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2018 NCP Exam Prep

2018 Questions

for

Daily Emails

Question & Answer Format Listed by Email Dates

i.

NCP “Question of the Day” emails are sent to each 2018 NCP Exam registrant

every business day in preparation for the annual exam.

These emailed questions and answers are intended to help familiarize the exam candidate

with the reference materials used to create the exam as well as important topics

influencing the check industry.

Questions are strictly designed as a study aid and are not presented in the same

multiple-choice format as the exam questions and do not contain the exact

questions found on the NCP Exam.

Copyright© 2017 by the Electronic Check Clearing House Organization

National Check Payments Certification

2018 Program

ii.

General Tips

Preparing for the NCP Exam

✓ Plan now – Set aside dedicated study time

✓ Read through the P.R.E.P. Guide more than once

• Complete all section quizzes in the guide

• Review answers and go back and look-up any missed answers

• Take the multiple-choice “Sample Exam” in the P.R.E.P. Guide

o See Exhibit 14 in the 2018 Guide

✓ Review exam topics and resources

• NCP Blueprint lists categories of topics covered in the exam

• Exam resources can be found on the website at: www.eccho.org/ncpc_training

✓ Review these “Question of the Day” emails

• Consider creating personal flash cards from the daily questions

• Questions can be used to prompt good daily study habit

✓ Consider an Exam Training class

• Training is offered by ECCHO’s NCP Educational Partners

• May be instructor-led, webinars or in-person or on-demand recorded sessions

• For a complete list of NCP Educational Partners and links to available training offerings go to: www.eccho.org/ncpc_training

NOTICE

FOR INTERNAL USE ONLY

This document could include technical inaccuracies or typographical errors and individual users are responsible for verifying any information found herein. Users should consult the actual text of laws,

payment rules, standards or other reference materials when evaluating a particular question or issue.

These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHOTM.

Copyright© 2017 by the Electronic Check Clearing House Organization

National Check Payments Certification

2018 Program

http://www.eccho.org/ncpc_training

http://www.eccho.org/ncpc_training

iii.

Page Left Intentionally Blank

Week 1: January 2 – 5 Jan. 2

What is the purpose of the Uniform Commercial Code?


What is the purpose of the Uniform Commercial Code?

✓ As outlined in the first article of the Uniform Commercial Code, the purpose and policies of

the UCC are to:

• Simplify, clarify, and modernize the law governing commercial transactions

• Permit the continued expansion of commercial practices through custom, usage, and agreement of the parties

• Make uniform the law among the various jurisdictions.

✓ UCC is organized as “articles” each dealing with a different subject area

• Article 3 covers negotiable instruments

• Article 4 cover bank deposits

• Article 4A covers funds transfer

✓ Articles 3 and 4 of the UCC apply directly to uniform check law and work in combination with Federal Reserve regulations and operating circulars

✓ The Uniform Commercial Code does not have legal effect in a state or US territory unless UCC provisions are enacted by the individual legislatures as statutes


What do the provisions of Article 3 and Article 4 of the Uniform Commercial Code (UCC) cover?


What do the provisions of Article 3 and Article 4 of the Uniform Commercial Code (UCC) cover?

U.C.C. - Article 3 - Negotiable Instruments

✓ Establishes the general duty standards for parties to act in good faith and exercise ordinary care; Deals with negotiable instruments such as checks, money orders or traveler’s checks.

✓ Main provisions cover:

• Part 1. General Provisions and Definitions

• Part 2. Negotiation, Transfer, and Indorsement

• Part 3. Enforcement of Instruments

• Part 4. Liability of Parties

• Part 5. Dishonor

• Part 6. Discharge and Payment

o For additional information, see reference at: UCC Article 3

U.C.C. - Article 4 – Bank Deposits and Collections

✓ Deals with the responsibilities for the collection of items through Depositary, Collecting, and Payor Banks

✓ Main provisions cover:

• Part 1. General Provisions and Definitions

• Part 2. Collection of Items: Depositary and Collecting Banks

• Part 3. Collection of Items: Payor Banks.

• Part 4. Relationship Between Payor Bank and Its Customer

• Part 5. Collection of Documentary Drafts

o For additional information, see reference at: UCC Article 4

http://www.law.cornell.edu/ucc/3/article3.htm

http://www.law.cornell.edu/ucc/4/article4.htm


What is the purpose of Regulation CC?

NOTE

Updates to Regulation CC released in 2017 (eff. July 1, 2018) will not be in effect during the 2018 NCP

Exam window and therefore are not addressed here for the 2018 NCP Exam. Related Question of the

Day questions and answers are based solely on the currently effective version of the regulation.


What is the purpose of Regulation CC?

Regulation CC § 229.1 states it’s authority and purpose as follows: (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 (12 U.S.C. 4001–4010) (the EFA Act) and the Check Clearing for the 21st Century Act (12 U.S.C. 5001–5018) (the Check 21 Act). Additional Information The regulation contains four subparts and six appendices.

✓ Subpart A: Definitions and administrative enforcement provisions

✓ Subpart B: Availability of Funds, Disclosure of Funds Availability Policies

• Jointly controlled by Federal Reserve Board and CFPB (Consumer Financial Protection Bureau)

• Key provisions include:

o the duty of banks to make funds deposited into accounts available for withdrawal, including availability schedules

o exceptions to the schedules o disclosure of funds availability policies o payment of interest o liability of banks for failure to comply with Subpart B

✓ Subpart C: Collection of Checks

• Requirements and specific warranties made by:

o Paying Bank o Returning Bank o Depositary Bank

• Includes the following:

o expeditious collection and return of checks by banks o the direct return of checks o the manner in which the paying bank and returning banks must return checks to

the depositary bank o notification of nonpayment by the paying bank o indorsement and presentment of checks o same-day settlement for certain checks o the liability of banks for failure to comply with subpart

✓ Subpart D: Rules relating to substitute checks:

• the creation and legal status of substitute checks

• substitute check warranties and indemnity

o expedited recredit procedures for resolving improper charges and warranty claims associated with substitute checks provided to consumers

o disclosure and notices that banks must provide


What did the Check 21 Act do?


What did the Check 21 Act do?

H.R. 1474, more commonly referred to as the Check 21 Act or Check 21, was intended to:

✓ Facilitate check truncation by authorizing substitute checks

✓ Foster innovation in the check collection system without mandating receipt of checks in electronic form

✓ Improve the overall efficiency of the Nation’s payments system

Mandated that all banks must accept substitute checks (paper items)

✓ Established that Check 21 supersedes any provision of state or Federal law, including the UCC, that is inconsistent with the Act, such as requiring the return of original checks to consumers in periodic account statements

✓ Created a new negotiable instrument, a “substitute check”, a paper reproduction of the original check that -

• Accurately represents all of the information on the front and back of the original item including the MICR line,

• Conforms to industry standards for substitute checks (ANS X9.100-140), and

• Must bear the legend: “This is a legal copy of your check. You can use it the same way you would use the original check.”

✓ Provided warranty criteria for substitute checks:

• Meets the legal equivalence requirements

• Not a duplicate of another paid item

✓ Provided indemnity criteria for substitute checks:

• Reconverting bank, and any subsequent banks handling a substitute check, indemnify for any losses incurred due to the receipt of a substitute check instead of the original

✓ Established provisions for expedited recredit:

• A substitute check was incorrectly charged to the account or there is a warranty breach from the substitute check

• The customer suffered a loss

• The original or better copy is required to determine the validity of the claim

✓ Outlined required evaluation and reporting from Federal agencies resulting from check truncation:

• Consumer funds availability improvements

• Economic and operational efficiencies

• Increase or decrease in check-related fraud losses

• Assessment of consumer acceptance


Additional Information

The provisions of the Check 21 Act, as implemented by Regulation CC, provide legal recognition and equivalency of substitute checks. Additional agreements and/or rules are required for image exchanges. The Act does not govern electronic check image exchange, and therefore image exchanges should be performed under an agreement between the parties. See white paper located on the CheckImage Collaborative website entitled, “The Role of Private Sector Rules and Federal Reserve System Rules in Check Image Exchange”, (Feb 12, 2008)

✓ In summary it states check image rules establish the legal rights and obligations of financial institutions in connection with their forward and return check image exchanges

✓ Rules and other agreements are required to address operational and technical requirements to reduce risk to exchange participants and can allow the same or compatible rules to be applied to check image exchanges across multiple financial institutions and multiple exchange networks.

✓ Financial institutions that exchange check images without coverage under check image rules, or other agreements to address the unique legal issues associated with check image exchange, potentially expose the sending and receiving financial institutions to increased payment and operational risks.

http://www.checkimagecentral.org/

http://www.checkimagecentral.org/wp-content/uploads/2015/10/RoleOfPrivateSecRulesAndFRSRules1.pdf



In the event of inconsistent rules or regulatory provisions, which check rules or regulations

prevail?


In the event of inconsistent rules or regulatory provisions,

which check rules or regulations prevail?

In general, Federal law preempts state law in cases of inconsistency -

✓ Regulation CC § 229.41 –

• The provisions of this subpart supersede any inconsistent provisions of the U.C.C. as adopted in any state, or of any other state law, but only to the extent of the inconsistency

✓ Regulation J § 210.3 (f) –

• The provisions of this subpart supersede any inconsistent provisions of the Uniform Commercial Code, of any other state law, or of part 229 of this title (Regulation CC), but only to the extent of the inconsistency.

✓ Uniform Commercial Code § 3-102 (c) –

• Regulations of the Board of Governors of the Federal Reserve System and operating circulars of the Federal Reserve Banks supersede any inconsistent provision of this Article to the extent of the inconsistency


What options are available in the U.S. for image exchange rules coverage?


What options are available in the U.S. for image exchange

rules coverage?

Either Federal Reserve or Private Sector Rules (Clearing House or unique agreement) options exist for image exchange rules coverage in the U.S.:

✓ Federal Reserve Image Exchange Rules

• Operating Circular 3 (OC3) applies to the handling of all cash items accepted for forward collection and all returned checks accepted for return by the Federal Reserve Bank (FRB)

o The Fed is itself a party to the sending and receiving of items under these rules o Incorporates Federal and state regulations (Reg J, Reg CC and UCC) regarding

check processing, and o Includes any additional Reserve Bank provisions for Fed exchanges

✓ Private Sector Image Exchange Rules

• ECCHO Operating Rules and Commentary: Applies to the forward collection and/ or return of check images between ECCHO members that agree to exchange images under the ECCHO Rules

o ECCHO is not a direct party to the exchange of items o Participation under Rules is voluntary, but once agreed must conform to Rules

provisions o Incorporates Federal and State regulations (Reg CC and UCC) regarding check

processing o May vary certain provisions by agreement between exchanging members

• Bi-lateral or Multi-lateral Agreements: Unique rules for exchanging images between two or more parties respectively, and outline specific areas of interest for that exchange

o Agreements must be re-negotiated for each new relationship added outside of the bi- or multi-lateral exchanging parties


Does Check 21 provide legal rules or address check image exchanges between banks?


Does Check 21 provide legal rules or address check image

exchanges between banks?

No. The provisions of the Check 21 Act, as implemented by Regulation CC, provide legal recognition and equivalency of substitute checks. Additional agreements and/or rules are required for image exchanges. The Act does not govern electronic check image exchange, and therefore image exchanges should be performed under an agreement between the parties. Additional Information

See white paper located on the CheckImage Collaborative website entitled, “The Role of Private Sector Rules and Federal Reserve System Rules in Check Image Exchange”, (Feb 12, 2008)

✓ In summary it states check image rules establish the legal rights and obligations of financial institutions in connection with their forward and return check image exchanges

✓ Rules and other agreements are required to address operational and technical requirements to reduce risk to exchange participants and can allow the same or compatible rules to be applied to check image exchanges across multiple financial institutions and multiple exchange networks.

✓ Financial institutions that exchange check images without coverage under check image rules, or other agreements to address the unique legal issues associated with check image exchange, potentially expose the sending and receiving financial institutions to increased payment and operational risks.

http://www.checkimagecentral.org/




What role does the Federal Reserve play in the U.S. financial payments system?


What role does the Federal Reserve play in the U.S. financial

payments system?

✓ The Federal Reserve has a mandate from Congress to promote an efficient nationwide

payments system. Since 1987, the Reserve Board has –

• Revamped the check-return system

• Improved presentment rights of private-sector banks

• Established rules governing Funds Availability

• Supported Check 21 to Congress

o Substitute checks paved the way for technology improvements to speed check collection and reduce processing costs

✓ The twelve Federal Reserve Banks (FRBs) also provide banking services to depository

institutions and to the federal government:

• For depository institutions, FRB’s maintain accounts and provide services to –

o Collect checks and settle interbank payments o Electronically transfer funds o Distribute and receive currency and coin to meet the public’s demand

• For the federal government, acts as fiscal agents to –

o Pay Treasury checks o Process electronic payments o Issues, transfers, and redeems U.S. government securities


What rules and regulations apply to items exchanged through the Federal Reserve?


What rules and regulations apply to items exchanged

through the Federal Reserve?

For the handling of all cash items accepted for forward collection and all returned checks accepted for return by the Federal Reserve, the following rules and regulations apply:

✓ Operating Circular No. 3 (OC3)

• Specific terms and conditions for handling items through the Federal Reserve

o Additional detail to provisions established under Reg J

• The Fed is itself a party to the sending and receiving of items under these rules

• Incorporates federal and state regulations (Reg J, Reg CC and UCC) regarding check processing

✓ Regulation J (Reg J)

• Provides the legal framework for collecting checks and other items, and to settle balances through the Federal Reserve

• Establishes procedures, duties, and responsibilities among –

o Federal Reserve Banks o Senders and payors of checks and other items o Senders and recipients of Fedwire funds transfers

• Works in conjunction with federal and state regulations, and Federal Reserve operating circulars

✓ Regulation CC (Reg CC)

• Federal regulation which governs the availability of funds deposited in checking accounts and the collection and return of checks

✓ Uniform Commercial Code (UCC)

• Does not have legal effect in a state or US territory unless UCC provisions are enacted by the individual legislatures as statutes

• Articles 3 and 4 of the UCC apply directly to uniform check law and work in combination with Federal Reserve regulations and operating circulars –

o Article 3 deals with negotiable instruments such as checks, money orders or traveler’s checks

o Article 4 covers the bank deposits and collections


According to the Federal Reserve Operating Circular No. 3 (OC3), what items are eligible for

image exchange?


According to the Federal Reserve Operating Circular No. 3 (OC3), what items are eligible for image exchange?

The Federal Reserve Banks Operating Circular No. 3 (OC3) outlines eligibility for both paper and image cash letters in terms of cash items or non-cash items: The process of sending items via image exchange equates to sending an “electronic item” to the Federal Reserve, which –

• Is an electronic image of an item and information describing that item that a Reserve Bank agrees to handle as a cash item;

o Checks payable in a state of the U.S. (under § 210.2 of Regulation J *) o Government checks o Postal money orders

• Must conform to the Reserve Bank’s technical requirements for processing electronic items;

• Must be data captured from a check, which “by definition must be paper”;

• May be forward collection or return item

* Section 210.2 of Regulation J – “State” means a State of the United States, the District of Columbia,

Puerto Rico, or a territory, possession or dependency of the United States:

- The Virgin Islands and Puerto Rico are deemed to be in the Second Federal Reserve District - Guam, American Samoa and the Northern Mariana Islands are deemed to be in the Twelfth

Federal Reserve District

Additional Information According to OC3, section 7.3, an image cash letter or image return letter sent to the Reserve Bank may not include an electronic item derived from:

• Items in carrier envelopes

• Food coupons

• Foreign items

• Photocopies of missing or destroyed items

• Notices in lieu of return


According to the ECCHO Rules, what items are eligible for image exchange?


According to the ECCHO Rules, what items are eligible for

image exchange?

ECCHO Rules, Section XIX (C) outlines image eligibility as follows:

✓ Item is defined as a “check” under § 229.2(k) of Regulation CC;

✓ Item is a Fully Qualified Item; and

✓ Sending Bank and the Receiving Bank have entered into an agreement and the item is eligible for imaging under that agreement.

Additional Information ECCHO considerations for item image eligibility:

✓ Sending Bank and Receiving Bank may, under their image exchange agreement, permit the exchange of images of items that are not Fully Qualified

• Partial MICR permitted by agreement; defined as

o As-read MICR: MICR line information obtained from automated scanning or reading of check (paper or image) without repair, modification, or manual keying of MICR line information

Allowable characters for As-Read MICR Information - numeric and special symbols allowable in MICR line information under applicable industry standards

o RNA (Routing Number and Amount) Include all information from routing number and dollar amount fields

o Do not include other character (numeric or otherwise) not contained in MICR line of Related Physical Check

✓ An item in a carrier is eligible for imaging if both:

• Front and back of the item are visible through the carrier

o Carrier qualifies for handling by automated check processing equipment

• Item otherwise meets the requirements for item eligibility in Section XIX of the Rules

✓ If the carrier is encoded, the carrier, and not the item, must be fully qualified in compliance with the ECCHO Rules


What provisions are included in the predominant image exchange rules to address the exchange

of images of savings bonds?


What provisions are included in the predominant image exchange rules to address the exchange of images of

savings bonds?

✓ Federal Reserve OC3: Requirements associated with bonds deposited electronically

• FRB makes no warranties with respect to savings bonds processed

• Must have a completed agreement on file

o New agreement required for separately sorted ICL deposits; No new agreement needed for savings bonds included in a mixed ICL

• Files must conform to ANSI X9.37-2003 and UCD requirements

• Savings bonds can be deposited in forward cash letters only

o No Return cash letter types will be supported

• MICR line requirements:

o With preprinted MICR line: Must contain full MICR line in Type 25 item detail record

o Without preprinted MICR line: Only routing number for savings bonds and the redemption amount in Type 25 item detail record are required

• Physical endorsements are not required

o Electronic endorsements in Type 26 or Type 28 records required, consistent with check image deposit guidelines

• Physical amount encoding is not required

• Pricing Error Adjustment (PEA)

o FRB provides immediate credit, subject to payment and adjustment o PEA adjustment is result of Bureau of the Fiscal Service (Fiscal Service)

identification of difference between redemption amount it calculates and amount it was charged for the bond

✓ ECCHO Rules:

• Provides agreement to transmit images of savings bonds between Members with exclusions

o Bonds do not meet requirements for image eligibility under Rules

• Rule establishes general standard of care applicable to handling Savings Bond similar to typical correspondent bank arrangements

• Comingling of images of savings bonds and checks allowed

• Industry Formats and Standards for Data File:

o Must follow specifications set forth in Fed Quick Reference Guide

• Bank may reject and return image of Bond for any reason prior to payment by Fed

• Payment subject to correction and adjustment from Treasury or Federal Reserve Bank (as fiscal agent to US Treasury)

o Sending Bank responsible for full amount of rejected, returned image, correction or adjustment

• Required use of adjustment process


o Receiving Bank will send adjustment claim with entry to Sending Bank that originally sent image to the Receiving Bank


✓ Treasury Requirements: Exchange of bonds are subject to regulations and guidelines of the Bureau of the Fiscal Service

• Paying Agent Stamp: Financial institution that is the Paying Agent must apply paying agent stamp to the front of the savings bond prior to imaging

o Should not interfere with any of the information in the MICR line or with serial number reflected on the front of the savings bond

• Retention and Destruction: Paying agents must retain paper savings bond for at least 30 calendar days following the date that the ICL containing the paid savings bond was submitted to the FRB

o Paper savings bonds must be stored in a secured location with physical, procedural and systemic controls in place

o At the end of the retention period, paper savings bonds must be destroyed in a manner that adequately destroys any personally identifiable information (PII) beyond recognition and reconstruction

✓ For additional details, refer to:

• See Federal Reserve Operating Circular 3 (OC3) - Appendix C: Redeemed Savings Bonds and Savings Notes; and

• ECCHO Operating Rules Section XVII: Transmission of Images of Savings Bonds for Redemption by U.S. Treasury Department


What is the purpose of the provisions of the ECCHO Adjustment Rules and related

Adjustment Matrix?


What is the purpose of the provisions of the ECCHO Adjustment Rules and related Adjustment Matrix?

The ECCHO Rules, Section XII and the related Adjustment Matrix set forth the processes and procedures for ECCHO members to make adjustment claims

✓ Adjustment rules provisions are in Section XII of the ECCHO Operating Rules

✓ Rules state members must comply with requirements of Adjustment Matrix for:

• Type of Adjustment

• Timing for claims

• Dollar threshold amount (if any)

• Documentation or other requirements

✓ Members may make Claim directly or through Provider

✓ Adjustments may come from:

• Forward or return item exchanged under the ECCHO Rules; or

• From items exchanged outside ECCHO Rules but members agree to adjust under the Rules

✓ Other provisions include notification of Sending Member and settlement and related timing

• In general, ECCHO members agree to a settlement process or use that of a provider

• Timing considerations:

o "With entry" claims: By close of banking day following banking day claim was received

o "Without entry" claims: By agreement of members or as established by provide


What Rules and/or Regulations provide oversight for checks converted to ACH?


What Rules and/or Regulations provide oversight for checks converted to ACH?

It depends on the Standard Entry Class code (SEC code), but will generally be the NACHA rules which provide the legal framework for moving transactions through the ACH system. The NACHA operating rules and guidelines include provisions for:

✓ Responsibilities, liabilities, and warranties of participants

✓ Availability of funds for converted check transactions

✓ Return timeframes for converted check transactions

Regulation E (Reg E) – Provides protection for consumers whose accounts are debited or credited via ACH:

✓ Initiated through an electronic terminal or telephone

✓ For the purpose of ordering, instructing, or authorizing a financial institution to debit or credit an account

Examples: Each of the following check conversion SEC codes, when initiated as paper checks then converted to ACH entries for payment and clearing, are no longer bound by the laws governing check payments:

✓ Accounts Receivable Entry (ARC)

✓ Point-of-Purchase Entry (POP)

✓ Back Office Conversion Entry (BOC)

Example of check conversion to ACH where check regulations would still apply:

✓ Re-presented Check Entry (RCK)

• Originated as a check, has been dishonored and is re-presented via ACH network

• Continues to be treated as a check transaction even though processed as ACH transaction

• Regulation CC, Uniform Commercial Code, and ACH Rules apply but not Reg E


When converting a check to an ARC, POP, or BOC transaction, what are the authorization

requirements?


When converting a check to an ARC, POP, or BOC transaction, what are the authorization requirements?

Authorization Requirements:

✓ ARC: Notice must be provided to Receiver

✓ POP: Authorization must be on the receipt signed at time of purchase

✓ BOC: Signage & written notice at time of payment

• Example: At the check-out or where check is presented as “source document” to the Originator


Other SEC codes and related Authorization Requirements;

✓ RCK: Signage or written notice at time of payment

✓ XCK: ODFI warrants it has the necessary authority to initiate the XCK entry.

For additional information, see the NACHA rules or NCP P.R.E.P. Guide, Exhibit 4 “ACH Check Conversion and Selected SEC Codes Overview”


How does Regulation CC define a “check”?


How does Regulation CC define a “check”?

Regulation CC § 229.2 (k) defines a check as –

✓ A negotiable demand draft drawn on or payable through or at an office of a bank;

✓ A negotiable demand draft drawn on a Federal Reserve Bank or a Federal Home Loan Bank;

✓ A negotiable demand draft drawn on the Treasury of the United States;

✓ A demand draft drawn on a state government or unit of general local government that is not payable through or at a bank;

✓ A United States Postal Service (USPS) money order; OR

✓ A traveler's check drawn on or payable through or at a bank

AND is -

✓ Payable in U.S. funds

• Either an original or substitute check

Additional Information: See Uniform Commercial Code (UCC) for negotiable instrument, draft and check definitions: UCC 3-104 defines a negotiable instrument as a written order signed by the drawer or an unconditional promise to pay a fixed sum of money.

✓ Unconditional unless it states an express condition to payment

• Promise or order subject to, or governed by, another record;

• Rights or obligations with respect to promise or order stated in another record

✓ An instrument as defined by UCC is a draft if it is an order or a note if it is a promise

✓ Check definition found within the negotiable instrument definition – see UCC [3-104(f)]

• Check: A draft payable on demand and drawn on a bank

• Includes cashier's check or teller's check even though described by another term (i.e. a “money order“)


What types of items must be given “next-day availability”?


What types of items must be given “next-day availability”?

Regulation CC §229.10 states when deposits of various types must be made available to a bank’s customers, measured in business days following the banking day on which the deposit is made: The following types of deposits must be made available on the first business day following the banking day of deposit (“next-day availability”):

✓ Cash

✓ Electronic payments (under other rules, funds for most electronic deposits are made available on the day of deposit)

✓ Check deposits made in person –

• U.S. Postal Service Money Orders

• Checks drawn on the Federal Reserve

• State or local government checks

• Cashier’s, certified, or teller’s checks

• On-us checks

✓ Check deposits made in person or at a proprietary ATM –

• U.S. Treasury checks deposited in an account held by a payee of the check

Note: The first $200 (or the total amount of the deposit if it is less than $200) of non-“next-day”

checks must be made available the next day.


Under what conditions may a bank delay the availability of funds on deposited checks?


Under what conditions may a bank delay the availability of funds on deposited checks?

Regulation CC §229.13 permits financial institutions to delay the availability of funds applied to a deposit under certain conditions for a “reasonable period of time”, which is generally outlined as:

✓ On-us checks - one additional business day (total of two business days)

✓ Non on-us checks - five additional business days (total of seven business days)

Not eligible for extended holds:

✓ Deposited cash

✓ Electronic payments (deposits)

Eligible for extended holds:

✓ Large deposits (greater than $5,000)

• First $5,000 of deposit is subject to the availability otherwise provided for checks

• Amount in excess of $5,000 may be held for an additional period of time

✓ Re-deposited checks

• May be held unless the check was returned because of missing indorsement or postdated check

✓ Deposits to accounts that are repeatedly overdrawn

• An account may be considered repeatedly overdrawn and items may be held if during the previous six months the account was negative as follows:

o Six or more banking days o Two or more banking days in the amount of $5,000 or more

✓ Reasonable cause to doubt the collectability of a check

• May exist for postdated checks or checks that the paying institution has said it will not honor

✓ Checks deposited during emergency conditions

• Beyond the control of the financial institution such as natural disasters or communications malfunctions

✓ Deposits into accounts of new customers

• Accounts open less than 30 days

o Next-day availability applies only to cash, electronic payments, and the first $5,000 of any other next-day items (e.g.; cashier's, certified, teller's, traveler's, and federal, state and local government checks)

o Remaining amount from large deposit holds must be available by the ninth business day

Week 5: January 29 – February 2 Jan. 29

What disclosures are required by Regulation CC?


What disclosures are required by Regulation CC?

✓ Section 229.15 General disclosure requirements

• Requires that disclosures set forth under subpart B be written clearly and conspicuously and in a form that the customer can keep.

✓ Section 229.16 Specific availability-policy disclosure

• Stipulates that a bank must provide disclosure statements describing its policy as to when funds deposited in an account are available for withdrawal. *

✓ Section 229.17 Initial disclosures

• States banks must disclose their specific availability policies to potential customers prior to opening a new account.

✓ Section 229.18 Additional disclosure requirements

• Requires banks to make certain disclosures:

o On all preprinted deposit slips provided to customers o At all locations where bank employees accept consumer deposits o At automated teller machines (ATMs) o Upon request o When any changes are made to their policies

✓ Section 229.57 Consumer awareness (Substitute Check) disclosures

• Requires banks make disclosure statements informing consumers –

o A substitute check is the legal equivalent of an original check o Recredit rights that apply when a substitute check was not properly charged to

an account


According to Regulation CC, what does it mean to return an item expeditiously?


According to Regulation CC, what does it mean to return an

item expeditiously?

Regulation CC § 229.30 Paying Bank’s responsibility for return of checks, requires the "expeditious" return of checks:

✓ A paying bank returns a check expeditiously if it:

• Returns the check to the depositary bank within two business days of presentment

• Sends the check in the same manner as it (or a similarly situated bank) would have sent the check for forward collection.


Once the Paying Bank makes the decision to dishonor and return the item, it must meet both return timings:

✓ UCC requirement to get the return out by the midnight deadline); and

✓ Regulation CC requirement to return the item in an expeditious manner

Uniform Commercial Code (UCC) Article 4 (§ 4-301):

✓ Paying Bank may return item before it has made final payment and before its midnight deadline, which is midnight on its next banking day following the banking day on which it received the relevant item, if the Paying Bank:

• Returns the item; or

• Returns an image of the item, by agreement and the image is returned in accordance with that agreement; or

• Provides notice of dishonor or nonpayment if the item is unavailable for return.

Regulation CC - § 229.30 Paying bank's responsibility for return of checks

✓ If paying bank determines not to pay a check, it shall return the check in an expeditious manner

• Paying bank returns a check in an expeditious manner if it sends the returned check in a manner such that the check would normally be received by the depositary bank not later than 4:00 p.m. (local time of the depositary bank) the second business day following the banking day on which the check was presented to the paying bank


What item(s) may be excluded from the Regulation CC expeditious return requirements?


What item(s) may be excluded from the Regulation CC

expeditious return requirements?

A Check drawn on the U.S. Treasury, a U.S. Postal Service money order or a check drawn on a state or unit of local government that is not payable through or at a bank

✓ These items would be excluded from the expeditious return, notice-of-nonpayment, and same-day settlement requirements

• See Regulation CC section 229.42 Exclusions for details

Week 5: January 29 – February 2 Feb. 1

What is a Remotely Created Check?


What is a Remotely Created Check?

Regulation CC § 229.2 (fff) defined a remotely created check (RCC) as:

✓ Check that is not created by the paying bank and that does not bear a signature applied, or purported to be applied, by the person on whose account the check is drawn.

Examples of uses for RCC’s:

✓ A check authorized by a consumer over the telephone that is not created by the paying bank and bears a legend on the signature line, such as “Authorized by Drawer,” –

• Credit card payment made over the phone today to avoid late charges

• Purchase made over the phone to a telemarketer by someone who doesn’t have a credit card

• Compensate a merchant for the return of an initial paper check due to insufficient funds


What recourse does a consumer/ Paying Bank have for an unauthorized RCC?


What recourse does a consumer/ Paying Bank have for an

unauthorized RCC?

✓ Consumer recourse for unauthorized Remotely Created Check (RCC):

• If identified within the bank's deadline for statement examination and the bank cannot verify that the customer actually authorized the charge, the customer is entitled to a refund.

o Valid reason for consumer claims – Depositor did not authorize the check

o Invalid reasons for consumer claims – Oral authorization obtained and recorded, the depositor forgot about it Charge was authorized, depositor is now experiencing "buyer's remorse"

✓ Paying Bank recourse for suspected unauthorized Remotely Created Check (RCC):

• If identified prior to its midnight deadline, may be returned per UCC § 4-301.

• If identified after its midnight deadline has passed:

o May submit a breach of warranty claim per Reg CC § 229.34 that the item is not authorized –

Bank that transfers or presents a remotely created check and receives a settlement or other consideration warrants to the transferee bank, any subsequent collecting bank, and the paying bank that the person on whose account the remotely created check is drawn authorized the issuance of the check in the amount stated on the check and to the payee stated on the check.

Within 30 days after the claimant has reason to know of the breach and the identity of the warranting bank

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