national check payments certification exceptions – returns and adjustments copyright© 2014 by the...

National Check Payments Certification

Exceptions – Returns and Adjustments

Copyright© 2014 by the Electronic Check Clearing House Organization

NCP 2015 Exam CycleCore Training Series

Session 8

2National Check Payments Certification

NOTICESThis training course may provide an introduction to or summary of various aspects of check payments and the legal and rules framework for check image exchange. Responsibility for compliance with image exchange rules, and/or the legal, operational and regulatory requirements applicable to check image exchange, remains at all times with the financial institution participating in check image exchange and/or the individual or company using a check image exchange service.

This presentation and the information contained herein is not intended as legal or compliance advice or recommendation to any person or company. This document could include technical inaccuracies or typographical errors and individual users are responsible for verifying any information found in this presentation and related “live” webinar or webinar playback. Financial institutions should consult with their legal counsel regarding legal and operational requirements applicable to any check image exchange program they may offer or in which they participate.

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

Copyright© 2014 by the Electronic Check Clearing House Organization(Certain contributed content subject to third party copyrights)


Session Overview

• Exceptions Overview–Returns–Adjustments

• Federal Reserve Bank – Adjustments• ECCHO Rules – Adjustments

Exceptions Overview


General Definition

• Exceptions: Any transaction in the form of a paper, image or electronic item that requires further investigation before final disposition of item can be determined–Returns and adjustments are exceptions

• Return – Item that is dishonored by Paying Bank–Must have specific return reason

• Adjustment – Correction for error(s) generally caused during item processing–May involve research to resolve multiple errors

Ex: Mis-encoding, mis-routing, incorrect posting, etc.


Governing Rules & Regulations

• Returns – Governed by statutory and regulatory requirements–UCC midnight deadline (UCC 4-301)–Reg CC expeditious return requirement (§ 229.30)

• Adjustments – Handled “by agreement” of the parties–Fed OC 3 rules–Clearing house rules–Third party providers for operational procedures

and settlement


Return or Adjust?

• An error has occurred – as the Paying Bank your return clocks are ticking– UCC requires you make the determination to pay or

dishonor the item by midnight of the day following presentment– Reg CC requires if the item is to be returned, the return

(or notice or return) be handled expeditiouslyReturn must reach depositary bank by 4:00 p.m. (local time of

depositary bank) two days after presentment• Do you return the item? • Do you adjust the item?–What are your options?

8

Return vs. AdjustmentAdjustments Considerations

• Made to appropriate party– Minimizes negative impact to customers– Handled within banking system– Adjustment areas familiar with process

• Can be less efficient than return– Settlement timing; Additional documentation

• May lose right to return item (missed deadlines for timely return)– Significant issue if item is counterfeit or forged and not duplicate

Paying BankBOFD

IMAGE

Deposit Chk

Image Adjustment

Image Return

or

Sub Chk

Drawer Customer

Duplicates

Sub Chk Return

IMAGE

Depositing Customer

Caused Duplicate

9

Return vs. Adjustment

Paying BankBOFD

IMAGE

Deposit Chk

Image Adjustment

Image Return

and

or

Sub Chk

Drawer Customer

Duplicates

IMAGE

Depositing Customer

Caused Duplicate

Sub Chk Return

Returns Considerations

• Faster – Timely Settlement – Do not lose right of return– In remote capture environment (RDC), speed is a consideration if

unsure of cause of duplicate• May have negative customer impacts

– Depositing customer and/or drawer customer


Exceptions – Returns• Return items may be directed back to:– BOFD, or – Prior collecting or presenting bank

• Returns processes dependent on channel used and agreements in place–Must still follow regulatory requirements

For expeditious return, check must be received at depositary bank by 4:00 pm 2nd business day following banking day of presentment

• Reg CC requires Paying Bank:– Identify return and reason for return

Clearly indicate reason for returnIf substitute check, place information within image on front of

substitute check


Types of Image Returns

• Customer and Administrative Returns–Customer Returns

May be called monetary returnso Dishonored item under check lawo Usually attempt charge to customer account

–Administrative Returns/Administrative reasonsMay be called non-monetary returns

o Return for reason other than dishonored itemo Usually handled internally rather than charged to customero Can also be handled through adjustment process

If handled as returno Must adhere to legal requirements for return item

–All Returns Carry Monetary Value


Reasons for Return

• Common Return Reason Codes–Customer Return Reasons

NSF – Not Sufficient Funds = ‘A’Stop Payment = ‘C’Closed Account = ‘D’Endorsement Missing = ‘I’Not Authorized = ‘Q’Warranty Breach = ‘3’

–Administrative ReasonsImage Missing = ‘I’Ineligible = ‘Q’Unusable Image = ‘U’Duplicate Presentment = ‘Y’


Return Reason Codes / Duplicates

• Need to use return reasons in electronic indorsement records–Helps identify represented items–Helps prevent false “positives” in duplicate

checking–Following slides offer brief review of

forward/return “flipping” of indorsement recordsCovered in prior session


25

26*

Paying Bank

Bank of First Deposit

(BOFD)

Legend:• BOFD – Lt. Green*• Paying Bank – Red

Forward Presentment

• Check Detail Record (Type 25)• Check Detail Addendum A Record (Type 26)


31/33

26 * 32

X9.100-187 FlowsReturn

“26” becomes “32” record

Return Record/Return Addendum B

35

Return Reason in Type 31 & 35 records

New “35” record added

by Paying Bank

Bank of First Deposit

(BOFD)

Legend:• BOFD – Lt. Green*• Paying Bank – Red

Paying Bank


• Return Routing Hierarchy

ECCHO Rules


Represented Items

• Depositary Bank may represent items–Automatically

Represents items based on agreement with depositors– Provide items back to depositing customer

Customer subsequently re-depositsRedeposit can be through original BOFD or 2nd BOFD

Paying BankBOFD

Image Presentment

(1) Image Return

(2)

Sub Chk Re-deposit

(3)

Represented Item(3)

Depositor/Customer

Deposit Original

(1)

Sub Chk(2)


Presentment and Returns• Item must first be presented in order to be dishonored• Image may not to be presented if it did not meet eligibility

requirements– Could have ICL containing item(s) that reject due to administrative

reasons– Items may/may not have been presented

• Examples:– Item in cash letter file did not contain both front and back of image

Item rejects in IQA – Not considered to be presentedReturned for administrative reason (Ineligible item)

– Cash letter file is processed; duplicate detection process flags several itemsImage cash letter file was presentedItems that are duplicates returned for administrative reason (Duplicate

item)


Summary

• Proper use of return code critical for timely returns and proper handling–Refer to paper on CheckImageCentral website

on proper use of return reason codes for additional informationhttp://checkimagecentral.org/pdf/ProperUseOfReturnCodesInImageExchange.pdf

http://checkimagecentral.org/pdf/ProperUseOfReturnCodesInImageExchange.pdf



Adjustments


Adjustments – By Agreement

• Federal Reserve Operating Circular 3 (OC3)–FRBs “Check Adjustments Services Operations

Resources” provide:Reporting timeframeRequirements for adjustment request through FRB

–Outlines specific adjustment types, related timing, documentation (DTF) requirements, etc.

• ECCHO Adjustment Rules and Matrix–Apply to Members for image exchange/return

activitiesWhether or not forward or return item exchanged under

ECCHO Rules


Top Five Fed Adjustments

• Five adjustment types account for 93% of the cases received first six months of 2014– PAID– ENC–NCH/NCI– PEA–WIC/URCC

• Will review in this section

PAID

40%

ENC32%

NCH/NCI17%

All Other7%

WIC/URCC2%

ERR2%

Source: Federal Reserve Retail Payments Office (RPO)


Check Adjustments• Other Adjustments under both Fed rules and private sector

rules (ECCHO Rules):– ENL – Enclosed Not Listed– LNE – Listed Not Enclosed– Informational Adjustments

OSCR – Original or Sufficient CopySOR – Source of ReceiptDISP – DispositionINFO – Information Requested

– Others• For more information refer to:– Federal Reserve online Check adjustments at: www.frbservices.org– ECCHO Adjustment Rules and Matrix (Exhibits II)

www.eccho.org/rules

http://www.frbservices.org/

http://www.eccho.org/rules


Common Adjustment Types• PAID: Duplicate paid item– Request for credit when both items have been paid

• ENC: Encoding error– Amount different than legal (written) amount; or– Written amount differs from the stated cash letter / return letter

amount• NCH: Noncash item– Includes MICR-Mismatch and NCI

• PEA: Pricing Error Adjustment– Reserved for FRB use– Fed sends to BPD to correct saving bond redemption errors

• WIC/URCC – Unauthorized Remotely Created Check claim– URCC – Warranty claim for the RCC– WIC – Warranty Indemnity Claim being a Check 21 WIC claim


Fed OC 3 – Overview

• For cash item or returned check received from the Fed:–FRB may adjust bank’s account if bank has a claim

• FRB does not perform adjustments with respect to every type of claim–Bank may need to pursue certain claims directly

• Bank seeking adjustment via Fed must adhere to OC3 and Fed’s requirements for adjustments– Item to be adjusted must have been exchanged

through Fed



• Timing–Fed undertakes to handle adjustment claims and

make entries within a reasonable time after receipt• Fed assumes no responsibility for:–Determining whether the statements in forms

submitted are correct –Arbitrating disputes between banks

• Bank may be subject to criminal penalties under Federal and/or State law for knowingly making false statements to influence action of FRB



• Fed does not:–Process adjustments of $25.00 of less

Unless for PAID item claim;Not Our Item (NOI) claim; orError (ERR) claim (effective 6/23/14)

–Review forms to verify correct information–Handle forgeries

• See sample 2013 ”Check Adjustment Request” form on following slide

FRB – Check Adjustment Request

Four new fields for PAID item claims:• FCL1 – From Cash Letter• TCL1 – To Cash Letter• CLD1 – Cash Letter Date• SEQ1 – Seq Number

Updated :June 23, 2014

Do not submit errors of $25 or less unless request is for:• Paid Item (PAID);• Not our Item (NOI); or • Entry in Error (ERR)ERR update: Changed min. from $25.01 min to $.01- Jun-2014 update


FRB Check Adjustment Updates

• New fields and documentation requirements associated with PAID investigation type (ITYP)–Four additional fields added to CA1000 (case open)

message on FedLine and paper adjustment form (see form/prior slide)–Certification form no longer required for single or

multiple PAID items–DTFs for single PAID item optional–DTFs for multiple PAID items still required

• Verify compliance with timing, current forms, all documentation requirements


PAID versus DUP

• PAID vs. DUP–PAID = Same item presented and paid twice–DUP = Duplicate adjustment entry

• PAID adjustment–Used when duplicate checks have been

presented to an account• DUP adjustment–Used when a duplicate adjustment entry has

been charged to the financial institution for the same error


FRB Adjustments: PAID ITYP• Photocopied and Original Paid (PAID)–Most prevalent adjustment type– Fed estimates of PAID adjustment requests received:

75% are both items from same depositor25% are items from two different depositors

• Duplicate image(s) and/or substitute check(s)– Receiver has choice on which item to report as duplicate

• Timing–Within six calendar months of the cash letter or return letter date

Same day entry– After six months but within one year of cash letter or return letter

dateProvide informationAdvise requesting institution to deal direct


FRB Adjustments: ENC ITYP

• Encoding Error (ENC):– Amount different than legal (written) amount or differs

from the stated cash letter / return letter amount

• Timing–Within six calendar months of cash letter or return letter

dateSame day entry

– After six calendar months of cash letter or return letter dateNo entryProvide SOR/DISP and advise requesting institution to deal

direct


FRB Adjustment Types

• NCH – Noncash Item–Covers both MICR Mismatch and NCI errors

• Timing:–Within 20 business days of cash letter date

Give immediate provisional entry –After 20 business days / Within six months of

cash letter dateEntry made after approval of offsetting institution

–After six monthsAdvised to deal direct


FRB Adjustment Types

• Non-Conforming Item (NCI): Used to adjust items that fail Fed standards for image clearing–Applicable only for FedForward, FedReturn depositors

NCI can only can come from the FedBank cannot report NCI to Fed but use NCH as discussed

on prior slide• Timing–Fed will charge-back items in cash letter that:

Do not conform to Fed standard for qualityIneligible for image clearing Contains invalid routing number


FRB Adjustments• Pricing Error Adjustment (PEA): For FRB use only – Initiated by the Fed at request of Bureau of Public Debt (BPD) –When BPD determines bond was:

Redeemed or processed for incorrect amount– Subject to standard adjustment minimum

BPD will not initiate adjustments for errors of $25 or less• Disputes Regarding PEA Adjustment–Use Entry in Error (ERR)

Institutions disputing BPD determination submit ERR adjustment request to Fed

Fed will contact BPD on institution’s behalfWill respond with correcting adjustment entry or additional

information – Further disputes, institutions will deal direct with BPD


FRB Adjustments

• Warranty/Indemnity Claim (WIC) Associated with Unauthorized Remotely Created Checks (URCCs) –Paying institution alleges RCC not authorized in

amount stated on check to payee on check

• Timing–Within 90 calendar days cash letter date

Same day entry–After 90 calendar days

No entryAdvise requesting institution to deal direct

ECCHO Rules – Adjustments


ECCHO Adjustment Rules

• Example of Adjustment flow– Illustrates both Members and Provider

• Adjustments types– Listed in matrix (ECCHO Rules- Exhibits II)

Member Receiving Adjustment

Adjustment Claim

Adjustment Provider

Member Sending Adjustment

Agreements

Adjustment Claim

Agreements


ECCHO Adjustment Rules• Must comply with requirements of Adjustment Matrix– Type of Adjustment– Time periods, dollar amount or other requirements– Documentation– Settlement and rejection

• Members may make Claim directly or through Provider • Adjustments may come from:– Forward or return under ECCHO Rules or– From exchange outside ECCHO Rules but members have agreed to

adjust under Rules• Members must determine to:– Bring claim under rules or – Return, represent or make claim through other channel

• Except for Group Adjustment each claim relates to only one image or return


ECCHO Adjustment Rules• Notification – Must notify Sending Member of receipt of

claim by end of next banking day after receipt– Notice in format and manner as agreed or established by provider

• Documentation – May be sent various ways– Can include Electronic Image or Electronic/Image Return by

sending:ImageSubstitute CheckPrint-out, photocopy, other physical representation of item

• Settlement – Members agree to process– If claim through provider, settlement of provider used

• Compensation – Not covered under these Rules– If provider allows, may make claim through provider– Optionally may make claim outside these Rules under other law

or other rules


ECCHO Adjustment Rules• Settlement Timing (unless Members agree otherwise)– “With entry” – Settle by close of banking day following banking day

claim was received– “Without entry” – Settle by agreement of members or time period

established by provider• Reject Claim – May reject or initiate claim to reverse settlement

if claim:– Did not comply with Rules or Matrix– Did not relate to item handled by Member– Claim was duplicate of another claim– Member previously initiated claim relating to same matter– Member has not established factual basis for claim

• Rules do not establish liability for members with respect to claim• Rules do not alter Member’s obligation under UCC, Reg CC, or

Rules


ECCHO – Check Adjustments

• Common Adjustment Types supported under ECCHO Adjustment Rules and Matrix–Duplicate – Item–Entry in Error–Amount Error–Non Conforming Image (NCI)–Unauthorized Remotely Created Check–Not Our Item (NOI)–Mis-matched MICR–Pricing Error Adjustment (PEA)


IMAGE

Bank D

Paying Bank P

Agreement

RDC Customer

Payments Galore

Statement

Electronic EndorsementRT # of Bank D

IMAGE (ICL)

IMAGE (ICL)

IMAGE (ICL)

Statement

Federal ReserveDeposits Check

Bank E

Physical and/or Electronic Endorsement

RT # of Bank E

Electronic EndorsementRT # of FRB

Note: Banks are all members of same clearinghouse

Duplicate Item Example


Duplicates in the Private Sector

• Two options to resolve duplicates:–Adjustment process: Duplicate – Item

Timingo 180 calendar days with entryo Up to 1 year without entry

Commonly used to report item previously paid o Both sources requiredo Adjustment typically goes to last institution to present item

–Return processUsed under administrative reason for returns at some

institutionsProvider must agree to accept administrative reason for

returns


ECCHO Rules – Adjustments• Entry in Error– Includes Adjusting Errors and Settlement– Timing

20 business days with entryUp to 1 year without entry

• Amount Error – Legal amount– Includes Encoding error or Misread– Timing

180 calendar days with entryUp to 1 year without entry

• Non-conforming image (NCI)– Includes image missing, ineligible item, and invalid RT– Timing

20 business days with entryUp to 1 year without entry


ECCHO Rules – Adjustments• Unauthorized Remotely Created Check – Two options under

the ECCHO Rules– Rule 8 – Warranty claim

Warranty under Reg CCo Moves liability from Paying bank to BOFD

Send through returns processo Form requiredo Specific timings to be followed

– Adjustment ProcessMirror Fed process and timingBOFD can not disclaim by stating Paying Bank’s customer authorized RCC

o Original could have been exchanged under ECCHO Rules oro Outside of ECCHO Rules and members agree to adjust under the rules

– Timing90 calendar days with entryUp to 1 year without entry

Time in Days

Payi

ngBa

nkBO

FD

11060* 75 90 1051

*60 days from availability of customer’s statement

Customer files statement within 60

calendar daysDra

win

gCu

stom

er

11060* 75 90 1051

Dep

ositi

ngCu

stom

er

ClaimDeadline to file disclaimer or request for

copy of customer statement 15 Business Days after receipt of claim

Deadline to provide copy 15 Business Days

Deadline to file disclaimer may be

extended 5 Business Days.

If not received

Requ

est C

opy

Deadline for receipt of BOFD disclaimer

or request for copy - 15 Business Days

Deadline for breach of warranty claim 15 Business Days after receipt of customer

statement. Settlement within 2 Business Days of claim

Dr customer’s account Rule 8

Dr customer’s accountRule 8

Claim

Dis

clai

mer

Send

Cop

y

Or

Rule 8 Warranty Claim Process

47


ECCHO Rules – Adjustments

• Mis-matched MICR–Item forward or return has mis-match between

image of item, related physical item, or Presentment Notice (MICR data record)Sender warrants these will all be the same

o “Chain of warranties”

–Timing180 calendar days with entryUp to 1 year without entry

MICR Mis-match

0000678941234555501450000047621

Presentment Notice (MICR Data File)

Image

Does Not Equal

MICR Mismatch Example

National Check Payments Certification 49

Note: Banks are all ECCHO members

Paying BankBank A

IMAGE


ECCHO Rules – Adjustments• Not Our Item (NOI)–Timing

90 calendar days with entryUp to 1 year without entry

• Pricing Error Adjustment (PEA)–ECCHO implemented PEA adjustment for use between

members–Timing

Deadline not applicable since ECCHO Member did not receive forward or return item

– Information requiredSame as if process through Federal Reserve


Questions

??? ?? ?


Recommended Resources• ECCHO Operating Rules and Commentary www.eccho.org/rules– Adjustments Matrix – Exhibits II

• “Proper Use of Return Codes in Image Exchange”: http://checkimagecentral.org/pdf/ProperUseOfReturnCodesInImageExchange.pdf

• FRB Operating Circular No. 3 (OC3) – Collection of Cash Items and Returned Checks www.frbservices.org/regulations/operating_circulars.html

• FRB Check Adjustments http://www.frbservices.org/operations/checkadjustments/quick_reference_guide.html

http://www.eccho.org/rules



http://www.frbservices.org/regulations/operating_circulars.html

http://www.frbservices.org/operations/checkadjustments/quick_reference_guide.html

Thank You!

Exceptions – Returns and Adjustments

Electronic Check Clearing House Organization3710 Rawlins Street; Suite 1075

Dallas, Texas 75219

NOTICEThis NCPC Program document contains copyrighted materials of its publisher.

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

Ellen Heffner, NCPDirector of Education

[email protected]

national check payments certification exceptions – returns and adjustments copyright© 2014 by the...

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