[Code of Federal Regulations]
[Title 12, Volume 2]
[Revised as of January 1, 2006]
From the U.S. Government Printing Office via GPO Access
[CITE: 12CFR210.12]

[Page 293-297]
 
                       TITLE 12--BANKS AND BANKING
 
                   CHAPTER II--FEDERAL RESERVE SYSTEM
 
PART 210_COLLECTION OF CHECKS AND OTHER ITEMS BY FEDERAL RESERVE BANKS 
AND FUNDS TRANSFERS THROUGH FEDWIRE (REGULATION J)--Table of Contents
 
 Subpart A_Collection of Checks and Other Items By Federal Reserve Banks
 
Sec. 210.12  Return of cash items and handling of returned checks.

    (a) Return of items--(1) Return of cash items handled by Reserve 
Banks. A paying bank that receives a cash item from a Reserve Bank, 
other than for immediate payment over the counter, and that settles for 
the item as provided in Sec. 210.9(b) of this subpart, may, before it 
has finally paid the item, return the item to any Reserve Bank (unless 
its Administrative Reserve Bank directs it to return the item to a 
specific Reserve Bank) in accordance with subpart C of part 229 of this 
chapter (Regulation CC), the Uniform Commercial Code, and the Reserve 
Banks' operating circulars. A paying bank that receives a cash item from 
a Reserve Bank also may return the item prior to settlement, in 
accordance with Sec. 210.9(b) of this subpart and the Reserve Banks' 
operating circulars. The rules or practices of a clearinghouse through 
which the item was presented, or a special collection agreement under 
which the item was presented, may not extend these return times, but may 
provide for a shorter return time.
    (2) Return of checks not handled by Reserve Banks. A paying bank 
that receives a check as defined in Sec. 229.2(k) of this chapter 
(Regulation CC), other than from a Reserve Bank, and that determines not 
to pay the check, may send the returned check to any Reserve Bank 
(unless its Administrative Reserve Bank directs it to send the returned 
check to a specific Reserve Bank) in accordance with subpart C of part 
229 of this chapter (Regulation CC), the Uniform Commercial Code, and 
the Reserve Banks' operating circulars. A returning bank may send a 
returned check to any Reserve Bank (unless its Administrative Reserve 
Bank directs it to send the returned check to a specific Reserve Bank) 
in accordance with subpart C of part 229 of this chapter (Regulation 
CC), the Uniform Commercial Code, and the Reserve Banks' operating 
circulars.
    (b) Handling of returned checks. (1) The following parties, in the 
following order, are deemed to have handled a returned check sent to a 
Reserve Bank under paragraph (a) of this section--
    (i) The paying or returning bank;
    (ii) The paying bank's or returning bank's Administrative Reserve 
Bank;
    (iii) The Reserve Bank that receives the returned check from the 
paying or returning bank (if different from the paying bank's or 
returning bank's Administrative Reserve Bank); and
    (iv) Another Reserve Bank, if any, that receives the returned check 
from a Reserve Bank.
    (2) A Reserve Bank that is not described in paragraph (b)(1) of this 
section is not a person that handles a returned check and is not a 
returning bank with respect to a returned check.
    (3) The identity and order of the parties under paragraph (b)(1) of 
this section determine the relationships and the rights and liabilities 
of the parties under this subpart, part 229 of this chapter (Regulation 
CC), and the Uniform Commercial Code.
    (c) Paying bank's and returning bank's agreement. The warranties, 
authorizations, and agreements made pursuant to this paragraph may not 
be disclaimed and are made whether or not the returned check bears an 
indorsement of the paying bank or returning bank. By sending a returned 
check to a Reserve Bank, the paying bank or returning bank does all of 
the following.
    (1) Authorization to handled returned check. The paying bank or 
returning bank authorizes the paying bank's or

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returning bank's administrative Reserve Bank, and any other Reserve Bank 
or returning bank to which the returned check is sent, to handle the 
returned check (and authorizes any Reserve Bank that handles settlement 
for the returned check to make accounting entries) subject to this 
subpart and to the Reserve Banks' operating circulars.
    (2) Warranties for all returned checks. The paying bank or returning 
bank warrants to each Reserve Bank handling a returned check that the 
returned check bears all indorsements applied by parties that previously 
handled the returned check, in paper or electronic form, for forward 
collection or return.
    (3) Warranties for all returned checks that are electronic items. A 
paying bank or returning bank that sends a returned check that is an 
electronic item makes the returning bank warranties set forth in and 
subject to the terms of Sec. 229.34 of this chapter for the electronic 
item as if it were a check subject to that section.
    (4) Warranties for returned checks that are electronic items that 
are not representations of substitute checks. If the returned check is 
an electronic item that is not a representation of a substitute check, 
the paying bank or returning bank warrants to each Reserve Bank handling 
the returned check that--
    (i) The electronic image portion of the item accurately represents 
all of the information on the front and back of the original check as of 
the time that the original check was truncated; the information portion 
of the item contains a record of all MICR-line information required for 
a substitute check under Sec. 229.2(aaa) of this chapter; and the item 
conforms to the technical standards for an electronic item set forth in 
an operating circular; and
    (ii) No person will receive a transfer, presentment, or return of, 
or otherwise be charged for, the electronic item, the original item, or 
a paper or electronic representation of the original item such that the 
person will be asked to make payment based on an item it already has 
paid.
    (5) Paying bank or returning bank's liability to Reserve Bank. (i) 
Except as provided in paragraph (c)(5)(ii) of this section, a paying 
bank or returning bank agrees to indemnify each Reserve Bank for any 
loss or expense (including attorneys' fees and expenses of litigation) 
resulting from--
    (A) The paying or returning bank's lack of authority to give the 
authorization in paragraph (c)(1) of this section;
    (B) Any action taken by a Reserve Bank within the scope of its 
authority in handling the returned check; or
    (C) Any warranty or indemnity made by the Reserve Bank under 
paragraph (e) of this section or part 229 of this chapter.
    (ii) A paying bank's or returning bank's liability for warranties 
and indemnities that a Reserve Bank makes for a returned check that is a 
substitute check, a paper or electronic representation thereof, or any 
other electronic item is subject to the following conditions and 
limitations--
    (A) A paying bank or returning bank that sent an original check 
shall not be liable for any amount that a Reserve Bank pays under 
subpart D of part 229 of this chapter or under Sec. 210.12(e)(1)(iii) 
of this subpart, absent the paying bank's or returning bank's agreement 
to the contrary;
    (B) Nothing in this subpart alters the liability under subpart D of 
part 229 of this chapter of a paying bank or returning bank that sent a 
substitute check or a paper or electronic representation of a substitute 
check; and
    (C) A paying bank or returning bank that sent an electronic item 
that is not a representation of a substitute check shall not be liable 
under paragraph (c)(5)(i) of this section for any amount that the 
Reserve Bank pays under subpart D of part 229 of this chapter or 
paragraph (e)(1)(iii) of this section that is attributable to the 
Reserve Bank's own lack of good faith or failure to exercise ordinary 
care.
    (d) Preservation of other warranties and indemnities. Nothing in 
paragraph (c) of this section limits any warranty or indemnity by a 
returning bank or paying bank (or a person that handled an item prior to 
that bank) arising under state law or regulation (such as the U.C.C.), 
other federal law or regulation (such as part 229 of this chapter), or 
an agreement with a Reserve Bank.
    (e) Warranties by and liability of Reserve Bank. (1) The following 
provisions

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apply when a Reserve Bank handles a returned check under this subpart.
    (i) Warranties for all items. The Reserve Bank warrants to the bank 
to which it sends the returned check that the returned check bears all 
indorsements applied by parties that previously handled the returned 
check, in paper or electronic form, for forward collection or return.
    (ii) Warranties for all returned checks that are electronic items. A 
Reserve Bank that sends a returned check that is an electronic item 
makes the returning bank warranties set forth in and subject to the 
terms of Sec. 229.34 of this chapter as if the electronic item were a 
check subject to that section.
    (iii) Warranties and indemnity for returned checks that are 
electronic items that are not representations of substitute checks. (A) 
If the returned check is an electronic item that is not a representation 
of a substitute check, the Reserve Bank warrants to the bank to which it 
sends the returned check that--
    (1) The electronic image portion of the item accurately represents 
all of the information on the front and back of the original check as of 
the time that the original check was truncated; the information portion 
of the item contains a record of all MICR-line information required for 
a substitute check under Sec. 229.2(aaa) of this chapter; and the item 
conforms with the technical standards for an electronic item set forth 
in an operating circular; and
    (2) No person will receive a transfer, presentment, or return of, or 
otherwise be charged for, the electronic item, the original item, or a 
paper or electronic representation of the original item such that the 
person will be asked to make payment based on an item it already has 
paid.
    (B) If the returned check is an electronic item that is not a 
representation of a substitute check--
    (1) Except as provided in paragraph (e)(1)(iii)(B)(2) of this 
section, the Reserve Bank agrees to indemnify the bank to which it sends 
the returned check (the recipient bank) for the amount of any losses 
that the bank incurs under subpart D of part 229 of this chapter for an 
indemnity that the bank was required to make under subpart D of part 229 
of this chapter in connection with a substitute check later created from 
the returned check.
    (2) A Reserve Bank shall not be liable under paragraph 
(e)(1)(iii)(B)(1) of this section for any amount that the recipient bank 
pays under subpart D of part 229 of this chapter that is attributable to 
the lack of good faith or failure to exercise ordinary care of the 
recipient bank or a person that handled the item, in any form, after the 
recipient bank.
    (2) A Reserve Bank shall not have or assume any other liability to 
any person except--
    (i) As provided in paragraph (e)(1) of this section;
    (ii) For the Reserve Bank's own lack of good faith or failure to 
exercise ordinary care as provided in subpart C of part 229 of this 
chapter; or
    (iii) As provided in subpart D of part 229 of this chapter.
    (d) Preservation of other warranties and indemnities. Nothing in 
paragraph (c) of this section limits any warranty or indemnity by a 
returning bank or paying bank (or a person that handled an item prior to 
that bank) arising under state law or regulation (such as the U.C.C.), 
other federal law or regulation (such as part 229 of this chapter), or 
an agreement with a Reserve Bank.
    (e) Warranties by and liability of Reserve Bank. (1) The following 
provisions apply when a Reserve Bank handles a returned check under this 
subpart.
    (i) Warranties for all items. The Reserve Bank warrants to the bank 
to which it sends the returned check that the returned check bears all 
indorsements applied by parties that previously handled the returned 
check, in paper or electronic form, for forward collection or return.
    (ii) Warranties for all returned checks that are electronic items. A 
Reserve Bank that sends a returned check that is an electronic item 
makes the returning bank warranties set forth in and subject to the 
terms of Sec. 229.34 of this chapter as if the electronic item were a 
check subject to that section.
    (iii) Warranties and indemnity for returned checks that are 
electronic items that are not representations of substitute checks. (A) 
If the returned check is an

[[Page 296]]

electronic item that is not a representation of a substitute check, the 
Reserve Bank warrants to the bank to which it sends the returned check 
that--
    (1) The electronic image portion of the item accurately represents 
all of the information on the front and back of the original check as of 
the time that the original check was truncated; the information portion 
of the item contains a record of all MICR-line information required for 
a substitute check under Sec. 229.2(aaa) of this chapter; and the item 
conforms with the technical standards for an electronic item set forth 
in an operating circular; and
    (2) No person will receive a transfer, presentment, or return of, or 
otherwise be charged for, the electronic item, the original item, or a 
paper or electronic representation of the original item such that the 
person will be asked to make payment based on an item it already has 
paid.
    (B) If the returned check is an electronic item that is not a 
representation of a substitute check--
    (1) Except as provided in paragraph (e)(1)(iii)(B)(2) of this 
section, the Reserve Bank agrees to indemnify the bank to which it sends 
the returned check (the recipient bank) for the amount of any losses 
that the bank incurs under subpart D of part 229 of this chapter for an 
indemnity that the bank was required to make under subpart D of part 229 
of this chapter in connection with a substitute check later created from 
the returned check.
    (2) A Reserve Bank shall not be liable under paragraph 
(e)(1)(iii)(B)(1) of this section for any amount that the recipient bank 
pays under subpart D of part 229 of this chapter that is attributable to 
the lack of good faith or failure to exercise ordinary care of the 
recipient bank or a person that handled the item, in any form, after the 
recipient bank.
    (2) A Reserve Bank shall not have or assume any other liability to 
any person except--
    (i) As provided in paragraph (e)(1) of this section;
    (ii) For the Reserve Bank's own lack of good faith or failure to 
exercise ordinary care as provided in subpart C of part 229 of this 
chapter; or
    (iii) As provided in subpart D of part 229 of this chapter.
    (f) Recovery by Reserve Bank. If an action or proceeding is brought 
against (or if defense is tendered to) a Reserve Bank that has handled a 
returned Check based on--
    (1) The alleged failure of the paying or returning bank to have the 
authority to give the authorization in paragraph (c)(1) of this section;
    (2) Any action by the Reserve Bank within the scope of its authority 
in handling the returned check; or
    (3) Any warranty or indemnity made by the Reserve Bank under 
paragraph (e) of this section or part 229 of this chapter,
    (g) Methods of recovery. (1) The Reserve Bank may recover the amount 
stated in paragraph (d) of this section by charging any account on its 
books that is maintained or used by the paying or returning bank (or by 
charging another returning Reserve Bank), if--
    (i) The Reserve Bank made seasonable written demand on the paying or 
returning bank to assume defense of the action or proceeding; and
    (ii) The paying or returning bank has not made any other arrangement 
for payment that is acceptable to the Reserve Bank.
    (2) The Reserve Bank is not responsible for defending the action or 
proceeding before using this method of recovery. A Reserve Bank that has 
been charged under this paragraph (f) may recover from the paying or 
returning bank in the manner and under the circumstances set forth in 
this paragraph (f). A Reserve Bank's failure to avail itself of the 
remedy provided in this paragraph (f) does not prejudice its enforcement 
in any other manner of the indemnity agreement referred to in paragraph 
(c)(3) of this section.
    (h) Reserve Bank's responsibility. A Reserve Bank shall handle a 
returned check, or a notice of nonpayment, in accordance with subpart C 
of part 229 and its operating circular.
    (i) Settlement. A subsequent returning bank or depositary bank shall 
settle with its Administrative Reserve Bank for returned checks in the 
same manner and by the same time as for cash items presented for payment 
under this

[[Page 297]]

subpart. Settlement with its Administrative Reserve Bank is deemed to be 
settlement with the Reserve Bank from which the returning bank or 
depositary bank received the item.
    (j) Security interest. When a paying or returning bank sends a 
returned check to a Reserve Bank, the paying bank, returning bank, and 
any prior returning bank grant to the paying bank's or returning bank's 
Administrative Reserve Bank a security interest in all of their 
respective assets in the possession of, or held for the account of, any 
Reserve Bank, to secure their respective obligations due or to become 
due to the Administrative Reserve Bank under this subpart or subpart C 
of part 229 of this chapter (Regulation CC). The security interest 
attaches when a warranty is breached or any other obligation to the 
Reserve Bank is incurred. If the Reserve Bank, in its sole discretion, 
deems itself insecure and gives notice thereof to the paying bank, 
returning bank, or prior returning bank, or if the paying bank, 
returning bank, or prior returning bank suspends payments or is closed, 
the Reserve Bank may take any action authorized by law to recover the 
amount of an obligation, including, but not limited to, the exercise of 
rights of set off, the realization on any available collateral, and any 
other rights it may have as a creditor under applicable law.

[53 FR 21985, June 13, 1988, as amended at Reg. J, 59 FR 22966, May 4, 
1994; 62 FR 48173, Sept. 15, 1997; Reg, J, 69 62560, Oct. 27, 2004]