of a § 229.53 and, in the case of a consumer, an routing number of the truncating bank substitute check or paper or electronic expedited recredit claim under § 229.54. surrounded by brackets on the front of the representation thereof, any subsequent bank 4. To be the legal equivalent of the original substitute check in accordance with that transfers, presents, or returns for check, a substitute check must bear the legal appendix D and ANS X9.100–140. consideration either the substitute check or a equivalence legend described in paper or electronic representation of the § 229.51(a)(2). A bank may not vary the Example. substitute check is responsible to subsequent language of the legal equivalence legend and A bank’s customer, which is a nonbank transferees for the warranties. Any warranty must place the legend on the substitute check business, receives checks for payment and by recipient could bring a claim for a breach of as specified by generally applicable industry agreement deposits substitute checks instead a substitute check warranty if it received standards for substitute checks contained in of the original checks with its depositary either the actual substitute check or a paper ANS X9.100–140. bank. The depositary bank is the reconverting or electronic representation of a substitute 5. In some cases, the original check used bank with respect to the substitute checks check. to create a substitute check could be forged and the truncating bank with respect to the 2. The substitute check warranties and or otherwise fraudulent. A substitute check original checks. In accordance with appendix indemnity are not given under §§ 229.52 and created from a fraudulent original check D and with ANS X9.100–140, the bank must 229.53 by a bank that truncates the original would have the same status under Regulation therefore be identified on the front of the check and by agreement transfers the original CC and the U.C.C. as the original fraudulent substitute checks as a reconverting bank and check electronically to a subsequent bank for check. For example, a substitute check of a as the truncating bank, and on the back of the consideration. However, parties may, by fraudulent original check would not be substitute checks as the depositary bank and agreement, allocate liabilities associated with properly payable under U.C.C. 4–401 and a reconverting bank. the exchange of electronic check information. would be subject to the transfer and presentment warranties in U.C.C. 4–207 and C. 229.51(c) Applicable Law Example. 4–208. 1. A substitute check that meets the A bank that receives check information requirements for legal equivalence set forth electronically and uses it to create substitute B. 229.51(b) Reconverting Bank Duties in this section is subject to any provision of checks is the reconverting bank and, when it 1. As discussed in more detail in appendix federal or state law that applies to original transfers, presents, or returns that substitute D and the commentary to § 229.35, a checks, except to the extent such provision check, becomes the first warrantor. However, reconverting bank must indorse (or, if it is a is inconsistent with the Check 21 Act or that bank may protect itself by including in paying bank with respect to the check, subpart D. A legally equivalent substitute its agreement with the sending bank identify itself on) the back of a substitute check is subject to all laws that are not provisions that specify the sending bank’s check in a manner that preserves all preempted by the Check 21 Act in the same warranties and responsibilities to the indorsements applied, whether physically or manner and to the same extent as is an receiving bank, particularly with respect to electronically, by persons that previously original check. Thus, any person could the accuracy of the check image and check handled the check in any form for forward satisfy a law that requires production of an data transmitted under the agreement. collection or return. Indorsements applied original check by producing a substitute 3. A bank need not affirmatively make the physically to the original check before an check that is derived from the relevant warranties because they attach automatically image of the check was captured would be original check and that meets the legal when a bank transfers, presents, or returns preserved through the image of the back of equivalence requirements of § 229.51(a). the substitute check (or a representation the original check that a substitute check 2. A law is not inconsistent with the Check thereof) for which it receives consideration. must contain. Indorsements applied 21 Act or subpart D merely because it allows Because a substitute check transferred, physically to the original check after an for the recovery of a greater amount of presented, or returned for consideration is image of the original check was captured damages. warranted to be the legal equivalent of the would be conveyed as electronic original check and thereby subject to existing indorsements (see paragraph 3 of the Example. laws as if it were the original check, all commentary to § 229.35(a)). If indorsements A drawer that suffers a loss with respect to U.C.C. and other Regulation CC warranties were applied electronically after an image of a substitute check that was improperly that apply to the original check also apply to the original check was captured or were charged to its account and for which the the substitute check. applied electronically after a previous drawer has an indemnity claim but not a 4. The legal equivalence warranty by substitute check was converted to electronic warranty claim would be limited under the definition must be linked to a particular form, the reconverting bank must apply those Check 21 Act to recovery of the amount of substitute check. When an original check is indorsements physically to the substitute the substitute check plus interest and truncated, the check may move from check. A reconverting bank is not responsible expenses. However, if the drawer also electronic form to substitute check form and for obtaining indorsements that persons that suffered damages that were proximately then back again, such that there would be previously handled the check should have caused because the bank wrongfully multiple substitute checks associated with applied but did not apply. dishonored subsequently presented checks as one original check. When a check changes 2. A reconverting bank also must identify a result of the improper substitute check form multiple times in the collection or itself as such on the front and back of the charge, the drawer could recover those losses return process, the first reconverting bank substitute check and must preserve on the under U.C.C. 4–402. and subsequent banks that transfer, present, back of the substitute check the or return the first substitute check (or a paper identifications of any previous reconverting XXXI § 229.52 Substitute Check Warranties or electronic representation of the first banks in accordance with appendix D. The substitute check) warrant the legal A. 229.52(a) Warranty Content and Provision presence on the back of a substitute check of equivalence of only the first substitute check. indorsements that were applied by previous 1. The responsibility for providing the If a bank receives an electronic reconverting banks and identified with substitute check warranties begins with the representation of a substitute check and uses asterisks in accordance with appendix D reconverting bank. In the case of a substitute that representation to create a second would satisfy the requirement that the check created by a bank, the reconverting substitute check, the second reconverting reconverting bank preserve the identification bank starts the flow of warranties when it bank and subsequent transferees of the of previous reconverting banks. As discussed transfers, presents, or returns a substitute second substitute check (or a representation in more detail in the commentary to § 229.35, check for which it receives consideration. A thereof) warrant the legal equivalence of both the reconverting bank and truncating bank bank that receives a substitute check created the first and second substitute checks. A routing numbers on the front of a substitute by a nonbank starts the flow of warranties reconverting bank would not be liable for a check and, if the reconverting bank is the when it transfers, presents, or returns for warranty breach under § 229.52 if the legal paying bank, the reconverting bank’s routing consideration either the substitute check it equivalence defect is the fault of a number on the back of a substitute check are received or an electronic or paper subsequent bank that handled the substitute for identification only and are not representation of that substitute check. To check, either as a substitute check or in other indorsements or acceptances. ensure that warranty protections flow all the paper or electronic form.

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5. The warranty in § 229.52(a)(2), which check or a paper or electronic representation prove payment. Any loss that the drawer addresses multiple payment requests for the of a substitute check is responsible for suffered as a result of receiving the blurry same check, is not linked to a particular providing the substitute check indemnity. check image would not trigger an indemnity substitute check but rather is given by each The indemnity covers losses due to any claim because the loss was not caused by the bank handling the substitute check, an subsequent recipient’s receipt of the receipt of a substitute check. The drawer electronic representation of a substitute substitute check instead of the original check. may, however, still have a warranty claim if check, or a subsequent substitute check The indemnity therefore covers the loss he received a copy of a substitute check, and created from an electronic representation of caused by receipt of the substitute check as may also have rights under the U.C.C. a substitute check. All banks that transfer, well as the loss that a bank incurs because present, or return a substitute check (or a it pays an indemnity to another person. A B. 229.53(b) Indemnity Amount paper or electronic representation thereof) bank that pays an indemnity would in turn 1. If a recipient of a substitute check is therefore provide the warranty regardless of have an indemnity claim regardless of making an indemnity claim because a bank whether the ultimate demand for double whether it received the substitute check or a has breached one of the substitute check payment is based on the original check, the paper or electronic representation of the warranties, the recipient can recover any substitute check, or some other electronic or substitute check The indemnity would not losses proximately caused by that warranty paper representation of the substitute or apply to a person that handled only the breach. original check, and regardless of the order in original check or a paper or electronic which the duplicative payment requests version of the original check that was not Examples. occur. This warranty is given by the banks derived from a substitute check. a. A drawer discovers that its account has that transfer, present, or return a substitute been charged for two different substitute check even if the demand for duplicative Examples. checks that were provided to the drawer and payment results from a fraudulent substitute a. A paying bank makes payment based on that were associated with the same original check about which the warranting bank had a substitute check that was derived from a check. As a result of this duplicative charge, no knowledge. fraudulent original cashier’s check. The the paying bank dishonored several Example. amount and other characteristics of the subsequently-presented checks that it original cashier’s check are such that, had the otherwise would have paid and charged the A nonbank depositor truncates a check and original check been presented instead, the drawer returned check fees. The payees of in lieu thereof sends an electronic version of paying bank would have inspected the the returned checks also charged the drawer that check to both Bank A and Bank B. Bank original check for security features. The returned check fees. The drawer would have A and Bank B each uses the check paying bank’s fraud detection procedures a warranty claim against any of the information that it received electronically to were designed to detect the fraud in question warranting banks, including its bank, for create a substitute check, which it presents to Bank C for payment. Bank A and Bank B and allow the bank to return the fraudulent breach of the warranty described in each is a reconverting bank that made the check in a timely manner. However, the § 229.52(a)(2). The drawer also could assert substitute check warranties when it security features that the bank would have an indemnity claim. Because there is only presented a substitute check to and received inspected were security features that did not one original check for any payment payment from Bank C. Bank C could pursue survive the imaging process (see the transaction, if the collecting and presenting a warranty claim for the loss it suffered as a commentary to § 229.51(a)). Under these bank had collected the original check instead result of the duplicative payment against circumstances, the paying bank could assert of using a substitute check the bank would either Bank A or Bank B. an indemnity claim against the bank that have been asked to make only one payment. presented the substitute check. The drawer could assert its warranty and B. 229.52(b) Warranty Recipients b. By contrast with the previous examples, indemnity claims against the paying bank, 1. A reconverting bank makes the the indemnity would not apply if the because that is the bank with which the warranties to the person to which it transfers, characteristics of the presented substitute drawer has a customer relationship and the presents, or returns the substitute check for check were such that the bank’s security drawer has received an indemnity from that consideration and to any subsequent policies and procedures would not have bank. The drawer could recover from the recipient that receives either the substitute detected the fraud even if the original had indemnifying bank the amount of the check or a paper or electronic representation been presented. For example, if the check erroneous charge, as well as the amount of derived from the substitute check. These was under the threshold amount at which the the returned check fees charged by both the subsequent recipients could include a bank subjects an item to its fraud detection paying bank and the payees of the returned subsequent collecting or returning bank, the procedures, the bank would not have checks. If the drawer’s account were an depositary bank, the drawer, the drawee, the inspected the item for security features interest-bearing account, the drawer also payee, the depositor, and any indorser. The regardless of the form of the item and could recover any interest lost on the paying bank would be included as a warranty accordingly would have suffered a loss even erroneously debited amount and the recipient, for example because it would be if it had received the original check. erroneous returned check fees. The drawer the drawee of a check or a transferee of a c. A paying bank makes an erroneous also could recover its expenditures for check that is payable through it. payment based on an electronic representation in connection with the claim. 2. The warranties flow with the substitute representation of a substitute check because Finally, the drawer could recover any other check to persons that receive a substitute the electronic cash letter accompanying the losses that were proximately caused by the check or a paper or electronic representation electronic item included the wrong amount warranty breach. of a substitute check. The warranties do not to be charged. The paying bank would not b. In the example above, the paying bank flow to a person that receives only the have an indemnity claim associated with that that received the duplicate substitute checks original check or a representation of an payment because its loss did not result from also would have a warranty claim against the original check that was not derived from a receipt of an actual substitute check instead previous transferor(s) of those substitute substitute check. However, a person that of the original check. However, the paying checks and could seek an indemnity from initially handled only the original check bank could protect itself from such losses that bank (or either of those banks). The could become a warranty recipient if that through its agreement with the bank that sent indemnifying bank would be responsible for person later receives a returned substitute the check to it electronically and may have compensating the paying bank for all the check or a paper or electronic representation rights under other law. losses proximately caused by the warranty of a substitute check that was derived from d. A drawer has agreed with its bank that breach, including representation expenses that original check. the drawer will not receive paid checks with and other costs incurred by the paying bank XXXII. § 229.53 Substitute Check periodic account statements. The drawer in settling the drawer’s claim. Indemnity requested a copy of a paid check in order to 2. If the recipient of the substitute check prove payment and received a photocopy of does not have a substitute check warranty A. 229.53(a) Scope of Indemnity a substitute check. The photocopy that the claim with respect to the substitute check, 1. Each bank that for consideration bank provided in response to this request the amount of the loss the recipient may transfers, presents, or returns a substitute was illegible, such that the drawer could not recover under § 229.53 is limited to the

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amount of the substitute check, plus interest Example. who suffers a total loss greater than the and expenses. However, the indemnified A paying bank indemnifies a drawer for a amount of the substitute check plus interest person might be entitled to additional substitute check that the drawer alleged was could attempt to recover the remainder of damages under some other provision of law. a forgery that would have been detected had that loss by bringing warranty, indemnity, or other claim under this subpart or other Examples. the original check instead been presented. The bank that provided the indemnity could applicable law. a. A drawer received a substitute check pursue its own indemnity claim against the Examples. that met all the legal equivalence bank that presented the substitute check, requirements and for which the drawer was could attempt to recover from the forger, or a. A consumer who received a substitute only charged once, but the drawer believed could pursue any claim that it might have check believed that he or she wrote the check that the underlying original check was a under other law. The bank also could request for $150, but the bank charged his or her forgery. If the drawer suffered a loss because from the drawer any information that the account for $1,500. The amount on the it could not prove the forgery based on the drawer might possess regarding the possible substitute check the consumer received is substitute check, for example because identity of the forger. illegible. If the substitute check contained a proving the forgery required analysis of pen blurry image of what was a legible original pressure that could be determined only from XXXIII. § 229.54 Expedited Recredit for check, the consumer could have a claim for the original check, the drawer would have an Consumers a breach of the legal equivalence warranty in indemnity claim. However, the drawer would addition to an improper charge claim. A. 229.54(a) Circumstances Giving Rise to a Because the amount of the check cannot be not have a substitute check warranty claim Claim because the substitute check was the legal determined from the substitute check 1. A consumer may make a claim for equivalent of the original check and no provided to the consumer, the consumer, if expedited recredit under this section only for person was asked to pay the substitute check acting in good faith, could assert that the a substitute check that he or she has received more than once. In that case, the amount of production of the original check or a better and for which the bank charged his or her the drawer’s indemnity under § 229.53 would copy of the original check is necessary to deposit account. As a result, checks used to determine the validity of the claim. The be limited to the amount of the substitute access loans, such as credit card checks or consumer in this case could attempt to check, plus interest and expenses. However, home equity line of credit checks, that are recover his or her losses by using the the drawer could attempt to recover reconverted to substitute checks would not expedited recredit procedure. The additional losses, if any, under other law. give rise to an expedited recredit claim, consumer’s losses recoverable under § 229.54 b. As described more fully in the unless such a check was returned unpaid and could include the $1,350 he or she believed commentary to § 229.53(a) regarding the the bank charged the consumer’s deposit was incorrectly charged plus any improperly scope of the indemnity, a paying bank could account for the amount of the returned check. charged fees associated with that charge, up have an indemnity claim if it paid a legally In addition, a consumer who received only to $150 (plus foregone interest on the amount equivalent substitute check that was created a statement that contained images of multiple of the consumer’s loss if the account was an from a fraudulent cashier’s check that the substitute checks per page would not be interest-bearing account). The consumer paying bank’s fraud detection procedures entitled to make an expedited recredit claim, could recover any additional losses, if any, would have caught and that the bank would although he or she could seek redress under under other law, such as U.C.C. 4–401 and have returned by its midnight deadline had other provisions of law, such as § 229.52 or 4–402. it received the original check. However, if the U.C.C. 4–401. However, a consumer who b. A consumer received a substitute check substitute check was not subject to a originally received only a statement for which his or her account was charged and warranty claim (because it met the legal containing images of multiple substitute believed that the original check from which equivalence requirements and there was only checks per page but later received a the substitute was derived was a forgery. The one payment request) the paying bank’s substitute check, such as in response to a forgery was good enough that analysis of the indemnity would be limited to the amount of request for a copy of a check shown in the original check was necessary to verify the substitute check plus interest and statement, could bring a claim if the other whether the signature is that of the expenses. expedited recredit criteria were met. consumer. Under those circumstances, the 3. The amount of an indemnity would be Although a consumer must at some point consumer, if acting in good faith, could assert reduced in proportion to the amount of any have received a substitute check to make an that the charge was improper, that he or she amount loss attributable to the indemnified expedited recredit claim, the consumer need therefore had incurred a loss in the amount person’s negligence or bad faith. This not be in possession of the substitute check of the check (plus foregone interest if the comparative negligence standard is intended at the time he or she submits the claim. account was an interest-bearing account), and to allocate liability in the same manner as the 2. A consumer must in good faith assert that he or she needed the original check to comparative negligence provision of that the bank improperly charged the determine the validity of the forgery claim. § 229.38(c). consumer’s account for the substitute check By contrast, if the signature on the substitute 4. An indemnifying bank may limit the or that the consumer has a warranty claim for check obviously was forged (for example, if losses for which it is responsible under the substitute check (or both). The warranty the forger signed a name other than that of § 229.53 by producing the original check or in question could be a substitute check the account holder) and there was no other a sufficient copy. However, production of the warranty described in § 229.52 or any other defect with the substitute check, the original check or a sufficient copy does not warranty that a bank provides with respect to consumer would not need the original check absolve the indemnifying bank from liability a check under other law. A consumer could, or a sufficient copy to determine the fact of claims relating to a warranty the bank has for example, have a warranty claim under the forgery and thus would not be able to provided under § 229.52 or any other law, § 229.34(b), which contains returned check make an expedited recredit claim under this including but not limited to subpart C of this warranties that are made to the owner of the section. However, the consumer would have part or the U.C.C. check. a claim under U.C.C. 4–401 if the item was 3. A consumer’s recovery under the C. 229.53(c) Subrogation of Rights not properly payable. expedited recredit section is limited to the 1. A bank that pays an indemnity claim is amount of his or her loss, up to the amount B. 229.54(b) Procedures for Making Claims subrogated to the rights of the person it of the substitute check subject to the claim, 1. The consumer must submit his or her indemnified, to the extent of the indemnity plus interest if the consumer’s account is an expedited recredit claim to the bank within it provided, so that it may attempt to recover interest-bearing account. The consumer’s loss 40 calendar days of the later of the day on that amount from another person based on an could include fees that resulted from the which the bank mailed or delivered, by a indemnity, warranty, or other claim. The allegedly incorrect charge, such as bounced means agreed to by the consumer, (1) the person that the bank indemnified must check fees that were imposed because the periodic account statement containing comply with reasonable requests from the improper charge caused the bank to dishonor information concerning the transaction indemnifying bank for assistance with subsequently presented checks that it giving rise to the claim, or (2) the substitute respect to the subrogated claim. otherwise would have honored. A consumer check giving rise to the claim. The mailing

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or delivery of a substitute check could be in that his or her signature had been forged, the consumer submitted a claim, even if the connection with a regular account statement, original check might be necessary to confirm consumer submitted multiple substitute in response to a consumer’s specific request the forgery if, for example, pen pressure or check claims in the same communication. for a copy of a check, or in connection with similar analysis were necessary to determine 2. A bank that provides a recredit to the the return of a substitute check to the payee. the genuineness of the signature. consumer, either provisionally or after 2. Section 229.54(b) contemplates more 8. The information that the consumer is determining that the consumer’s claim is than one possible means of delivering an required to provide under § 229.54(b)(2)(iv) valid, may reverse the amount of the recredit account statement or a substitute check to the to facilitate the bank’s investigation of the if the bank later determines that the claim in consumer. The time period for making a claim could include, for example, a copy of fact was not valid. A bank that reverses a claim thus could be triggered by the mailed, the allegedly defective substitute check or recredit also may reverse the amount of any in-person, or electronic delivery of an information related to that check, such as the interest that it has paid on the previously account statement or by the mailed or in- number, amount, and payee. recredited amount. A bank’s time for person delivery of a substitute check. In- 9. A bank may accept an expedited recredit reversing a recredit may be limited by a person delivery would include, for example, claim in any form but could in its discretion statute of limitations. making an account statement or substitute require the consumer to submit the claim in check available at the bank for the writing. A bank that requires a recredit claim D. 229.54(d) Availability of Recredit consumer’s retrieval under an arrangement to be in writing must inform the consumer 1. The availability of a recredit provided by agreed to by the consumer. In the case of a of that requirement and provide a location to a bank under § 229.54(c) is governed solely mailed statement or substitute check, the 40- which such a written claim should be sent. by § 229.54(d) and therefore is not subject to day period should be calculated from the If the consumer attempts to make a claim the availability provisions of subpart B. A postmark on the envelope. In the case of in- orally, the bank must inform the consumer at bank generally must make a recredit available person delivery, the 40-day period should be that time of the written notice requirement. for withdrawal no later than the start of the calculated from the earlier of the calendar A bank that receives a timely oral claim and business day after the banking day on which day on which delivery occurred or the bank then requires the consumer to submit the the bank provided the recredit. However, a first made the statement or substitute check claim in writing may require the consumer to bank may delay the availability of up to the available for the consumer’s retrieval. submit the written claim within 10 business first $2,500 that it provisionally recredits to 3. A bank must extend the consumer’s time days of the bank’s receipt of the timely oral a consumer account under § 229.54(c)(3)(i) if for submitting a claim for a reasonable period claim. If the consumer’s oral claim was (1) the account is a new account, (2) without if the consumer is prevented from submitting timely and the consumer’s written claim was regard to the substitute check giving rise to his or her claim within 40 days because of received within the 10-day period for the recredit claim, the account has been extenuating circumstances. Extenuating submitting the claim in writing, the repeatedly overdrawn during the six month circumstances could include, for example, consumer would satisfy the requirement of period ending on the date the bank received the extended travel or illness of the § 229.54(b)(1) to submit his or her claim the claim, or (3) the bank has reasonable consumer. within 40 days, even if the bank received the cause to believe that the claim is fraudulent. 4. For purposes of determining the written claim after that 40-day period. These first two exceptions are meant to timeliness of a consumer’s actions, a 10. A bank may permit but may not require operate in the same manner as the consumer’s claim is considered received on a consumer to submit a written claim corresponding new account and repeated the banking day on which the consumer’s electronically. overdraft exceptions in subpart B, as bank receives a complete claim in person or 11. If a bank requires a consumer to submit described in § 229.13(a) and (d) and the by telephone or on the banking day on which a claim in writing, the bank may compute commentary thereto regarding application of the consumer’s bank receives a letter or e- time periods for the bank’s action on the the exceptions. When a recredit amount for mail containing a complete claim. (But see claim from the date that the bank received which a bank delays availability contains an paragraphs 9–11 of this section for a the written claim. Thus, if a consumer called interest component, that component also is discussion of time periods related to oral the bank to make an expedited recredit claim subject to the delay because it is part of the claims that the bank requires to be put in and the bank required the consumer to amount recredited under § 229.54(c)(3)(i). writing.) submit the claim in writing, the time at However, interest continues to accrue during 5. A consumer who makes an untimely which the bank must take action on the claim the hold period. claim would not be entitled to recover his or would be determined based on the date on 2. Section 229.54(d)(2) describes the her losses using the expedited recredit which the bank received the written claim, maximum period of time that a bank may procedure. However, he or she still could not the date on which the consumer made delay availability of a recredit provided have rights under other law, such as a the oral claim. under § 229.54(c). The bank may delay warranty or indemnity claim under subpart 12. Regardless of whether the consumer’s availability under one of the three listed D, a claim for an improper charge to his or communication with the bank is oral or exceptions until the business day after the her account under U.C.C. 4–401, or a claim written, a consumer complaint that does not banking day on which the bank determines for wrongful dishonor under U.C.C. 4–402. contain all the elements described in that the consumer’s claim is valid or the 45th 6. A consumer’s claim must include the § 229.54(b) is not a claim for purposes of calendar day after the banking day on which reason why the consumer believes that his or § 229.54. If the consumer attempts to submit the bank received the consumer’s claim, her account was charged improperly or why a claim but does not provide all the required whichever is earlier. The only portion of the he or she has a warranty claim. A charge information, then the bank has a duty to recredit that is subject to delay under could be improper, for example, if the bank inform the consumer that the complaint does § 229.54(d)(2) is the amount that the bank charged the consumer’s account for an not constitute a claim under § 229.54 and recredits under § 229.54(c)(3)(i) (including amount different than the consumer believes identify what information is missing. the interest component, if any) pending its he or she authorized or charged the consumer investigation of a claim. more than once for the same check, or if the C. 229.54(c) Action on Claims check in question was a forgery or otherwise 1. If the bank has not determined whether E. 229.54(e) Notices Relating to Consumer fraudulent. or not the consumer’s claim is valid by the Expedited Recredit Claims 7. A consumer also must provide a reason end of the 10th business day after the 1. A bank must notify a consumer of its why production of the original check or a banking day on which the consumer action regarding a recredit claim no later than sufficient copy is necessary to determine the submitted the claim, the bank must by that the business day after the banking day that validity of the claim identified by the time recredit the consumer’s account for the the bank makes a recredit, determines a claim consumer. For example, if the consumer amount of the consumer’s loss, up to the is not valid, or reverses a recredit, as believed that the bank charged his or her lesser of the amount of the substitute check appropriate. As provided in § 229.58, a bank account for the wrong amount, the original or $2,500, plus interest if the account is an may provide any notice required by this check might be necessary to prove this claim interest-bearing account. A bank must section by U.S. mail or by any other means if the amount of the substitute check were provide the recredit pending investigation for through which the consumer has agreed to illegible. Similarly, if the consumer believed each substitute check for which the receive account information.

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2. A bank that denies the consumer’s provide a recredit, either to the consumer or original check or handled for forward recredit claim must demonstrate to the to another bank that is obligated to provide collection or return. consumer that the substitute check was a recredit in connection with the consumer’s 4. The indemnifying bank’s right to require properly charged or that the warranty claim claim; and second, because the bank detected a claimant bank to submit a claim in writing was not valid, such as by explaining the a problem with the substitute check that, if and the computation of time from the date of reason that the substitute check charge was uncaught, could have given rise to a the written submission parallel the proper or the consumer’s warranty claim was consumer claim. corresponding provision in the consumer not valid. For example, if a consumer has 2. The loss giving rise to an interbank recredit section (§ 229.54(b)(3)). However, the claimed that the bank charged its account for recredit claim could be the recredit that the indemnifying bank also may require the an improper amount, the bank denying that claimant bank provided directly to its claimant bank to submit a copy of the written claim must explain why it determined that consumer customer under § 229.54 or a loss or electronic claim submitted by the the charged amount was proper. incurred because the claimant bank was consumer under that section, if any. 3. A bank denying a recredit claim also required to indemnify another bank that C. 229.55(c) Action on Claims must provide the original check or a provided an expedited recredit to either a sufficient copy, unless the bank is providing consumer or a bank. 1. An indemnifying bank that responds to the claim denial notice electronically and the an interbank expedited recredit claim by consumer has agreed to receive that type of Examples. providing the original check or a sufficient information electronically. In that case, a. A paying bank charged a consumer’s copy of the original check need not § 229.58 allows the bank instead to provide account based on a substitute check that demonstrate why that claim or the an image of the original check or an image contained a blurry image of a legible original underlying consumer expedited recredit of the sufficient copy that the bank would check, and the consumer whose account was claim is or is not valid. have sent to the consumer had the bank charged made an expedited recredit claim XXXV. § 229.56 Liability provided the notice by mail. against the paying bank because the 4. A bank that relies on information or consumer suffered a loss and needed the A. 229.56(a) Measure of Damages documents in addition to the original check original check or a sufficient copy to 1. In general, a person’s recovery under or sufficient copy when denying a consumer determine the validity of his or her claim. this section is limited to the amount of the expedited recredit claim also must either The paying bank would have a warranty loss up to the amount of the substitute check provide such information or documents to claim against the presenting bank that that is the subject of the claim, plus interest the consumer or inform the consumer that he transferred the defective substitute check to and expenses (including costs and reasonable or she may request copies of such it and against any previous transferring attorney’s fees and other expenses of information or documents. This requirement bank(s) that handled that substitute check or representation) related to that substitute does not apply to a bank that relies only on another paper or electronic representation of check. However, a person that is entitled to the original check or a sufficient copy to the check. The paying bank therefore would an indemnity under § 229.53 because of a make its determination. meet each of the requirements necessary to breach of a substitute check warranty also 5. Models C–22 through C–25 in appendix bring an interbank expedited recredit claim. may recover under § 229.53 any losses C contain model language for each of three b. Continuing with the example in proximately caused by the warranty breach, notices described in § 229.54(e). A bank may, paragraph a, if the presenting bank including interest, costs, wrongfully-charged but is not required to, use the language listed determined that the paying bank’s claim was fees imposed as a result of the warranty in the appendix. The Check 21 Act does not valid and provided a recredit, the presenting breach, reasonable attorney’s fees, and other provide banks that use these models with a bank would have suffered a loss in the expenses of representation. safe harbor. However, the Board has amount of the recredit it provided and could, 2. A reconverting bank also may be liable published these models to aid banks’ efforts in turn, make an expedited recredit claim to comply with § 229.54(e). under § 229.38 for damages associated with against the bank that transferred the defective the illegibility of indorsements applied to F. 229.54(f) Recredit Does Not Abrogate substitute check to it. substitute checks if that illegibility results Other Liabilities B. 229.55(b) Procedures for Making Claims because the reduction of the original check 1. The amount that a consumer may image and its placement on the substitute 1. An interbank recredit claim under this check shifted a previously-applied recover under § 229.54 is limited to the lesser section must be brought within 120 calendar of the amount of his or her loss or the amount indorsement that, when applied, complied days of the transaction giving rise to the with appendix D. For more detailed of the substitute check, plus interest on that claim. For purposes of computing this amount if his or her account earns interest. discussion of this topic, see § 229.38 and the period, the transaction giving rise to the accompanying commentary. However, a consumer’s total loss associated claim is the claimant bank’s settlement for with the substitute check could exceed that the substitute check in question. B. 229.56(b) Timeliness of Action amount, and the consumer could be entitled 2. When estimating the amount of its loss, to additional damages under other law. For 1. A bank’s delay beyond the time limits § 229.55(b)(2)(ii) states that the claimant bank prescribed or permitted by any provision of example, if a consumer’s loss exceeded the should include ‘‘interest if applicable.’’ The amount of the substitute check plus interest subpart D is excused if the delay is caused quoted phrase refers to any interest that the by certain circumstances beyond the bank’s and he or she had both a warranty and an claimant bank or a bank that the claimant indemnity claim with respect to the control. This parallels the standard of U.C.C. bank indemnified paid to a consumer who 4–109(b). substitute check, he or she would be entitled has an interest-bearing account in connection to additional damages under § 229.53 of this with an expedited recredit under § 229.54. C. 229.56(c) Jurisdiction subpart. Similarly, if a consumer was charged 3. The information that the claimant bank 1. The Check 21 Act confers subject matter bounced check fees as a result of an is required to provide under § 229.55(b)(2)(iv) jurisdiction on courts of competent improperly charged substitute check and to facilitate investigation of the claim could jurisdiction and provides a time limit for could not recover all of those fees because of include, for example, a copy of any written civil actions for violations of subpart D. the § 229.54’s limitation on recovery, he or claim that a consumer submitted under she could attempt to recover additional § 229.54 or any written record the bank may D. 229.56(d) Notice of Claims amounts under U.C.C. 4–402. have of a claim the consumer submitted 1. This paragraph is designed to adopt the XXXIV. § 229.55 Expedited Recredit orally. The information also could include a notice of claim provisions of U.C.C. 4–207(d) Procedures for Banks copy of the defective substitute check or and 4–208(e), with an added provision that information relating to that check, such as a timely § 229.54 expedited recredit claim A. 229.55(a) Circumstances Giving Rise to a the number, amount, and payee of the check. satisfies the generally-applicable notice Claim However, a claimant bank that provides a requirement. The time limit described in this 1. This section allows a bank to make an copy of the substitute check must take paragraph applies only to notices of warranty expedited recredit claim under two sets of reasonable steps to ensure that the copy is and indemnity claims. As provided in circumstances: first, because it is obligated to not mistaken for a legal equivalent of the § 229.56(c), all actions under § 229.56 must

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be brought within one year of the date that containing images of multiple substitute 7. Model C–5A the cause of action accrues. checks per page, does not trigger the notice A bank may use this form when it is requirement. providing the disclosure to its consumers XXXVI. Consumer Awareness 2. A consumer who does not routinely required by § 229.57 explaining that a A. 229.57(a) General Disclosure Requirement receive paid checks might receive a returned substitute check is the legal equivalent of an and Content substitute check. For example, a consumer original check and the circumstances under deposits an original check that is payable to 1. A bank must provide the disclosure which the consumer may make a claim for him or her into his or her deposit account. expedited recredit. required by § 229.57 under two The paying bank returns the check unpaid circumstances. First, each bank must provide and the depositary bank returns the check to * * * * * the disclosure to each of its consumer the depositor in the form of a substitute customers who receives paid checks with his check. A depositary bank that provides a I 56. In appendix E, in newly- or her account statement. This requirement returned substitute check to a consumer redesignated paragraph XXXVIII.D., does not apply if the bank provides with the depositor must provide the substitute check revise the heading, the first sentence of account statement something other than paid disclosure at that time. original checks, paid substitute checks, or a paragraph D.1. and add new paragraphs combination thereof. For example, this XXXVII. Variation by Agreement D.11. through D.15. to read as follows: requirement would not apply if a bank Section 229.60 provides that banks XXXVIII. * * * provided with the account statement only a involved in an interbank expedited recredit D. Model Notices, Models C–12 through C–25 document that contained multiple check claim under § 229.55 may vary the terms of images per page. Second, a bank also must that section by agreement, but otherwise no 1. Models C–12 through C–25 generally. provide the disclosure when it (a) provides person may vary the terms of subpart D by Models C–12 through C–25 provide models a substitute check to a consumer in response agreement. A bank’s decision to provide of the various notices required by the to that consumer’s request for a check or more generous protections for consumers regulation. * * * check copy or (b) returns a substitute check than this subpart requires, such as by to a consumer depositor. A bank must * * * * * providing consumers additional time to 11. Models C–22 through C–25 generally. provide the disclosure each time it provides submit expedited claims under § 229.54 a substitute check to a consumer on an Models C–22 through C–25 provide models under non-exigent circumstances, would not for the various notices required when a occasional basis, regardless of whether the be a variation prohibited by § 229.60. consumer who receives substitute checks bank previously provided the disclosure to * * * * * that consumer. makes an expedited recredit claim under I 2. A bank may, but is not required to, use 54. In appendix E, in newly- § 229.54 for a loss related to a substitute the model disclosure in appendix C–5A to redesignated paragraph XXXVIII., revise check. The Check 21 Act does not provide satisfy the disclosure content requirements of the heading and paragraph A.1. to read banks that use these models with a safe this section. A bank that uses the model as follows: harbor. However, the Board has published these models to aid banks’ efforts to comply language is deemed to comply with the * * * * * disclosure content requirement(s) for which with § 229.54(e). it uses the model language, provided the XXXVIII. Appendix C—Model Availability 12. Model C–22 Valid Claim Refund information in the disclosure accurately Policy Disclosures, Clauses, and Notices; and Notice. A bank may use this model when describes the bank’s policies and practices. A Model Substitute Check Policy Disclosure crediting the entire amount or the remaining bank also may include in its disclosure and Notices amount of a consumer’s expedited recredit additional information relating to substitute claim after determining that the consumer’s A. Introduction checks that is not required by this section. claim is valid. This notice could be used 3. A bank may, by agreement or at the 1. Appendix C contains model disclosure, when the bank provides the consumer a full consumer’s request, provide the disclosure clauses, and notices that may be used by recredit based on a valid claim determination required by this section in a language other banks to meet their disclosure and notice within ten days of the receipt of the than English, provided that the bank makes responsibilities under the regulation. Banks consumer’s claim or when the bank recredits a complete English notice available at the using the models (except models C–22 the remaining amount of a consumer’s consumer’s request. through C–25) properly will be deemed in expedited recredit claim by the 45th calendar compliance with the regulation’s disclosure day after receiving the consumer’s claim, as B. 229.57(b) Distribution requirements. required under § 229.54(e)(1). 1. A consumer may request a check or a * * * * * 13. Model C–23 Provisional Refund Notice. A bank may use this model when providing copy of a check on an occasional basis, such I as to prove that he or she made a particular 55. In appendix E, in newly- a full or partial expedited recredit to a payment. A bank that responds to the redesignated paragraph XXXVIII.B., consumer pending further investigation of consumer’s request by providing a substitute revise the heading, the first sentence of the consumer’s claim, as required under check must provide the required disclosure paragraphs B.1.a. and the first sentence § 229.54(e)(1). at the time of the consumer’s request if of paragraph B.1.c. and add a new 14. Model C–24 Denial Notice. A bank may feasible. Otherwise, the bank must provide paragraph B.7., to read as follows: use this model when denying a claim for an the disclosure no later than the time at which expedited recredit under § 229.54(e)(2). the bank provides a substitute check in XXXVIII. * * * 15. Model C–25 Reversal Notice. A bank response to the consumer’s request. It would B. Model Availability Policy and Substitute may use this model when reversing an not be feasible for a bank to provide notice Check Policy Disclosures, Models C–1 expedited recredit that was credited to a to the consumer at the time of the request if, through C–5A consumer’s account under § 229.54(e)(3). for example, the bank did not know at the 1. Models C–1 through C–5A generally. * * * * * time of the request whether it would provide a. Models C–1 through C–5A are models a substitute check in response to that request, for the availability policy disclosures I 57. In appendix E, remove the phrase regardless of the form of the consumer’s described in § 229.16 and substitute check request. It also would not be feasible for a ‘‘the Act’’ wherever it appears and add policy disclosure described in § 229.57. the phrase ‘‘the EFA Act’’ in its place. bank to provide notice at the time of the *** request if the consumer’s request was mailed By order of the Board of Governors of the to the bank or made by telephone, even if the * * * * * Federal Reserve System, July 27, 2004. c. Models C–1 through C–5A generally do bank knew when it received the request that Jennifer J. Johnson, it would provide a substitute check in not reflect any optional provisions of the Secretary of the Board. response. A bank’s provision to the consumer regulation, or those that apply only to certain of something other a substitute check, such banks. * * * [FR Doc. 04–17362 Filed 8–3–04; 8:45 am] as a photocopy of a check or a statement * * * * * BILLING CODE 6210–02–P

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