[Federal Register: January 8, 2004 (Volume 69, Number 5)]
[Proposed Rules]
[Page 1469-1501]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08ja04-9]
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Part III
Federal Reserve System
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12 CFR Part 229
Availability of Funds and Collection of Checks; Proposed Rule
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FEDERAL RESERVE SYSTEM
12 CFR Part 229
[Regulation CC; Docket No. R-1176]
Availability of Funds and Collection of Checks
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule.
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SUMMARY: The Board of Governors is publishing for comment proposed
amendments to Regulation CC that would add a new subpart D, with
commentary, to implement the recently-enacted Check Clearing for the
21st Century Act. These proposed amendments (1) would set forth the
requirements of the Act that apply to banks, (2) provide a model
disclosure and model notices relating to substitute checks, and (3) set
forth indorsement requirements and truncating bank and reconverting
bank identification requirements for substitute checks. The proposed
amendments also would clarify some existing provisions of the rule and
commentary.
DATES: Comments on the proposed rule must be received by March 12,
2004.
ADDRESSES: Comments should refer to docket number R-1176 and should be
addressed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of
the Federal Reserve System. Comments may be mailed to 20th Street and
Constitution Avenue, NW., Washington, DC 20551; faxed to the Office of
the Secretary at 202/452-3819 or 202/452-3102; or mailed electronically
to regs.comments@federalreserve.gov. Because paper mail at the Board of
Governors is subject to delay, please consider submitting your comments
by fax or e-mail. Members of the public may inspect comments in
accordance with the Board's Rules Regarding the Availability of
Information (12 CFR part 261) in Room MP-500 of the Martin Building on
weekdays between 9 a.m. and 5 p.m.
FOR FURTHER INFORMATION CONTACT: Jack K. Walton, II, Assistant Director
(202/452-2660), or Joseph P. Baressi, Senior Financial Services Analyst
(202/452-3959), Division of Reserve Bank Operations and Payment
Systems; or Stephanie Martin, Associate General Counsel (202/452-3198),
or Adrianne G. Threatt, Counsel (202/452-3554), Legal Division; for
users of Telecommunication Devices for the Deaf (TDD) only, contact
202/263-4869.
SUPPLEMENTARY INFORMATION:
Background
I. The Need for and General Provisions of the Check 21 Act
Under current law, a bank that presents a check for payment must
present the original paper check unless the paying bank has agreed to
accept presentment from the collecting bank in some other form.\1\
Sections 3-501(b)(2) and 4-110 of the Uniform Commercial Code (U.C.C.)
specifically authorize banks and other persons to agree to alternative
means of presentment, such as electronic presentment. However, to
truncate checks early in the collection process and engage in broad-
based electronic presentment, a collecting bank would need electronic
presentment agreements with each bank to which it presents checks. This
has proven impracticable because of both the large number of paying
banks and the unwillingness of some paying banks to receive electronic
presentment.\2\ As a result of the difficulty in obtaining the
agreements necessary to present checks electronically in all cases,
banks have not been able to take full advantage of the efficiencies and
potential cost savings of handling checks electronically.
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\1\ See, e.g., section 3-501(b) of the Uniform Commercial Code.
\2\ Some paying banks and bank customers prefer to receive
checks in paper form for operational or other reasons.
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The Check Clearing for the 21st Century Act (the Check 21 Act or
the Act) facilitates the broader use of electronic check processing
without mandating that any bank change its current check collection
practices.\3\ The Check 21 Act accomplishes this by authorizing the use
of a new negotiable instrument called a substitute check. A substitute
check is a paper reproduction of an original check that contains an
image of the front and back of the original check and is suitable for
automated processing in the same manner as the original check. A bank
that for consideration transfers, presents, or returns a substitute
check (or another paper or electronic representation of a substitute
check) warrants that (1) the substitute check contains an accurate
image of the front and back of the original check and a legend stating
that it is the legal equivalent of the original check, and (2) no
depositary bank, drawee, drawer, or indorser will be asked to pay a
check that it already has paid. A substitute check for which a bank has
made these warranties is the legal equivalent of the original check for
all purposes and all persons.
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\3\ Pub. L. 108-100, 117 Stat. 1177 (codified at 12 U.S.C. 5001-
5018). The Check 21 Act was enacted on October 28, 2003, and takes
effect on October 28, 2004.
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Allowing a substitute check that is subject to the substitute check
warranties to be the legal equivalent of an original check should
facilitate the use of electronics in the check collection process. For
example, a depositary bank in California that receives a check drawn on
a bank in New York now must present the original paper check for
payment absent an agreement to the contrary, even if the California
bank has agreements to collect checks electronically with other banks
in the collection chain for that check. Under the Check 21 Act, by
contrast, the California bank could transfer check information
electronically to a collecting bank in New York with which it had an
agreement to do so. The New York collecting bank then could create a
substitute check to present to the New York paying bank. The New York
paying bank would be required to accept a substitute check that met all
the legal equivalence requirements. Thus, instead of processing and
transporting the original check across the country, the California bank
could collect the substitute check using only local New York
transportation.
The Check 21 Act does not require any bank to use electronic check
processing, receive electronic presentment, or create substitute
checks, nor would the Check 21 Act make electronic check images or
electronic check information the legal equivalent of original checks.
However, after the effective date of the Check 21 Act, any bank or
other person that requires an original check must accept a legally
equivalent substitute check in satisfaction of that requirement. The
characteristics of a substitute check are such that a bank that
receives a substitute check would be able to process that substitute
check to the same extent that it could process the original check. As a
result, for the most part, banks would not be required to change their
check processing equipment or practices because of the Check 21 Act,
and there would be no need for a bank to sort original checks and
substitute checks separately during the check collection process.\4\
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\4\ However, as described in more detail in the section-by-
section analysis, a bank must place a ``5'' in position 44 of the
MICR line of a qualified returned substitute check, as opposed to a
``2'' that is required in that position for a qualified returned
original check.
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Certain provisions of the Check 21 Act will affect all banks, even
those that do not choose to create substitute
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checks. For example, a bank that simply received a substitute check
created by another bank, or a paper or electronic representation of a
substitute check, would make the substitute check warranties when it
delivered that item for presentment, collection, or return or provided
that item to its customer. Any bank that receives consideration for a
substitute check, or a representation of a substitute check, that it
transfers, presents, or returns also is responsible for indemnifying
any person that suffers a loss due to the receipt of a substitute check
instead of the original check. Moreover, a bank that provides a
substitute check to a consumer might be required to provide an
expedited recredit to the consumer if the consumer incurred a loss due
to receipt of the substitute check rather than the original check.
Finally, a bank must provide a disclosure that describes substitute
checks and substitute check rights to consumers who receive paid checks
with their periodic account statements and consumers who receive
substitute checks on a case-by-case basis.
Although the foregoing provisions of the Check 21 Act would apply
to all banks, the law is designed so that losses associated with a
substitute check ultimately would be borne by the party that caused the
problem with the substitute check. In many cases this would be the
first bank to transfer the substitute check (the reconverting bank).\5\
A bank that paid a warranty claim or provided an indemnity or expedited
recredit for a substitute check that it received from another bank
therefore could, in turn, bring a warranty, indemnity, or interbank
expedited recredit claim against the bank that transferred the
substitute check to it and thereby pass the associated loss back to the
responsible party.\6\
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\5\ A reconverting bank is (1) the bank that creates a
substitute check or (2) the first bank that receives a substitute
check created by a person that is not a bank and transfers either
that substitute check or a paper or electronic representation of
that substitute check.
\6\ Banks may further allocate liability amongst themselves as
part of their agreements to handle checks electronically. A
reconverting bank therefore could, by agreement, pass back some or
all of its loss associated with paying a warranty or indemnity to
the bank that sent the check to it electronically.
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The Check 21 Act imposes additional duties on reconverting banks. A
reconverting bank must identify itself as such on a substitute check
and must preserve the indorsements of parties that previously handled
the check in any form. The reconverting bank will be the first bank to
provide the substitute check warranties and the first bank in the chain
of indemnifying banks, and thus ultimately should bear any loss
traceable to a problem that existed as of the time the substitute check
was created.\7\
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\7\ But see footnote 6.
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II. Overview of New Subpart D and Associated Amendments to Subpart A
The proposed new subpart D would incorporate into Regulation CC the
requirements of the Check 21 Act that affect banks that create or
receive substitute checks or paper or electronic representations of
substitute checks. Subpart D therefore would contain provisions
concerning requirements a substitute check must meet to be the legal
equivalent of an original check, reconverting bank duties, the
warranties and indemnity associated with substitute checks, expedited
recredit procedures for consumers and banks, liability for violations
of subpart D, the interaction between subpart D and existing federal
and state laws, and the consumer awareness disclosure and other notices
regarding substitute checks.
The proposed amendments to implement the Check 21 Act also affect
some existing provisions of Regulation CC and its commentary. For
example, the Board proposes to amend the authority and scope section,
Sec. 229.1, to acknowledge the Check 21 Act as an authority source and
to describe subpart D. The Board also proposes to supplement some
existing defined terms in Sec. 229.2 for which the Check 21 Act has
slightly different definitions and to define several new terms used in
subpart D. The Board also proposes to amend the magnetic ink character
recognition (MICR) line requirements for qualified returned checks to
allow for differences to facilitate the processing of substitute checks
and to amend Sec. 229.35 and appendix D to include indorsement and
identification standards for substitute checks.
III. Other Amendments to Existing Provisions
The Board also proposes revisions to several other provisions of
Regulation CC and its commentary. These changes generally either
respond to enquiries that Board staff has received or respond to
changed circumstances affecting the relevant provision. For example,
the Board proposes amending the commentary to clarify that a returned
check notice need not be written, clarify the application of the
Electronic Signatures in Global and National Commerce Act (the E-Sign
Act) to consumer disclosures required by Regulation CC, and clarify the
time by which a paying bank may extend the return or notice of
nonpayment deadline.
Section-by-Section Analysis
The section-by-section analysis discusses the proposed commentary
to each section in the course of discussing the proposed regulatory
text.
I. Amendments to Implement the Check 21 Act
A. Section 229.1 Authority and Scope
The Board proposes to amend Sec. 229.1 to include the Check 21 Act
as an additional source of authority and to describe briefly the scope
of new subpart D with respect to substitute checks.
B. Section 229.2 Definitions
The Board proposes two types of amendments to this section. First,
the Board proposes to amend some existing defined terms to account for
differences between those definitions and the definitions required by
the Check 21 Act.\8\ Second, the Board proposes to define new terms
used in subpart D.
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\8\ Some terms are defined identically in existing Regulation CC
and the Check 21 Act, such that no amendments are necessary.
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1. Amendments to Existing Definitions
The Board proposes to reword the existing introductory sentence and
move into that sentence the text of existing Sec. 229.2(qq), which
provides that terms not defined in Sec. 229.2 have the meanings set
forth in the U.C.C.
a. Account. The Check 21 Act defines the term account to mean any
deposit account at a bank and therefore is much broader than the
existing definition in Sec. 229.2(a), which essentially is limited to
accounts that permit frequent transfers and withdrawals. The Board
therefore proposes to amend the account definition to state that the
existing definition applies except for purposes of subpart D. The Board
proposes a new paragraph defining the term account for purposes of
subpart D and, in connection therewith, subpart A, to mean any deposit,
as defined at Sec. 204.2(a)(1)(i) of Regulation D, at a bank. The
Board also proposes to amend the commentary to the account definition
to incorporate these changes and to highlight that many deposits that
are not accounts for purposes of subparts B and C would be accounts for
purposes of subpart D.
b. Bank. The Check 21 Act defines bank to include all of the
entities currently defined as banks by Sec. 229.2(e), plus the United
States Treasury and the United States Postal Service to the
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extent that those entities act as payors. The Board proposes to amend
the existing definition and its commentary to incorporate the broader
definition of bank for purposes of subpart D. For internal consistency,
the Board proposes substituting the phrase ``paying bank'' where the
Check 21 Act used the term ``payor.''
c. Check. The Check 21 Act's definition of check is the same as the
definition in existing Sec. 229.2(k) that applies to subpart C. The
Board proposes to amend the subpart C definition of check and its
commentary to apply to both subparts C and D. The proposed commentary
to this definition states that a substitute check meeting the
requirements of Sec. 229.2(zz) is a check for purposes of all
provisions of Regulation CC.
d. Forward collection. The term forward collection is defined in
Sec. 229.2(q) to mean the process by which a bank sends a check on a
cash basis to the paying bank for payment. The Check 21 Act's
definition is substantively the same as the existing definition but
includes a clause noting that sending a check to a collecting bank for
settlement can be a component of forward collection. The Board proposes
to amend the forward collection definition and commentary to include
that clause.
e. Paying bank. The Check 21 Act's definition of paying bank
essentially parallels the definition in Sec. 229.2(z) but adds the
U.S. Treasury and the U.S. Postal Service with respect to a check that
is payable by one of those entities and is sent to that entity for
collection. The Board therefore proposes to amend Sec. 229.2(z) and
the commentary thereto to incorporate the broader definition of paying
bank in subpart D.
f. Qualified returned check. Although the definition of a qualified
returned check in Sec. 229.2(bb) remains unchanged by the Check 21
Act, the Board proposes to amend the commentary to that definition as
it relates to the content of position 44 of the MICR line. Currently,
the commentary notes that a qualified returned check should have a
``2'' in position 44. The proposed amendment would retain that
requirement for original checks but, in accordance with the generally
applicable industry standard for substitute checks (American National
Standard Specifications for Image Replacement Documents, X9.90 (ANS
X9.90)), would require a ``5'' in position 44 if the qualified returned
check is a substitute check.\9\ The ``5'' would ensure that the size of
the image of the original check would remain constant on subsequent
substitute checks.
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\9\ ANS X9.90 was in draft form on the date that the Board
approved this proposed rule. The Board expects that ANS X9.90 will
be final on or before October 28, 2004.
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g. State. The Check 21 Act defines state to include all the
entities that are currently listed in Sec. 229.2(ff), plus Guam,
American Samoa, the Trust Territory of the Pacific Islands, the
Northern Mariana Islands, and any other territory of the United States.
The Board therefore proposes to supplement the existing definition of
state by including these additional entities as states for purposes of
subpart D.
2. Proposed New Definitions
a. Claimant Bank. The term claimant bank is used in section 8 of
the Check 21 Act regarding expedited recredit claims by banks, although
the statute does not define that term. The Board proposes to define the
term claimant bank in Sec. 229.2(qq) to mean a bank that submits a
claim for recredit under Sec. 229.55 of Regulation CC, which
corresponds to section 8 of the statute.
b. Collecting bank, consumer, customer, and indemnifying bank. The
Board proposes to define the terms collecting bank, consumer, customer,
and indemnifying bank at Sec. 229.2(rr), (ss), (tt), and (uu),
respectively. The proposed definitions incorporate the Check 21 Act
definitions with only minor grammatical variations from the statutory
language.
c. Magnetic ink character recognition (MICR) line. The Board
proposes to incorporate the Check 21 Act's definition of magnetic ink
character recognition (MICR) line in Sec. 229.2(vv). The proposed
commentary would note that American National Standard Specifications
for Placement and Location of MICR Printing, X9.13 (ANS X9.13) is the
governing standard for MICR lines of original checks and substitute
checks, and that ANS X9.90 has some additional requirements regarding
the content of the MICR line of a substitute check.
d. Original check. The Board proposes to define the term original
check in Sec. 229.2(ww) as the first paper check that is issued with
respect to a particular payment transaction. The proposed commentary to
this new definition explains that the Board has defined this term in
order to distinguish the original check from a substitute check and
from other paper or electronic representations of a check.
e. Person. The Board proposes to incorporate the Check 21 Act's
definition of person in Sec. 229.2(xx).
f. Reconverting bank. The Board proposes to define reconverting
bank in Sec. 229.2(yy) to be (1) the bank that creates a substitute
check or (2) with respect to a substitute check created by a person
that is not a bank, the first bank that receives the substitute check
and that transfers, presents, or returns the substitute check or, in
lieu of that substitute check, the first paper or electronic
representation of that substitute check. The proposed commentary to
this definition provides further clarification as to when and where
creation of a substitute check occurs and explains that a bank need not
accept a substitute check that was created by a nonbank and that has
not yet been handled by a bank, unless the bank agrees to do so.
Moreover, the proposed commentary provides examples of when a bank
would be a reconverting bank under the definition and notes that there
could be multiple reconverting banks with respect to the same payment
transaction if a check moves from electronic form to substitute check
form multiple times throughout the collection and return process.
g. Substitute check. The Board proposes to incorporate the Check 21
Act's definition of substitute check in Sec. 229.2(zz).
The scope of the Check 21 Act and subpart D is limited to
substitute checks. To clarify the scope of the term and the subpart,
the Board proposes extensive commentary on the definition of substitute
check. The proposed commentary provides guidance on the meaning of a
``paper reproduction of an original check'' and clarifies that, because
a substitute check by definition must be a piece of paper, an
electronic check file or electronic check image that has not been
printed in accordance with the substitute check definition and
generally applicable industry standards is not a substitute check. The
commentary also explains what information is required or permitted as
part of the original check images that are contained on a substitute
check.
The Board particularly requests comment on the proposed commentary
to the substitute check definition that describes the various ways in
which the MICR line of a substitute check can vary from the MICR line
of the original check. First, the commentary notes that ANS X9.90
requires the content of position 44 of the MICR line of a substitute
check to vary from that of position 44 of the original check to ensure
that the check image remains constant if more than one substitute check
is created to represent the same original check.
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Second, the commentary acknowledges that the original check could
have an encoding error in the amount field (including a failure to
encode) and that a substitute check that reproduces that error would
meet the definition of a substitute check. However, the commentary
notes that a reconverting bank that creates a substitute check from an
original check with a misencoded amount field or a bank that handles a
substitute check that perpetuates the amount encoding error may repair
the MICR line to facilitate the processing of the check without
changing the item's status as a substitute check. This approach would
be consistent with the current industry practice of allowing a bank to
repair the MICR line of an original check when the bank detects an
encoding error in the amount field.
Third, the commentary notes that the MICR line of the original
check could be accurate in every respect but that check imaging
equipment could (1) fail to read a portion of the MICR line but note
the presence of MICR information with an asterisk, (2) misread a digit
in the MICR line, for example by reading an ``8'' as a ``3,'' or (3)
intentionally read a space or a placeholder, such as a hyphen, to be a
``0.'' These errors collectively are referred to as MICR-read errors.
To ensure that the items a bank transfers in reliance on the Check 21
Act and subpart D meet the definition of a substitute check, the
commentary states that before a reconverting bank creates a substitute
check it should correct all MICR-read errors.\10\ The proposed
commentary would clarify that an item that perpetuated a MICR-read
error would not be a substitute check as defined in Sec. 229.2(zz).
However, as discussed in connection with Sec. 229.51(c) of the
proposed rule and the proposed commentary to that section, the Board
proposes that, when such a noncompliant item purports to be a
substitute check, the substitute check warranties, indemnity, and
recredit rights would apply to that item as if it were a substitute
check, even though it would not be the legal equivalent of the original
check. The Board proposes this approach in order to facilitate
compliance with and prevent circumvention and evasion of the Check 21
Act.
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\10\ American National Standards Specifications for Electronic
Exchange of Check and Image Data, X9.37, (ANS X9.37), is being
amended to address the identification and repair of MICR-read errors
that are indicated with asterisks. The Board expects this amendment
to be finalized prior to the effective date of the Check 21 Act.
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h. Sufficient copy and copy. The Board proposes that Sec.
229.2(aaa) would define a sufficient copy to be a copy of an original
check that accurately represents the information on the front and back
of the original check as of the time of truncation or otherwise is
sufficient to determine the validity of a claim. This concept first
appears in section 6(d)(1) of the Check 21 Act regarding what a bank
must produce to limit its liability for an indemnity claim. The concept
also appears in the Check 21 Act (with minor variations) in sections
7(c)(1)(B) and 8(c)(1)(A) regarding what a bank must produce to avoid
making a recredit and in section 7(f)(1)(A) regarding the content of
the bank's notice regarding denial of a consumer recredit claim. To
streamline the regulation and make the various sufficient copy criteria
parallel throughout the rule, the rule defines sufficient copy as it is
defined in the indemnity section and uses that defined term in the
portions of the rule that correspond to the statutory provisions listed
above. The Board proposes to define a copy to be a paper reproduction
of a check.\11\ The proposed commentary to these terms reiterates that
an electronic check image that appears on a computer screen but has not
yet been printed does not constitute a copy or a sufficient copy. The
commentary also provides examples of what types of documents would
constitute a sufficient copy.
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\11\ As explained in the analysis of Sec. 229.58, when a bank
is required to produce an original check or a sufficient copy, the
rule allows a bank to provide an electronic image of that item if
the recipient has agreed to receive that information electronically.
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i. Transfer and consideration. The Board proposes to define
transfer and consideration at Sec. 229.2(bbb) in a manner that
supplements the U.C.C. definitions of those terms in order to make the
warranty, indemnity, and legal equivalence provisions function as
contemplated in the Check 21 Act.
The Check 21 Act warranties, which are a precondition for the legal
equivalence of a substitute check, and the indemnity, are given when a
substitute check or representation thereof is transferred, presented,
or returned for consideration. Under the existing U.C.C. definitions, a
bank that pays a substitute check that it later provides to the drawer
or a bank that pays a check presented electronically and then creates a
substitute check to give to the drawer would not be transferring the
check to the drawer under the U.C.C. and arguably would not receive
consideration for the substitute check from the drawer. However, the
Check 21 Act explicitly provides that a drawer receives the substitute
check warranties if it receives a substitute check or a paper or
electronic representation of a substitute check. The Check 21 Act also
provides that a drawer who suffers a loss due to the receipt of a
substitute check instead of the original check receives an indemnity.
These provisions indicate that the substitute check received by the
drawer in the examples provided above is intended to be the legal
equivalent of the original check and subject to the warranties and
indemnity.
Therefore, for the limited purpose of making the warranty,
indemnity, and legal equivalence sections work as intended, the
proposed rule would expand the term transfer to include delivery of a
substitute check (or a paper or electronic representation of a
substitute check) by a bank to a person that is not a bank. The
proposed rule also would expand the term consideration to include the
bank's charging, having the right to charge, or otherwise receiving
value for a substitute check (or a paper or electronic representation
of the substitute check) that the bank transfers. However, the proposed
rule would explicitly exclude from the definition of consideration the
transfer of a substitute check solely in response to a claim related to
that substitute check.\12\ The proposed commentary to the transfer and
consideration definitions provides examples of the situations the
expansion is designed to capture.
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\12\ A bank should be able to produce a substitute check that
does not contain the legal equivalence legend as a ``sufficient
copy'' in response to an indemnity or recredit claim. However, if
this were considered a transfer for consideration, the bank would be
making the substitute check warranties and thus could not in good
faith provide a substitute check without a legend, because by doing
so it automatically would have breached the legal equivalence legend
component of the legal equivalence warranty.
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j. Truncate. The Board proposes to incorporate the Check 21 Act's
definition of truncate in Sec. 229.2(ccc). The proposed commentary
highlights that removal of a substitute check is not truncation because
truncation refers only to original checks.
k. Truncating bank. The Board proposes to define in Sec.
229.2(ddd) the term truncating bank, which is not used in the Check 21
Act but is used in Sec. 229.51 and appendix D of the proposed rule.
The Board proposes to define truncating bank (in a manner that
parallels the definition of reconverting bank) to be the bank that
truncates the original check or, if a person other than a bank
truncates the check, the first bank that transfers, presents, or
returns the check in a form other than the original check. The proposed
commentary to this section provides an
[[Page 1474]]
example of when a bank would be a truncating bank.
C. Section 229.30 Paying Bank's Responsibility for Return of Checks,
and Section 229.31 Returning Bank's Responsibility for Return of Checks
The Board proposes to revise existing sentences in Sec. Sec.
229.30(a)(2)(iii) and 229.31(a)(2)(iii) relating to the proper MICR-
line encoding of a qualified returned check. These amendments would
specify that a qualified returned substitute check must contain a ``5''
in position 44 of the MICR line, whereas a qualified returned original
check must contain a ``2'' in that position. As discussed above with
respect to the definition of a qualified returned check and the
definition of substitute check, a substitute check must contain a
different number to ensure that the image of the original check remains
a constant size. The Board proposes to move the specific references to
ANS X9.13 from the regulation text to the commentary of these two
paragraphs and specify that this standard applies to original checks.
The commentary to each paragraph also would specify that ANS X9.90 is
the standard that applies to substitute checks.
D. Indorsement Standards: Sections 229.35(a) and 229.38(d) and Appendix
D
In the current processing environment, banks generally print or
``spray'' indorsements on original checks when the checks are processed
through the banks' automated check sorters. A substitute check will
contain previous indorsements physically applied to the original check
by preserving the image of the back of the original check. In addition,
the reconverting bank will print, or ``overlay,'' on the back of the
substitute check any previous indorsements that were applied to the
original check electronically and the reconverting bank's own
indorsement. Banks handling checks downstream from reconverting banks
generally will process a mix of original checks and substitute checks
through their sorters and spray indorsements on both.
ANS X9.90 presumes that banks that receive paper checks, including
substitute checks, will continue to spray indorsements on those checks
in the same locations that they do today. ANS X9.90 also presumes that
indorsements physically applied to a check before it is reconverted
will be preserved through the accurate image of the back of the check
that a substitute check must contain. However, the locations that ANS
X9.90 specifies for previously applied electronic indorsements that a
reconverting bank physically overlays on substitute checks and for the
reconverting bank's own indorsement differ from the indorsement
locations specified in current appendix D. In particular, the current
appendix requires the depositary bank indorsement to be placed on the
back of the check between 3 inches from the leading edge and 1.5 inches
from the trailing edge, whereas ANS X9.90 requires a depositary bank's
previously applied electronic indorsement to be overlaid by the
reconverting bank on the back of a substitute check between 1.95 and
2.55 inches from the leading edge.\13\ The current appendix requires a
subsequent collecting bank indorsement to be placed on the back of the
check between the leading edge and 3.0 inches from the leading edge,
whereas ANS X9.90 requires a subsequent collecting bank's previously
applied electronic indorsement to be overlaid by the reconverting bank
on the back of a substitute check very close to the trailing edge.
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\13\ When looking at a check from the front, the leading edge is
the right edge of the check and the trailing edge is the left edge
of the check.
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The Board believes that, in light of technical constraints,
existing check sorting equipment will not be able to modify in real
time the location of the indorsements that the equipment sprays onto a
check based on whether the check is an original check or a substitute
check. The Board therefore proposes that the appendix's current
location specifications would apply to indorsements printed on original
checks and indorsements printed on existing substitute checks. Banks
that do not create substitute checks generally would comply with the
amended appendix D requirements by indorsing original checks and
existing substitute checks exactly as they indorse original checks
today. However, the Board proposes to amend appendix D to include new
indorsement locations with which a reconverting bank must comply when
it creates a substitute check. These locations would conform to ANS
X9.90's location specifications for indorsements applied to a
substitute check by a reconverting bank.
The Board also notes that ANS X9.90 provides that an image of an
original check will be reduced in size when placed on a substitute
check. Images of business-sized checks will be reduced to about 65
percent of their original size and images of personal-sized checks will
be reduced to about 80 percent of their original size. Because of this
size reduction, the location of an indorsement, particularly a
depositary bank indorsement, sprayed on an original paper check likely
will change when a reconverting bank creates a substitute check that
contains that indorsement within the image of the original paper check.
The Check 21 Act places ultimate liability on the reconverting bank for
certain losses related to substitute checks. The Board believes that
the reconverting bank also should bear the liability under Sec.
229.38(d)(1) (which allocates liability for losses due to illegible
indorsements) for any loss that results due to the shift in the
placement of the indorsement. The Board proposes to amend that section
and its commentary to explain this reconverting bank liability.
Appendix D currently requires depositary bank indorsements to be
printed in dark purple or black ink and requires all other indorsements
to be printed in an ink color other than purple. The Board does not
believe that the use of differing ink colors significantly aids
returning banks' ability to identify the depositary bank indorsement.
However, the Board does believe that it is important for all
indorsements to be printed in dark ink so that they can be easily read
and imaged. The Board further believes that all indorsements that a
reconverting bank prints onto a substitute check at the time that the
substitute check is created will be printed in a single ink color,
likely black. The Board therefore proposes to require all indorsements,
including the depositary bank indorsement, to be printed in black ink.
Current appendix D requires a depositary bank to include its name
and location in its indorsement. However, ANS X9.37 does not include
this data in an electronic depositary bank indorsement record, and as a
result this data will not be included when a reconverting bank overlays
a depositary bank indorsement onto a substitute check. Nevertheless, a
depositary bank that sprays its indorsement onto a check may wish to
include this information in its indorsement to limit the number of
locations at which it must accept returned checks. The Board therefore
proposes to permit but not require the inclusion of the depositary
bank's name and location in its indorsement.
Appendix D currently does not contain any content requirements for
returning bank indorsements and implicitly permits the indorsements to
be placed on the front of the check. Under ANS X9.90, however, a
returning bank that also is a reconverting bank with respect to a
substitute check must be identified as such on the back of the check.
The Board therefore proposes to
[[Page 1475]]
amend appendix D to require returning bank indorsers to comply with the
same indorsement requirements as collecting banks. Specifically, the
Board proposes to require that a subsequent collecting bank or
returning bank indorsement be applied to the back of a check and
include only (1) the bank's nine-digit routing number, and, if the
returning bank is a reconverting bank with respect to the check, an
asterisk at each end of the number to identify the bank as a
reconverting bank, (2) the indorsement date, and (3) an optional trace
or sequence number. The Board requests comment on what benefits, if
any, there would be in providing returning banks with the flexibility
to indorse on the front of checks and to include additional information
in their indorsements.
The Board notes that Regulation CC does not require paying banks to
indorse checks. To facilitate compliance with section 4 of the Check 21
Act, however, a paying bank that also is a reconverting bank with
respect to a substitute check should be identified as such on the check
in a manner that a subsequent reconverting bank can preserve.\14\ The
Board therefore proposes to amend appendix D to require a paying bank
that is also a reconverting bank with respect to a substitute check to
identify itself as such by placing on the back of the check its nine-
digit routing number (without arrows) and an asterisk at each end of
the number. This identification would not constitute an indorsement.
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\14\ If the paying bank were a reconverting bank and did not
identify itself as such on the back of the check, then the only
place the paying bank would be identified as a reconverting bank
would be the routing number of the paying bank, surrounded by
asterisks, on the front of the check (according to ANS X9.90). If
the substitute check were subsequently converted to electronic form
and reconverted to paper, the identification of the paying bank as a
reconverting bank on the front of the check would be lost, because
its routing number would be replaced with the identification of the
subsequent reconverting bank. This would place the subsequent
reconverting bank in violation of the Check 21 Act's requirement
``to preserve any previous reconverting bank identifications'' (see
section 4(d) of the Check 21 Act).
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Finally, for purposes of clarity, the Board proposes other
technical amendments to appendix D.
The Board requests comment on all aspects of the proposed
indorsement and identification standards discussed above.
E. Section 229.51 General Provisions Governing Substitute Checks
1. Legal Equivalence and Agreement
Section 4(b) of the Check 21 Act provides that a substitute check
is the legal equivalent of the original check for all purposes and all
persons if the check contains an accurate image of the front and back
of the original check and bears a specified ``legal equivalence''
legend. Although section 4(b) does not mention warranties as a
precondition of legal equivalence, section 4(a) provides that any
person may deposit, present, collect, or return a substitute check
without the agreement of the recipient so long as a bank has made the
substitute check warranties with respect to that check. Section 4(a)
clearly intends that persons are required to accept a substitute check
without agreement only if a bank has provided the substitute check
warranties. The Board therefore believes that section 4(a) in effect
requires a bank warranty as another prerequisite of legal equivalence.
Section 229.51(a) of the proposed rule would make this requirement
explicit by providing that a substitute check for which a bank has
provided the substitute check warranties is the legal equivalent of the
original check for all purposes and all persons if it meets the
accuracy and legend requirements.
The proposed commentary to Sec. 229.51(a) reiterates that a
substitute check created by a person other than a bank can be
transferred only by agreement unless and until a bank makes the
substitute check warranties with respect to that check. The proposed
commentary clarifies that a substitute check created by a person who is
not a bank therefore cannot be the legal equivalent of the original
check absent a bank's agreement to make the substitute check
warranties. The commentary also provides clarification about what
information on the check must be accurately represented as a
prerequisite for legal equivalence. Finally, the commentary to Sec.
229.52(b)(2) states that the legal equivalence legend must use the
language specified in that section.
2. Reconverting Bank Duties
Proposed Sec. 229.51(b)(1)-(2) contains the reconverting bank
duties described in sections 4(c) and 4(d) of the Check 21 Act
regarding indorsements and identifications. In addition, Sec.
229.51(b)(3) requires a reconverting bank to identify the bank that
truncated the original check. The Board proposes to impose this
requirement by regulation because ANS X9.90 requires identification of
the truncating bank and because it is likely that banks in the
collection and return chain would want to identify the truncating bank
if there were a problem with a substitute check because the truncating
bank would be in the best position to provide the original check or
additional information about the original check. The proposed
regulation requires the reconverting bank and truncating bank
identifications to be applied in accordance with generally applicable
industry standards and with appendix D of Regulation CC.
The proposed commentary to Sec. 229.51 provides that, although a
reconverting bank is responsible for preserving all previously-applied
indorsements, it is not responsible for obtaining indorsements that
should have been applied but were not. The proposed commentary also
notes that some previously applied indorsements will be preserved
because they will be shown on a substitute check's image of the back of
the original check, whereas the reconverting bank must physically apply
to the back of the substitute check any previous indorsements that were
applied electronically. The proposed commentary also notes that, under
appendix D, the reconverting bank indorsement and identification are
set off with asterisks and the truncating bank identification is set
off with brackets. The proposed commentary also makes clear that
preservation of a previous reconverting bank's indorsement (or
identification, if the reconverting is the paying bank) set off by
asterisks on the back of the check also satisfies the requirement of
preserving the previous reconverting bank's identification.
3. Legal Status of an Item That Purports To Be a Substitute Check But
Is Not
As described in the discussion above concerning the definition of a
substitute check, a reproduction of an original check that does not
have the same MICR line as the original check would not be a substitute
check. However, the Board believes that a bank that transfers such an
item as if that item were a substitute check should not be allowed to
evade the requirements of the Check 21 Act and subpart D simply because
the item it created failed to meet the substitute check definition.\15\
To protect recipients of such items and to provide incentives for
reconverting banks to ensure that they only transfer items that comply
with subpart D, the proposed rule provides that the recipient of an
item that purports to be but is not a substitute check has warranty and
indemnity rights, and, where applicable, recredit and consumer
awareness disclosure rights under subpart D as though the item were a
substitute check. The Board requests comment on whether an item
[[Page 1476]]
that fails to meet any of the other the substitute check requirements
in Sec. 229.2(zz) also should be treated as though it were a
substitute check for those limited purposes.
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\15\ An item could purport to be a substitute check, for
example, if it contained the legal equivalence legend or if a person
provided the item when applicable law required production of the
original check.
---------------------------------------------------------------------------
4. Applicable Law
Proposed Sec. 229.52(c) incorporates the Check 21 Act's provision
stating that a substitute check that meets the legal equivalence
requirements is subject to any existing federal or state law as though
it were the original check, to the extent that such provision is not
inconsistent with the Check 21 Act. The proposed commentary to this
section clarifies that a law is not inconsistent with the Check 21 Act
merely because it allows for the recovery of additional damages.
F. Section 229.52 Substitute Check Warranties
Proposed Sec. 229.52 of the rule implements section 5 of the Check
21 Act, which contains new warranties relating to substitute checks.
For purposes of clarity, the proposed rule is organized differently
than the Check 21 Act.
1. Content and Provision of the Substitute Check Warranties
Proposed Sec. 229.52(a) sets forth the content of the substitute
check warranties and identifies the banks that provide, and the events
that trigger provision of, those warranties. The warranties are (1)
that the substitute check meets the requirements for legal equivalence
(i.e., that the substitute check accurately represents the information
on the front and back of the original check and bears the legal
equivalence legend) and (2) that no depositary bank, drawee, drawer, or
indorser will be asked to make payment based on a check that it already
has paid.
In describing the second warranty, the Check 21 Act provides that
none of the named parties will receive ``presentment or return'' of an
item such that it will be asked to make a duplicative payment. However,
one such recipient, the drawer, typically would not receive presentment
or return of a check but rather would have its account charged for the
check. The proposed rule therefore states that the named parties will
not receive presentment or return of, or otherwise be charged for, a
duplicative item.
The Check 21 Act states that each of the two warranties is made
when a bank transfers, presents, or returns a ``substitute check'' for
consideration. However, the list of warranty recipients, which includes
persons that received some other paper or electronic form of the
substitute check, indicates that banks continue to provide the
warranties even if they transfer and receive consideration for
something that is not, but that was derived from, a substitute check.
Section 229.52(a) of the proposed rule therefore provides specifically
that a bank makes the warranties when it transfers, presents, or
returns for consideration the substitute check or any paper or
electronic representation of a substitute check.
The Board notes that the Check 21 Act and the proposed rule state
that the warranty against duplicative presentment or return applies
such that the depositary bank, drawee, drawer, or indorser will not
receive presentment or return ``of the substitute check, the original
check, or a copy or other paper or electronic version of the substitute
check or original check'' such that that person ``will be asked to make
a payment based on a check'' it already has paid. This language could
be read to exclude a situation where a second charge results from an
ACH debit that was created using information from an original check or
substitute check.\16\ However, such an ACH debit arguably could be
considered ``an electronic version'' of a substitute check or original
check to which the duplicative payment warranty would apply. The Board
specifically requests comment on whether using information from a check
to create an ACH debit entry should be a payment request covered by
this warranty.
---------------------------------------------------------------------------
\16\ Such ``check conversions'' are covered under the Board's
Regulation E and rules of the National ACH Association as electronic
fund transfers rather than check transactions and are not, to the
Board's knowledge, treated as check transactions for any other
purpose.
---------------------------------------------------------------------------
The proposed commentary to Sec. 229.52(a) clarifies that the
reconverting bank is the first bank to provide the substitute check
warranties. That discussion also notes that, when a bank is a
reconverting bank because it by agreement receives a substitute check
that a nonbank created, the reconverting bank starts the warranty chain
for that substitute check even if the reconverting bank transfers an
electronic representation of that substitute check instead of the
actual substitute check that it received. The proposed commentary also
clarifies that a bank that by agreement transfers an electronic version
of an original check prior to the creation of the first substitute
check does not make the substitute check warranties, but that parties
to the agreement can allocate amongst themselves liabilities associated
with the substitute check warranties. Moreover, the proposed commentary
discusses the mechanics of each of the two warranties, including how
they apply when multiple substitute checks are created with respect to
the same payment transaction.
2. Warranty Recipients
Section 5 of the Check 21 Act provides that warranties are provided
to ``the transferee, any subsequent collecting or returning bank, the
drawee, the drawer, the payee, the depositor, and any endorser
(regardless of whether the warrantee receives the substitute check or
another paper or electronic form of the substitute check or original
check) * * * '' Although Sec. 229.52(b) of the proposed rule lists all
these persons as warrantees, it does so in a slightly different manner
than the statute. The warranties are intended to flow forward to all
persons, including the paying bank, that received a substitute check or
any paper or electronic representation of a substitute check, but not
backward to persons that handled only the original check or some
representation of the original check that was not derived from a
substitute check. The rule therefore states that the warranties are
provided to the recipient and any subsequent recipient, including all
of the parties specifically listed in the statute, regardless of
whether the recipient received the substitute check or another paper or
electronic representation of the substitute check. The proposed
commentary to Sec. 229.52(b) provides additional discussion about the
flow of the warranties.
G. Section 229.53 Substitute Check Indemnity
1. Scope of Indemnity
Section 6 of the Check 21 Act specifies the scope and amount of the
substitute check indemnity, and the proposed rule incorporates this
section largely unchanged. The proposed rule states that a bank that
transfers, presents, or returns a substitute check or a paper or
electronic representation of a substitute check for which it receives
consideration shall indemnify the recipient and any subsequent
recipient (including a collecting or returning bank, the depositary
bank, the drawer, the drawee, the payee, the depositor, and any
indorser) for any loss incurred by any recipient of a substitute check
if that loss occurred due to the receipt of a substitute check instead
of the original check. As with the proposed rule's language regarding
the scope of the warranties, discussed in detail in the analysis of
Sec. 229.52, the proposed
[[Page 1477]]
language regarding the scope of the substitute check indemnity
clarifies that the indemnity flows to subsequent, not prior, parties
that receive a substitute check or a representation of a substitute
check.
The proposed commentary regarding the scope of the indemnity
highlights that the indemnity applies only if the first indemnified
party incurred a loss due to receipt of the substitute check instead of
the original check. However, a bank that paid an indemnity (other than
the first reconverting bank) would in turn be eligible to make an
indemnity claim even if that bank only received a representation of a
substitute check. Thus, the indemnity covers losses suffered directly
due to the receipt of a substitute check instead of the original check
and losses incurred by providing an indemnity to another person. The
proposed commentary provides several examples to illustrate the scope
of the indemnity.
2. Indemnity Amount
The proposed rule incorporates the statutory language regarding the
indemnity amount with minor clarifications. The rule provides that the
amount of the indemnity is (1) the amount of any loss (including
interest, costs, reasonable attorney's fees, and other expenses of
representation) caused by the breach of a substitute check warranty, or
(2) in the absence of a breach of a substitute check warranty, the
amount of the loss, up to the amount of the substitute check, plus
interest and expenses (including costs and reasonable attorney's fees
and other expenses of representation). The proposed rule supplements
the statutory language by specifically stating that interest would be
included in the damages proximately caused by a breach of a substitute
check warranty.
The proposed rule also incorporates statutory provisions regarding
reduction of the indemnity amount. Section 229.53(b)(2) of the proposed
rule states that the indemnity amount described in the preceding
paragraph will be reduced in proportion to the amount of negligence or
bad faith of the party making the indemnity claim, but that nothing in
that comparative negligence section reduces any person's rights under
the U.C.C. or other applicable law. Section 229.53(b)(3) of the
proposed rule provides that an indemnifying bank will be liable only
for losses incurred up to the time that it produces the original check
or a sufficient copy of the original check, although production of that
item does not absolve the indemnifying bank from liability for
breaching a substitute check warranty or a warranty established under
any other law.
The proposed commentary to Sec. 229.53(b) provides examples that
illustrate the amount of the indemnity under various sets of facts.
3. Subrogation of Rights
Section 229.53(c) of the proposed rule incorporates section 6(e) of
the statute by providing that an indemnifying bank shall be subrogated
to the rights of the party it indemnified to the extent of the
indemnity provided and may attempt to recover from another party based
on a warranty or other claim. This section also provides that the
indemnified party has a duty to comply with reasonable requests for
assistance made by the indemnifying bank with respect to such a claim.
The proposed commentary provides an example of what would constitute a
reasonable request for assistance.
H. Section 229.54 Expedited Recredit for Consumers
Section 7 of the statute sets forth the circumstances giving rise
to a consumer expedited recredit claim, the time period and procedures
for making such a claim, the conditions for a recredit, the timing and
availability of a recredit, a bank's ability to reverse a recredit on a
later determination that the consumer's claim was not valid, and the
notices a bank must provide in connection with recredit claims. Section
229.54 of the proposed rule implements all of these provisions but
reorganizes them for purposes of clarity. The Board also proposes to
supplement the statutory text in certain respects in order to
explicitly acknowledge certain actions that are implicit in the text of
the statute.
1. Circumstances Giving Rise to a Claim
Section 229.54(a) of the proposed rule provides that a consumer may
make an expedited recredit claim under that section for a recredit with
respect to a substitute check if the consumer asserts in good faith
that (1) the bank holding the consumer's account charged that account
for a substitute check that was provided to the consumer (although the
consumer need not be in possession of the substitute check at the time
he or she submits a claim); (2) the substitute check was not properly
charged to the consumer account or the consumer has a warranty claim
with respect to the substitute check; (3) the consumer suffered a
resulting loss; and (4) production of the original check or a
sufficient copy of the original check is necessary to determine whether
or not the substitute check in fact was improperly charged or whether
the consumer's warranty claim is valid. This section implements
sections 7(a)(1) and 7(h) of the Check 21 Act with some organizational
changes.
The proposed commentary on the circumstances giving rise to a claim
provides additional detail concerning when a consumer would and would
not meet the criteria for bringing an expedited recredit claim under
Sec. 229.54. For example, the commentary clarifies that a consumer who
receives only an image statement that contains an image of a substitute
check cannot make a claim because he or she has not actually received a
substitute check, although such a consumer would have redress for an
improper charge associated with the substitute check under the U.C.C.
and might have a claim for breach of a substitute check warranty. The
commentary also notes that the warranty giving rise to a Sec. 229.54
claim could be a substitute check warranty or any other warranty
provided to the consumer in connection with the substitute check. The
commentary further notes that recovery under Sec. 229.54 is limited to
the amount of the substitute check, plus interest if the consumer has
an interest-bearing account, although a consumer may be able to recover
additional amounts under other law, including Sec. Sec. 229.52 and
229.53 of the proposed rule.
2. Procedures for Making Claims
a. Timing of Claim. The Check 21 Act states that a consumer's
expedited recredit claim is due before the end of the 40-day period
beginning on the later of the date that the bank mailed or delivered to
the consumer the periodic account statement that contains information
about the transaction giving rise to the claim or the date on which the
bank made the substitute check available to the consumer. Section
229.54(b)(1)(i) of the proposed rule implements this provision. The
proposed rule clarifies that the 40-day time period refers to calendar
days and that a bank makes a substitute check ``available'' by mailing
or delivering it to the consumer.
The statute provides that the bank must extend the consumer's time
for making a claim by a reasonable period of time if the consumer
cannot meet the 40-day deadline due to extenuating circumstances, such
as his or her extended travel or illness. Section 229.54(b)(1)(ii) of
the proposed rule includes the general provision regarding the time
extension but moves to the commentary the specific examples of what
constitutes an extenuating circumstance. This parallels the
[[Page 1478]]
approach the Board took when implementing the Electronic Fund Transfer
Act (see 15 U.S.C. 1693(g) and 12 CFR 205.6(b)(4)).
b. Content of Claim. Section 229.54(b)(2) of the proposed rule
states that the consumer's claim must include (1) a description of the
consumer's claim, including the reason why the consumer believes his or
her account was improperly charged for the substitute check or the
nature of his or her warranty claim with respect to such check; (2) a
statement that the consumer suffered a loss and an estimate of the
amount of that loss; (3) the reason why production of the original
check or a sufficient copy of the original check is necessary to
determine whether or not the charge to the consumer's account was
proper or the consumer's warranty claim is valid; and (4) sufficient
information to allow the bank to identify the substitute check and
investigate the claim. The proposed rule uses the defined term
``sufficient copy,'' as opposed to the Check 21 Act's ``better copy,''
of the original check. As defined, a sufficient copy by its nature
would be a better copy.
The proposed commentary to Sec. 229.54(b)(2) discusses in more
detail the reasons why a charge to the consumer's account could be
improper and why the original check or a sufficient copy would be
necessary to determine the validity of the consumer's recredit claim.
The proposed commentary also discusses what types of information a
consumer should provide to facilitate the bank's investigation of a
claim.
c. Form and Submission of Claim. Section 229.54(b)(3) of the
proposed rule incorporates the statutory provisions regarding the
bank's ability to require a consumer to submit an expedited recredit
claim in writing and the bank's ability to accept a written submission
electronically. The proposed commentary to Sec. 229.54(b)(3) clarifies
that a bank that requires a claim to be in writing must inform the
claimant of that requirement and also indicates that a communication,
whether oral or written, that does not contain all the required
information does not constitute a ``claim'' under Sec. 229.54.
Although the statute states that a bank may permit an electronic
submission ``if the consumer has agreed to communicate with the bank in
that manner,'' the proposed rule omits the quoted language. The Board
believes that a consumer's act of submitting a claim electronically
indicates the consumer's agreement to communicate electronically, such
that the statute's agreement language is unnecessary. However, the
proposed commentary notes that a bank cannot require a consumer to
submit a written claim electronically.
The proposed rule also clarifies that a bank that requires the
consumer's claim to be in writing must compute the time period for
acting on the claim from the date that the consumer submitted the
written claim, even if the consumer previously provided some
information relating to the claim in another form.\17\ In addition, the
statute measures time from the ``business day'' (defined as any day,
other than a Saturday, Sunday, or legal holiday) on which the bank
received a claim. However, the Board proposes to incorporate the term
``banking day,'' as it has for other parts of Regulation CC. Banking
day means ``that part of any business day on which an office of a bank
is open to the public for carrying on substantially all of its banking
functions.'' The Board believes that ``banking day'' is an appropriate
term when referring to the time at which a bank must begin measuring
the time period for action. The Board requests comment on both of these
adjustments relating to time period calculations.
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\17\ The commentary to this provision clarifies that a bank that
requires expedited recredit claims to be in writing must inform the
consumer.
---------------------------------------------------------------------------
3. Action on Claims
Section 7(c)(1) of the Check 21 Act requires a bank that receives a
complete and timely claim for which all the prerequisites are met to
recredit the consumer's account for the amount of the substitute check,
plus interest if the consumer's account is an interest bearing account,
unless the bank has provided the original check or a sufficient copy to
the consumer and demonstrated to the consumer that the substitute check
was properly charged to his or her account. Section 7(c)(2) of the
Check 21 Act requires the bank to provide the recredit no later than
the end of the business day following the business day on which the
bank determined that the consumer's claim was valid or, if the bank has
not yet determined the validity of the claim, before the end of the
10th business day after the business day on which the consumer
recredited the claim. Section 7(c)(2) limits the amount that the bank
is required to provide on the 10th day to the amount of the loss, up to
the lesser of the amount of the substitute check or $2,500, plus
interest, and requires the bank to provide the additional amount of the
substitute check, if any, on the 45th calendar day following the
business day on which the consumer submitted the claim. Section 7(e) of
the Check 21 Act provides that a bank may reverse a recredit if it
determines that the substitute check in question was properly charged
to the consumer account and if it notifies the consumer.
The proposed rule incorporates each of the Check 21 Act's
substantive requirements regarding action on a consumer's expedited
recredit claim but reorganizes those requirements in a way that the
Board believes is more straightforward. The Board requests comment on
whether or not its proposed reorganization of the statutory provisions
regarding action on claims is an improvement over the statutory
organization and encourages commenters to provide specific
organizational suggestions.
Section 229.54(c)(1) of the proposed rule provides that one of the
bank's options for responding to a recredit claim is affirmatively to
determine a consumer's claim to be valid. Although the statute does not
list this possible response explicitly, the bank's ability to respond
to a claim by determining that the claim is valid is implicit in the
``timing of the recredit'' section of the statute (section 7(c)(2)(A)),
which requires the bank to provide a recredit the day after it
determines that the consumer's claim is valid.
The statute provides that if a bank determines that the consumer's
claim is not valid, the bank must provide the consumer with the
original check or a copy of the original check sufficient to determine
the validity of the claim and must demonstrate why the substitute check
was properly charged to the consumer account. Because the statute
provides that a warranty claim may be the basis of a consumer's
expedited recredit claim, Sec. 229.54(c)(2), by reference to Sec.
229.54(e)(2), of the proposed rule requires the bank either to
demonstrate that a charge was proper or to explain why the warranty
claim is not valid, as appropriate in light of the consumer's claim.
Section 7(c) of the statute states that a bank must recredit the
amount of the substitute check, plus interest if the account is an
interest-bearing account. However, recrediting the full amount of the
check could create overcompensation in some cases, such as where the
consumer's allegation is that the bank charged the substitute check for
the wrong amount. Section 229.54(c) of the proposed rule therefore
provides that a bank must recredit the amount of the loss, up to the
amount of the substitute check plus interest.
If, after providing a recredit, a bank later determines that the
consumer's claim is not valid, Sec. 229.54(c)(4) of the
[[Page 1479]]
proposed rule would allow the bank to reverse both the amount it
previously recredited plus any interest that it has paid on that
amount. The statute does not explicitly address the reversal of
interest when reversing a recredit, and the Board specifically requests
comment on whether the proposed approach is appropriate.
The proposed commentary to Sec. 229.54(c) clarifies that a bank
that receives claims for multiple substitute checks in the same
communication must provide the expedited recredit for each such check
by the 10th day after submission, unless the bank by that date has
determined whether or not the claims are valid. The commentary also
clarifies that a bank may, when appropriate, reverse any amount that it
previously recredited, regardless of whether such amount originally was
provided after a determination that a claim was valid or pending the
bank's investigation of the claim. The Board requests comment on
whether additional commentary to Sec. 229.54 would be useful and, if
so, what specific points should be covered.
4. Availability of Recredit
Section 7(d) of the statute provides that a bank can delay the
availability of a recredit if the account is a new account or has been
repeatedly overdrawn in the last six months, or if the bank has
reasonable cause to suspect fraud. The proposed rule incorporates the
statutory language with minor clarifications. The statute states that
the new account exception applies if ``the claim is made'' within 30
days of establishment of the account, whereas the proposed rule
provides that the exception applies if ``the consumer submits the
claim'' within 30 days. This change clarifies when a claim ``is made''
in a manner that is consistent with the other time period calculations
in the statute and proposed rule. The rule also reorganizes the
language in the exception for prevention of fraud losses to parallel
the existing exception for reasonable cause to doubt collectibility in
Sec. 229.13.
The proposed commentary to Sec. 229.54(d) clarifies that the
availability of recredits provided under Sec. 229.54(c) is governed
solely by Sec. 229.54(d) and thus is not subject to subpart B. The
commentary also clarifies that the periods in Sec. 229.54(d) are the
maximum periods that the bank may delay availability. In addition, the
commentary clarifies that the bank may delay availability of a recredit
under Sec. 229.54(d) only with respect to the amount of the substitute
check that the bank recredits under Sec. 229.54(c)(3)(i) pending
investigation of the consumer's claim.
5. Notices Relating to Consumer Expedited Recredit Claims
Section 229.54(e) of the proposed rule describes the notices
required by the statute when a bank provides or reverses a recredit or
denies a consumer's recredit claim. The proposed rule provides that a
bank that recredits a consumer account must, no later than the business
day after the banking day on which the bank provides the recredit,
notify the consumer of the amount of the recredit and the date on which
the recredited funds will be available for withdrawal.
The proposed rule requires a bank that determines that a consumer's
claim is not valid to notify the consumer no later than the business
day after the banking day on which the bank makes its determination.
The proposed rule provides that an invalid claim notice must include an
explanation of the basis for the bank's determination that the
substitute check was properly charged or the consumer's warranty claim
is not valid, plus the original check or a sufficient copy of the
original check. The statute requires a bank that denies a consumer's
expedited recredit claim to notify the consumer that he or she may
request the information or documents on which the bank relied in making
its determination. However, the proposed rule allows a bank that relies
on information or documents in addition to the original check or
sufficient copy to provide such information or documents with the
notice or to indicate that the consumer may obtain them on request.
The proposed rule provides that a bank that reverses an amount it
previously credited to a consumer account must notify the consumer no
later than the business day after the banking day on which the bank
made the reversal. This notice must include the information required
for an invalid claim notice, plus the amount of the reversal, including
both the amount of the recredit and the amount of paid interest, if
any, being reversed, and the date on which the bank made the reversal.
The proposed commentary to Sec. 229.54(e) clarifies that a bank
may provide a required notice by U.S. mail or by any other means
through which the consumer has agreed to receive account information.
The commentary highlights that, if a bank is required to provide an
original check or sufficient copy as part of the notice, a bank that
provides a notice electronically satisfies that requirement by
providing an electronic image of the original check or sufficient copy,
if the consumer has agreed to receive that information electronically.
As discussed in the analysis of appendix C, the Board proposes
model language for each of the notices required by Sec. 229.54(e).
I. Section 229.55 Expedited Recredit for Banks
Section 8 of the Check 21 Act provides that a bank may make a claim
against an indemnifying bank if (1) the claimant bank or a bank that
the claimant bank has indemnified has received a claim for expedited
recredit from a consumer or would have been subject to such a claim if
the consumer account had been charged for the substitute check; (2) the
claimant bank is obligated to provide a consumer expedited recredit
with respect to such substitute check or otherwise has suffered a
resulting loss; and (3) the production of the original check or a
sufficient copy of the original check is necessary to determine the
validity of the charge to the consumer account or the validity of any
warranty claim connected with such substitute check. The content
requirements for an interbank expedited recredit claim essentially
parallel those for a consumer expedited recredit claim but also state
that a bank that provides a copy of a substitute check with its claim
must take steps to ensure that such copy is not mistaken for a legally
equivalent substitute check or handled for forward collection or
return. An indemnifying bank may require the claim to be in writing and
may permit the claimant bank to submit it electronically.
A claimant bank must bring its claim under section 8 of the Check
21 Act within 120 days of the transaction that gave rise to the claim,
and the indemnifying bank must respond within 10 business days of
receiving the claim by providing (1) a recredit, (2) the original check
or a sufficient copy, (3) or information to the claimant bank as to why
the indemnifying bank is not obligated to do (1) or (2). If the
claimant bank later receives or reverses a recredit or otherwise
receives compensation for the substitute check for which the
indemnifying bank previously provided a recredit, then the claimant
bank must reimburse the indemnifying bank. An indemnifying bank that
provides an original check or sufficient copy also may be entitled to a
refund under Sec. 229.53 if it has provided a recredit that exceeds
the losses the claimant bank sustained up to the day that the
indemnifying bank provided the original check or sufficient copy.
[[Page 1480]]
The proposed rule implements section 8 of the statute with some
minor organizational and clarifying changes. The rule clarifies that
bank action on a claim is required by ``the end of'' the 10th business
day after the relevant banking day, consistent with the parallel
consumer recredit provision. Moreover, the proposed rule clarifies
that, when an indemnifying bank requires a claim to be in writing, the
10-day period commences with the receipt of the written claim.
The proposed rule also clarifies both paragraphs of the Check 21
Act regarding the indemnifying bank's right to a refund. Section
7(c)(3) of the statute states that the ``claimant bank must refund * *
* any amount previously advanced by the indemnifying bank.'' Without
further elaboration, this provision could be read to mean that a
claimant bank must give to the indemnifying bank more than the claimant
bank recovered.\18\ The rule makes clear that a claimant bank that
receives other compensation for the substitute check does not have to
refund to the indemnifying bank more than the claimant bank previously
recovered from the indemnifying bank. In addition, section 8(d) of the
statute provides that an indemnifying bank that produces the original
check or a sufficient copy has the right to a refund under the
indemnity section. Section 229.55(e)(2) of the proposed rule clarifies
the statutory language by describing the amount to be refunded under
that provision.
---------------------------------------------------------------------------
\18\ For example, if the claimant bank received a recredit for
$150 and then received a subsequent recovery for $100, the refund to
the indemnifying bank should be the amount of the recovery ($100)
rather than the entire amount previously advanced ($150).
---------------------------------------------------------------------------
The proposed commentary to Sec. 229.55 elaborates on the rule text
in several respects. The commentary highlights that a bank could have a
recredit claim either because it is obligated to provide a recredit to
a consumer or another bank or because it has suffered a loss as result
of catching a substitute check problem that, if uncaught, could have
given rise to a consumer expedited recredit claim. The commentary
provides examples about the types of losses that could give rise to
consumer claim and the circumstances under which a bank could bring a
valid claim. The commentary also provides additional information
relating to the procedures for making claims.
J. Section 229.56 Liability
The Check 21 Act provides for delays in an emergency in section 9,
the measure of damages in section 10, and the statute of limitations
and notice of claims in section 11. Section 229.56 of the proposed rule
incorporates each of those sections with minor technical changes in a
manner that parallels existing subpart C liability provisions in Sec.
229.38.
Section 229.56 (a) of the proposed rule provides that the amount of
damages recoverable for a breach of a substitute check warranty or
failure to comply with any provision of subpart D generally is limited
to the amount of the loss or the substitute check, whichever is less,
plus interest and expenses relating to the substitute check. This
section contains exceptions, however, noting that a person could
recover more than the generally applicable amount by bringing an
indemnity claim or could recover less than the generally applicable
amount if the person's negligence or bad faith contributed to the loss
or if the person obtained a recredit under Sec. 229.54 or Sec.
229.55.
Section 229.56(b) of the proposed rule states that delay by a bank
beyond the time periods described in subpart D is excused if such delay
is attributable to one of the causes specified in that paragraph.
Section 229.56(c) of the proposed rule specifies the courts in
which a person may bring an action to enforce subpart D and provides
that such an action must be brought within one year after the cause of
action accrues. The statute provides that a cause of action accrues as
of the date the injured party first learns or reasonably should have
learned of the facts and circumstances giving rise to the cause of
action. The proposed rule clarifies that one of the facts and
circumstances included in the concept of accrual is the identity of the
bank against which the action is to be brought. This clarification is
intended to make the date from which the statute of limitations is
measured correspond to the date from which timely notice of a claim is
measured.
Section 229.56(d) generally provides that, unless a person gives
notice of a Sec. 229.56 claim to the warranting or indemnifying bank
within 30 calendar days after the person has reason to know of both the
claim and the identity of the indemnifying or warranting bank, the
warranting or indemnifying bank is discharged from liability in an
action to enforce a claim under subpart D to the extent of any loss
caused by the delay in giving notice of the claim. However, this
paragraph also states that a timely recredit claim by a consumer under
Sec. 229.54 constitutes timely notice under this paragraph.
The proposed commentary to Sec. 229.54 briefly elaborates on each
of the four paragraphs of that section in a manner that corresponds to
the commentary for Sec. 229.38.
K. Section 229.57 Consumer Awareness
This section of the proposed rule implements section 12 of the
Check 21 Act, which requires a bank to provide a consumer awareness
disclosure regarding substitute checks and substitute check rights to
each consumer ``who receives original checks or substitute checks.''
The Board believes that the quoted language, when read with the
statutory provisions governing distribution of notices, indicates that
section 12 disclosures are intended only for (1) consumers who
routinely receive paid checks with their account statements and (2)
other consumers who receive substitute checks only on a case-by-case
basis. The proposed rule reflects this interpretation.
The proposed rule specifically notes that, unless the bank already
has provided the disclosure, a case-by-case disclosure is required when
(1) a consumer receives a substitute check in response to his or her
specific request for an original check or a copy of a check or (2) a
check deposited by a consumer is returned unpaid to the consumer's
account in the form of a substitute check. The Check 21 Act requires
that when a bank provides a substitute check to a consumer in response
to the consumer's request for a check, the bank must provide the
consumer disclosure at the time of the request. This requirement may be
impractical, however, as the bank may not know at the time of the
request whether it will provide the original check, a substitute check,
or some other copy of the check. Requiring the bank to provide the
disclosure at the time of the request could prove unnecessarily
burdensome to the bank and confusing to the consumer, because the
consumer would receive a disclosure describing rights that may not
apply to the item the consumer ultimately receives. The Board therefore
has proposed two alternative rule provisions regarding when a bank must
provide the disclosure to a consumer who requests a copy of a check.
One alternative tracks the statute and requires a bank to provide the
disclosure at the time of the request, but the other alternative
requires provision of the disclosure at the time the bank provides the
substitute check to the consumer. The Board specifically requests
comment on which of these alternatives is preferable.
The proposed commentary to Sec. 229.57 indicates that a bank may
use the model substitute check disclosure in appendix
[[Page 1481]]
C and will be deemed to comply with the disclosure content
requirement(s) for which it uses the model disclosure. The commentary
also provides examples of when a bank must distribute the required
disclosure.
L. Section 229.58 Mode of Delivery
The Check 21 Act discusses in several places the form in which a
bank must provide required information. The proposed rule, by contrast,
has a separate section regarding mode of delivery that applies to the
entire subpart. Section 229.58 provides that a bank may provide any
information required by subpart D by U.S. mail or by any other means
through which the recipient has agreed to receive account information.
This section also specifically allows a bank that is required to
provide an original check or a sufficient copy to provide an electronic
version of the relevant paper document if the recipient has agreed to
receive that information electronically. This latter provision
addresses the potential inconsistency between section 7(f)(2) as
interpreted at Sec. 229.54(e)(2), which requires a bank denying a
consumer's recredit claim to provide the original check or a sufficient
copy (each of which is by definition a piece of paper), with section
7(f)(4), which permits a bank to provide the notices (which presumably
means all components of the notice) electronically.
M. Section 229.59 Relation to Other Law
This section of the proposed rule implements section 13 of the
Check 21 Act by stating that the Check 21 Act and subpart D supersede
any provision of federal or state law, including the U.C.C., that is
inconsistent with the Check 21 Act or subpart D, but only to the extent
of the inconsistency.
N. Section 229.60 Variation by Agreement
Section 229.60 of the proposed rule implements section 14 of the
Check 21 Act by providing that any provision of Sec. 229.55 (expedited
recredit for banks) may be varied by agreement of the banks involved,
but that no other provision of subpart D may be varied by agreement by
any person or persons.
O. Appendix C--Model Forms
Section 12(c) of the Check 21 Act requires the Board to publish
model forms that banks can use to satisfy the content requirements of
the consumer awareness disclosure required by that section. Section
229.57 of the proposed rule lists those content requirements. The
statute provides that a bank that uses the model form published by the
Board to comply with Sec. 229.57 shall be treated as complying with
that section if the form accurately describes the bank's policies and
practices.
The Board proposes to include the required model disclosure as
model C-5A in appendix C. The proposed model disclosure explains in
very simple terms what a substitute check is, when the consumer
expedited recredit right applies, and what a consumer must do to
exercise that right. The Board requests comment on whether the proposed
model disclosure is clear, accurate, and concise.
Although not required by statute to do so, the Board also proposes
to publish in appendix C models for the notices a bank must provide in
response to a consumer's expedited recredit claim under section 7(f) of
the Check 21 Act and Sec. 229.54(e) of the proposed rule. Although
there is no statutory safe harbor that applies to the proposed model
notices under Sec. 229.54(e), the Board nevertheless believes that
these model notices may be helpful to banks in complying with the
regulation. In light of the absence of a statutory safe harbor, the
Board specifically requests comment on whether providing model language
for the Sec. 229.54(e) notices is useful.
The Board proposes technical amendments to the introductory
paragraph and table of contents of appendix C to reflect the inclusion
of the new disclosure and notices. The Board also proposes to amend the
commentary to appendix C to clarify the appropriate use of the new
models.
II. Other Amendments to Regulation CC
The Board also is proposing at this time several amendments to
existing Regulation CC and its commentary that are unrelated to the
Check 21 Act. The Board requests comment on each of these proposed
revisions and also welcomes comments about any other areas of the
existing rule and commentary that should be clarified.
A. Section 229.2 Definitions
The Board proposes to amend the commentary to the definition of
local paying bank (Sec. 229.2(s)) to provide additional detail
regarding how to determine whether deposits mailed to a central check
processing facility are local or nonlocal.
B. Section 229.10 Next-Day Availability
The Board proposes adding a sentence to the commentary to Sec.
229.10(c) to clarify that a special deposit slip notice need not be
posted at each teller window, although it must be posted in a place
where consumers are likely to see it before making a deposit.
C. Section 229.13 Exceptions
The Board proposes to amend the commentary to Sec. 229.13(g)
regarding notices of exception holds to clarify that a bank providing
such a notice electronically to a consumer must comply with the
requirements of the Electronic Signatures in Global and National
Commerce Act (the E-Sign Act).
D. Section 229.15 General Disclosure Requirements
The Board proposes to amend the commentary to Sec. 229.15(a)
regarding the general form of notices required by subpart B to clarify
that a bank providing a notice electronically to a consumer must comply
with the requirements of the E-Sign Act. The Board also proposes to
explain in more detail in the commentary how a notice can be ``clear
and conspicuous,'' as required in existing Sec. 229.15(a), and under
what circumstances a bank may provide a required notice in a language
other than English.
E. Section 229.30 Paying Bank's Responsibility for Return of Checks
The Board proposes amending Sec. 229.30(c)(1) regarding the
extension for the deadline of a return or notice of nonpayment under
the U.C.C. or Regulation J. The current paragraph allows extensions
when a paying bank uses a means of delivery that ordinarily would
result in receipt by the receiving bank's next banking day. At least
one court has interpreted the current provision to permit an extension
of the midnight deadline even when the check was received by a
returning bank at a time that was too late for the returning bank to
process the check that day (see Oak Brook Bank v. Northern Trust, 2001
U.S. App. LEXIS 15065 (7th Cir., 2001)). The proposed rule therefore
would more specifically describe the applicable time of receipt to be
the bank's cutoff hour for the next processing cycle (if sent to a
returning bank) or next banking day (if sent to a depositary bank).
This parallels the existing language in Sec. 229.30(c)(2). The Board
proposes corresponding changes to the commentary to this section.
F. Section 229.33 Notice of Nonpayment
The Board proposes deleting the phrase ``with question marks'' at
the end of Sec. 229.33(b). Instead, the Board proposes to note in the
commentary to
[[Page 1482]]
that section that a bank must identify an item of information if the
bank is uncertain as to that item's accuracy by setting the item off
with question marks, asterisks, or other symbols designated for this
purpose by generally applicable industry standards. This change is
meant to describe the actual industry practice more closely.
The Board also proposes amending the text of Sec. 229.33(d) to
state that a bank must ``send or give'' the consumer notice regarding
receipt of a returned check or notice or nonpayment. This is meant to
clarify that such a notice need not be in writing. The Board also
proposes to add additional detail to the commentary to Sec. 220.33(d)
to describe the means by which a bank may provide the required notice.
The Board also requests comment on whether there are circumstances
under which it would be appropriate to reduce the time frame for
providing a notice of nonpayment.
G. Section 229.37 Variation by Agreement
The Board proposes to delete an obsolete reference from the last
sentence of paragraph XXIII.A of the commentary to this section.
III. Specific Requests for Comment
In addition to the specific requests for comment discussed in the
section-by-section analysis, the Board requests comment on the
following issues.
A. Treatment of Generally Applicable Industry Standards
As discussed at various points in the section-by-section analysis,
when the Check 21 Act or existing Regulation CC refers to generally
applicable industry standards, the Board proposes including only a
general reference to generally applicable industry standards in the
rule text. However, if only one industry standard applies, the proposed
commentary would identify that standard. If the Board determines to use
this approach in the final rule, it could account for changes in
industry standards simply by amending the commentary and would not need
to change the underlying regulatory requirement that banks comply with
industry standards. The Board requests comment generally on the
desirability of this approach and specifically on whether commenters
would prefer that the Board identify specific industry standards within
the text of the rule.
B. Relation of the Check 21 Act to Other Law
The proposed commentary at various points attempts to clarify the
interaction between the rights and remedies conferred by the Check 21
Act and those conferred by other law, particularly the U.C.C. The Board
specifically requests comment on whether the proposed commentary is
adequate with respect to the interaction between the Check 21 Act and
existing law or whether commenters believe that additional discussion
and examples are needed. If the latter, the Board requests that
commenters be as specific as possible in describing which provisions of
the Check 21 Act need clarification with respect to which provisions of
existing law, and in identifying examples that should be added to the
commentary.
C. Remotely-Created Demand Drafts
In 2002, the National Conference of Commissioners on Uniform State
Laws and the American Law Institute approved revisions to Articles 3
and 4 of the U.C.C. regarding remotely-created consumer items. The
U.C.C. revisions define a remotely-created consumer item to mean ``an
item drawn on a consumer account, which is not created by the payor
bank and does not bear a handwritten signature purporting to be the
signature of the drawer.'' The U.C.C. revisions would require a person
who transfers a remotely-created consumer item to warrant that the
person on whose account the item is drawn authorized the issuance of
the item in the amount for which the item is drawn.
The U.C.C. revisions are based on similar provisions enacted by
certain individual states designed to address check fraud. (Some state
laws and check clearinghouse rules refer to these items as ``demand
drafts.'') As noted in the U.C.C. drafter's commentary, the revisions
implement a limited rejection of Price v. Neal, 97 Eng. Rep. 871 (K.B.
1762), so that in certain circumstances (those involving remotely-
created consumer checks) the paying bank can use a warranty claim to
absolve itself of responsibility for honoring an unauthorized item. The
revisions rest on the premise that monitoring by depositary banks can
control this type of fraud more effectively than any practices readily
available to paying banks.
The U.C.C. revisions have been adopted in at least one state and
introduced in at least three others. The Board requests comment on
whether it would be appropriate to incorporate the U.C.C. revisions
into Regulation CC.
D. Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Board to use
plain language in all its proposed and final rules. The Board requests
comment on whether it could make the proposed regulatory language
clearer and, if so, how.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (PRA) (44
U.S.C. 3506; 5 CFR 1320 Appendix A.1), the Board reviewed the proposed
rule under the authority delegated to the Board by the Office of
Management and Budget (OMB). The proposed rule contains requirements
subject to the PRA.
The collection of information that is proposed by this rulemaking
is found in 12 CFR 229.54, 229.55, and 229.57. This information is
required to obtain a benefit for consumers and mandatory for financial
institutions. The respondents that are regulated by the Board are state
member banks and branches and agencies of foreign banks. Consumers who
choose to make claims in accordance with Sec. 229.54 of the proposed
rule also would be respondents. The Board is estimating paperwork
burden only for these three types of respondents; other federal banking
agencies are required to estimate paperwork burden for the depository
institutions for which they have administrative enforcement authority.
The proposed rulemaking contains several notice requirements and a
disclosure requirement in relation to the Check 21 Act. The first
notice, described in Sec. 229.54(b)(2), is the information a consumer
would provide when making an expedited recredit claim. The Federal
Reserve estimates that each of the 949 state member banks and 295
branches and agencies will receive, on average, 25 of these claims per
year. It is also estimated that it will take consumers, on average, 15
minutes to complete and send this claim. Thus, the Federal Reserve
estimates that the combined annual burden for consumers submitting
expedited recredit claims is 7,775 hours.
The second notice, described in Sec. 229.54(e), is required when a
bank validates the consumer's claim, denies a consumer's recredit
claim, or reverses a consumer's recredit claim. The Federal Reserve
estimates that each of the 949 state member banks and 295 branches and
agencies will send, on average, 35 of these notices per year. It is
also estimated that it will take the institutions, on average, 15
minutes to prepare and distribute each notice. Thus, the estimated
total annual burden for these three bank notices is 10,885 hours.
The third notice, described in Sec. 229.55(b)(2), is required for
a bank making a claim against an indemnifying
[[Page 1483]]
bank for a substitute check. The Federal Reserve estimates that each of
the 949 state member banks and 295 branches and agencies will submit,
on average, 15 of these claims per year. It is also estimated that it
will take institutions, on average, 15 minutes to complete and send
each notice. Thus, the estimated total annual burden for this notice is
4,665 hours.
Finally, Sec. 229.57 describes the disclosure requirement that
state member banks or branches and agencies of foreign banks must
provide to promote consumer awareness about substitute checks. Banks
are required to provide a consumer awareness disclosure to consumers
who receive paid checks with their periodic statements and consumers
who request or otherwise receive paid checks on a case-by-case basis. A
model disclosure is provided in appendix C-5A. The Federal Reserve
estimates that each of the 949 state member banks and 295 branches and
agencies will, on average, have 500 disclosures per year and that, on
average, it will take 5 minutes to prepare and distribute the
disclosure. Thus, the estimated total annual burden for this disclosure
is 51,833 hours.
The Federal Reserve may not conduct or sponsor, and an organization
is not required to respond to, this information collection unless it
displays a currently valid OMB control number. An OMB control number
will be obtained. The Federal Reserve specifically requests comment on
these burden estimates as described above.
Comments are also invited on: a. whether the proposed collection of
information is necessary for the proper performance of the Federal
Reserve's functions; including whether the information has practical
utility; b. the accuracy of the Federal Reserve's estimate of the
burden of the proposed information collection, including the cost of
compliance; c. ways to enhance the quality, utility, and clarity of the
information to be collected; and d. ways to minimize the burden of
information collection on respondents, including through the use of
automated collection techniques or other forms of information
technology. Comments on the collections of information should be sent
to Secretary, Board of Governors of the Federal Reserve System,
Washington, DC 20551, with copies of such comments to be sent to the
Office of Management and Budget, Paperwork Reduction Project (7100-to
be obtained), Washington, DC 20503.
Regulatory Flexibility Act
The Board is proposing the foregoing amendments to implement the
Check 21 Act and to provide clarification on existing regulatory
provisions. The Check 21 Act requires the Board to publish model forms
and clauses that banks may use to satisfy that statute's consumer
awareness requirement. The Board also proposes to incorporate all
provisions of the Check 21 Act that affect banks into existing
Regulation CC, so that all federal provisions administered by the Board
with respect to check collection will be described in one place.
The Check 21 Act and the proposed new subpart D that would
implement it apply to all banks regardless of their size. The statute
and proposed rule authorize, but do not require, banks to provide a new
negotiable instrument called a substitute check when an original check
is required. However, no bank is required to create substitute checks,
and the impact on the check processing practices of banks that only
receive and do not create substitute checks should be minimal. The
proposed rule does, however, require all banks to provide a consumer
awareness notice to consumers who receive substitute checks and to
provide a notice to a consumer who, on a case-by-case basis, seeks a
recredit for a substitute check that has caused the consumer to incur a
loss. These disclosure and notice requirements are statutory.
The Board is not aware of any other federal rules that duplicate,
overlap, or conflict with the proposed rule. The Board notes that the
proposed rule is consistent with other parts of Regulation CC and the
Board's Regulation J (12 CFR part 210) that apply to checks because
those provisions would apply to properly-prepared substitute checks in
the same manner that they apply to original checks.
The Board specifically requests comment on the impact of the
proposed rule on small banks.
12 CFR Chapter II
List of Subjects in 12 CFR Part 229
Banks, Banking, Federal Reserve System, Reporting and recordkeeping
requirements.
Authority and Issuance
For the reasons set forth in the preamble, the Board is proposing
to amend 12 CFR part 229 to read as follows:
PART 229--AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS
(REGULATION CC)
1. The authority citation for part 229 is amended to read as
follows:
Authority: 12 U.S.C. 4001 et seq., 12 U.S.C. 5001-5018.
2. In Sec. 229.1, revise paragraph (a) and add a new paragraph
(b)(4) to read as follows:
Sec. 229.1 Authority and purpose; organization.
(a) Authority and purpose. This part is issued by the Board of
Governors of the Federal Reserve System (Board) to implement the
Expedited Funds Availability Act, as amended (12 U.S.C. 4001 et seq.)
(the EFA Act) and the Check Clearing for the 21st Century Act (12
U.S.C. 5001-5018) (the Check 21 Act).
(b) Organization. * * *
(4) Subpart D of this part contains rules relating to substitute
checks. These rules address the creation and legal status of substitute
checks; the substitute check warranties and indemnity; expedited
recredit procedures for resolving improper charges and warranty claims
associated with substitute checks; and the disclosure and notices that
banks must provide to consumers who receive substitute checks and who
make expedited recredit claims.
3. In Sec. 229.2, revise the introductory sentence to read as
follows:
Sec. 229.2 Definitions.
As used in this part, and unless the context requires otherwise,
the following terms have the meanings set forth in this section, and
the terms not defined in this section have the meanings set forth in
the Uniform Commercial Code:
* * * * *
4. In Sec. 229.2(a):
A. Redesignate existing paragraphs (1), (2), (3), (4), and (5) as
paragraphs (a)(1)(i), (a)(1)(ii), (a)(1)(iii), (a)(1)(iv), and
(a)(1)(v), respectively;
B. Designate paragraph (a) as paragraph (a)(1) and revise the first
sentence of that paragraph;
C. Designate the undesignated paragraph as paragraph (2) and revise
that paragraph; and
D. Add a new paragraph (3).
The revisions and addition read as follows:
(a) Account. (1) Except for purposes of subpart D of this part,
account means a deposit as defined in 12 CFR 204.2(a)(1)(i) that is a
transaction account as described in 12 CFR 204.2(e). * * *
(2) For purposes of subpart B of this part and, in connection
therewith, this subpart A, account does not include an account where
the account holder is a bank, where the account holder is an office of
an institution described in
[[Page 1484]]
paragraphs (e)(1) through (e)(6) of this section or an office of a
``foreign bank'' as defined in section 1(b) of the International
Banking Act (12 U.S.C. 3101) that is located outside the United States,
or where the direct or indirect account holder is the Treasury of the
United States.
(3) For purposes of subpart D of this part and, in connection
therewith, this subpart A, account means any deposit, as defined in 12
CFR 204.2(a)(1)(i), at a bank. Account includes a demand deposit or
other transaction account and a savings deposit or other time deposit,
as those terms are defined in 12 CFR 204.2.
* * * * *
5. In Sec. 229.2(e), remove the phrase ``subpart C'' from the
last, undesignated paragraph and add the phrase ``subparts C and D'' in
its place, and after the undesignated paragraph add a new paragraph to
read as follows:
(e) * * *
Note: For purposes of subpart D of this part and, in connection
therewith, this subpart A, bank also includes the Treasury of the
United States or the United States Postal Service to the extent that
the Treasury or the Postal Service acts as a paying bank.
* * * * *
6. In Sec. 229.2(k), remove the phrase ``subpart C'' from the last
sentence of the undesignated paragraph and add the phrase ``subparts C
and D'' in its place.
7. In Sec. 229.2(q), insert the phrase ``to a collecting bank for
settlement or'' between the words ``basis'' and ``to.''
8. In Sec. 229.2(z), remove the phrase ``subpart C'' from the
last, undesignated paragraph and add the phrase ``subparts C and D'' in
its place, and after the undesignated paragraph add a new paragraph to
read as follows:
(z) * * *
Note: For purposes of subpart D of this part and, in connection
therewith, this subpart A, paying bank also includes the Treasury of
the United States or the United States Postal Service for a check
that is payable by that entity and that is sent to that entity for
payment or collection.
* * * * *
9. In Sec. 229.2(ff), add a new sentence after the first sentence
to read as follows:
(ff) * * * For purposes of subpart D of this part and, in
connection therewith, this subpart A, state also means Guam, American
Samoa, the Trust Territory of the Pacific Islands, the Northern Mariana
Islands, and any other territory of the United States.
* * * * *
10. In Sec. 229.2, revise paragraph (qq) to read as follows:
* * * * *
(qq) Claimant bank means a bank that submits a claim for a recredit
for a substitute check to an indemnifying bank under Sec. 229.55.
11. In Sec. 229.2, after paragraph (qq) add the following new
paragraphs (rr) through (ddd), to read as follows:
* * * * *
(rr) Collecting bank means any bank handling a check for forward
collection, except the paying bank.
(ss) Consumer means a natural person who--
(1) With respect to a check handled for forward collection, draws
the check on a consumer account; or
(2) With respect to a check handled for return, deposits the check
into or cashes the check against a consumer account.
(tt) Customer means a person having an account with a bank.
(uu) Indemnifying bank means a bank that provides an indemnity
under Sec. 229.53 with respect to a substitute check.
(vv) Magnetic ink character recognition line and MICR line mean the
numbers, which may include the bank routing number, account number,
check number, check amount, and other information, that are printed
near the bottom of a check in magnetic ink in accordance with generally
applicable industry standards.
(ww) Original check means the first paper check issued with respect
to a particular payment transaction.
(xx) Person means a natural person, corporation, unincorporated
company, partnership, government unit or instrumentality, trust, or any
other entity or organization.
(yy) Reconverting bank means--
(1) The bank that creates a substitute check; or
(2) With respect to a substitute check that was created by a person
that is not a bank, the first bank that receives the substitute check
and transfers, presents, or returns that substitute check or, in lieu
thereof, the first paper or electronic representation of that
substitute check.
(zz) Substitute check means a paper reproduction of an original
check that--
(1) Contains an image of the front and back of the original check;
(2) Bears a MICR line containing all the information appearing on
the MICR line of the original check, except as provided under generally
applicable industry standards for substitute checks to facilitate the
processing of substitute checks;
(3) Conforms in paper stock, dimension, and otherwise with
generally applicable industry standards for substitute checks; and
(4) Is suitable for automated processing in the same manner as the
original check.
(aaa) A sufficient copy of an original check is a copy of an
original check that accurately represents all of the information on the
front and back of that check as of the time it was truncated or that
otherwise is sufficient to determine the validity of the relevant
claim. A copy of an original check means any paper reproduction of an
original check, including a paper printout of an electronic image of
the original check, a photocopy of the original check, or a substitute
check.
(bbb) Transfer and consideration. For purposes of subpart D, the
terms transfer and consideration have the meanings set forth in the
Uniform Commercial Code and in addition--
(1) The term transfer with respect to a substitute check or a paper
or electronic representation of a substitute check means delivery of
the substitute check or other representation of the substitute check by
a bank to a person other than a bank; and
(2)(i) Except as provided in paragraph (bbb)(2)(ii) of this
section, a bank that transfers a substitute check or a paper or
electronic representation of a substitute check directly to a person
other than a bank has received consideration for the substitute check
or other paper or electronic representation of the substitute check if
it has charged, or has the right to charge, the person's account or
otherwise has received value for the check.
(ii) A bank does not receive consideration when it transfers a
substitute check or a paper or electronic representation of a
substitute check solely in response to a person's warranty, indemnity,
expedited recredit, or other claim with respect to the substitute
check.
(ccc) Truncate means to remove an original check from the forward
collection or return process and send to a recipient, in lieu of such
original check, a substitute check or, by agreement, information
relating to the original check (including data taken from the MICR line
of the original check or an electronic image of the original check),
whether with or without the subsequent delivery of the original check.
(ddd) Truncating bank means--
(1) The bank that truncates the original check; or
(2) If a person other than a bank truncates the original check, the
first bank that transfers, presents, or returns, in lieu of such
original check, a substitute check or, by agreement, information
relating to the original
[[Page 1485]]
check (including data taken from the MICR line of the original check or
an electronic image of the original check), whether with or without the
subsequent delivery of the original check.
Sec. 229.3 [Amended]
12. In Sec. 229.3, remove the phrase ``the Act'' from paragraphs
(b)(1) and (c)(2)(ii) and add the phrase ``the EFA Act'' in its place.
Sec. 229.20 [Amended]
13. In Sec. 229.20, remove the phrase ``the Act'' wherever it
appears and add the phrase ``the EFA Act'' in its place.
Sec. 229.21 [Amended]
14. In Sec. 229.21(g)(2), remove the phrase ``the Act'' and add
the phrase ``the EFA Act'' in its place.
Sec. 229.30 [Amended]
15. In Sec. 229.30(a)(2)(iii), remove the next-to-last sentence
and add the following sentence in its place:
(a) * * *
(2) * * *
(iii) * * * A qualified returned check must be encoded in magnetic
ink with the routing number of the depositary bank, the amount of the
returned check, and a ``2'' or, in the case of a substitute check, a
``5'', in position 44 of the MICR line as a return identifier in
accordance with generally applicable industry standards. * * *
* * * * *
16. In Sec. 229.30, revise paragraph (c)(1), to read as follows:
(c)* * *
(1) On or before the receiving bank's cutoff hour for the next
processing cycle (if sent to a returning bank) or on or before the
receiving bank's next banking day (if sent to the depositary bank)
following the otherwise applicable deadline, for all deadlines other
than those described in paragraph (c)(2) of this section; this deadline
is extended further if a paying bank uses a highly expeditious means of
transportation, even if this means of transportation would ordinarily
result in delivery after the receiving bank's next cutoff hour or
banking day referred to above; or
* * * * *
Sec. 229.31 [Amended]
17. In Sec. 229.31(a)(2)(iii), remove the second-to-last sentence
and add the following sentence in its place:
(a) * * *
(2) * * *
(iii) * * * A qualified returned check must be encoded in magnetic
ink with the routing number of the depositary bank, the amount of the
returned check, and a ``2'' or, in the case of a substitute check, a
``5'', in position 44 of the MICR line as a return identifier in
accordance with generally applicable industry standards. * * *
* * * * *
Sec. 229.33 [Amended]
18. In Sec. 229.33(b), remove the phrase ``with question marks''
from the last sentence of the undesignated paragraph.
19. In Sec. 229.33(d), add the phrase ``or give'' between the
words ``send'' and ``notice.''
Sec. 229.35 [Amended]
20. In Sec. 229.35, revise paragraph (a) to read as follows:
(a) Indorsement standards. A bank (other than a paying bank) that
handles a check during forward collection or a returned check shall
indorse the check in a manner that enables a subsequent collecting
bank, paying bank, or returning bank to interpret the indorsement, in
accordance with the indorsement standard set forth in appendix D of
this part.
* * * * *
Sec. 229.38 [Amended]
21. In Sec. 229.38(d)(1), add a new sentence between the next-to-
last and last sentences and revise the last sentence to read as
follows:
(d) Responsibility for certain aspects of checks--(1) * * * A
reconverting bank is responsible for damages under paragraph (a) of
this section to the extent that the condition of the back of a
substitute check transferred by it adversely affects the ability of a
bank to indorse the check legibly in accordance with Sec. 229.35.
Responsibility under this paragraph shall be treated as negligence of
the paying bank, depositary bank, or reconverting bank for purposes of
paragraph (c) of this section.
* * * * *
22. In Sec. 229.38(f), remove the phrase ``the Act'' and add the
phrase ``the EFA Act'' in its place.
PART 229--AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS
(REGULATION CC)
23. Add a new subpart D to read as follows:
Subpart D--Substitute Checks
Sec.
229.51 General provisions governing substitute checks.
229.52 Substitute check warranties.
229.53 Substitute check indemnity.
229.54 Expedited recredit for consumers.
229.55 Expedited recredit procedures for banks.
229.56 Liability.
229.57 Consumer awareness.
229.58 Mode of delivery of information required by this subpart.
229.59 Relation to other law.
229.60 Variation by agreement.
Authority: 12 U.S.C. 5001-5018.
Subpart D--Substitute Checks
Sec. 229.51 General provisions governing substitute checks.
(a) Legal equivalence. A substitute check for which a bank has
provided the warranties described in Sec. 229.52 is the legal
equivalent of an original check for all persons and all purposes,
including any provision of federal or state law, if the substitute
check--
(1) Accurately represents all of the information on the front and
back of the original check as of the time the original check was
truncated; and
(2) Bears the legend, ``This is a legal copy of your check. You can
use it the same way you would use the original check.''
(b) Reconverting bank duties. A bank shall ensure that a substitute
check for which it is the reconverting bank--
(1) Bears all indorsements applied by parties that previously
handled the check in any form (including the original check, a
substitute check, or another paper or electronic representation of such
original check or substitute check) for forward collection or return;
(2) Identifies the reconverting bank in a manner that preserves any
previous reconverting bank identifications, in accordance with
generally applicable industry standards for substitute checks and
appendix D of this part; and
(3) Identifies the bank that truncated the original check in
accordance with generally applicable industry standards for substitute
checks and appendix D of this part.
(c) Purported substitute checks. If a bank transfers, presents, or
returns, and receives consideration for, an item that meets all the
requirements of a substitute check except for the MICR line requirement
in section 229.2(zz)(2), that item is a substitute check for purposes
of Sec. Sec. 229.52 through 229.57 of this subpart.
(d) Applicable law. A substitute check that is the legal equivalent
of an original check under paragraph (a) of this section shall be
subject to any provision, including any provision relating to the
protection of customers, of this part, the U.C.C., and any other
applicable federal or state law as if such substitute check were the
original check, to the extent such provision of law is not inconsistent
with the Check 21 Act or this subpart.
[[Page 1486]]
Sec. 229.52 Substitute check warranties.
(a) Content and provision of substitute check warranties. A bank
that transfers, presents, or returns a substitute check (or a paper or
electronic representation of a substitute check) for which it receives
consideration warrants to the parties listed in paragraph (b) of this
section that--
(1) The substitute check meets the requirements for legal
equivalence described in Sec. 229.51(a)(1)-(2); and
(2) No depositary bank, drawee, drawer, or indorser will receive
presentment or return of, or otherwise be charged for, the substitute
check, the original check, or a paper or electronic representation of
the substitute check or original check such that that person will be
asked to make a payment based on a check that it already has paid.
(b) Warranty recipients. A bank makes the warranties described in
paragraph (a) to the person to which the bank transfers, presents, or
returns the substitute check or a paper or electronic representation of
such substitute check and to any subsequent recipient, which could
include a collecting or returning bank, the depositary bank, the
drawer, the drawee, the payee, the depositor, and any indorser. These
parties receive the warranties regardless of whether they received the
substitute check or a paper or electronic representation of the
substitute check.
Sec. 229.53 Substitute check indemnity.
(a) Scope of indemnity. A bank that transfers, presents, or returns
a substitute check or a paper or electronic representation of a
substitute check for which it receives consideration shall indemnify
the recipient and any subsequent recipient (including a collecting or
returning bank, the depositary bank, the drawer, the drawee, the payee,
the depositor, and any indorser) for any loss incurred by any recipient
of a substitute check if that loss occurred due to the receipt of a
substitute check instead of the original check.
(b) Indemnity amount--(1) In general. Unless otherwise indicated by
paragraph (b)(2) or (b)(3) of this section, the amount of the indemnity
under paragraph (a) of this section is as follows:
(i) If the loss resulted from a breach of a substitute check
warranty provided under Sec. 229.52, the amount of the indemnity shall
be the amount of any loss (including interest, costs, reasonable
attorney's fees, and other expenses of representation) proximately
caused by the warranty breach.
(ii) If the loss did not result from a breach of a substitute check
warranty provided under Sec. 229.52, the amount of the indemnity shall
be the sum of--
(A) The amount of any resulting loss, up to the amount of the
substitute check; and
(B) Interest and expenses (including costs and reasonable
attorney's fees and other expenses of representation) related to the
substitute check.
(2) Comparative negligence. (i) If a loss described in paragraph
(a) of this section results in whole or in part from the indemnified
party's negligence or failure to act in good faith, then the indemnity
amount described in paragraph (b)(1) of this section shall be reduced
in proportion to the amount of negligence or bad faith attributable to
the indemnified party.
(ii) Nothing in this paragraph (b)(2) reduces the rights of a
consumer or any other person under the U.C.C. or other applicable
provision of state or federal law.
(3) Effect of producing the original check or a sufficient copy of
the original check--(i) If an indemnifying bank produces the original
check or a sufficient copy of the original check, the indemnifying bank
shall--
(A) Be liable under this section only for losses that are incurred
up to the time that the bank provides that original check or sufficient
copy to the indemnified party; and
(B) Have a right to the return of any funds it has paid under this
section in excess of those losses.
(ii) The production by the indemnifying bank of the original check
or a sufficient copy under paragraph (b)(3)(i) of this section shall
not absolve the indemnifying bank from any liability under any warranty
that the bank has provided under Sec. 229.52 or other applicable law.
(c) Subrogation of rights--(1) In general. An indemnifying bank
shall be subrogated to the rights of the party that it indemnifies to
the extent of the indemnity it has provided and may attempt to recover
from another party based on a warranty or other claim.
(2) Duty of indemnified party for subrogated claims. Each
indemnified party shall have a duty to comply with all reasonable
requests for assistance from an indemnifying bank in connection with
any claim the indemnifying bank brings against a warrantor or other
party related to a check that forms the basis for the indemnification.
Sec. 229.54 Expedited recredit for consumers.
(a) Circumstances giving rise to a claim. A consumer may make a
claim under this section for a recredit with respect to a substitute
check if the consumer asserts in good faith that--
(1) The bank holding the consumer's account charged that account
for a substitute check that was provided to the consumer (although the
consumer need not be in possession of the substitute check at the time
he or she submits a claim);
(2) The substitute check was not properly charged to the consumer
account or the consumer has a warranty claim with respect to the
substitute check;
(3) The consumer suffered a resulting loss; and
(4) Production of the original check or a sufficient copy of the
original check is necessary to determine whether or not the substitute
check in fact was improperly charged or whether the consumer's warranty
claim is valid.
(b) Procedures for making claims. A consumer must make his or her
claim for a recredit under this section with the bank that holds the
consumer's account in accordance with the timing, content, and form
requirements of this section.
(1) Timing of claim. (i) The consumer must submit his or her claim
to the bank by the end of the 40th calendar day after the later of the
calendar day on which the bank mailed or delivered, by a means agreed
to by the consumer--
(A) The periodic account statement that contains information
concerning the transaction giving rise to the claim; or
(B) The substitute check giving rise to the claim.
(ii) If the consumer cannot submit his or her claim by the time
specified in paragraph (b)(1)(i) of this section because of extenuating
circumstances, the bank must extend the 40-calendar-day period by an
additional reasonable amount of time.
(2) Content of claim. The consumer's claim must include the
following information:
(i) A description of the consumer's claim, including the reason why
the consumer believes his or her account was improperly charged for the
substitute check or the nature of his or her warranty claim with
respect to such check;
(ii) A statement that the consumer suffered a loss and an estimate
of the amount of that loss;
(iii) The reason why production of the original check or a
sufficient copy of the original check is necessary to determine whether
or not the charge to the consumer's account was proper or the
consumer's warranty claim is valid; and
(iv) Sufficient information to allow the bank to identify the
substitute check and investigate the claim.
[[Page 1487]]
(3) Form and submission of claim; computation of time. The bank
holding the account that is the subject of the consumer's claim may, in
its discretion, require the consumer to submit the information required
by this section in writing. A bank that requires a written submission
may permit the consumer to submit the written claim electronically. A
bank that requires the consumer to submit a written claim shall compute
any time period in this subpart that begins with the submission of the
claim from the date on which the consumer submitted the written claim.
(c) Action on claims. A bank that receives a claim that meets the
requirements of paragraph (b) of this section must act as follows:
(1) Valid consumer claim. If the bank determines that the
consumer's claim is valid, the bank must--
(i) Recredit the consumer's account for the amount of the
consumer's loss, up to the amount of the substitute check, plus
interest if the account is an interest-bearing account, no later than
the end of the business day after the banking day on which the bank
makes that determination; and
(ii) Send to the consumer the notice required by paragraph (e)(1)
of this section.
(2) Invalid consumer claim. If a bank determines that the
consumer's claim is not valid, the bank must send to the consumer the
notice described in paragraph (e)(2) of this section.
(3) Recredit pending investigation. If the bank has not taken an
action described in paragraph (c)(1) or (c)(2) of this section before
the end of the 10th business day after the banking day on which the
consumer submitted the claim, the bank must--
(i) Recredit the consumer's account for the amount of the
consumer's loss, up to the lesser of the amount of the substitute check
or $2,500, plus interest if the account is an interest-bearing account,
by the end of that day and send to the consumer the notice required by
paragraph (e)(1) of this section; and
(ii) Recredit the consumer's account for the remaining amount of
the consumer's loss, if any, up to the amount of the substitute check,
plus interest if the account is an interest-bearing account, no later
than the end of the 45th calendar day after the banking day on which
the consumer submitted the claim and send to the consumer the notice
required by paragraph (e)(1) of this section, unless the bank prior to
that time has determined that the consumer's claim is or is not valid
in accordance with paragraph (c)(1) or (c)(2) of this section.
(4) Reversal of recredit. A bank at any time may reverse a recredit
that it has made to a consumer account under paragraph (c)(1) or (c)(3)
of this section, plus interest the bank has paid, if any, on that
amount, if the bank--
(i) Determines that a substitute check for which the bank
recredited the consumer account in fact was properly charged to that
account or that the consumer's warranty claim was not valid; and
(ii) Notifies the consumer in accordance with paragraph (e)(3) of
this section.
(d) Availability of recredit--(1) Next-day availability. Except as
provided in paragraph (d)(2) of this section, a bank shall make any
amount that it recredits to a consumer account under this section
available for withdrawal no later than the start of the business day
after the banking day on which the bank provides the recredit.
(2) Safeguard exceptions. A bank may delay availability to a
consumer of a recredit provided under paragraph (c)(3)(i) of this
section until the start of the earlier of the business day after the
banking day on which the bank determines the consumer's claim is valid
or the 45th calendar day after the banking day on which the consumer
submitted the claim if--
(i) The consumer submits the claim during the 30-calendar-day
period beginning on the banking day on which the consumer account was
established;
(ii) Without regard to the charge that gave rise to the recredit
claim--
(A) On six or more business days during the six-month period ending
on the calendar day on which the consumer submitted the claim, the
balance in the consumer account was negative or would have become
negative if checks or other charges to the account had been paid; or
(B) On two or more business days during such six-month period, the
balance in the consumer account was negative or would have become
negative in the amount of $5,000 or more if checks or other charges to
the account had been paid; or
(iii) The bank has reasonable cause to believe that the claim is
fraudulent, based on facts that would cause a well-grounded belief in
the mind of a reasonable person that the claim is fraudulent. The fact
that the check in question or the consumer is of a particular class may
not be the basis for invoking this exception.
(3) Overdraft fees. A bank that delays availability as permitted in
paragraph (d)(2) of this section may not impose an overdraft fee with
respect to drafts drawn by the consumer on such recredited funds until
the fifth calendar day after the calendar day on which the bank sent
the notice required by paragraph (e)(1) of this section.
(e) Notices relating to consumer expedited recredit claims--(1)
Notice of recredit. A bank that recredits a consumer account under
paragraph (c) of this section must notify the consumer of the recredit
no later than the business day after the banking day on which the bank
recredits the consumer account. This notice must describe--
(i) The amount of the recredit; and
(ii) The date on which the recredited funds will be available for
withdrawal.
(2) Notice that the consumer's claim is not valid. If a bank
determines that a substitute check for which a consumer made a claim
under this section was in fact properly charged to the consumer account
or that the consumer's warranty claim for that substitute check was not
valid, the bank shall notify the consumer no later than the business
day after the banking day on which the bank makes that determination.
This notice must include--
(i) The original check or a sufficient copy of the original check,
except as provided in Sec. 229.58;
(ii) An explanation of the basis for the bank's determination that
the substitute check was properly charged or the consumer's warranty
claim is not valid; and
(iii) The information or documents (in addition to the original
check or sufficient copy), if any, on which the bank relied in making
its determination or a statement that the consumer may request copies
of such information or documents.
(3) Notice of a reversal of recredit. A bank that reverses an
amount it previously credited to a consumer account must notify the
consumer no later than the business day after the banking day on which
the bank made the reversal. This notice must include the information
listed in paragraph (e)(2) of this section and also describe--
(i) The amount of the reversal, including both the amount of the
recredit and the amount of paid interest, if any, being reversed; and
(ii) The date on which the bank made the reversal.
(f) Other claims not affected. Providing a recredit in accordance
with this section shall not absolve the bank from liability for a claim
made under any other provision of law, such as a claim for wrongful
dishonor of a check under the U.C.C., or from liability for additional
damages under Sec. 229.53 or Sec. 229.56.
[[Page 1488]]
Sec. 229.55 Expedited recredit procedures for banks.
(a) Circumstances giving rise to a claim. A bank that has an
indemnity claim under Sec. 229.53 with respect to a substitute check
may make an expedited recredit claim against an indemnifying bank if--
(1) The claimant bank or a bank that the claimant bank has
indemnified--
(i) Has received a claim for expedited recredit from a consumer
under Sec. 229.54; or
(ii) Would have been subject to such a claim if the consumer
account had been charged for the substitute check;
(2) The claimant bank is obligated to provide an expedited recredit
with respect to such substitute check under Sec. 229.54 or otherwise
has suffered a resulting loss; and
(3) The production of the original check or a sufficient copy of
the original check is necessary to determine the validity of the charge
to the consumer account or the validity of any warranty claim connected
with such substitute check.
(b) Procedures for making claims. A claimant bank must send its
claim to the indemnifying bank, subject to the timing, content, and
form requirements of this section.
(1) Timing of claim. The claimant bank must submit its claim to the
indemnifying bank by the end of the 120th calendar day after the date
of the transaction that gave rise to the claim.
(2) Content of claim. The claimant bank's claim must include the
following information--
(i) A description of the consumer's claim or the warranty claim
related to the substitute check, including why the bank believes that
the substitute check may not be properly charged to the consumer
account;
(ii) A statement that the claimant bank is obligated to recredit a
consumer account under Sec. 229.54 or otherwise has suffered a loss
and an estimate of the amount of that recredit or loss, including
interest if applicable;
(iii) The reason why production of the original check or a
sufficient copy of the original check is necessary to determine the
validity of the charge to the consumer account or the warranty claim;
and
(iv) Sufficient information to allow the indemnifying bank to
identify the substitute check and investigate the claim.
(3) Requirements relating to copies of substitute checks. If the
information submitted by a claimant bank under paragraph (b)(2) of this
section includes a copy of any substitute check, the claimant bank must
take reasonable steps to ensure that the copy cannot be mistaken for
the legal equivalent of the check under Sec. 229.51(a) or sent or
handled by any bank, including the indemnifying bank, for forward
collection or return.
(4) Form and submission of claim; computation of time. The
indemnifying bank may, in its discretion, require the claimant bank to
submit the information required by this section in writing, including a
copy of the paper or electronic claim submitted by the consumer, if
any. An indemnifying bank that requires a written submission may permit
the claimant bank to submit the written claim electronically. A bank
that requires the claimant bank to submit a written claim shall compute
any time period in this subpart that begins with the submission of the
claim from the date on which the bank received the written claim.
(c) Action on claims. No later than the 10th business day after the
banking day on which the indemnifying bank receives a claim that meets
the requirements of paragraph (b) of this section, the indemnifying
bank must--
(1) Recredit the claimant bank for the amount of the claim, up to
the amount of the substitute check, plus interest if applicable;
(2) Provide to the claimant bank the original check or a sufficient
copy of the original check; or
(3) Provide information to the claimant bank regarding why the
claimant bank is not obligated to comply with paragraph (c)(1) or
(c)(2) of this section.
(d) Recredit does not abrogate other liabilities. Providing a
recredit to a claimant bank under this section does not absolve the
indemnifying bank from liability for claims brought under any other law
or from additional damages under Sec. 229.53 or Sec. 229.56.
(e) Indemnifying bank's right to a refund. (1) If a claimant bank
reverses a recredit it previously made to a consumer account under
Sec. 229.54 or otherwise receives reimbursement for a substitute check
that formed the basis of its claim under this section, the claimant
bank must provide a refund promptly to any indemnifying bank that
previously advanced funds to the claimant bank. The amount of the
refund to the indemnifying bank shall be the amount of the reversal or
reimbursement obtained by the claimant bank, up to the amount
previously advanced by the indemnifying bank.
(2) If the indemnifying bank provides the claimant bank with the
original check or a sufficient copy of the original check under
paragraph (c)(2) of this section, Sec. 229.53(b)(3) governs the
indemnifying bank's entitlement to repayment of any amount provided to
the claimant bank that exceeds the amount of losses the claimant bank
incurred up to that time.
Sec. 229.56 Liability.
(a) Measure of damages--(1) In general. Except as provided in
paragraph (a)(2) or (a)(3) of this section or Sec. 229.53, any person
that breaches a warranty described in Sec. 229.52 or fails to comply
with any requirement of this subpart with respect to any other person
shall be liable to that person for an amount equal to the sum of--
(i) The lesser of the amount of the loss suffered by the person as
a result of the breach or failure or the amount of the substitute
check; and
(ii) Interest and expenses (including costs and reasonable
attorney's fees and other expenses of representation) related to the
substitute check.
(2) Offset of recredits. The amount of damages a person receives
under paragraph (a)(1) of this section shall be reduced by any amount
that the person receives and retains as a recredit under Sec. 229.54
or Sec. 229.55.
(3) Comparative negligence. (i) If a person incurs damages that
resulted in whole or in part from that person's negligence or failure
to act in good faith, then the amount of any damages due to that person
under paragraph (a)(1) of this section shall be reduced in proportion
to the amount of negligence or bad faith attributable to that person.
(ii) Nothing in this paragraph (a)(3) reduces the rights of a
consumer or any other person under the U.C.C. or other applicable
provision of federal or state law.
(b) Timeliness of action. Delay by a bank beyond any time limits
prescribed or permitted by this subpart is excused if the delay is
caused by interruption of communication or computer facilities,
suspension of payments by another bank, war, emergency conditions,
failure of equipment, or other circumstances beyond the control of the
bank and if the bank uses such diligence as the circumstances require.
(c) Jurisdiction. A person may bring an action to enforce a claim
under this subpart in any United States district court or in any other
court of competent jurisdiction. Such claim must be brought within one
year of the date on which the person's cause of action accrues. For
purposes of this paragraph, a cause of action accrues as of the date on
which the injured party first learns, or by which such person
reasonably should have learned, of the facts and circumstances giving
rise to the cause of action, including the identity of the
[[Page 1489]]
warranting or indemnifying bank against which the action is brought.
(d) Notice of claims. Except as otherwise provided in this
paragraph (d), unless a person gives notice of a claim under this
section to the warranting or indemnifying bank within 30 calendar days
after the person has reason to know of both the claim and the identity
of the warranting or indemnifying bank, the warranting or indemnifying
bank is discharged from liability in an action to enforce a claim under
this subpart to the extent of any loss caused by the delay in giving
notice of the claim. A timely recredit claim by a consumer under Sec.
229.54 constitutes timely notice under this paragraph.
Sec. 229.57 Consumer awareness.
(a) General disclosure requirement and content. Each bank must
provide, in accordance with paragraph (b) of this section, a disclosure
to each of its consumer customers that describes--
(1) That a substitute check is the legal equivalent of an original
check for all persons and for all purposes, including any provision of
any federal or state law, if the substitute check meets the legal
equivalence requirements described in Sec. 229.51(a); and
(2) The consumer recredit rights that apply when a consumer in good
faith believes that a substitute check was not properly charged to his
or her account.
(b) Distribution--(1) Disclosure to consumers who receive paid
checks with periodic account statements. A bank must provide the
disclosure described in paragraph (a) of this section to a consumer who
receives paid checks with his or her periodic account statement--
(i) No later than the first regularly scheduled communication with
the consumer after October 28, 2004, for each consumer who is a
customer of the bank on that date; and
(ii) At the time the customer relationship is initiated for each
consumer account opened after October 28, 2004.
(2) Disclosure to consumers who receive substitute checks only an
occasional basis. Unless a bank already has provided the disclosure
described in paragraph (a) of this section, the bank must provide such
disclosure to a consumer customer of the bank who--
[Alternative 1: (i) Requests an original check or a copy of a check
and receives a substitute check, at the time of such request;]
[Alternative 2: (i) Requests an original check or a copy of a check
and receives a substitute check, at the time the bank provides such
substitute check;] or
(ii) Receives a returned substitute check, at the time the bank
provides such substitute check.
Sec. 229.58 Mode of delivery of information required by this subpart.
A bank may deliver any notice or other information that it is
required to provide under this subpart by United States mail or by any
other means through which the recipient has agreed to receive account
information. If a bank is required to provide an original check or a
sufficient copy of an original check, the bank instead may provide an
electronic image of the original check or sufficient copy if the
recipient has agreed to receive that information electronically.
Sec. 229.59 Relation to other law.
The Check 21 Act and this subpart supersede any provision of
federal or state law, including the Uniform Commercial Code, that is
inconsistent with the Check 21 Act or this subpart, but only to the
extent of the inconsistency.
Sec. 229.60 Variation by agreement.
Any provision of Sec. 229.55 may be varied by agreement of the
banks involved. No other provision of this subpart may be varied by
agreement by any person or persons.
* * * * *
24. In appendix C, revise the title, introductory paragraph, and
amend the table of contents by adding the new entries to read as
follows:
Appendix C to Part 229--Model Availability Policy Disclosures, Clauses,
and Notices; Model Substitute Check Policy Disclosure and Notices
This appendix contains model availability policy and substitute
check policy disclosures, clauses, and notices to facilitate
compliance with the disclosure and notice requirements of Regulation
CC (12 CFR 229). Although use of these models is not required, banks
using them properly (with the exception of models C-22 through C-25)
to make disclosures required by Regulation CC are deemed to be in
compliance.
Model Availability Policy Disclosures
* * * * *
C-5A Substitute Check Policy Disclosure
* * * * *
Model Notices
* * * * *
C-22 Expedited Recredit Claim, Full Refund
C-23 Expedited Recredit Claim, Partial Refund
C-24 Expedited Recredit Claim, Denial Notice
C-25 Expedited Recredit Claim, Reversal Notice
* * * * *
25. In appendix C, after model C-5 add the following new model C-5A
to read as follows:
* * * * *
C-5A--Substitute Check Policy Disclosure
Substitute Checks and Your Rights
Some or all of the checks that you receive with your account
statement or by request may look different than the check you wrote.
To make check processing easier, a federal law permits banks to
replace original checks with ``substitute checks.'' This notice
describes substitute checks and the rights that you will have when
you receive substitute checks.
What Is a Substitute Check?
A substitute check is a copy of an original check that is the
same as the original check for all purposes, including proving that
you made a payment, if it includes an accurate copy of the front and
back of the original check and contains the words: ``This is a legal
copy of your check. You can use it the same way you would use the
original check.'' A substitute check that meets these requirements
is generally subject to federal and state laws that apply to an
original check. If you lose money because you received a substitute
check, you have the right to file a claim for an expedited refund.
Your Right To File a Claim for an Expedited Refund
Federal law gives you the right to file a claim for an expedited
refund if you receive a substitute check and believe that all of the
statements below are true--
(1) The substitute check was incorrectly charged to your account
(for example, this may be true if we charged your account for the
wrong amount or if we charged your account more than once for the
same check);
(2) You lost money as a result of the substitute check charge to
your account; and
(3) You need the original check or a better copy of the original
check to demonstrate that we incorrectly charged your account (for
example, this may be true if you think that we charged your account
for the wrong amount and the substitute check does not clearly show
the amount).
Expedited Refunds
To obtain an expedited refund, you must send us a claim. Federal
law limits an expedited refund to the amount of your loss, up to the
amount of the substitute check, plus interest if your account earns
interest. You should be aware that you could be entitled to
additional amounts under other state or federal law.
How To Make a Claim for an Expedited Refund
Please make your claim [by calling (phone number), by writing to
us at (address), or by e-mailing us at (address)]. You must make
your claim within 40 calendar days of the later of these two dates:
(1) The date that we delivered the account statement showing the
charge that you are disputing, or
(2) The date on which we made the substitute check available to
you.
[[Page 1490]]
If there is a good reason (such as a long trip or a hospital
stay) that you cannot make your claim by the required day, we will
give you additional time.
Your expedited refund claim must--
(1) Describe why you think the charge to your account was
incorrect;
(2) Estimate how much money you have lost because of the
substitute check charge;
(3) Explain why the substitute check is not sufficient to show
whether or not the charge to your account was correct; and
(4) Provide us with a copy of the substitute check or give us
information that will help us to identify the substitute check and
investigate your claim (for example, the check number, the name of
the person to whom you wrote the check, and the amount of the
check).
Our Responsibilities for Handling Your Claim
We will investigate your claim promptly. If we conclude that we
incorrectly charged your account, we will refund to your account the
amount of your claim (up to the amount of the substitute check, plus
interest if your account earns interest) within one business day of
making that decision. If we conclude that we correctly charged your
account, we will send you a notice that explains the reason for our
decision and includes either the original check or a better copy of
the original check than the one you already received. If we have not
made a decision on your claim within 10 business days after you
submitted it, we will refund the amount that we owe to your account,
up to $2,500, plus interest, by that date. We will refund the
remaining amount, if any, plus interest, to your account by the 45th
calendar day after you submitted your claim.
If we refund your account, on the next business day we will send
you a notice that tells you the amount of your refund and the date
on which you may withdraw that amount. Normally, you may withdraw
your refund on the business day after we make it. In limited cases,
we may delay your ability to withdraw up to the first $2,500 of the
refund until the earlier of these two dates: (1) The day after we
determine that your claim is valid; or (2) the 45th calendar day
after the day that you submitted your claim.
Reversal of Refund
We may reverse any refund that we have given you if we later
determine that the substitute check was correctly charged to your
account. We also may reverse any interest we have paid you on that
amount if your account earns interest. Within one business day after
we reverse a refund, we will send you the original check or a better
copy of the original check than the one you previously received,
explain to you why the substitute check was correctly charged to
your account, and tell you the amount and date of the reversal.
* * * * *
26. In appendix C, after model C-21 add new models C-22 through C-
25 to read as follows:
* * * * *
C-22--Expedited Recredit Claim, Full Refund Notice
Notice of Refund
We have determined that your claim that a substitute check was
incorrectly charged to your account is valid. We are refunding
(amount) [of which (amount) represents accrued interest] to your
account. You may withdraw these funds as of (date). [This refund is
the amount in excess of the $2,500 that we credited to your account
on (date).]
If we later determine that the substitute check was correctly
charged to your account, we will reverse the refund by charging your
account. We will notify you within one day of any such reversal.
C-23--Expedited Recredit Claim, Partial Refund Notice
Notice of Partial Refund
In response to your claim that a substitute check was
incorrectly charged to your account, we are refunding (amount) [of
which (amount) represents accrued interest] to your account, pending
the completion of our investigation of your claim. You may withdraw
these funds as of (date). [Unless we determine that your claim is
not valid, the remaining amount of your refund will be credited to
your account no later than the 45th calendar day after you submitted
your claim.]
If we later determine that the substitute check was correctly
charged to your account, we will reverse the refund by charging your
account. We will notify you within one day of any such reversal.
C-24--Expedited Recredit Claim, Denial Notice
Denial of Claim
We reviewed your claim that a substitute check was incorrectly
charged to your account. We are denying your claim. As the enclosed
[(original check) or (copy of the original check)] shows, the charge
to your account of (amount) was proper because (reason, e.g. amount
charged is the same or the signature is authentic).
[We have also enclosed a copy of the other information we used
to make our decision.] [Upon your request, we will send you a copy
of the other information that we used to make our decision.]
C-25--Expedited Recredit Claim, Reversal Notice
Reversal of Refund
In response to your claim that a substitute check was
incorrectly charged to your account, we provided a refund of
(amount) by crediting your account on (date(s)). We now have
determined that the substitute check was correctly charged to your
account. As the enclosed [(original check) or (copy of the original
check)] shows, the charge to your account of (amount) was proper
because (reason, e.g. amount charged is the same or the signature is
authentic). As a result, we have reversed the refund to your account
[plus interest we have paid you on that amount] by charging your
account in the amount of (amount) on (date).
[We have also enclosed a copy of the other information we used
to make our decision.] [Upon your request, we will send you a copy
of the information we used to make our decision.]
27. In appendix D, revise the title and text to read as follows:
Appendix D to Part 229--Indorsement, Reconverting Bank Identification,
and Truncating Bank Identification Standards
(1) The depositary bank shall indorse an original check or
substitute check according to the following specifications:
(i) The indorsement shall contain--
(A) The bank's nine-digit routing number, set off by an arrow at
each end of the number and pointing toward the number, and, if the
depositary bank is a reconverting bank with respect to the check, an
asterisk outside the arrow at each end of the routing number to
identify the bank as a reconverting bank; and
(B) The indorsement date.
(ii) The indorsement also may contain--
(A) The bank's name or location;
(B) A branch identification;
(C) A trace or sequence number;
(D) A telephone number for receipt of notification of large-
dollar returned checks; and
(E) Other information provided that the inclusion of such
information does not interfere with the readability of the
indorsement.
(iii) The indorsement, if applied to an existing paper check,
shall be placed on the back of the check so that the routing number
is wholly contained in the area 3.0 inches from the leading edge of
the check to 1.5 inches from the trailing edge of the check.\1\
---------------------------------------------------------------------------
\1\ The leading edge is defined as the right side of the check
looking at it from the front. The trailing edge is defined as the
left side of the check looking at it from the front. See American
National Standards Committee on Financial Services Specification for
the Placement and Location of MICR Printing, X9.13.
---------------------------------------------------------------------------
(iv) When printing its depositary bank indorsement or a
previously applied electronic indorsement of the depositary bank
onto a substitute check at the time that the substitute check is
created, a reconverting bank shall place the indorsement on the back
of the check between 1.95 and 2.55 inches from the leading edge of
the check.
(2) Each subsequent collecting bank or returning bank indorser
shall protect the identifiability and legibility of the depositary
bank indorsement by indorsing an original check or substitute check
according to the following specifications:
(i) The indorsement shall contain only--
(A) The bank's nine-digit routing number (without arrows) and,
if the collecting bank or returning bank is a reconverting bank with
respect to the check, an asterisk at each end of the number to
identify the bank as a reconverting bank;
(B) The indorsement date, and
(C) An optional trace or sequence number.
(ii) The indorsement, if applied to an existing paper check,
shall be placed on the back of the check from 0.0 inches to 3.0
inches from the leading edge of the check.
(iii) When printing its collecting bank or returning bank
indorsement or a previously
[[Page 1491]]
applied electronic indorsement of a collecting bank or returning
bank onto a substitute check at the time that the substitute check
is created, a reconverting bank shall place the indorsement on the
back of the check between 0.25 and 2.50 inches from the trailing
edge of the check.
(3) A reconverting bank shall comply with the following
specifications when creating a substitute check:
(i) If it is a depositary bank, collecting bank, or returning
bank with respect to the substitute check, the reconverting bank
shall place its own indorsement onto the back of the check as
specified in this appendix.
(ii) If it is the paying bank with respect to the substitute
check, then the reconverting bank shall so identify itself by
placing on the back of the check, between 0.25 and 2.50 inches from
the trailing edge of the check, its nine-digit routing number
(without arrows) and an asterisk at each end of the number.
(iii) The reconverting bank shall place on the front of the
check, between 0.25 and 2.10 inches from the trailing edge of the
check and within 0.575 inches from the top of the check, its nine-
digit routing number (without arrows) and an asterisk at each end of
the number.
(iv) The reconverting bank shall place on the front of the
check, between 2.10 and 2.50 inches from the trailing edge of the
check and within 2.6 inches from the top of the check, the
truncating bank's nine-digit routing number (without arrows) and a
bracket at each end of the number.
(4) Any indorsement, reconverting bank identification, or
truncating bank identification placed on an original check or
substitute check shall be printed in black ink.
Appendix E--[Amended]
28. In appendix E, paragraph II.B, revise the first, second, third,
and last sentences of paragraph 1, revise paragraph 3, and add a new
paragraph 4, to read as follows:
II. * * *
B. 229.2(a) Account
1. The EFA Act defines account to mean ``a demand deposit
account or similar transaction account at a depository
institution.'' The regulation defines account, for purposes other
than subpart D, in terms of the definition of ``transaction
account'' in the Board's Regulation D (12 CFR part 204). This
definition of account, however, excludes certain deposits, such as
nondocumentary obligations (see 12 CFR 204.2(a)(1)(vii)), that are
covered under the definition of ``transaction account'' in
Regulation D. * * * The Board believes that it is appropriate to
exclude these accounts because of the reference to demand deposits
in the EFA Act, which suggests that the EFA Act is intended to apply
only to accounts that permit unlimited third party transfers.
* * * * *
3. Interbank deposits, including accounts of offices of domestic
banks or foreign banks located outside the United States, and direct
and indirect accounts of the United States Treasury (including
Treasury General Accounts and Treasury Tax and Loan deposits) are
exempt from subpart B and, in connection therewith, subpart A.
4. The Check 21 Act defines account to mean any deposit account
at a bank. Therefore, for purposes of subpart D and, in connection
therewith, subpart A, account means any deposit, as that term is
defined by Sec. 204.2(a)(1)(i) of Regulation D, at a bank. Many
deposits that are not accounts for purposes of the other subparts of
Regulation CC, such as savings deposits and interbank deposits, are
included in the account definition for purposes of subpart D.
* * * * *
29. In appendix E, paragraph II.F, remove the phrase ``subpart C''
wherever it appears and add the phrase ``subparts C and D'' in its
place and add a new paragraph 4 to read as follows:
II. * * *
F. * * *
4. For purposes of subpart D and, in connection therewith,
subpart A, the term bank also includes the Treasury of the United
States and the United States Postal Service to the extent that they
act as paying banks because the Check 21 Act includes these two
entities in the definition of the term bank.
* * * * *
30. In appendix E, paragraph II.K., remove the phrase ``subpart C''
in paragraph 8 and add the phrase ``subparts C and D'' in its place,
redesignate paragraph 9 as paragraph 10, and add a new paragraph 9 to
read as follows:
II. * * *
K. * * *
9. A substitute check as defined in Sec. 229.2(zz) is a check
for purposes of Regulation CC, even if that substitute check does
not meet the requirements for legal equivalence set forth in Sec.
229.51(a).
* * * * *
31. In appendix E, paragraph II.Q.1, revise the first sentence to
read as follows:
II. * * *
Q. * * *
1. Forward collection is defined to mean the process by which a
bank sends a check to the paying bank for collection, including
sending the check to an intermediary collecting bank for settlement,
as distinguished from the process by which the check is returned
unpaid. * * *
* * * * *
32. In appendix E, revise paragraph II.S.1.b and add a new
paragraph II.S.1.c to read as follows:
II. * * *
S. * * *
1. * * *
b. The location of the depositary bank is determined by the
physical location of the branch or proprietary ATM at which a check
is deposited, regardless of whether the deposit is made in person,
by mail, or otherwise. For example, if a branch of the depositary
bank located in one check-processing region sends a check that was
deposited at that branch to the depositary bank's central facility
in another check-processing region, and the central facility is in
the same check-processing region as the paying bank, the check is
still considered nonlocal. (See the commentary on the definition of
``paying bank.'')
c. If a person deposits a check to an account by mailing or
otherwise sending the check to a facility or office that is not a
bank, the check is considered local or nonlocal depending on the
location of the bank whose indorsement appears on the check as the
depositary bank.
* * * * *
33. In appendix E, paragraph II.Z., revise the second and third
sentences of paragraph 1, remove the phrase ``subpart C'' in paragraph
3 and add the phrase ``subparts C and D'' in its place, and add a new
paragraph 6 to read as follows:
II. * * *
Z. * * *
1. * * * For purposes of all subparts of Regulation CC, the term
paying bank includes the bank by which a check is payable, the
payable-at bank to which a check is sent, or, if the check is
payable by a nonbank payor, the bank through which the check is
payable and to which it is sent for payment or collection. For
purposes of subparts C and D, the term paying bank also includes the
payable-through bank and the bank whose routing number appears on
the check, regardless of whether the check is payable by a different
bank, provided that the check is sent for payment or collection to
the payable through bank or the bank whose routing number appears on
the check. * * *
* * * * *
6. In accordance with the Check 21 Act, for purposes of subpart
D and, in connection therewith, subpart A, paying bank includes the
Treasury of the United States or the United States Postal Service
with respect to a check payable by that entity and sent to that
entity for payment or collection, even though the Treasury and
Postal Service are not defined as banks for purposes of subparts B
and C.
* * * * *
34. In appendix E, paragraph II.BB.1. remove the last two sentences
and add the following new sentence in their place to read as follows:
II. * * *
BB. * * *
1. * * * Returned checks are identified by placing a ``2'' or,
in the case of a substitute check, a ``5,'' in position 44 of the
MICR line as a return identifier in accordance with American
National Standard Specifications for Placement and Location of MICR
Printing, X9.13 (hereinafter referred to as ``ANS X9.13'') for
original checks or American National Standard Specifications for
Image Replacement Documents, X9.90 (hereinafter referred to as ``ANS
X9.90'') for substitute checks.
* * * * *
[[Page 1492]]
35. In appendix E to part 229, add new paragraphs II.QQ through
II.DDD, to read as follows:
II. Section 229.2 Definitions
* * * * *
QQ. 229.2(qq) [Reserved]
RR. 229.2(rr) [Reserved]
SS. 229.2(ss) [Reserved]
TT. 229.2(tt) [Reserved]
UU. 229.2(uu) [Reserved]
VV. 229.2(vv) MICR Line
1. Information in the MICR line of a check must be printed in
accordance with the generally applicable industry standards
contained in ANS X9.13. As discussed in the commentary to the
definition of substitute check, ANS X9.90 also applies to the
content of the MICR line of a substitute check.
WW. 229.2(ww) Original Check
1. The definition of the term original check distinguishes the
first paper check signed or otherwise authorized by the drawer to
effect a particular payment transaction from a substitute check or
other paper or electronic representation that is derived from an
original or substitute check.
XX. 229.2(xx) [Reserved]
YY. 229.2(yy) Reconverting Bank
1. A substitute check is ``created'' when and where a paper
reproduction of an original check that meets the requirements of
Sec. 229.2(zz) is physically printed.
2. A bank is a reconverting bank if it creates a substitute
check directly or if another person by agreement creates a
substitute check on the bank's behalf.
Examples. a. Bank A, by agreement, sends an electronic check
file for collection to Bank B. If Bank B chooses to use that file to
print a substitute check that meets the requirements of Sec.
229.2(zz), Bank B is the reconverting bank as of the time it prints
the substitute check. Bank A is not a reconverting bank because it
handled the original check and electronic information about that
original check but never created a substitute check.
b. Company A, which is not a bank, agrees to receive check
information electronically from Bank A in order to create substitute
checks on behalf of Bank A. Bank A creates a substitute check and
becomes the reconverting bank when Company A prints a substitute
check in accordance with that agreement.
3. A bank also is a reconverting bank if it is the first bank
that receives a substitute check created by a nonbank and transfers,
presents, or returns that substitute check or, in lieu thereof, the
first paper or electronic representation of such substitute check.
Under Sec. 229.51, a substitute check is the legal equivalent of
the original check only if a bank has made the substitute check
warranties listed in Sec. 229.52. A bank therefore is not required
to accept a substitute check that was created by a person other than
a bank and has not yet been transferred by a bank, although a bank
may agree to do so.
Example. A bank's customer, which is a nonbank business,
receives a check for payment and wants to deposit a substitute check
instead of the original checks with the bank. If no other bank had
yet handled the substitute check, the depositary bank that agreed to
accept the substitute checks would be the reconverting bank as of
the time the depositary bank transferred the substitute check (or
other paper or electronic representation of that check) for
collection or otherwise, presented the substitute check (or
representation) to the paying bank, or returned the substitute check
(or representation).
4. A check could move from electronic form to substitute check
form several times during the collection and return process. It
therefore is possible that there could be multiple substitute
checks, and thus multiple reconverting banks, with respect to the
same payment transaction.
ZZ. 229.2(zz) Substitute Check
1. For purposes of this definition, a paper reproduction of an
original check could include a reproduction created directly from an
original check or a reproduction of the original check created from
some other source, such as an electronic file or previous substitute
check that contains an image of the original check.
2. Because a substitute check must be a piece of paper, an
electronic file or electronic check image that has not yet been
printed in accordance with the substitute check definition and
generally applicable industry standards is not a substitute check.
Because a substitute check must be a representation of an item that
is defined as a check under Sec. 229.2(k), a paper reproduction of
an image of something that is not a check cannot be a substitute
check.
3. As described in Sec. 229.51(b) and the commentary thereto, a
reconverting bank is required to ensure that a substitute check
contains all indorsements applied by previous parties that handled
the check in any form. Therefore, the image on the back of a
substitute check would include indorsements that were applied to the
original check prior to truncation plus a physical representation of
any indorsements that were applied electronically to the check after
truncation but before creation of the substitute check.
Example. Bank A truncates an original check and, by agreement,
transmits to Bank B an electronic image of the check accompanied by
an electronic indorsement. Bank B then creates a substitute check to
send to Bank C. The back of the substitute check created by Bank B
must contain a representation of the indorsement previously applied
electronically by Bank A and Bank B's own indorsement. (For more
information on indorsement requirements, see appendix D).
4. Some substitute checks will not be created directly from the
original check, but rather will be created from a previous
substitute check. In that case, the back of the subsequent
substitute check would contain (1) the indorsements that were
applied physically to the original check, (2) a physical
representation of indorsements that were applied electronically to
the original check after truncation but before creation of the first
substitute check; (3) indorsements that were applied physically to
the previous substitute check; and (4) a physical representation of
any indorsements that were applied electronically after the previous
substitute check was converted to electronic form but before
creation of the subsequent substitute check. The front of a
subsequent substitute check should contain an image of the front of
the original check as that image appeared on the previous substitute
check at the time the previous substitute check was converted to
electronic form. Because information could have been physically
added to the original check image contained on the previous
substitute check, the original check image that appears on the front
of a subsequent substitute check could contain information in
addition to that which appeared on the original check at the time it
was truncated.
5. The MICR line of a substitute check must contain the same
information as the MICR line of the original check, except as
provided by generally applicable industry standards for substitute
checks to facilitate the processing of substitute checks.
Examples. a. The generally applicable industry standards
contained in ANS X9.90 require the number appearing in position 44
of the MICR line of a substitute check to differ from the number
that appeared in position 44 of an original check. On an original
check, position 44 generally is left blank for forward collection
and contains a ``2'' for a qualified returned check. ANS X9.90
provides that a substitute check used for forward collection should
have a ``4'' and a qualified returned substitute check should have a
``5'' in position 44. The ``4'' and ``5'' indicate that the check
image must be clipped at an appropriate size so that the size of the
check image remains constant throughout the collection and return
process, regardless of the number of substitute checks created that
represent the same original check (see also Sec. Sec. 229.30(a)(2)
and 229.31(a)(2) and the commentary thereto regarding requirements
for qualified returned substitute checks).
b. It is a generally applicable industry practice for a bank
that detects an encoding error in the amount field of the original
check (including omission of the amount) to correct that error by
repairing the MICR line, such as by placing an additional MICR strip
containing the paying bank's routing number and the correct amount
of the check beneath the original MICR line. In accordance with the
generally applicable MICR-line repair practice for original checks
and to facilitate processing of substitute checks in the same manner
as original checks, a bank that creates a substitute check from an
original check with a misencoded or unencoded amount or a bank that
handles a substitute check that reproduces an amount encoding error
that appeared on the original check may correct the amount encoding
error that the bank detects. Such a repair will not change the
item's status as a substitute check under subpart D. A paper
reproduction of an original check that reproduced an uncorrected
amount encoding error that
[[Page 1493]]
appeared on the original check would, assuming all other
requirements of the substitute check definition were met, be a valid
substitute check that could be transferred, collected, or returned.
However, subsequent banks that handled that substitute check and the
drawer might have a claim for breach of an encoding warranty (see
U.C.C. Sec. 4-209 and Sec. 229.34(c) of Regulation CC).
c. A MICR-line error could occur if the automated check sorter
of the bank that truncated the original check electronically
misinterpreted the MICR line data, such that the MICR line
information actually used to process the check electronically was
incorrect or incomplete. For example, if the check sorter detected
but could not fully interpret the MICR line, the electronic MICR-
line information would contain asterisks where the uninterpreted
MICR data should appear. Similarly, the check sorter could have read
a number in the MICR line incorrectly (such as reading a ``3''
instead of an ``8'') or intentionally substituted one character for
another (such as replacing a space or a hyphen with a ``0'') when
converting the MICR-line information to electronic form. Each of
these differences from the MICR line of the original check
constitutes a MICR-read error, and a paper reproduction of an
original check that contained such a MICR-read error would not
satisfy the substitute check definition. To ensure that the item
transferred by the reconverting bank meets the substitute check
definition, the reconverting bank should repair all MICR-read errors
(see, for example, American National Standards Specifications for
Electronic Exchange of Check and Image Data, X9.37, which contains
provisions that facilitate the repair of the MICR line). As
discussed in more detail in Sec. 229.51(c) and the commentary
thereto, a paper reproduction of an original check that contains a
MICR-read error but that purports to be a substitute check, such as
by containing the legal equivalence legend or by being delivered
when an original check is required, would be a substitute check for
purposes of Sec. Sec. 229.52 through 229.57 of Regulation CC but
would not be the legal equivalent of the original check.
6. A substitute check must conform to the generally applicable
industry standards for substitute checks set forth in ANS X9.90 and
must be suitable for automated processing in the same manner as the
original check. Thus, an item that meets all other substitute check
requirements but that contains a MICR line that is not printed in
magnetic ink is not a substitute check. Similarly, a substitute
check image that appears within an image statement containing
multiple check images is not a substitute check because it does not
contain a MICR line printed in magnetic ink and also is not the same
size or suitable for automated processing in the same manner as an
original check.
AAA. 229.2(aaa) Sufficient Copy and Copy
1. A bank may limit its liability for an indemnity claim and may
respond to an expedited recredit claim by providing the claimant
with a copy of a check that accurately represents all of the
information on the front and back of the original check as of the
time the original check was truncated or that otherwise is
sufficient to determine the validity of the relevant claim. A
sufficient copy that contains an image of the back of the original
check as of the time it was truncated also could contain additional
information, such as subsequently applied indorsements.
2. A copy must be a paper reproduction of a check. An electronic
image that appears on a computer screen but has not yet been printed
therefore is not a copy or a sufficient copy. However, if an account
holder has agreed to receive such information electronically, a bank
that is required to provide an original check or sufficient copy may
satisfy that requirement by providing an electronic image in
accordance with Sec. 229.58 and the commentary thereto.
Examples. a. A copy of an original check that accurately
represents all the information on the front and back of the original
check as of the time of truncation always would constitute a
sufficient copy. Thus, a substitute check that met the legal
equivalence requirements would be a sufficient copy. In addition, a
substitute check that accurately represented all the information on
the front and back of the original check also would be a sufficient
copy even if such substitute check did not bear the legal
equivalence legend or if a bank had not made the substitute check
warranties.
b. A copy of the original check that does not accurately
represent all the information on both the front and back of the
original check also could be a sufficient copy if such copy
contained all the information necessary to determine the validity of
the relevant claim. For instance, if a consumer received a
substitute check that contained a blurry image of a legible original
check, the consumer might seek an expedited recredit because his or
her account was charged for $1,000, but he or she believed that the
check was written for only $100. A clear copy of only the front of
the original check that showed the amount of the check likely would
be sufficient to determine whether the consumer had a valid claim.
BBB. 229.2(bbb) Transfer and Consideration
1. Under Sec. Sec. 229.52 and 229.53, a bank makes the
warranties and is responsible for the indemnity when it transfers a
substitute check (or a representation thereof) for consideration.
The Check 21 Act contemplates that drawers and other nonbank persons
that receive substitute checks (or representations thereof ) from a
bank will receive the warranties and indemnity from all previous
banks that handled the check, although such parties normally are not
transferees that receive consideration for purposes of the U.C.C. To
ensure that these parties are covered by the substitute check
warranties and indemnity, Sec. 229.2(bbb) incorporates the U.C.C.
definitions of the term transfer and consideration by reference and
expands those definitions to cover a broader range of situations.
Delivering a check to a non-bank that is acting on behalf of a bank
(such as a third-party check processor or presentment point) is a
transfer of the check to that bank.
Examples. a. A paying bank pays a substitute check and then
provides that paid substitute check (or a representation thereof) to
a drawer with a periodic account statement. Under the expanded
definitions, the paying bank thereby transfers the substitute check
(or representation thereof) to the drawer for consideration and
makes the substitute check warranties described in Sec. 229.52. A
drawer that suffers a loss as a result of the substitute check (or
representation thereof) thus would have rights under the Check 21
Act and subpart D against the paying bank, which is the bank with
which it has a relationship, as well as against all previous
warranting banks in the collection chain.
b. The expanded definitions also operate such that a paying bank
that pays an original check (or a representation thereof) and then
creates a substitute check to provide to the drawer with a periodic
account statement transfers the substitute check for consideration
and thereby provides the warranties.
c. Moreover, the expanded definitions ensure that a bank that
receives a returned check in any form and then provides a substitute
check to the depositor gives the substitute check warranties to the
depositor.
CCC. 229.2(ccc) Truncate
1. Truncate means to remove the original check from the forward
collection or return process and to send in lieu of the original
check either a substitute check or, by agreement, information
relating to the original check. Truncation does not include removal
of a substitute check from the check collection or return process.
DDD. 229.2(ddd) Truncating Bank
1. A bank is a truncating bank if it truncates an original check
or if it is the first bank to transfer, present, or return, another
form of a check that was truncated by a person that is not a bank.
Example. A bank's customer that is a nonbank business receives a
check for payment and wants to deposit either a substitute check or
an electronic representation of the original check with its
depositary bank instead of the original. The depositary bank that
agrees to accept a check in a form other than the original check
would be the truncating bank. That bank also would be the
reconverting bank if it were the first bank to transfer, present, or
return a substitute check that it created or that it accepted from
its nonbank customer (see Sec. 229.2(yy) and the commentary
thereto).
* * * * *
36. In appendix E, paragraph IV.D.6.e. is amended by adding new
sentences between the second and third sentences to read as follows:
IV. * * *
D. * * *
6. * * *
e. * * * Such notice need not be posted at each teller window,
but the notice must be posted in a place where consumers seeking to
make deposits are likely to see it before making their deposits. For
example, the notice might be posted at the point where the
[[Page 1494]]
line forms for teller service in the lobby. The notice is not
required at any drive-through teller windows nor is it required at
night depository locations, or at locations where consumer deposits
are not accepted. * * *
* * * * *
37. In appendix E, paragraph VII.H.1.a., revise the third sentence
and add a new fifth sentence to read as follows:
VII. * * *
H. * * *
1. * * *
a. * * * For a customer that is not a consumer, a depositary
bank satisfies the written-notice requirement by sending an
electronic notice that displays the text and is in a form that the
customer may keep, if the customer agrees to such means of notice. *
* * For a customer who is a consumer, a depositary bank satisfies
the written-notice requirement by sending an electronic notice in
compliance with the requirements of the Electronic Signatures in
Global and National Commerce Act (12 U.S.C. 7001 et seq.), which
include obtaining the consumer's affirmative consent to such means
of notice.
* * * * *
38. In appendix E, paragraph IX.A.1, remove the third and fourth
sentences and add new sentences in their place to read as follows:
IX. * * *
A. * * *
1. * * * A disclosure is clear and conspicuous if it is
reasonably understandable and designed to call attention to the
nature and significance of the information in the disclosure (see
the examples listed in Sec. 216.3(b)(2) of this chapter). A
disclosure is in a form that the customer may keep if, for example,
it can be downloaded or printed. For a customer that is not a
consumer, a depositary bank satisfies the written-disclosure
requirement by sending an electronic disclosure that displays the
text and is in a form that the customer may keep, if the customer
agrees to such means of disclosure. For a customer who is a
consumer, a depositary bank satisfies the written-notice requirement
by sending an electronic notice in compliance with the requirements
of the Electronic Signatures in Global and National Commerce Act (12
U.S.C. 7001 et seq.), which include obtaining the consumer's
affirmative consent to such means of notice.
* * * * *
39. In appendix E, paragraph IX.A, add a new paragraph 4. to read
as follows:
IX. * * *
A. * * *
4. A bank may, by agreement or at the consumer's request,
provide any disclosure or notice required by subpart B in a language
other than English, provided that the bank makes a complete
disclosure available in English at the customer's request.
40. In appendix E, add a new sentence at the end of paragraph
XVI.A.7. to read as follows:
XVI. * * *
A. * * *
7. * * * A check that is converted to a qualified returned check
must be encoded in accordance with ANS X9.13 for original checks or
ANS X9.90 for substitute checks.
* * * * *
41. In appendix E, revise paragraph XVI.C.1.a. to read as follows:
XVI. * * *
C. * * *
1. * * * a. A paying bank may have a courier that leaves after
midnight (or after any other applicable deadline) to deliver its
forward-collection checks. This paragraph removes the constraint of
the midnight deadline for returned checks if the returned check
either reaches the returning bank to which it is sent by that bank's
cut-off hour for the next processing cycle after the applicable
deadline or reaches the depositary bank to which it is sent by that
bank's next banking day following the expiration of the applicable
deadline. The extension also applies if the check reaches the bank
to which it is sent later than the close of that bank's cut-off hour
for the next processing cycle or its next banking day, as
applicable, if highly expeditious means of transportation are used.
For example, a West Coast paying bank may use this further extension
to ship a returned check by air courier directly to an East Coast
returning bank even if the check arrives after the returning bank's
cut-off hour for the next processing cycle. This paragraph applies
to the extension of all midnight deadlines except Saturday midnight
deadlines (see paragraph C.1.b. of this appendix).
* * * * *
42. In appendix E, add a new sentence at the end of paragraph
XVII.A.7.a. to read as follows:
XVII. * * *
A. * * *
7. * * * a. * * * A check that is converted to a qualified
returned check must be encoded in accordance with ANS X9.13 for
original checks or ANS X9.90 for substitute checks.
* * * * *
43. In appendix E, add a new paragraph XIX.B.3., to read as
follows:
XIX. * * *
B. * * *
3. A bank must identify an item of information if the bank is
uncertain as to that item's accuracy. A bank may make this
identification by setting the item off with question marks,
asterisks, or other symbols designated for this purpose by generally
applicable industry standards, such as ANS X9.37.
* * * * *
44. In appendix E, paragraph XIX.D.1., insert a new sentence
between the next-to-last and last sentences and revise the last
sentence to read as follows:
XIX. * * *
D. * * *
1. * * * A bank that chooses to provide the notice required by
Sec. 229.33(d) in writing may send the notice by e-mail or
facsimile if the bank sends the notice to the e-mail address or
facsimile number specified by the customer for that purpose. The
notice to the customer required under this paragraph also may
satisfy the notice requirement of Sec. 229.13(g) if the depositary
bank invokes the reasonable-cause exception of Sec. 229.13(e) due
to the receipt of a notice of nonpayment, provided the notice meets
all the requirements of Sec. 229.13(g).
* * * * *
45. In appendix E, paragraph XXI.A.1., remove the phrase ``are
legible'' from the fourth sentence and add the phrase ``can be
interpreted by a subsequent collecting bank, paying bank, or returning
bank'' in its place.
46. In appendix E, paragraph XXI.A., remove existing paragraphs 2.
through 6., remove paragraph 8., redesignate existing paragraph 7. as
paragraph 8., and add the following paragraphs 2. through 7. to read as
follows:
XXI. * * *
A.
* * * * *
2. Banks generally apply indorsements to paper checks in one of
two ways: (1) Banks print or ``spray'' indorsements onto checks when
the checks are processed through the banks' automated check sorters
(regardless of whether the checks are original checks or substitute
checks), and (2) reconverting banks print or ``overlay'' previously
applied electronic indorsements and their own indorsements and
identifications onto substitute checks at the time that the
substitute checks are created. A substitute check will contain, in
its image of the original check or previous substitute check,
reproductions of indorsements that were sprayed onto the previous
item. For purposes of the indorsement standard set forth in appendix
D, a reproduction of a previously applied sprayed or overlaid
indorsement contained within an image of a check does not constitute
a ``previously applied electronic indorsement.'' To accommodate
these two indorsement scenarios, the appendix includes two
indorsement location specifications: One standard applies to banks
spraying indorsements onto existing paper original checks and
substitute checks, and another applies to reconverting banks
overlaying previously applied electronic indorsements and their own
indorsements onto substitute checks at the time the substitute
checks are created.
3. The location of an indorsement applied to an existing paper
check in accordance with appendix D may shift if that check is
truncated and later reconverted to a substitute check. If the
indorsement is overwritten by a subsequent indorsement that also is
applied in accordance with appendix D, then the indorsement could be
[[Page 1495]]
rendered illegible. See Sec. 229.38(d) and the commentary thereto
for information regarding liability for a loss that results from an
illegible indorsement.
4. To ensure that indorsements can be easily read and imaged,
the standard requires all indorsements applied to original checks
and substitute checks to be printed in black ink.
5. The standard requires the depositary bank's indorsement to
include (1) its nine-digit routing number set off by an arrow at
each end of the routing number and, if the depositary bank is a
reconverting bank with respect to the check, an asterisk outside the
arrow at each end of the routing number to identify the bank as a
reconverting bank, and (2) the indorsement date. The standard also
permits but does not require the indorsement to include other
identifying information. The standard requires a collecting bank's
or returning bank's indorsement to include only (1) the bank's nine
digit routing number (without arrows) and, if the collecting bank or
returning bank is a reconverting bank with respect to the check, an
asterisk at each end of the number to identify the bank as a
reconverting bank, (2) the indorsement date, and (3) an optional
trace or sequence number.
6. Depositary banks should not include information that can be
confused with required information. For example, a nine-digit zip
code could be confused with the nine-digit routing number.
7. A depositary bank may want to include an address in its
indorsement in order to limit the number of locations at which it
must accept returned checks. In instances where this address is not
consistent with the routing number in the indorsement, the
depositary bank is required to accept returned checks at a branch or
head office consistent with the routing number. Banks should note,
however, that Sec. 229.32 requires a depositary bank to accept
returned checks at the location(s) at which it accepts forward-
collection checks.
* * * * *
47. In appendix E, paragraph XXI.A.13, in the first sentence add
the phrase ``collecting banks and'' between the phrases ``standard
for'' and ``returning banks'' and add a new sentence to the end of the
paragraph to read as follows:
XXI. * * *
A. * * *
13. * * * With respect to the identification of a paying bank
that is also a reconverting bank, see the commentary to Sec.
229.51(b)(2).
* * * * *
48. In appendix E, paragraph XXIII.A, remove the last sentence.
49. In appendix E, paragraph XXIV.D, revise the last sentence of
paragraph 1., redesignate paragraphs 2. and 3. as paragraphs 3. and 4.,
respectively, and a add a new paragraph 2. to read as follows:
XXIV. * * *
D. * * *
1. Responsibility for back of check. * * * Accordingly, this
provision places responsibility on the paying bank, depositary bank,
or reconverting bank, as appropriate, for keeping the back of the
check clear for bank indorsements during forward collection and
return. * * *
2. ANS X9.90 provides that an image of an original check should
be reduced in size when placed on a substitute check: images of
business-sized checks will be reduced to about 65 percent of their
original size and images of personal-sized checks will be reduced to
about 80 percent of their original size. Because of this size
reduction, the location of an indorsement, particularly a depositary
bank indorsement, applied to an original paper check will likely
change when a reconverting bank creates a substitute check that
contains that indorsement within the image of the original paper
check. If the indorsement was applied to the original paper check in
accordance with appendix D's location requirements for indorsements
applied to existing paper checks, and if the size reduction of the
image causes the placement of the indorsement to no longer be
consistent with the appendix's requirements, then the reconverting
bank bears the liability for any loss that results from the shift in
the placement of the indorsement.
Example. In accordance with appendix D's specifications, a
depositary bank sprays its indorsement onto a business-sized
original check between 3.0 inches from the leading of the check and
1.5 inches from the trailing edge of the check. The check's
conversion to electronic form and subsequent reconversion to paper
form causes the location of the depositary bank indorsement, now
contained within the image of the original check, to change such
that it is less than 3.0 inches from the leading edge of the
substitute check. In accordance with appendix D's specifications, a
subsequent collecting bank sprays its indorsement onto the
substitute check between the leading edge of the check and 3.0
inches from the leading edge of the check and the indorsement
happens to be on top of the shifted depositary bank indorsement. If
the check is returned unpaid and the return is not expeditious
because of the illegibility of the depositary bank indorsement, and
the depositary bank incurs a loss that it would not have incurred
had the return been expeditious, the reconverting bank bears the
liability for that loss.
* * * * *
50. In appendix E, redesignate commentary XXX as commentary XXXVII
and add new commentaries XXX through XXXVI to read as follows:
* * * * *
XXX. Sec. 229.51 General provisions governing substitute checks
A. Sec. 229.51(a) Legal Equivalence
1. Section 229.51(a) states that a substitute check for which a
bank has provided the substitute check warranties is the legal
equivalent of the original check for all purposes and all persons if
it meets the accuracy and legend requirements. Any person therefore
may transfer or otherwise provide such a check to any other person
for any purpose without obtaining the recipient's agreement.
Although a person still would be entitled to receive a paper check
absent agreement to the contrary, that person would be required to
accept a legally equivalent substitute check in lieu of the original
check. A person that receives a substitute check cannot be assessed
costs associated with the creation of the substitute check, absent
agreement to the contrary.
2. A person other than a bank that creates a substitute check
could transfer that check only by agreement unless and until a bank
provided the substitute check warranties. For example, a nonbank
that wanted to create substitute checks for the purpose of
depositing such checks for collection could not deposit those
substitute checks without the agreement of a depositary bank.
Example. A depositary bank could agree to allow a person that is
not a bank to deposit substitute checks that person created. The
depositary bank then would provide the substitute check warranties
and become the reconverting bank when the bank transferred the check
to another bank for collection, presented the check to the paying
bank, or otherwise transferred the check. If the substitute check
also met the accuracy and legend requirements for legal equivalence,
as warranted, the transferee would be required to accept it just as
it would the original check.
3. To be the legal equivalent of the original check, a
substitute check must accurately represent all the information on
the front and back of the check as of the time the original check
was truncated. The information that must be accurately represented
includes (1) the information identifying the drawer and the paying
bank that is preprinted on the check, including the MICR line; (2)
the payment instructions placed on the check by, or as authorized
by, the drawer, such as the amount of the check, the payee, and the
drawer's signature; and (3) other information placed on the check
prior to truncation, such as any required identification information
written on the front of the check and any indorsements applied to
the back of the check. A substitute check need not capture other
characteristics of the check, such as watermarks, microprinting, or
other physical security features that cannot survive the imaging
process, or decorative images, in order to meet the accuracy
requirement. Conversely, some security features that are latent on
the original check might become visible as a result of the check
imaging process. For example, the original check might have a faint
representation of the word ``void'' that will appear more clearly on
a photocopied or electronic image of the check. Provided the
inclusion of the clearer version of the word on the image used to
create a substitute check did not obscure the required information
listed above, a substitute check that contained such information
could be the legal equivalent of an original check under Sec.
229.51(a).
4. To be the legal equivalent of the original check, a
substitute check also must bear the legal equivalence legend
described in Sec. 229.51(a)(2). A bank may not vary the language of
the legal equivalence legend and
[[Page 1496]]
must place the legend on the substitute check as specified by
generally applicable industry standards for substitute checks
contained in ANS X9.90.
B. 229.51(b) Reconverting Bank Duties
1. As discussed in more detail in appendix D and the commentary
to Sec. 229.35, a reconverting bank must indorse (or, if it is a
paying bank with respect to the check, identify itself on) the back
of a substitute check in a manner that preserves all indorsements
applied, whether physically or electronically, by persons that
previously handled the check in any form for forward collection or
return. Indorsements applied physically to the original check should
be preserved through the image of the back of the original check. If
indorsements were applied electronically after the original check
was truncated or were applied electronically after a previous
substitute check was converted to electronic form, the reconverting
bank must apply those indorsements physically to the substitute
check. A reconverting bank is not responsible for obtaining
indorsements that persons that previously handled the check should
have applied but did not apply.
2. A reconverting bank also must identify itself as such on the
front and back of the substitute check and must preserve on the back
of the substitute check the identifications of any previous
reconverting banks in accordance with appendix D. The presence on
the back of a substitute check of indorsements that were applied by
previous reconverting banks and identified with asterisks in
accordance with appendix D would satisfy the requirement that the
reconverting bank preserve the identification of previous
reconverting banks.
3. The reconverting bank must place the routing number of the
truncating bank surrounded by brackets on the front of the
substitute check in accordance with appendix D.
Example. A bank's customer, which is a nonbank business,
receives checks for payment and wants to deposit substitute checks
instead of the original checks with its depositary bank. A bank that
agrees to accept these substitute checks for deposit would be the
depositary bank and the reconverting bank with respect to the
substitute checks and the truncating bank with respect to the
original checks. In accordance with appendix D and with X9.90, the
bank must therefore be identified on the front of the substitute
checks as a reconverting bank and as the truncating bank, and on the
back of the substitute checks as the depositary bank and a
reconverting bank.
C. 229.51(c) Purported Substitute Checks
1. A reconverting bank must ensure that a substitute check bears
a MICR line containing all the information appearing on the MICR
line of the original check, except as provided under generally
applicable industry standards for substitute checks to facilitate
the processing of substitute checks. As discussed in the commentary
to the substitute check definition, the MICR line of the substitute
check could vary from the MICR line of the original check in two
ways and still qualify as a substitute check: (1) The substitute
check indicator in position 44 would be different on the substitute
check and (2) the reconverting bank or a subsequent bank could
correct an amount encoding error (including a failure to encode)
that is traceable to the original check. If the MICR line differs in
other ways from the MICR line of the original check, the item would
not meet the definition of substitute check. If the item is handled
as if it were a substitute check, however, this section provides
that the warranties, indemnity, expedited recredit, liability, and
consumer awareness provisions would apply to that item as if it were
a substitute check. The item would not, however, be the legal
equivalent of the original check.
D. 229.51(d) Applicable Law
1. A substitute check that meets the requirements for legal
equivalence set forth in this section is subject to any provision of
federal or state law that applies to original checks, except to the
extent such provision is inconsistent with the Check 21 Act or
subpart D. A legally equivalent substitute check is subject to all
laws that are not preempted by the Check 21 Act in the same manner
and to the same extent as is an original check. Thus, any person
could satisfy a law that requires production of an original check by
producing a substitute check that is derived from the relevant
original check and that meets the legal equivalence requirements of
Sec. 229.51(a).
2. A law is not inconsistent with the Check 21 Act or subpart D
merely because it allows for the recovery of a greater amount of
damages.
Example. A drawer that suffers a loss with respect to a
substitute check that was improperly charged to its account and for
which the drawer has an indemnity claim but not a warranty claim
would be limited under the Check 21 Act to recovery of the amount of
the substitute check plus interest and expenses. However, if the
drawer also suffered damages that were proximately caused because
the bank wrongfully dishonored subsequently presented checks as a
result of the improper substitute check charge, the drawer could
recover those losses under U.C.C. Sec. 4-402.
XXXI Sec. 229.52 Substitute Check Warranties
A. 229.52(a) Warranty Content and Provision
1. The substitute check warranties are first given by the
reconverting bank. In the case of a substitute check created by a
bank, the reconverting bank gives the warranties when it transfers,
presents, or returns a substitute check for which it receives
consideration. A bank that receives a substitute check created by a
nonbank makes the warranties when it transfers for consideration
either the substitute check it received or an electronic or paper
representation of that substitute check. The warranties also are
given by any subsequent bank that transfers for consideration either
the substitute check or a paper or electronic representation of the
substitute check. A paper representation of a substitute check could
include an image of the substitute check contained within an image
statement or information about the check (such as the check number
and amount) that is included on a periodic account statement.
2. A bank that truncates the original check and by agreement
transfers the check electronically to a subsequent bank for
consideration does not make the substitute check warranties to the
recipient of the electronic form of the original check, because the
sending bank has not transferred for consideration a substitute
check or paper or electronic representation of a substitute check.
However, parties may, by agreement, allocate liabilities associated
with the exchange of electronic check information.
Example. A bank that receives check information electronically
and uses it to create substitute checks is the reconverting bank and
the first warrantor. However, that bank may protect itself by
including in its agreement with the sending bank provisions that
specify the sending bank's warranties and responsibilities to the
receiving bank, particularly with respect to the accuracy of the
check image and check data transmitted under the agreement.
3. A bank need not affirmatively make the warranties because
they attach automatically when a bank transfers, presents, or
returns the substitute check (or a representation thereof) for which
it receives consideration. Because a substitute check transferred
for consideration is warranted to be the legal equivalent of the
original check and thereby subject to existing laws as if it were
the original check, all U.C.C. and other Regulation CC warranties
that apply to the original check also apply to the substitute check.
4. The legal equivalence warranty by definition must be linked
to a particular substitute check. When an original check is
truncated, the check may move from electronic form to substitute
check form and then back again, such that there would be multiple
substitute checks that reproduced the same original check. When a
check changes form multiple times in the collection or return
process, the first reconverting bank and subsequent banks that
transfer the first substitute check (or a paper or electronic
representation of the first substitute check) warrant the legal
equivalence of only the first substitute check. If a bank receives
an electronic representation of a substitute check and uses that
representation to create a second substitute check, the second
reconverting bank and subsequent transferees of the second
substitute check (or a representation thereof) warrant the legal
equivalence of both the first and second substitute checks. A
reconverting bank would not be liable for a warranty breach under
Sec. 229.52 if the legal equivalence defect is the fault of a
subsequent bank that handled the substitute check, either as a
substitute check or in other paper or electronic form.
5. The warranty in Sec. 229.52(a)(2), which addresses multiple
payment requests for the same check, is not linked to a particular
substitute check but rather is given by each bank handling the
substitute check, an electronic representation of a substitute
check, or a subsequent substitute check created from an electronic
representation of a substitute check. All reconverting banks,
transferring banks, and returning banks
[[Page 1497]]
therefore provide the warranty regardless of whether the ultimate
demand for double payment is based on the original check, the
substitute check, or some other electronic or paper representation
of the substitute or original check. This warranty is given by the
banks that transfer, present, or return a substitute check, even if
the demand for duplicative payment results from a fraudulent
substitute check about which the warranting bank had no knowledge.
Example. Bank A uses check information that it received
electronically to create a substitute check, which it presents to
Bank B for payment. Bank A is a reconverting bank that made the
substitute check warranties when it presented the check and received
payment. An employee of Bank A later uses the electronic check
information to create a second, identical substitute check, which he
then deposits at Bank C. Bank C presents the second substitute check
to Bank B for payment. Bank C also is a reconverting bank that has
made the warranties as of the time it presented the second
substitute check to Bank B. The drawer of the original check and
Bank B could pursue a warranty claim against either Bank A or Bank
C.
B. 229.52(b) Warranty Recipients
1. A reconverting bank makes the warranties to the person to
which it transfers, presents, or returns the substitute check for
consideration and to any subsequent recipient that receives either
the substitute check or a paper or electronic representation derived
from the substitute check. These subsequent recipients could include
a subsequent collecting or returning bank, the depositary bank, the
drawer, the drawee, the payee, the depositor, and any indorser. The
paying bank would be included as a warranty recipient, for example
because it would be the drawee of a check or a transferee of a check
that is payable through it.
2. A person does not receive the warranties if it previously
handled only the original check or a representation of an original
check that was not derived from a substitute check. In other words,
the warranties flow only forward to persons that receive a
substitute check or something derived from a substitute check; they
do not flow backward to persons that handled only an original check
or an image of an original check that predated the first substitute
check. However, a person that initially handled only the original
check could become a warranty recipient if that person later
received a returned substitute check or a paper or electronic
representation of a substitute check that was derived from that
original check.
XXXII. Sec. 229.53 Substitute Check Indemnity
A. 229.53(a) Scope of Indemnity
1. As with the warranties, responsibility for providing the
indemnity begins with the reconverting bank and is made by each bank
that subsequently receives consideration for a substitute check (or
a paper or electronic representation of the substitute check) that
it transfers, presents, or returns. The indemnity covers losses by
any subsequent recipient (including the subsequent collecting or
returning bank, the depositary bank, the drawer, the drawee, the
payee, the depositor, and any indorser) that are due to the fact
that any recipient of a substitute check received a substitute check
instead of the original check. As with the warranties, the indemnity
is not provided to or by a person that handled only the original
check, or a paper or electronic version of the original check that
was not derived from a substitute check.
2. The indemnity would cover losses that a recipient suffered
directly because it received a substitute check instead of the
original check. The indemnity also would cover losses incurred
because a person provided an indemnity, either to the person that
suffered a loss due to the receipt of a substitute check or to
another bank that provided an indemnity in connection with that
loss. A bank that has provided an indemnity could, in turn, bring an
indemnity claim regardless of whether that bank received the actual
substitute check or a paper or electronic representation of the
substitute check. The indemnity would not, however, cover a loss
that was not ultimately traceable to the receipt of a substitute
check instead of the original check.
Examples. a. A paying bank makes payment based on a substitute
check that was derived from a fraudulent original cashier's check.
The amount and other characteristics of the original cashier's check
are such that, had the original check been presented instead, the
paying bank would have inspected the original check for security
features and likely would have detected the fraud and returned the
original check before its midnight deadline. The security features
that the bank would have inspected were security features that did
not survive the imaging process (see the commentary to Sec.
229.51(a)). Under these circumstances, the paying bank could assert
an indemnity claim against the bank that presented the substitute
check.
b. By contrast with the previous example, the indemnity would
not apply if the characteristics of the presented substitute check
were such that the bank's security policies and procedures would not
have detected the fraud even if the original had been presented. For
example, if the check was under the threshold amount the bank has
established for examining security features, the bank likely would
not have caught the error and accordingly would have suffered a loss
even if it had received the original check.
c. A paying bank that made payment based on an electronic
representation of the check and subsequently suffered a loss would
not have an indemnity claim associated with that payment because its
loss did not result from receipt of an actual substitute check.
However, the paying bank could protect itself from such losses
through its agreement with the bank that sent the check to it
electronically and may have rights under other check law.
d. A drawer has agreed with its bank that the drawer will not
receive paid checks with periodic account statements. The drawer
requests a copy of paid check in order to prove payment and received
a photocopy of the front of a substitute check. The photocopy that
the bank provided in response to this request was illegible, such
that the drawer could not prove payment. Any loss that the depositor
suffered as a result of receiving the blurry check image would not
trigger an indemnity claim because the loss was not caused by the
receipt of a substitute check.
B. 229.53(b) Indemnity Amount
1. If a recipient of a substitute check is making an indemnity
claim because a bank has breached one of the substitute check
warranties, the recipient can recover any losses proximately caused
by that warranty breach.
Examples. a. A drawer discovered that its account had been
charged mistakenly for a purported substitute check because the
substitute check contained an ``8'' in the account-number field of
the MICR line where the original check contained a ``3.'' As a
result of this erroneous charge, the paying bank dishonored several
subsequently-presented checks that it otherwise would have paid and
charged the drawer returned check fees. The payees of the returned
checks also charged the drawer returned check fees. The drawer would
have a warranty claim against any of the warranting banks, including
its bank, for breach of the warranty described in Sec.
229.52(a)(1). The drawer also could assert an indemnity claim,
because if the original check had been presented instead of the
purported substitute check, the bank likely would not have charged
the drawer's account. It is likely that the drawer would assert its
warranty and indemnity claims against the paying bank, because that
is the bank with which the drawer has an account relationship. The
drawer could recover from the indemnifying bank the amount of the
erroneous charge, as well as the amount of the returned check fees
charged by both the paying bank and the payees of the returned
checks. If the drawer's account were an interest-bearing account,
the drawer also could recover any interest lost on the erroneously
debited amount and the erroneous returned check fees. The drawer
also could recover its expenditures for representation in connection
with the claim. Finally, the drawer could recover any other losses
that were proximately caused by the warranty breach.
b. In the example above, the paying bank that received the
purported substitute check also would have a warranty claim against
the previous transferor of the purported substitute check and could
seek an indemnity from that bank. The indemnifying bank would be
responsible for compensating the paying bank for all the losses
proximately caused by the warranty breach, including representation
expenses and other costs incurred by the paying bank in settling the
drawer's claim.
c. A person received a purported substitute check that did not
contain the legal equivalence legend, could not use that item to
prove payment, and suffered a resulting loss. The item did not
contain the legend and thus did not meet one of the requirements for
legal equivalence, as warranted, and the person suffered a loss that
would not have been suffered had the original check been received
instead. The person therefore could recover all damages proximately
caused by the warranty breach.
[[Page 1498]]
2. If the recipient of the substitute check does not have a
substitute check warranty claim with respect to the substitute
check, its recovery under Sec. 229.53 is limited to the amount of
the substitute check, plus interest and expenses. However, the
indemnified party might be entitled to additional damages under some
other provision of law.
Examples. a. A drawer received a substitute check that met all
the legal equivalence requirements and that was only charged once to
the drawer's account, but the drawer believed that the underlying
original check was a forgery. If the drawer suffered a loss because
it could not prove the forgery based on the substitute check, for
example because proving the forgery required analysis of pen
pressure that could be determined only from the original check, the
drawer would have an indemnity claim. However, the drawer would not
have a substitute check warranty claim because the substitute check
was the legal equivalent of the original and no person was asked to
pay the substitute check more than once. In that case, the amount of
the drawer's indemnity would be limited to the amount of the
substitute check, plus interest and expenses, although the drawer
could attempt to recover additional losses, if any, under other law.
b. As described more fully in the commentary to Sec. 229.53(a)
regarding the scope of the indemnity, a paying bank could have an
indemnity claim if it paid a legally equivalent substitute check
that was created from a fraudulent cashier's check that the paying
bank likely would have returned by its midnight deadline had it
received the original check. However, if the legally equivalent
substitute check was only presented once, the paying bank's
indemnity would be limited to the amount of the substitute check
plus interest and expenses.
3. The amount of an indemnity would be reduced in proportion to
the amount of any amount loss attributable to the indemnified
party's negligence or bad faith. This comparative negligence
standard is intended to allocate liability in the same manner as the
comparative negligence provision of Sec. 229.38(c).
C. 229.53(c) Subrogation of Rights
1. A bank that pays an indemnity claim is subrogated to the
rights of the person it indemnified, to the extent of the indemnity
it provided, so that it may attempt to recover that amount from
another party based on an indemnity, warranty, or other claim. The
party that the bank indemnified must comply with reasonable requests
from the indemnifying bank for assistance with respect to the
subrogated claim.
Example. A paying bank indemnifies a drawer for a substitute
check that the drawer alleged was a forgery that would have been
detected had the original check instead been presented. The bank
that provided the indemnity could pursue its own indemnity claim
against the bank that presented the substitute check, could attempt
to recover from the forger, or could pursue a U.C.C. warranty claim
against a bank that previously handled the check. The bank also
could request from the drawer any information that the drawer might
possess regarding the possible identity of the forger.
XXXIII. Sec. 229.54 Expedited Recredit for Consumers
A. 229.54(a) Circumstances Giving Rise to a Claim
1. A consumer may make a claim for expedited recredit under this
section only for a substitute check that he or she has received.
Thus, a consumer that received only an image statement containing an
image of a substitute check would not be entitled to make an
expedited recredit claim, although he or she could seek redress
under other provisions of law, such as Sec. 229.52 or U.C.C.
section 4-401. However, a consumer who originally received only an
image statement but later received a substitute check, such as in
response to a request for a copy of a check shown in the statement,
could bring a claim if the other expedited recredit criteria were
met. Although a consumer must at some point have received a
substitute check to make an expedited recredit claim, the consumer
need not be in possession of the substitute check at the time he or
she submits the claim.
2. A consumer must in good faith assert that the bank improperly
charged the consumer's account for the substitute check or that the
consumer has a warranty claim for the substitute check (or both).
The warranty in question could be a substitute check warranty
described in Sec. 229.52 or any other warranty that a bank provides
with respect to a check under Sec. 229.34, the U.C.C., or other
law.
3. A consumer's recovery under the expedited recredit section is
limited to the amount of his or her loss, up to the amount of the
substitute check subject to the claim, plus interest if the
consumer's account is an interest-bearing account. A consumer who
suffers a loss greater than the amount of the substitute check plus
interest could attempt to recover the remainder of that loss by
bringing warranty, indemnity, or other claim under this subpart or
other applicable law.
Examples. a. A consumer who received a substitute check believed
that he or she wrote the check for $150, but the bank charged his or
her account for $1,500. The amount on the substitute check the
consumer received is illegible. If the substitute check contained a
blurry image of what was a legible original check, the consumer
could have a claim for a breach of the legal equivalence warranty in
addition to an improper charge claim. Because the amount of the
check cannot be determined from the substitute check provided to the
consumer, the consumer, if acting in good faith, could assert that
the production of the original check or a better copy of the
original check is necessary to determine the validity of the claim.
The consumer in this case could attempt to recover his or her losses
by using the expedited recredit procedure.
b. A consumer received a substitute check for which his or her
account was charged and believed that the original check from which
the substitute was derived was a forgery. The forgery was good
enough that analysis of the original check is necessary to verify
whether the signature is that of the consumer. Under those
circumstances, the consumer, if acting in good faith, could assert
that the charge was improper, that he or she therefore had incurred
a loss in the amount of the check (plus foregone interest if the
account was an interest-bearing account), and that he or she needed
the original check to determine the validity of the forgery claim.
By contrast, if the signature on the substitute check obviously was
forged (for example, if the forger signed a name other than that of
the account holder) and there was no other defect with the
substitute check, the consumer would not need the original check or
a sufficient copy to determine the fact of the forgery and thus
would not be able to make an expedited recredit claim under this
section. However, the consumer would have a claim under U.C.C.
section 4-401 if the item was not properly payable.
B. 229.54(b) Procedures for Making Claims
1. The consumer must submit his or her expedited recredit claim
to the bank within 40 calendar days of the later of the day on which
the bank mailed or delivered, by a means agreed to by the consumer,
(1) the periodic account statement containing information concerning
the transaction giving rise to the claim or (2) the substitute check
giving rise to the claim. The mailing or delivery of a substitute
check could be in connection with a regular account statement, in
response to a consumer's specific request for a copy of a check, or
in connection with the return of a substitute check to the payee.
2. Section 229.54(b) contemplates more than one possible means
of delivering an account statement or a substitute check to the
consumer. The time period for making a claim thus could be triggered
by the mailing, in-person, or electronic delivery of an account
statement or by the mailing or in-person delivery of a substitute
check. In the case of a mailed statement or substitute check, the
40-day period should be calculated using the postmark on the
envelope.
3. A bank must extend the consumer's time for submitting a claim
for a reasonable period if the consumer is prevented from submitting
his or her claim within 40 days because of extenuating
circumstances. Extenuating circumstances could include, for example,
the extended travel or illness of the consumer.
4. A consumer's claim must include the reason why the consumer
believes that his or her account was charged improperly or why he or
she has a warranty claim. A charge could be improper, for example,
if the bank charged the consumer's account for an amount different
than the consumer believes he or she authorized or charged the
consumer more than once for the same check, or if the check in
question was a forgery or otherwise fraudulent.
5. A consumer also must provide a reason why production of the
original check or a sufficient copy is necessary to determine the
validity of the claim identified by the consumer. For example, if
the consumer believed that the bank charged his or her account for
the wrong amount, the original check might be necessary to prove
this claim if the amount of the substitute check were illegible.
Similarly, if the consumer believed
[[Page 1499]]
that his or her signature had been forged, the original check might
be necessary to confirm the forgery if, for example, pen pressure or
similar analysis were necessary to determine the genuineness of the
signature.
6. The information that the consumer is required to provide
under Sec. 229.54(b)(2)(iv) to facilitate the bank's investigation
of the claim could include, for example, a copy of the allegedly
defective substitute check or information related to that check,
such as the number, amount, and payee.
7. A bank may accept an expedited recredit claim in any form but
could in its discretion require the consumer to submit the claim in
writing. A bank that requires a recredit claim to be in writing
should inform the consumer of that requirement and provide a
location to which such a written claim should be sent. For example,
a bank could inform a consumer of the written notice requirement in
the consumer awareness notice required by Sec. 229.57 or, if the
consumer attempts to make a claim orally, by informing the consumer
at that time of the written notice requirement.
8. A bank may permit a consumer to submit a claim
electronically. However, a bank cannot require that a written claim
be submitted electronically.
9. If a bank requires a consumer to submit a claim in writing,
the bank must compute time periods that begin with submission of a
claim from the date that the bank received the written claim. Thus,
if a consumer called the bank to make an expedited recredit claim
and the bank required the consumer to submit the claim in writing,
the time at which the bank must take action on the claim would be
determined based on the date on which the bank received the written
claim, not the date on which the consumer placed the call.
10. Regardless of whether the consumer's communication with the
bank is oral or written, a consumer complaint that does not contain
all the elements described in Sec. 229.54(b) is not a claim for
purposes of Sec. 229.54.
C. 229.54(c) Action on Claims
1. If the bank has not determined whether or not the consumer's
claim is valid by the end of the 10th business day after the banking
day on which the consumer submitted the claim, the bank must by that
time recredit the consumer's account for the amount of the
consumer's loss, up to the lesser of the amount of the substitute
check or $2,500, plus interest if the account is an interest-bearing
account. A bank must provide the recredit pending investigation for
each substitute check for which the consumer submitted a claim, even
if the consumer submitted multiple substitute check claims in the
same communication. For example, if a consumer sends claims with
respect to two different substitute checks in the same envelope or
e-mail, the bank must make the required provisional credit for each
of the two claims by the 10th business day thereafter (unless the
bank already determined whether or not those claims are valid in
accordance with Sec. 229.54(c)(1) or (c)(2)).
2. A bank that provides a recredit to the consumer, either
provisionally or after determining that the consumer's claim is
valid, may reverse the amount of the recredit if the bank at any
time later determines that the claim in fact was not valid. A bank
that reverses a recredit also may reverse the amount of any interest
that it has paid on the previously recredited amount.
D. 229.54(d) Availability of Recredit
1. The availability of a recredit provided by a bank under Sec.
229.54(c) is governed solely by Sec. 229.54(d) and therefore is not
subject to the availability provisions of subpart B. A bank
generally must make a recredit available for withdrawal no later
than the start of the business day after the banking day on which
the bank provided the recredit. However, a bank may delay the
availability of up to the first $2,500 that it provisionally
recredits to a consumer account under Sec. 229.54(c)(3)(i) if (1)
the account is a new account, (2) without regard to the substitute
check giving rise to the recredit claim, the account has been
repeatedly withdrawn during the six month period ending on the date
the bank received the claim, or (3) the bank has reasonable cause to
believe that the claim is fraudulent. These first two exceptions are
meant to operate in the same manner as the corresponding new account
and repeated overdraft exceptions in subpart B (see Sec. 229.13(a)
and (d)).
2. Section 229.54(d)(2) describes the maximum period of time
that a bank may delay availability of a recredit provided under
Sec. 229.54(c). The bank may delay availability under one of the
three listed exceptions until the business day after the banking day
on which the bank determines that the consumer's claim is valid or
the 45th calendar day after the banking day on which the bank
received the consumer's claim, whichever is earlier. The only
portion of the recredit that is subject to delay under Sec.
229.54(d)(2) is the amount that the bank recredits under Sec.
229.54(c)(3)(i) pending its investigation of a claim.
E. 229.54(e) Notices Relating to Consumer Expedited Recredit Claims
1. A bank must notify a consumer of its action regarding a
recredit claim no later than the business day after the banking day
that the bank makes a recredit, determines a claim is not valid, or
reverses a recredit, as appropriate. As provided in Sec. 229.58, a
bank may provide any notice required by this section by U.S. mail or
by any other means through which the consumer has agreed to receive
account information.
2. A bank that denies the consumer's recredit claim must explain
the reason that it is denying the claim, such as the reason the bank
believes the substitute check was proper or the consumer's warranty
claim was not valid. For example, if a consumer has claimed that the
bank charged its account for an improper amount, the bank denying
that claim must explain why it determined that the charged amount
was proper.
3. A bank denying a recredit claim also must provide the
original check or a sufficient copy of the original check, unless
the bank is providing the claim denial notice electronically and the
consumer has agreed to receive that type of information
electronically. In that case, Sec. 229.58 allows the bank instead
to provide an image of the original check or an image of the
sufficient copy that the bank would have sent to the consumer had
the bank provided the notice by mail. If a consumer receives an
electronic image of the original check or an electronic image of a
sufficient copy, the consumer could obtain a sufficient copy simply
by printing that image.
4. A bank that relies on information or documents in addition to
the original check or sufficient copy when denying a consumer
expedited recredit claim also must either provide such information
or documents to the consumer or inform the consumer that he or she
may request copies of such information or documents. This
requirement does not apply to a bank that relies only on the
original check or a sufficient copy to make its determination.
5. Models C-22 through C-25 in appendix C contain model language
for each of three notices described in Sec. 229.54(e). A bank may,
but is not required to, use the language listed in the appendix. The
Check 21 Act does not provide banks that use these models with a
safe harbor. Therefore, use of these models may, but will not
necessarily, be deemed to be compliance with the requirements of
Sec. 229.54(e).
XXXIV. Sec. 229.55 Expedited Recredit Procedures for Banks
A. 229.55(a) Circumstances Giving Rise to a Claim
1. This section allows a bank to make an expedited recredit
claim under two sets of circumstances: first, because it is
obligated to provide a recredit, either to the consumer or to
another bank that is obligated to provide a recredit in connection
with the consumer's claim; and second, because the bank detected a
problem with the substitute check that, if uncaught, could have
given rise to a consumer claim.
2. The loss giving rise to an interbank recredit claim could be
the recredit that the claimant bank provided directly to its
consumer customer under Sec. 229.54 or a loss incurred because the
claimant bank was required to indemnify another bank that provided
compensation to a consumer or to a bank in connection with a
consumer expedited recredit claim under Sec. 229.54.
Examples. a. A paying bank charged a consumer's account based on
a substitute check that contained a blurry image of a legible
original check, and the consumer whose account was charged made an
expedited recredit claim against the paying bank because the
consumer suffered a loss and needed the original check or a
sufficient copy to determine the validity of his or her claim. The
paying bank would have a warranty claim against the presenting bank
that transferred the defective substitute check to it and against
any previous transferring bank(s) that handled that substitute check
or another paper or electronic representation of the check. The
paying bank therefore would meet each of the requirements necessary
to bring an interbank expedited recredit claim.
b. Continuing with the example a., if the presenting bank
determined that the paying bank's claim was valid and provided a
recredit, the presenting bank would have
[[Page 1500]]
suffered a loss in the amount of the recredit it provided and could,
in turn, make an expedited recredit claim against the bank that
transferred the defective substitute check to it.
B. 229.55(b) Procedures for Making Claims
1. An interbank recredit claim under this section must be
brought within 120 calendar days of the transaction giving rise to
the claim. The length of the time period for bringing an interbank
recredit claim allows multiple banks that might have suffered a loss
as a result of a particular transaction sufficient time to bring a
claim. The time period also allows for the delay between the
transaction date and the due date for the consumer's claim under
Sec. 229.54.
2. When estimating the amount of its loss, Sec.
229.55(b)(2)(ii) states that the claimant bank should include
``interest if applicable.'' The quoted phrase refers to any interest
that the claimant bank or a bank that the claimant bank indemnified
paid to a consumer who has an interest-bearing account in connection
with an expedited recredit under Sec. 229.54.
3. The information that the claimant bank is required to provide
under Sec. 229.55(b)(2)(iv) to facilitate investigation of the
claim could include, for example, a copy of any written claim that a
consumer submitted under Sec. 229.54 or any written record the bank
may have of a claim the consumer submitted orally. The information
also could include a copy of the defective substitute check or
information relating to that check, such as the number, amount, and
payee of the check. However, a claimant bank that provides a copy of
the substitute check must take reasonable steps to ensure that the
copy is not mistaken for a legal equivalent of the original check or
handled for forward collection or return.
4. The indemnifying bank's right to require a claimant bank to
submit a claim in writing and the computation of time from the date
of the written submission parallel the corresponding provision in
the consumer recredit section (Sec. 229.54(b)(3)). However, the
indemnifying bank also may require the claimant bank to submit a
copy of the written or electronic claim submitted by the consumer
under that section, if any.
C. 229.55(c) Action on Claims
1. An indemnifying bank that responds to an interbank expedited
recredit claim by providing the original check or a sufficient copy
of the original check need not explain why that claim or the
underlying consumer expedited recredit claim is or is not valid.
XXXV. Sec. 229.56 Liability
A. 229.56(a) Measure of Damages
1. In general, a person's recovery under this section is limited
to the amount of the loss up to the amount of the substitute check
that is the subject of the claim, plus interest and expenses
(including costs and reasonable attorney's fees and other expenses
of representation) related to that substitute check. However, a
person that is entitled to an indemnity under Sec. 229.53 because
of a breach of a substitute check warranty also may recover under
Sec. 229.53 any losses proximately caused by the warranty breach,
including interest, costs, reasonable attorney's fees, and other
expenses of representation. As a practical matter, a person likely
would seek to recover under Sec. 229.53 if it received the
problematic substitute check and under Sec. 229.56 if it did not.
2. A reconverting bank also may be liable under Sec. 229.38 for
damages associated with the illegibility of indorsements applied to
substitute checks if that illegibility results because the reduction
of the original check image and its placement on the substitute
check shifted a previously-applied indorsement that, when applied,
complied with appendix D.
B. 229.56(b) Timeliness of Action
1. A bank's delay beyond the time limits prescribed or permitted
by any provision of subpart D is excused if the delay is caused by
certain circumstances beyond the bank's control. This parallels the
standard of U.C.C. Sec. 4-109(b).
C. 229.56(c) Jurisdiction
1. The Check 21 Act confers subject matter jurisdiction on
courts of competent jurisdiction and provides a time limit for civil
actions for violations of subpart D.
D. 229.56(d) Notice of Claims
1. This paragraph is designed to adopt the notice of claim
provisions of U.C.C. Sec. Sec. 4-207(d) and 4-208(e), with an added
provision that a timely Sec. 229.54 expedited recredit claim
satisfies the generally-applicable notice requirement. The time
limit described in this paragraph applies only to notices of
warranty and indemnity claims. As provided in Sec. 229.56(c), all
actions under Sec. 229.56 must be brought within one year of the
date that the cause of action accrues.
XXXVI. Consumer Awareness
A. 229.57(a) General Disclosure Requirement and Content
1. Each bank must provide the disclosure required by this
section to each of its consumer customers who receives paid checks
with his or her account statement or who otherwise receives
substitute checks.
2. A bank may, but is not required to, use the model disclosure
in appendix C-5A to satisfy the disclosure content requirements of
this section. A bank that uses the model language is deemed to
comply with the disclosure content requirement(s) for which it uses
the model language, provided the information in the disclosure
accurately describes the bank's policies and practices. A bank also
may include in its disclosure additional information relating to
substitute checks that is not required by this section.
3. A bank may, by agreement or at the consumer's request,
provide the disclosure required by this section in a language other
than English, provided that the bank makes a complete English notice
available at the consumer's request.
B. 229.57(b) Distribution
1. A bank must provide the disclosure described in Sec.
229.57(a) to each consumer who routinely receives paid checks with
his or her periodic account statement. A bank also must provide the
disclosure to a consumer who does not routinely receive his or her
checks but rather receives a substitute check on an occasional
basis, unless the bank previously provided the disclosure to that
consumer.
Examples. a. A consumer who does not receive paid checks with
each periodic account statement may request a copy of a check on a
case-by-case basis, such as to prove that he or she made a
particular payment. [Alternative 1: A bank that responds to the
consumer's request by providing a substitute check must provide the
required disclosure at the time the consumer requests the copy.]
[Alternative 2: A bank that responds to the consumer's request by
providing a substitute check must provide the required disclosure no
later than the time at which it provides that substitute check.]
b. A consumer who does not routinely receive paid checks might
receive a returned substitute check. For example, a consumer
deposits an original check that is payable to him or her into his or
her deposit account. The paying bank returns the check unpaid and
the depositary bank returns the check to the depositor in the form
of a substitute check. A depositary bank that provides a returned
substitute check to a consumer depositor must provide the substitute
check disclosure at that time, unless it has given such disclosure
previously.
51. In appendix E, in newly-redesignated paragraph XXXVII, revise
paragraph A.1. to read as follows:
* * * * *
XXXVII. Appendix C--Model Availability Policy Disclosures, Clauses, and
Notices; and Model Substitute Check Policy Disclosure and Notices
A. Introduction
1. Appendix C contains model disclosure, clauses, and notices
that may be used by banks to meet their disclosure and notice
responsibilities under the regulation. Banks using the models
(except models C-22 through C-25) properly will be deemed in
compliance with the regulation's disclosure requirements.
* * * * *
52. In appendix E, in newly-redesignated paragraph XXXVII.B.,
revise the first sentence of paragraphs 1.a and the first sentence of
paragraph 1.c and add a new paragraph 7, to read as follows:
XXXVII. * * *
B. Model Availability Policy and Substitute Check Policy Disclosures,
Models C-1 through C-5A
1. Models C-1 through C-5A generally.
a. Models C-1 through C-5A are models for the availability
policy disclosures described in Sec. 229.16 and substitute check
policy disclosure described in Sec. 229.57. * * *
* * * * *
c. Models C-1 through C-5A generally do not reflect any optional
provisions of the
[[Page 1501]]
regulation, or those that apply only to certain banks. * * *
* * * * *
7. Model C-5A.
A bank may use this form when it is providing the disclosure to
its consumers required by Sec. 229.57 explaining when a substitute
check is the legal equivalent of an original check for all purposes
and the circumstances under which the consumer may make a claim for
expedited recredit.
* * * * *
53. In appendix E, in newly-redesignated paragraph XXXVII.D.,
revise the first sentence of paragraph 1. and add new paragraphs 11.
through 15., to read as follows:
XXXVII. * * *
D. Model Notices, Models C-12 through C-25
1. Models C-12 through C-25 generally. Models C-12 through C-25
provide models of the various notices required by the regulation. *
* *
* * * * *
11. Models C-22 through C-25 generally. Models C-22 through C-25
provide models for the various notices required when a customer who
receives substitute checks makes an expedited recredit claim under
Sec. 229.54 for a loss related to a substitute check. The Check 21
Act does not provide banks that use these models with a safe harbor;
therefore, use of these models may, but will not necessarily, be
deemed compliance with the requirements of Sec. 229.54(e).
12. Model C-22 Full Refund Notice. A bank may use this model
when crediting the entire amount of a customer's expedited recredit
claim within ten days of the customer submitting the claim or when
crediting the remaining amount of a customer's expedited recredit
claim by the 45th calendar day after the customer submitted the
claim, as required under Sec. 229.54(e)(1).
13. Model C-23 Partial Refund Notice. A bank may use this model
when crediting a partial expedited recredit to a customer, pending
further investigation of the claim, as required under Sec.
229.54(e)(1).
14. Model C-24 Denial of Claim. A bank may use this model when
denying a claim for an expedited recredit under Sec. 229.54(e)(2).
15. Model C-25 Reversal of Refund. A bank may use this model
when reversing an expedited recredit that was credited to a
customer's account under Sec. 229.54(e)(3).
* * * * *
54. In appendix E, remove the phrase ``the Act'' wherever it
appears and add the phrase ``the EFA Act'' in its place.
By order of the Board of Governors of the Federal Reserve
System, December 22, 2003.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 04-300 Filed 1-7-04; 8:45 am]
BILLING CODE 6210-01-P