questions for daily emails...ncp “question of the day” emails are sent each business day to the...

Questions

for

Daily Emails

2019 NCP Program

Question & Answer Format Listed by Email Dates

i.

NCP “Question of the Day” emails are sent each business day to the NCP Exam registrant 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 payments 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.

NOTICES

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 included in this document.

The Clearing House Payments Company L.L.C. makes no warranties, expressed or implied, regarding a person’s use of this document as a preparation tool for the NCP Exam. This NCPC

program document is subject to change in future editions without notice to any person.

These program training materials may not be reproduced or published, in whole or in part, without the express permission of The Clearing House Payments Company L.L.C.

Copyright© 2018 by The Clearing House Payments Company L.L.C.

National Check Payments Certification

2019 Program

ii.

General Tips

Preparing for the NCP Exam

✓ Plan now – Set aside dedicated study time

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

• Complete all eleven (11) section quizzes in the Guide

o Review quiz answers (also included in the Guide) and go back and look-up any missed questions

• Review the multiple-choice “Sample Exam” in the Guide (Exhibit 14)

o Answer all questions then check your answers (Answer Key included) o Go back and look up any missed questions

✓ Focus on things you don’t know or where you may need to refresh or update

✓ Review exam topics and resources in the NCP Exam Blueprint

• Listing of general knowledge areas covered in the exam broken out by rules and regulations, fraud and risk mitigation, check operations and check products

o Exam resources are here on the website: www.eccho.org/ncpc_training

✓ Review these “Question of the Day” emails

• Consider creating personal flash cards from these daily questions & answers

• Flipping through the Q&As can prompt good daily study habits

✓ Consider an Exam Training class

• Training is offered by ECCHO’s NCP Educational Partners

• May be instructor-led webinars, in-person training series or multi-day review sessions, or may be offered as 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

.



2019 Program

http://www.eccho.org/ncpc_training

http://www.eccho.org/ncpc_training

iii.

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Week 1: January 2 – 4 Jan. 2

What is the purpose of the Uniform Commercial Code and what provisions

are included in Articles 3 and 4?


What is the purpose of the Uniform Commercial Code and

what provisions are included in Articles 3 and 4?

✓ Uniform Commercial Code: 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

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

✓ UCC is organized as “articles” each dealing with a different subject area (see additional details below):

• Article 3 covers negotiable instruments

• Article 4 cover bank deposits and collections

• Article 4A covers funds transfer

✓ 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:

o Part 1. General Provisions and Definitions o Part 2. Negotiation, Transfer, and Indorsement o Part 3. Enforcement of Instruments o Part 4. Liability of Parties o Part 5. Dishonor o Part 6. Discharge and Payment o For additional information, see 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:

o Part 1. General Provisions and Definitions o Part 2. Collection of Items: Depositary and Collecting Banks o Part 3. Collection of Items: Payor Banks. o Part 4. Relationship Between Payor Bank and Its Customer o Part 5. Collection of Documentary Drafts o For additional information, see UCC Article 4


What is the purpose of Regulation CC?


What is the purpose of Regulation CC?

Regulation CC § 229.1 states its authority and purpose as follows:

✓ Authority and purpose: 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 Regulation CC contains four subparts and multiple 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 BCFP (Bureau of Consumer Financial Protection)

• Key provisions include:

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

o Exceptions: to availability schedules o Payment of interest o General disclosure requirements: Disclosure of funds availability policies o Liability of banks for failure to comply with subpart B

✓ Subpart C: Collection of Checks

• Definitions of check, electronic check and electronic returned check, and electronically-created item

• Provisions for electronic checks/electronic returned checks to be subject to subpart C

• Requirements and specific warranties made by:

o Paying Bank, Returning Bank and Depositary Bank

• Warranties and Indemnities

o Expeditious collection and return of checks, electronic checks and electronic returned check by banks

o Transfer and presentment warranties for remotely created checks o Direct return of checks and electronic returned checks o Paying bank and returning banks requirements for returns to depositary bank o Notification of nonpayment o Indorsement o Presentment and issuance of checks o Same-day settlement for certain checks o Variation by agreement o Liability of banks for failure to comply with subpart C

✓ Subpart D: Rules relating to substitute checks:

• Includes creation and legal status of substitute checks, warranties and indemnity, expedited recredit procedures, disclosure and notices banks must provide


Do provisions of the Check 21 Act apply to check image exchange?


Do provisions of the Check 21 Act apply to check image exchange?

✓ No. Check 21, as implemented in subpart D of Regulation CC, provides legal recognition and equivalency of substitute checks. It does not include provisions for the exchange of check images.

• However, Regulation CC defines electronic checks and electronic returned checks which, by definition, must be derived from a paper check.

• Subpart C lists the warranties and indemnities related to electronic checks and electronic returned checks. See §229.34 for more information.

Additional Information

✓ In general, the Check Clearing for the 21st Century 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 U.S. payments system;

• Created the “substitute check”, a paper reproduction of the original check;

• Mandated that all banks must accept substitute checks;

• Provided warranty and indemnity criteria for substitute checks

• Provided expedited recredit procedures

• Provided disclosure and notices banks must provide


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 channels are available in the U.S. for image exchange?


What channels are available in the U.S. for image exchange?

Images are exchanged by agreement. Such agreements may be between a bank and the Federal Reserve or between one or more banks for a private sector exchange. Exchanging images through the Federal Reserve Bank (FRB) subjects a financial institution to

FRB image exchange rules:

✓ Federal Reserve Rules – Operating Circular 3 (OC 3):

• 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 FRB is itself a party to the sending and receiving of items under these rules o Incorporates federal and state regulations (Regulation J, Regulation CC and

UCC) regarding check payments, and o Includes any additional Reserve Bank provisions for FRB exchanges

Exchanging images through a private sector exchange subjects a financial institution to the

Rules agreed upon when agreeing to the exchange:

✓ Private Sector Image Exchange Rules:

• ECCHO Operating Rules and Commentary: Clearinghouse Rules that apply 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 (Regulation CC and UCC) regarding

check payments 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;

• Agreements must outline specific areas of interest related to that exchange

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


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 Regulation J

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

• Incorporates federal and state regulations regarding check processing

✓ Regulation 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

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

Note: Regulation J updates were released late last year. Regulation J and Federal Reserve Operating

Circular 3 (OC 3) are interdependent, and neither were available in final form when these materials were

updated. Therefore, only the 2018 effective versions for both Regulation J and OC 3 are covered in these

questions, in the 2019 NCP training and on any related questions on the 2019 NCP Exam.


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

Note: OC 3 and Regulation J updates were released late last year. Regulation J and Federal Reserve

Operating Circular 3 (OC 3) are interdependent, and neither were available in final form when these

materials were updated. Therefore, only the 2018 effective versions for both Regulation J and OC 3 are

covered in these questions, in the 2019 NCP training and on any related questions on the 2019 NCP

Exam.


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


According to the ECCHO Rules, what items are

eligible for image exchange?

ECCHO Rules, Section XIX (C) outlines images eligible for exchange as follows:

✓ Item is a check under § 229.2(k) and electronic check and electronic returned check under 229.2(ggg) 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 standards

• 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 detail record o Without preprinted MICR line: Only routing number for savings bonds and the

redemption amount in Type 25 detail record are required

• Physical endorsements not required

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

• Physical amount encoding 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:

• Agreement to transmit images of savings bonds between Members with exclusions

o Bonds do not meet requirements for image eligibility under Rules

• Rules establishe 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: Receiving Bank will send adjustment claim with entry to Sending Bank that originally sent image to the Receiving Bank


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 (Adjustment Claims) and the related Adjustment Matrix (Exhibit I in the Rules) set forth the processes and procedures for ECCHO members to make adjustment claims

✓ ARules 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 a 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


State the rules and/or regulations that provide oversight for checks converted to ACH entries

and give examples of related SEC codes.


State the rules and/or regulations that provide oversight for

checks converted to ACH entries and give examples of related SEC codes.

Provisions related to the various Standard Entry Class codes (SEC codes) are found in the NACHA Operating Rules and Guidelines which provide the legal framework for moving transactions through the ACH system. This generally includes:

✓ Warranties and the responsibilities and liabilities of participants

✓ Availability of funds for converted check transactions

✓ Return timeframes for converted check transactions

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

✓ Transaction initiated through an electronic terminal or telephone

✓ 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 and 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 an ACH transaction

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


How is a “check” defined in both Regulation CC and in the Uniform Commercial Code (UCC)?


How is a “check” defined in both Regulation CC and in the

Uniform Commercial Code (UCC)?

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;

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

✓ Negotiable demand draft drawn on the Treasury of the United States;

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

✓ United States Postal Service (USPS) money order;

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

✓ Term check includes an original and a substitute check

AND is -

✓ Must be payable in U.S. funds

Regulation CC § 229.2 (ggg) further defines an “electronic check” and “electronic returned check” as –

✓ An electronic image of, and electronic information derived from, a paper check or paper returned check that –

• Is sent to a receiving bank pursuant to and agreement between the sender and the receiving bank; and

• Conforms with ANS X9.100-187

Uniform Commercial Code (UCC) include definitions for instruments, negotiable instruments, drafts and checks:

✓ UCC 3-104 defines a negotiable instrument as:

• a written promise or order;

• to pay a specified amount of money, although interest may be added;

• to the person named on the instrument, or to the bearer of the instrument;

• on demand or at a fixed future time;

• without the requirement for the person promising payment to perform any act in addition to paying the money specified

o Note: Instrument as defined by UCC is a draft if it is an order or a note if it is a promise

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

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

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


What is an Electronically Created Item (ECI), and where is it defined?


What is an Electronically Created Item (ECI), and

where is it defined

✓ ECI or electronically-created item is defined in Regulation CC (229.2 (hhh):

• Electronically-created item means an electronic image that has all the attributes of an electronic check or electronic returned check but was created electronically and not derived from a paper check

Additional Information:

✓ Regulation CC Commentary states the following with regard to the ECI:

• Electronically-created items are also sometimes referred to in the industry as “electronic payment orders” or “EPOs.”

• Because an electronically-created item as defined in Regulation CC never existed in paper form, it does not meet the definition of “electronic check” in 229.2(ggg) and therefore an electronically-created item cannot be used to create a substitute check that is the legal equivalent of the original paper check.

• An electronically-created item can resemble an electronic image of a paper check or an electronic image of a remotely created check

• Examples:

o Corporate customer of a bank, rather than printing and mailing a paper check to a payee, electronically creates an image that looks like an image of the corporate customer's paper checks and emails the image to the payee.

o Consumer uses a smart-phone application through which the consumer provides the payee name, amount, and the consumer's signature. The application electronically sends this information, appearing formatted as a check, to the payee.

o Consumer calls his utility company to make an emergency bill payment, and provides his bank account information. The utility company uses this information to create an electronically-created item and deposits the electronically-created item with its bank to obtain payment from the consumer


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(h) – Availability of deposits subject to exceptions:

✓ Permits financial institutions to extend the availability of funds applied to a deposit under certain conditions for a “reasonable period of time”

✓ Reasonable period is described for each of the following types of checks:

• On-us checks: One additional business day (total of two business days)

• Local checks and certain other checks: Five additional business days (total of seven business days)

• Nonlocal checks: Six additional business days (total of 11 business days)

✓ Longer extension may be reasonable; bank has burden of establishing what’s reasonable

Not eligible for extended holds:

✓ Deposited cash and electronic payments (deposits)

Reg CC §229.13 – Exceptions: Outlines items that may be 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 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 paying institution will not honor

✓ Checks deposited during emergency conditions

• Beyond financial institution’s control (e.g. 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


What types of disclosures are required by Regulation CC?


What types of 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

Week 5: January 28 – February 1 Jan. 28

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

may be excluded from this requirement?


According to Regulation CC, what does it mean to return an item expeditiously and what items may be excluded

from this requirement?

Regulation CC § 229.31 includes the Paying Bank’s responsibility for return of checks and notices of nonpayment:

✓ Returns: Paying bank returns a check expeditiously if it:

• Sends the returned check in a manner such that the check would normally be received by the depositary bank not later than 2:00 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

✓ Notice of nonpayment: If Paying bank determines not to pay a check in the amount of $5,000 or more, it shall:

• Provide notice of nonpayment such that notice would normally be received by the depositary bank not later than 2:00 p.m. (local time of depositary bank) on the second business day following banking day on which check was presented to paying bank

• Notice may be provided by any reasonable means, including the returned check

Regulation CC §229.42 – Exclusions: The following items would be excluded from the expeditious return, the notice of nonpayment, and the same day settlement requirements:

✓ Checks drawn on the U.S. Treasury

✓ U.S. Postal Service money orders

✓ Checks drawn on a state or unit of local government that is not payable through or at a bank


✓ Once Paying Bank makes the decision to return an 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:

o Returns the item; or o Returns an image of the item, by agreement and the image is returned in

accordance with that agreement; or o Provides notice of dishonor or nonpayment if the item is unavailable for return.


Are electronically-created items (ECIs) considered checks or electronic checks under

the provisions of Regulation CC?


Are electronically-created items (ECIs) considered checks or electronic checks under the provisions of Regulation CC?

✓ No. Regulation CC §229.30 outlines how electronic checks and electronic returned checks are covered under the provisions of Subpart C of the regulation:

• Electronic checks and electronic returned checks are subject to this Subpart C as if they were checks or returned checks

o Except where “paper check” or “paper returned check” is specified

• Term “check” or “returned check” as used in Subpart A includes “electronic check” or “electronic returned check,”

o Except where “paper check” or “paper returned check” is specified

✓ Electronic checks and electronic returned checks must be derived from a paper check.

• These definitions do not include electronically-created items

o See the definitions below for electronic check/electronic returned check and ECIs

Regulation CC definitions:

✓ §229.2 (ggg) Electronic check and electronic returned check mean an electronic image of, and electronic information derived from, a paper check or paper returned check, respectively, that—

• (1) Is sent to a receiving bank pursuant to an agreement between the sender and the receiving bank; and

• (2) Conforms with ANS X9.100-187, unless the Board by rule or order determines that a different standard applies or the

• parties otherwise agree.

✓ §229.2 (hhh) Electronically-created item means an electronic image that has all the attributes of an electronic check or electronic returned check but was created electronically and not derived from a paper check.


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 or the Paying Bank have for an unauthorized RCC?


What recourse does a consumer or the Paying Bank

have for an unauthorized RCC?

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

• If identified within bank's deadline for statement examination and the bank cannot verify that the customer authorized the charge, customer may be 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, but 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 (see UCC § 4-301)

• If identified after its midnight deadline has passed:

o May submit a breach of warranty claim


• Regulation CC § 229.34(b) provides the transfer and presentment warranties with respect to a remotely created check:

o 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 –

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.

Week 5: January 28 – February 1 Feb. 1

What does truncate mean, and what does it mean to be a truncating bank in a

check image exchange?

Week 5: January 28 – February 1 Feb. 1

What does truncate mean, and what does it mean to be a truncating bank in a

check image exchange?

Definition are found in Regulation CC:

✓ Truncate (§229.2 (ddd)) states that to 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 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

✓ Truncating bank (§229.2(eee)) means –

• Bank that truncates the original check; or

• 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 information relating to the original check.

Week 6: February 4 – 8 Feb. 4

How does the UCC define the issue of an instrument and the negotiation of an instrument?


How does the UCC define the issue of an instrument and the negotiation of an instrument?

✓ Issue of an Instrument: Uniform Commercial Code (UCC) § 3-105 defines issue of an instrument as:

• First delivery of an instrument by the drawer, whether to a holder or nonholder,

• For the purpose of giving rights on the instrument to any person.

✓ Negotiation: Uniform Commercial Code (UCC) § 3-201(a) defines negotiation as -

• Transfer of possession of an instrument – whether voluntary or involuntary:

o By a person other than the issuer; o To a person who becomes a holder

✓ Requirements for negotiation of an instrument:

• If the instrument is payable to an identifiable person, requires both:

o Transfer of possession of the instrument; AND o Indorsement of the instrument by the holder

• If the instrument is payable to “bearer”:

o Only requires transfer of possession


✓ UCC 3-105 provides the following information:

• An unissued instrument is binding on the drawer, but nonissuance is a defense

• An instrument that is conditionally issued or is issued for a special purpose is binding on the drawer, but failure of the condition or special purpose to be fulfilled is a defense

• The term "issuer" applies to the drawer of an issued or unissued instrument


In the case of an item written with differing courtesy and legal amounts, which amount is

correct?


In the case of an item written with differing courtesy and legal amounts, which amount is correct?

The legal amount - Amount written in words


Uniform Commercial Code (UCC) § 3-114 provides clarification on differing amounts on an item:

✓ If an item contains contradictory terms:

• Handwritten terms prevail over typewritten and printed terms

• Typewritten terms prevail over printed terms

• Words prevail over numbers


According to Regulation CC, what conditions must be met by a depositary

bank to provide the Remote Deposit Capture (RDC) Indemnity?


According to Regulation CC, what conditions must be met by a depositary bank to provide the Remote Deposit Capture

(RDC) Indemnity?

✓ §229.34 (f) Remote deposit capture indemnity states the indemnity is provided by a depositary bank that—

• Is a truncating bank because it accepts deposit of an electronic image or other electronic information related to an original check;

• Does not receive the original check;

• Receives settlement or other consideration for an electronic check or substitute check related to the original check; and

• Does not receive a return of the check unpaid


What is a properly payable item as defined in the Uniform Commercial Code (UCC)?


What is a properly payable item as defined in

the Uniform Commercial Code (UCC)?

The Uniform Commercial Code (UCC) § 4-401 states:

✓ An item is properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank


✓ A bank may charge against the account of a customer an item that is properly payable from that account even though the charge creates an overdraft. However, the customer is not liable for the amount of an overdraft if the customer didn’t sign the item or benefit from the proceeds of the item


What is an Indorsement, how is one provided, and by whom?


What is an Indorsement, how is one provided, and by whom?

What is an Indorsement?

✓ Uniform Commercial Code (UCC) § 3-204(a) defines indorsement as –

• A signature that is made on an instrument for the purpose of negotiating the instrument

How is one provided?

✓ Uniform Commercial Code (UCC) § 3-401(b) indicates that a signature –

• May be made manually or by means of a device or machine; and

• Includes a name or - if they are executed or adopted by a person with a present intention to authenticate a writing – a word, mark or symbol

By whom?

✓ The way a check is made payable will determine who must negotiate/indorse it. Checks may be payable to Bearer or to Order (UCC § 3-109):

• Payable to Bearer - means the holder of the item can negotiate it

• Payable to Order – means it is payable to an identified person and the identified person (or that person’s representative) must indorse the item

• If payable to multiple parties (UCC § 3-110(d) ) –

o Two or more parties with "and" in the middle, both must indorse it o Two or more parties with the names separated by "or" or "and/or", either party

can indorse it


List and explain four different types of indorsements?


List and explain four different types of indorsements?

According to the Uniform Commercial Code (UCC) Article 3, sections 3-205 and 3-206, an identified person may indorse an instrument for the purposes of negotiating the instrument in the following ways:

✓ Special Indorsement –

• Identifies the person to whom an instrument is payable

• Makes the instrument an Order instrument that may only be negotiated by the identified person

✓ Blank Indorsement –

• Does not identify a payee, is not a Special Indorsement

• Consists of only a signature; becomes a Bearer instrument

• May be converted into a Special Indorsement (see prior definition) by writing words above the signature identifying the person to whom an instrument is payable

✓ Anomalous Indorsement –

• Made by person who is not the holder of the instrument

• Does not affect the manner in which the instrument may be negotiated

✓ Restrictive Indorsement –

• Restricts negotiability of instrument with words indicating payment is to be made to:

o A particular account or bank by a particular means; (e.g.; “For Deposit Only”, “For Remote Deposit Only to ABC Bank, or “For Collection”)

o An agent for the benefit of the indorser or another person

• Does not prevent a purchaser of the instrument from becoming a holder in due course, unless the purchaser converts the instrument or has notice or knowledge of other fiduciary duty (e.g.; words included that payment is to the indorser for the benefit of another person)

• In order to become a holder in due course, the holder must –

o Take the item “for value” back to the indorser o Obey the restrictions on the indorsement o Verify this language from UCC – correct and/or expand as needed


✓ For additional considerations related to restrictive indorsements, see Regulation CC 229.34 (f) and related commentary in Appendix E Commentary XX. Section 229.34 Warranties and Indemnities – Part G


What type of indorsement is a bank indorsement?


What type of indorsement is a bank indorsement?

Generally, the words “pay any bank” (or the like) make a bank indorsement a restrictive indorsement.

✓ The Uniform Commercial Code (UCC) § 4-201 states:

• Collecting Bank plays the role of agent (or sub-agent) for the item’s owner in the collection process regardless of the form, or lack of, indorsement

• Once item has been indorsed “pay any bank” or the like, only a bank may acquire the rights of a Holder until the item has been either:

o Returned to the customer who initiated collection o Specially indorsed by a bank to a person who is not a bank


✓ Commentary to Regulation CC §229.35(c) –

• Protects the rights of a customer depositing a check in a bank without requiring the words “pay any bank,” as required by the UCC 4-201(b):

o Use of this language in a depositary bank's indorsement will make it more difficult for other banks to identify the depositary bank;

o Applicable industry standard prohibits such material in subsequent collecting bank indorsements;

• Existence of a bank indorsement provides notice of the restrictive indorsement without any additional words


What do the terms “holder” and “holder in due course” mean with regard to check payments?


What do the terms “holder” and “holder in due course” mean with regard to check payments?

UCC Article 1 (1-201) General Definitions states

✓ Holder means the person in possession of a negotiable instrument that is:

• Payable either to bearer or

• Payable to an identified person that is the person in possession

UCC § 3-302 states:

✓ Holder in due course is a holder who has possession of the check and that took the check:

• In good faith,

• For value,

• Without notice it was overdue or dishonored

• Without notice the signature was unauthorized or altered

• Without knowledge of other claims against it

✓ Benefit of being a holder in due course (HIDC):

• Can enforce the check against drawer even if the check was returned unpaid by the drawee (Paying Bank)


✓ Consider the difference between a "holder" and a "holder in due course":

• One becomes a holder of an instrument through negotiation;

o Bearer instrument: the holder must have the instrument in his/ her possession o Identified instrument: the holder must be identified on the instrument and must

have the instrument in his/ her possession

• To become a holder in due course, the holder must:

o Have possession of the instrument; o Have given value in exchange for the instrument; o Meet all the required conditions (as listed above)

• Note: Not every holder is a holder in due course


List a provision of the RDC Indemnity in Regulation CC that if not met, could preclude a depositary bank in receipt of the original check

from making an indemnity claim?


List a provision of the RDC Indemnity in Regulation CC that if not met, could preclude a

depositary bank in receipt of the original check from making an indemnity claim?

✓ If the depositary bank accepted the original check for deposit with a restrictive indorsement inconsistent with the means of deposit.

• For example – Bank XYZ accepts an original paper check for deposit with a restrictive indorsement that states “For Mobile Deposit Only at Bank ABC”


✓ RDC Indemnity generally states a depositary bank that—

• Is a truncating bank, because it accepts deposit of an electronic image or other electronic information related to an original check;

• Does not receive the original check;

• Receives settlement or other consideration for an electronic check or substitute check related to the original check; and

• Does not receive a return of the check unpaid—

o Shall indemnify a depositary bank that Accepts the original check for deposit Receives a return or adjustment of the duplicate item; and Incurs a loss due to the check having already been paid

✓ See Reg CC §229.34(f) and related commentary for additional details and examples


What is the Universal Companion Document (UCD) and what is its purpose?


What is the Universal Companion Document (UCD) and what is its purpose?

✓ Universal Companion Document (UCD) – clarifies how financial institutions should use the ANS X9.100-187 standard to ensure all necessary and appropriate payment data is exchanged between collecting and paying institutions

• Standard defines which records must be used for check image exchange (forward and return)

• UCD explains how to populate the fields in those records’

o Outlines each record deemed to have critical payment data and lists all associated fields contained in the standard

o Describes any unique field validations for the following exchanges: Endpoint Exchange Federal Reserve The Clearing House (SVPCO) Viewpointe

• Use of the UCD requires all image exchange participants to obtain, use and adhere to the record and field usage definitions detailed in the ANS X9.100-187 standard


✓ Background: Universal Companion Document (UCD) was developed by the CheckImage Collaborative's Image Quality Work Group with input from a wide range of financial institutions as well as major image exchange providers. It is designed to:

• Formalize an industry standard for check image exchange using the ANSI X9.100-187 standard format; and

• Establish a uniform industry approach for populating and validating check image files

✓ UCD is not a standard but a technical report (TR 47) to the X9.100-187 standard

• See X9 TR 47 Universal Companion Document Industry Adoption of X9.100-187 which is publicly available for download at http://www.X9.org

http://www.x9.org/


How does the UCD require a bank to identify itself in a standard X9.100-187 image cash letter?


How does the UCD require a bank to identify itself in a standard X9.100-187 image cash letter?

Bank indorsements may be carried in the standard X9.100-187 standard-formatted electronic file in two ways:

✓ Physical indorsements on check image contained in the Image View Data Record (Type 52);

✓ Electronic information carried in each item’s related records including:

• Forward item records:

o Check Item Detail Record (Type 25) o Check Detail Addendum A Record (Type 26) o Check Detail Addendum C Record (Type 28)

• Return item records:

o Return Record (Type 31) o Return Addendum A Record (Type 32) o Return Addendum B Record (Type 33) o Return Addendum D Record (Type 35)


✓ When returning a check that was presented in an image cash letter, the 20-series forward presentment records are transcribed, to include all bank and item information, in the corresponding 30-series image return records (as described above)

✓ See the X9.100-187 standard, the Universal Companion Document and/or the NCP P.R.E.P. Guide for additional information


What structural file processing requirements are outlined in UCD for the ANS X9.100-187

image cash letter standard?


What structural file processing requirements are outlined in the UCD for the ANS X9.100-187 image cash letter standard?

UCD provides field validation requirements:

✓ Defined in the tables for each record

• Control Record errors or file corruption type errors: Result in a file rejection

• Item Record errors: Result in an item level reject

o Will be adjusted or returned as an administrative return using a defined value of “2” as the Return Reason Code

✓ Field Level edit information is included in the tables for each record type

Following is a list of structural requirements for the processing of ANS X9.100-187 image exchange files:

✓ Failure to meet processing requirements will result in file rejection, when:

• Header Records DO NOT have a corresponding Control Record as shown:

o File Header Record (Type 01) – File Control Record (Type 99) o Cash Letter Header Record (Type 10) – Cash Letter Control Record (Type 90) o Bundle Header Record (Type 20) – Bundle Control Record (Type 70)

• All records are NOT properly sequenced in accordance with X9.100-187

o Addendum counts DO NOT match number of addendum records included o Item Counts or Dollar Amounts in Bundle, Cash Letter, and File Control Records

fail to balance

✓ Failure to meet processing requirements will result in item level rejects, when

• Image View Detail Record (Type 50) DOES NOT have a corresponding Image View Data Record (Type 52).

• Check Detail Record (Type 25), DOES NOT have at least one Type 26 or Type 28 Addendum record.

• Return Record (Type 31) DOES NOT have at least one Type 32 and one Type 35 Addendum record

o See Validation Table for exceptions when Returns Indicator (Field 14 in Record Type 10) has a defined value of “E” (Administrative Returns).


What information is contained in the forward collection records Types 25, 26 and 28 as

defined by the ANS X9.100-187 image cash letter standard?


What information is contained in the forward collection

records Types 25, 26 and 28 as defined by the ANS X9.100-187 image cash letter standard?

The ANS X9.100-187 standard defines these records as follows –

✓ Check Detail Record (Type 25)

• “The item” – one record for each check

• Contains the MICR line information of the check, the ECE Item Sequence Number and other indicators for processing

• For business-sized check, would carry aux-on us field

✓ Check Detail Addendum A Record (Type 26)

• Addendum record associated with previous Check Detail Record (Type 25)

• Typically referred to as the Bank of First Deposit (BOFD) indorsement record

• Contains the routing number of the item as the return location

• Multiple Type 26 records indicate multiple presentments of an item

✓ Check Detail Addendum C Record (Type 28)

• Addendum record associated with previous Check Detail Record (Type 25)

o Typically referred to as Subsequent Indorsement record

• Two key purposes:

o Contains the indorsement information for any institution handling the item subsequent to the depositary bank (BOFD)

Each subsequent collecting bank will identify itself with an additional Type 28 record in addition to retaining all previous indorsement records

Note: If a returns consolidator agreement is in place, would carry the depositary bank's indorsement with an indicator

o Contains the Return Reason when flipped from a prior Type 35 record on a re-presented item;

✓ If the physical indorsement is not visible in the image, each item is required to have one Type 26 or Type 28 record.

✓ An item may have multiples of each record type in the case of multiple presentments and in the case of multiple subsequent indorsements

✓ To re-present items returned electronically, each item’s Type 31, Type 32, Type 33 and Type 35 records will be retained in the Forward Presentment files corresponding Type 25, Type 26 and Type 28 records


What information is contained in the returned item record Types 31, 32, 33 and 35 as defined by the ANS X9.100-187 image

cash letter standard?


What information is contained in the returned item record Types 31, 32, 33 and 35 as defined by the ANS X9.100-187

image cash letter standard?

Each item’s data from the electronically presented Type 25, Type 26, and Type 28 forward exchange records will be transcribed to and retained in the Returned Item file’s corresponding Type 31, Type 32, Type 33 and Type 35 records. The ANS X9.100-187 standard defines these records as follows:

✓ Return Record (Type 31)

• “The return item” - one record for each return

• Contains MICR line information of the check, the ECE Item Sequence Number, the current return reason code and other indicators for processing

• Corresponds to the associated Check Detail (Type 25) record

o MICR Auxiliary On-Us field is not contained on this record (See Record Type 33)

✓ Return Addendum A Record (Type 32)

• Addendum record associated with Return Record (Type 31)

• Mirrors Check Detail Addendum A Record (Type 26) which identifies return location for customer returns; contains field values including:

o Return location routing number o Item sequence number (if present) o Item business date

• May be multiple Type 32 records if there were multiple Type 26 records

✓ Return Addendum B Record (Type 33)


• Typically only present when the item has MICR Auxiliary On-Us field found in Check Detail Record (Type 25) on forward collection file

✓ Return Addendum D Record (Type 35)


• Record mirrors Check Detail Addendum C Record (Type 28) which identifies information for each subsequent endorsing institution

o Returning bank will add an additional Type 35 record to the electronic history which includes the return reason code

• May be multiple Type 35 records if there were multiple Type 28 records

Week 9: February 25 – March 1 Feb. 25

Can a depositary bank make an RDC indemnity claim if it chooses not to chargeback

a duplicate return or adjustment?


Can a depositary bank make an RDC indemnity claim if it

chooses not to chargeback a duplicate return or adjustment?

✓ No. While it would depend on the facts and circumstances in each case, the conditions of the indemnity as set forth in Regulation CC state that a subsequent depositary bank that received the original paper check must have:

• Received a return or adjustment of the duplicate item, and

• Suffered a loss as a result of that duplicate item.

✓ Paper Deposit Bank that may be able to recover through charging back the return or adjustment to their customer would not have suffered a loss and would not meet this condition of the RDC Indemnity claim.


✓ See the Regulation CC §229.34(f) and related commentary for details on the requirements to make the RDC Indemnity and to make a related indemnity claim


What does it mean to dishonor an item and what

is Wrongful Dishonor?


What does it mean to dishonor an item and what is Wrongful

Dishonor?

The Uniform Commercial Code (UCC) Article 3, § 3-502 describes what it means to dishonor an item as when –

✓ The Payor Bank returns a presented item by its midnight deadline either:

• Without paying or accepting the check; or

• Sends a timely notice of dishonor or non-payment

The UCC Article 4, § 4-402 describes wrongful dishonor as when –

✓ The Payor Bank dishonors either:

• A properly payable item; or

• An item that would create an overdraft and the bank had agreed to pay the overdraft


✓ Per UCC Article 4, § 4-402(c):

• A Payor Bank may make a determination at any time between when the item is received and when it returns the item or notice of non-payment

• The account balance only needs to be checked once

• If the bank re-determines the account balance, the later balance is the one used to determine whether an item is wrongfully dishonored


Where are return reason codes defined and what is the difference between a customer return and

a return for an administrative reason?


Where are return reason codes defined and what is the

difference between a customer return and a return for an administrative reason?

ANS X9.100-188 standard provides the finanical industry with a list of return reason codes for image exchange and for the creation of IRDs (substitute checks)

✓ Standard provides a listing of return reasons and the associated codes with information on proper usage based on general industry practice

ANS X9.100-188 standard lists return reasons for both Customer and Administrative returns

✓ Customer Returns:

• Must be sent to the return location as defined within Regulation CC

• Code distinguishes to the presenting bank the reason for non-payment when an item is dishonored; Customer Return items are usually charged to a customer account

• Examples of Customer Return reasons:

o NSF – Not Sufficient Funds o Stop Payment o Closed Account

✓ Administrative Reasons for Return:

• Typically sent to the bank that presented the forward item;

o May not be the Return Location as defined in Regulation CC

• Distinguishes to the presenting bank an item returned for reasons other than a dishonored item

• Usually handled internally by the presenting bank rather than being charged to a customer; Can also be handled through the adjustment process

• Examples of Administrative Reasons for return:

o Image Missing o Ineligible item o Unusable image


✓ Uniform Commercial Code and Regulation CC do not list specific reasons for an item to be dishonored and returned

✓ Regulation CC does not define reasons for returns but does require the paying bank to identify the return as follows:

• Clearly indicate on front of check that it is a returned check and a reason for return

• For a substitute check or an electronic returned check, must include this information such that the information would be retained on any subsequent substitute check


When truncating and transmitting items

electronically, how long must the item and

associated information be retained?


When truncating and transmitting items electronically, how

long must the item and associated information be retained?

There are multiple rules and regulations which apply to the retention of paper checks and the retention of the associated electronic image and item data that have been truncated and transmitted via image exchange:

✓ Rules –

• ECCHO Rules – Allows the Sending Bank to determine a time period for the retention of original check based on internal bank policy. Refers retention of the electronic image and associated data to applicable law (see UCC § 4-406 below.)

• Federal Reserve Operating Circular 3 (OC3) – Does not establish a document (or associated electronic image and item data) retention requirement.

✓ Regulations –

• Uniform Commercial Code (UCC) – § 4-406 outlines that items must either be retained or “maintain the capacity to furnish legible copies of the items until the expiration of seven years after the receipt of the items”. However, UCC adoption may vary by state and may impose different retention periods.

• Check 21 Act – Does not itself impose any unique retention requirements but “allows that a substitute check shall be the legal equivalent of the original check for all purposes” including any state or federal law provisions.

Any party providing a substitute check to meet a UCC requirement to provide the item or legible

copy of the item must also retain images and all associated item information for the same

seven-year retention period.

Week 9: February 25 – March 1 Mar. 1

If an ineligible item is included in an Image Cash

Letter, what is the process to reject that item

back to the Sending Bank?

Week 9: February 25 – March 1 Mar. 1

If an ineligible item is included in an Image Cash Letter, what

is the process to reject that item back to the Sending Bank?

The Receiving Bank would handle ineligible items in accordance with any agreement with the Sending Bank, the agreement or procedures of the exchange network through which the item was received, applicable check law, and/or other practice that the Receiving Bank has developed with the Sending Bank:

✓ Applicable laws:

• UCC Midnight Deadline

• Regulation CC requirements for timely (expeditious) return

✓ Possible processes:

• Return image cash letter (ICLR) with administrative reason code

• Federal Reserve chargebacks

• Manual processes such as secure email or fax

• Any other processes outlined in the agreement between the Sending and Receiving Banks

✓ Additional Administrative Reasons:

• Poor quality image

• Ineligible item

• Missing image

• Codeline mis-match

• Any others included in the agreement between the Sending and Receiving Banks

Week 10: March 4 – 8 Mar. 4

What is Presentment?


What is Presentment?

The Uniform Commercial Code (UCC) Article 3, § 3-501(a) defines presentment as:

✓ A demand for payment made to the drawee by or on behalf of a person entitled to enforce an instrument.


The following presentment considerations are subject to UCC Article 4, agreement of the parties, and clearing-house rules:

✓ Location for presentment

• Presentment is made at the place of payment by any commercially reasonable means including:

o Oral, written, or electronic communication (if electronic presentment authorized)

✓ Effective

• Presentment occurs when demand for payment is received by the drawee

✓ Time of day Cut-off considerations

• Drawee may establish a cut-off hour for presentment

o May treat items presented after cut-off hour as presented the next business day

✓ Provided to the Paying Bank

• The instrument is presented unless otherwise agreed by the parties, such as in agreements for electronic image exchange

✓ Indorsement

• Without dishonoring the instrument, the party to whom presentment is made may:

o Return the item to the presenter for lack of a necessary indorsement; or o For failure to comply with the terms of the instrument, agreement of the parties,

or other applicable law or rules


How many times may an item be presented for payment?


How many times may an item be presented for payment?

An item may be presented two or three times depending on the rules under which the exchange occurred.

✓ Under the Federal Reserve’s Operating Circular 3 (OC3), an item may be presented no more than two times (original presentment and one re-presentment)

• An item that has been presented a second time, if rejected, cannot be re-presented through the Fed

✓ Under the ECCHO Rules, an item may be presented not more than three times (original presentment and up to two re-presentments)


✓ Federal Reserve Operating Circular 3 (OC3) - 3.1 Items We Do Not Handle As Cash Items

3.1 (f) A sender should not send to us any item if:

the bank on which the item is drawn has declined to pay the item two or more times. For purposes of this subparagraph 3.1(f) only, the term “the item” means a check; any substitute check, electronic item, or ACH entry derived from the check; and any photocopy in lieu of that check.

✓ ECCHO Rules Section XX. ELECTRONIC/IMAGE RETURNS

XX (I). Resending of an Item. A Returnee Member that is the Depositary Bank that has received an Electronic/Image Return may re-present or resend to the Paying Bank:

(1) the Related Physical Check,

(2) an Electronic Image or

(3) any other form or manner of the Related Physical Check outside of these Rules,

no more than two times after the return of the Electronic/Image Return. Any other re-presentment or resending of the or the Related Physical Check, an Electronic Image of such Related Physical Check or any other form or manner outside these Rules as either a check or an electronic funds transfer, is prohibited.

Rules Commentary: Clarifies that it does not matter what format or manner the subsequent presentments or clearings of an item may take after the initial return of an Electronic/Image Return. The limitation on the total number of presentments or clearings under this Rule applies to all forms of the item including any substitute check, electronic image or record of the Related Physical Check, an ACH entry derived from the Related Physical Check or a photocopy in lieu of the Related Physical Check.


What are consequential damages?


What are consequential damages?

“Consequential damages” is a term which refers to a monetary award as an outcome from a lawsuit brought which is based upon a sequence of events leading to an injury, not necessarily occurring directly and immediately from the initial act itself. For example: If a bank wrongfully dishonors a check, the customer on whose account the check is drawn may take action against the bank for actual damages resulting from the dishonored check (such as overdraft fees) and possibly consequential damages as well (such as impacts from cancelled services for which the check was intended to pay before it was dishonored).

✓ The Uniform Commercial Code (UCC) Article 4, § 4-402(b) outlines the liability of a Payor Bank for wrongful dishonor as including –

• Damages proximately caused by the wrongful dishonor (to be determined on a case-by-case basis)

• Actual damages proved

• May include damages for:

o An arrest of the customer o Prosecution of the customer o Other consequential damages


What is a more common term for an item that is more than six months old?


What is a more common term for an item that is more than six months old?

✓ Stale dated refers to items more than six months old

✓ Uniform Commercial Code (UCC) outlines a bank’s obligations regarding stale dated checks in § 4-404 Bank Not Obliged To Pay Check More Than Six Months Old:

A bank is under no obligation to a customer having a checking account to pay a check, other than a certified check, which is presented more than six months after its date, but it may charge its customer's account for a payment made thereafter in good faith.

✓ Regulation CC commentary, in referencing UCC §4-404, includes the example of stale dated checks as one condition under which it may extend the time funds must be made available for withdrawal

o Fact that a check is deposited more than six months after the date on the check (i.e. a stale check) is a reasonable indication that the check may be uncollectible, because under U.C.C. 4-404 a bank has no duty to its customer to pay a check that is more than six months old

• See § 229.13(e) and related commentary for additional details


What is a customer’s responsibility in detecting altered or counterfeit items on their account?


What is a customer’s responsibility in detecting altered or counterfeit items on their account?

Uniform Commercial Code (UCC) § 4-406 outlines a “customer’s duty” to discover and report unauthorized signature or altered items:

✓ Bank that has paid a check must send its customer either –

• the item; or information in the statement sufficient to allow the customer to identify the item (check number, amount and date the item paid)

✓ If bank sends such a statement, the customer has a duty to examine it with reasonable promptness and must check to see if a paid item was unauthorized due to either an –

• Unauthorized signature (forgery or agent acting outside the scope of authority); or

• Alteration

✓ Customer must notify the bank within a reasonable time, from when statement or items were made available to the customer, of any unauthorized payment in order to assert the claim of alteration or unauthorized signature against the bank

✓ Promptness” of reporting required of the customer is not specifically defined in UCC

• No specified definition in UCC of how many days constitutes “reasonable promptness” for purposes of the customer review

• May be case law in the states that address this


Two additional sections to consider in UCC 4-406 CUSTOMER'S DUTY TO DISCOVER AND REPORT UNAUTHORIZED SIGNATURE OR ALTERATION

✓ §4-406 (d): If the bank proves the customer failed to comply with duties imposed by this section, the customer is precluded from asserting against the bank the customer's unauthorized signature or any alteration on the item if:

• Bank also proves that it suffered a loss by reason of customer’s failure to comply;

• Customer's unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank, if the payment was made before the bank received notice from the customer, and after the customer had a reasonable period of time, not exceeding 30 days, to examine the item or statement and notify the bank.

o Note: 30-day period only applies to this repeat check fraud rule (fraud by the same wrong-doer)

✓ §4-406 (f) Without regard to care or lack of care of either customer or bank, a customer who does not within one year after statement or items are made available, discover and report unauthorized signature or alteration, customer is precluded from asserting against the bank the unauthorized signature or alteration.

• §4-406 (f) is known as the Statute of Repose: The one year stated is the outside timing for customer to file a claim after the bank has provided the item, or statement describing the item, to the customer


What is the time limit for a Stop Payment Order?


What is the time limit for a Stop Payment Order?

According to the Uniform Commercial Code (UCC) §4-403 –

✓ A customer (or anyone authorized if there is more than one person on the account) may stop payment on any item drawn on his/ her account or may close the account

✓ In order to stop payment or close the account, the customer must –

• Order the bank to do so

• Describe the item or account with reasonable certainty

• Provide the order and description at a time and in a manner that affords the bank a reasonable opportunity to act on it

✓ A Stop Payment Order (SPO) will remain in effect for –

• Written order – 6 months

• Oral order – 14 days unless confirmed in writing before the 14 days are over

• If renewed in writing, before the initial period is over, the order can be renewed for additional 6-month periods


What is Declaration of Loss and when would it be used?


What is a Declaration of Loss and when would it be used??

As defined in UCC § 3-312, a Declaration of Loss is:

✓ A statement, made under penalty of perjury, that:

• Declarer lost possession of a check

• Declarer is the drawer or payee of the check (for a certified check) or the remitter or payee of the check (for cashier's check or teller's check)

• Loss of possession was not the result of a transfer by the declarer or a lawful seizure, and

• Declarer cannot reasonably obtain possession of the check (check was destroyed, lost, or stolen -- in the wrongful possession of an unknown person)

✓ If a cashier’s check or teller’s check is lost, stolen or destroyed, the remitter or payee may file a Declaration of Loss with the obligated bank with certain timing requirements:

• Must be filed timely to afford the obligated bank reasonable time to act on it, before the check is paid

• Then the claim becomes enforceable at the later of:

o Date the claim is asserted; or o 90th day following the date of the cashier's check or teller's check

• Until the claim becomes enforceable, the obligated bank may pay the check or, in the case of a teller's check, may permit the drawee to pay the check


Under what circumstances can a stop payment

be placed on a cashier’s check?


Under what circumstances can a stop payment be placed on a cashier’s check?

Generally, a bank cannot place stop payment on a cashier’s check or a teller’s check as these are considered guaranteed obligations of the bank:

✓ Cashier’s check: Check that a bank draws on itself; the bank is both drawer and drawee

• Signed by officer / employee of bank on behalf of the bank as drawer

• A direct obligation of the bank

✓ Teller’s check: Check that is drawn by a bank on another bank

• Includes checks payable at or through a bank

• A direct obligation of the bank

o Also checks drawn on a nonbank if check is payable through or at a bank

Bank may also refuse payment under certain circumstances such as:

✓ Alteration or forged endorsement

✓ Claim against the payee/presenter

• See UCC § 3-312 LOST, DESTROYED, OR STOLEN CASHIER'S CHECK, TELLER'S CHECK, OR CERTIFIED CHECK for additional details

In general, a bank must be sure of the facts and circumstances prior to refusing payment on a guaranteed obligation as there can be penalties for wrongfully refusing to honor a cashier’s or teller’s check.

✓ UCC § 3-411 states the person with the right to enforce the check is entitled to:

• Compensation for expenses and loss of interest resulting from the nonpayment and may recover consequential damages if the obligated bank refuses to pay after receiving notice of the circumstances giving rise to the damages

✓ See UCC 3-411 REFUSAL TO PAY CASHIER'S CHECKS, TELLER'S CHECKS, AND CERTIFIED CHECKS for additional information


What warranties are outlined in the UCC?


What warranties are outlined in the UCC?

Source /Type Warranty or Other Responsibility Application to Banks

and/or Customers

UCC Transfer

Warranties

§ 4-207(a)

Person or collecting bank that transfers an item warrants to the

transferee and any subsequent collecting bank:

(1) Warrantor is entitled to enforce the item;

(2) All signatures on the item are authentic and authorized;

(3) Item has not been altered;

(4) Item is not subject to defense or claim or recoupment;

(5) Warrantor has no knowledge of any insolvency proceeding

commenced with respect to maker or acceptor; and

(6) With respect to RCC consumer item, person on whose

account item is drawn authorized item and the amount for

which it is drawn.

Applies interbank only

Made applicable to the

electronic check

exchange process by

means of ECCHO

Rules and Reg J, as

applicable.

UCC

Presentment

Warranties

§ 4-208(a)

Person presenting item and previous transferor warrant to the

drawee bank:

(1) Warrantor is entitled to enforce draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft;

(2) Item has not been altered; and (3) Warrantor has no knowledge that signature of the

purported drawer of the draft is unauthorized; and (4) With respect to RCC consumer item, person on whose

account item is drawn authorized item and the amount for which it is drawn.


Made applicable to the

electronic check

exchange process by

means of ECCHO

Rules and Reg J, as

applicable.

UCC Encoding

Warranty

§ 4-209(a)

Person encoding information on item after issue warrants that

the information is correctly encoded.

If the customer of a depositary bank encodes, bank also makes

the warranty.

Applies interbank and to

payor customer

See also ECCHO

indemnity protection for

repairing/encoding bank


What warranties are outlined in Regulation CC?


What warranties are outlined in Regulation CC?


and/or Customers

Reg CC –

Transfer

Warranties for

Settlement

Amount and

Encoding

§229.34(c)(2), (c)(3)

Bank that transfers a check warrants:

(1) To the transferee bank, that the accompanying information, if any, accurately indicates total amount of checks transferred; and

(2) To any bank that subsequently handles the check, that, at the time of transfer, the information encoded on check after issue is accurate.


Reg CC –

Presentment

Warranties for

Settlement

Amount and

Encoding

§229.34(c)(1), (c)(3)

Bank that presents a check warrants:

(1) To the paying bank, that the total amount presented equals total amount requested for settlement; and

(2) To any bank that subsequently handles the check, that, at the time of presentment, the information encoded on check after issue is accurate.


Reg CC –

Transfer and

Presentment

Warranty for

Remotely

Created

Checks (RCCs) §229.34(b)

Bank that transfers or presents a remotely created check and

receives settlement or other consideration warrants to the

transferee bank, any subsequent collecting bank and the paying

bank that the remotely created check is authorized in the amount

and to the payee stated on the check.


Reg CC –

Transfer

Warranties for

Electronic

Checks

§229.34(a)(1), (a)(2)

Bank that transfers or presents an electronic check or electronic

returned check and receives a settlement or other consideration

for it warrants that:

(i) The electronic image 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, and the electronic

information includes an accurate record of all MICR line

information required for a substitute check under § 229.2(aaa)

of Regulation CC and the amount of the check, and

(ii) No person will receive a transfer, presentment, or return of,

or otherwise be charged for an electronic check or electronic

returned check, the original check, a substitute check, or a

paper or electronic representation of a substitute check such

Applies interbank

Warranties also flow to

the drawer customer

(on forward exchange)

and the owner of check

(on return exchange).



and/or Customers

that the person will be asked to make payment based on a

check it has already paid.

(Commonly referred to as “No Duplicate Payment’ warranty)

Reg CC –

Substitute

Check

Warranties

§229.52(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 that:

(1) Substitute check meets requirements for legal equivalence [§ 229.51(a)(1)-(2) of Regulation CC]; and

(2) No duplicate payment.

Applies interbank and to

any other person that

receives a substitute

check or electronic

check that is created

from a substitute check.


Page Left Intentionally Blank


If an item that has been truncated is presented multiple times for payment, what warranty or

warranties violations have occurred?


If an item that has been truncated is presented multiple times for payment, what warranty or warranties violations have

occurred?

Depending on the agreements and the channel of exchange, the warranty against presenting an item multiple times (“no double debit” warranty) is addressed as follows:

✓ ECCHO Rules, Section XIX(L) references the language in Regulation CC (see below) for items exchanged under ECCHO Rules

✓ Regulation CC, § 229.34(a)(ii) – Warranties with respect to electronic checks and electronic returned checks:

• No person will receive a transfer, presentment, or return of, or otherwise be charged for an electronic check or electronic returned check, the original check, a substitute check, or a paper or electronic representation of a substitute check such that the person will be asked to make payment based on a check it has already paid

✓ Regulation J for items sent to or received from the Federal Reserve:

• § 210.5: Sender warrants to each Reserve Bank handling the item that –

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.

• § 210.6: Reserve Bank to a subsequent collecting bank and to the paying bank and any other payor that –

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.

Week 12: March 18– 22 Mar. 19

A Paying Bank determines the same check image was presented twice – once by Bank A, which accepted the check via a mobile

deposit, and once by Bank B, which accepted the physical check and presented an image of the check to the Paying Bank.

What warranty was breached and what recourse does the Paying Bank have for a

breach of warranty claim?


A Paying Bank determines the same check image was presented twice – once by Bank A, which accepted the check

via a mobile deposit, and once by Bank B, which accepted the physical check and presented an image

of the check to the Paying Bank.

What warranty was breached and what recourse does the Paying Bank have for a breach of warranty claim?

This scenario describes a common duplicate situation which would be addressed by the “no double-debit” warranty, or warranty against duplicate payments

✓ If request for duplicate payment is received, that is a breach of the following warranty in Regulation CC §229.34(a):

• No person will receive a transfer, presentment, or return of, or otherwise be charged for an electronic check or electronic returned check, the original check, a substitute check, or a paper or electronic representation of a substitute check such that the person will be asked to make payment based on a check it has already paid

Paying Bank can make the breach of warranty claim to either Bank A or Bank B

✓ Both depositary banks (Bank A and Bank B) made the same warranty against duplicate presentment on each check image that was presented


✓ Similar warranties would apply regardless of the channel of exchange

• Warranty against duplicate presentment is found in Regulation CC


What is the purpose of the FFIEC?


What is the purpose of the FFIEC?

The Federal Financial Institutions Examination Council (FFIEC) is a formal interagency body that makes recommendations to promote uniformity in the supervision of financial institutions. The FFIEC:

✓ Prescribes uniform principles, standards, and report forms for the federal examination of financial institutions

✓ Is empowered by:

• Board of Governors of the Federal Reserve System (FRB)

• Federal Deposit Insurance Corporation (FDIC)

• National Credit Union Administration (NCUA)

• Office of the Comptroller of the Currency (OCC), and

• Consumer Financial Protection Bureau (CFPB)

• In 2006, the State Liaison Committee (SLC) was added to the Council as a voting member - SLC includes representatives from:

o Conference of State Bank Supervisors (CSBS) o American Council of State Savings Supervisors (ACSSS) o National Association of State Credit Union Supervisors (NASCUS)

✓ See Exhibit 17 of the NCP P.R.E.P. Guide for an overview of selected guidance booklets and key study points for FFIEC guidance documents referenced by the NCP program.


According to the FFIEC, what are six types of risk in a bank?


According to the FFIEC, what are six types of risk in a bank?

✓ Strategic risk –

• Associated with the financial institution's mission and future business plans for entering new business lines, expanding existing services through mergers and acquisitions, and enhancing infrastructure

✓ Credit Risk –

• Arises when a party will not settle an obligation for full value

✓ Reputation Risk –

• Occurs when negative publicity regarding an institution's business practices leads to a loss of revenue or litigation

✓ Operational Risk –

• Risk of loss resulting from inadequate or failed internal processes, people and systems, or external events

✓ Liquidity Risk –

• Current and potential risk to earnings or capital arising from a financial institution's inability to meet its obligations when they come due without incurring unacceptable losses

✓ Legal or Compliance Risk –

• Arises from failure to comply with statutory or regulatory obligations, existing consumer protection statutes, regulations, and case law governing retail payment transactions

✓ For additional details, refer to:

• FFIEC Retail Payment Systems, IT Examination Handbook available at this link: http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_RetailPaymentSystems.pdf

http://ithandbook.ffiec.gov/ITBooklets/FFIEC_ITBooklet_RetailPaymentSystems.pdf


What are BCPs and BIAs and why are both considered important?


What are BCPs and BIAs and why are both considered important?

According to the FFIEC:

✓ Business Continuity Plan (BCP) establishes the basis for financial institutions to recover and resume business processes when operations have been disrupted unexpectedly.

• Because financial institutions play a crucial role in the overall economy, disruptions in service should be minimized in order to maintain public trust and confidence in the financial system.

• Financial institution management should incorporate business continuity considerations into the overall design of their business model to proactively mitigate the risk of service disruptions.

✓ Business Impact Analysis (BIA) is the first step in the business continuity planning process and should include:

• Assessment and prioritization of all business functions and processes, including their interdependencies, as part of a work flow analysis;

• Identification of the potential impact of business disruptions resulting from uncontrolled, non-specific events on the institution's business functions and processes;

• Identification of the legal and regulatory requirements for the institution's business functions and processes;

• Estimation of maximum allowable downtime, as well as the acceptable level of losses, associated with the institution's business functions and processes; and

• Estimation of recovery time objectives (RTOs), recovery point objectives (RPOs), and recovery of the critical path.


What information should be provided in a Business Continuity Plan and what is the

recommended development process?


What information should be provided in a Business Continuity Plan and what is the recommended

development process?

Business Continuity Planning involves the development of an enterprise-wide BCP and the prioritization of business objectives and critical operations that are essential for recovery in the event of disruption.

Characteristics of an enterprise-wide BCP:

✓ Findings from a comprehensive BIA and risk assessment

✓ Documented in a written program and disseminated to financial institution employees

✓ Reviewed and approved by the board and senior management at least annually

✓ Specifics regarding the various events that could prompt implementation of the plan and the process for invoking the BCP

• Responsibilities and procedures to be followed by each continuity team

• Current contact lists of critical personnel

• Communication processes for internal and external stakeholders

• Relocation strategies to alternate facilities

• Procedures for approving unanticipated expenses

• Focused on the impact of various threats that could potentially disrupt operations rather than on specific events

✓ Four main steps in the BCP development process include:

1.) Business Impact Analysis (BIA): Identification of potential impact of uncontrolled non-specific events on business functions and processes

2.) Risk Assessment: Analysis of threats based upon business impact and prioritization of potential disruptions based on severity

3.) Risk Management: Identification, assessment, and reduction of risk to an acceptable level; Development, implementation, and maintenance of a written, enterprise-wide BCP

4.) Risk Monitoring and Testing: Incorporate BIA and Risk Assessment findings into the BCP; Regular assessment and revision


What are examples of potential disruptive events that could invoke a Business Continuity Plan?


What are examples of potential disruptive events that could invoke a Business Continuity Plan?

✓ Potential disruptive events that may result in a BCP being invoked can include the following:

• Critical personnel are unavailable and/or cannot be contacted

• Critical buildings, facilities, or geographic regions are not accessible

• Hardware Issues

o Equipment has malfunctioned or is destroyed

• Software Issues

o Software and data are not accessible or are corrupted

• Third-party services are not available

• Utilities are not available

o May include power, telecommunications, etc.

• Liquidity needs cannot be met

• Vital records are not available


What is Remote Deposit Capture?


What is Remote Deposit Capture?

According to the FFIEC Supervisory Guidance for Remote Deposit Capture (Jan-2009), remote deposit capture (RDC) is:

✓ A deposit transaction delivery system that allows a financial institution to receive digital information from deposit documents captured at remote locations such as:

• Branches or other back office locations

• ATMs

• Domestic and foreign correspondents

• Customer locations


✓ Risk considerations with RDC:

• RDC should be viewed as a new delivery system and not simply a new service

• Prior to implementing, senior management should identify and assess the following types of risk associated with the new system:

o Legal risks o Compliance risks o Reputational risks o Operational risks

✓ Benefits of RDC can include:

• New banking products/ revenue streams

• Improved availability

• Reduced processing costs

• Accelerated clearing

• Reduced return item risk

• Reduced transportation costs


What should be included in a Risk Management plan for Remote Deposit Capture (RDC)?


What should be included in a Risk Management plan for Remote Deposit Capture (RDC)?

A Risk Management plan for Remote Deposit Capture should include:

✓ Risk Assessment to identify the related types and levels of risk exposure

✓ Comprehensive contracts and customer agreements that clearly identify the roles, responsibilities, and liabilities of all parties in the RDC process to minimize exposure to legal and compliance risks

✓ Appropriate technology and process controls implemented at both the financial institution and customer location(s) to address operational risk

✓ Risk measurement and monitoring systems implemented for both the financial institution and customer

✓ When appropriate and available, insurance coverage to transfer risk


According to the FFIEC Remote Deposit Capture Guidance

✓ Necessary elements of the RDC risk management process in an electronic environment generally will include principles of risk management applicable to financial institutions’ internal deployment of other forms of electronic deposit delivery systems such as

• Mobile banking

• Automated clearing house [ACH] check conversions


What provisions should be included in a customer agreement for

Remote Deposit Capture (RDC)?


What provisions should be included in a customer agreement for Remote Deposit Capture (RDC)?

According to FFIEC Remote Deposit Capture Guidance, customer contracts or agreements should include:

✓ Clear outline identifying the roles, responsibilities, and liabilities of all parties in the RDC process

✓ Appropriate technology and process controls implemented at both the financial institution and customer location(s) to address operational risk

✓ Handling and record retention procedures, including physical and logical security expectations

✓ Eligible items, processes/ procedures, performance standards

✓ Funds availability, collateral, collected funds requirements

✓ Imaged documents (or originals, if available) RDC customers must provide to facilitate investigations related to unusual transactions or poor quality transmissions, or to resolve disputes

✓ Periodic audits of the RDC process, including the IT infrastructure

✓ Governing laws, regulations, and rules

✓ Authority of the financial institution to mandate specific internal controls at the customer’s locations, audit customer operations, or to terminate the RDC relationship

Week 14: April 1 – 5 Apr. 1

The FFIEC’s Retail Payment Systems booklet includes guidance for what type of payments in

the current Appendix E?


The FFIEC’s Retail Payment Systems booklet includes guidance for what type of payments in the current

Appendix E?

Appendix E provides guidance for Mobile Financial Services

✓ FFIEC issued a revised Retail Payment Systems booklet in 2016 which included the addition of this new appendix

✓ Appendix E: Mobile Financial Services: Contains guidance for mobile financial services risk considerations including:

• Risk identification

• Risk measurement

• Risk mitigation

• Monitoring and reporting

✓ Supplements existing booklet guidance on other retail payment topics including:

• Electronic payments related to credit cards and debit cards

• Remote deposit capture

• Changes in technology of retail payment systems


✓ Mobile financial services are products and services financial institutions provide to customers through mobile devices

• Customers may be less likely to activate security controls, virus protection, or personal firewall functionality on mobile devices

✓ Mobile financial systems can pose elevated risks related to:

• Device security

• Authentication

• Data and application security

• Data transmission security

• Compliance

• Third-party management

✓ Appendix E focuses on associated risks and emphasizes an enterprise-wide risk management approach to effectively manage and mitigate those risks


What is one reason the Federal Reserve Bank may reject an image as a non-conforming item?


What is one reason the Federal Reserve Bank may reject an image as a non-conforming item?

✓ Federal Reserve Operating Circular 3 (OC3) outlines the reasons the Reserve bank will not handle an item as a cash item including:

• Items the bank has declined to pay two or more times (limit of one presentment and one re-presentment via the FRB);

• Item that includes a MICR line with a retired routing number;

• Passbook, certificate, or other document is attached to the item;

• Special instructions, including a request for special advice of payment or dishonor, accompany the item;

• Item consists of more than a single thickness of paper


What does it mean to be “Image Survivable”?


What does it mean to be “Image Survivable”?

Image Survivable refers to check security features designed to help reduce check fraud that do not become disabled during the imaging process, called Image-survivable Check Security Features (ICSF):

✓ Examples of traditional paper check security features rendered useless during the imaging process include:

• Chemical & thermal sensitive paper

• Paper printed with watermarks, embossing, or foils

• Holograms

• Paper with “original document” or other screens on the back of check

• “VOID” or other pantographs designed to appear on a photocopy

✓ Three types of Image Survivable Security Features:

• Bar-coding, seal-encoding, & digital watermarks

o Encrypt check payment data (such as the payee, check number, account number, and/or amount) into a printed security mark on the check

o Special software is needed to decode the security mark to verify check image

• Typically used on checks when payment data is known at the time of printing, such as corporate account checks


What liability is shifted from a bank that uses a Third Party processor?


What liability is shifted from a bank that uses a Third Party processor?

No liability shifts from a bank to a Third Party processor that is operating on behalf of the bank.

✓ For exchanges under the ECCHO Rules, Section IV outlines that –

• A Member utilizing a Third Party Agent remains responsible for all of that Member’s obligations prescribed in this these Rules.

• Each act or omission of the Third Party Agent shall for purposes of the Rules be deemed to be an act or omission of the Member on whose behalf the Third Party Agent was acting.

✓ The FFIEC recommends that agreements with Third Party processors should include –

• Comprehensive contract provisions and adequate due diligence processes

• Provisions for monitoring service level agreements, including the review of select retail payment transaction items to ensure they are accurate and processed timely

• Defined terms of acceptable access and potential liabilities in the event of fraud or processing errors


What does “Straight Through Processing” mean and why is it important?


What does “Straight Through Processing” mean and why is it important?

Straight Through Processing (STP) is the ability to receive and process transactions end-to-end utilizing an electronic and automated system without intervention.

✓ Nearly all banks have implemented some form of image technology in place of traditional paper processes

✓ Business case benefits associated with STP include:

• Elimination of possible processing delays due to inefficient and/or manual operation

• Acceleration of clearing by reducing the amount of time spent processing transactions

• Minimized operational errors by reducing or eliminating the number of touch-points and exception processes

• Reduction of transaction processing costs associated with staff, inefficient manual operations


What are examples of poor image quality?


What are examples of poor image quality?

Common image quality defects can include the following:

✓ Too light - Image not having a sufficient number of black pixels or sufficient “contrast”

✓ Too dark - Image having too many black pixels or insufficient “brightness“

✓ Streaks - Image contains one or more “dark” or “light” bands that extend horizontally across the majority of the entire document image

✓ Excessive skew – Image is not in proper alignment

✓ Piggyback - Two or more documents are present and overlapped within the document image

✓ Folded or torn corners or edges – Image is missing information due to source document being folded or torn

✓ Size issues

• Too small/ undersize – Image’s width or height is below the minimum check size

• Too large/ oversize – Image width or height is above the minimum check size

✓ Image compression issues:

• Below minimum compression - Compressed image size is too low.

• Above maximum compression - Compressed image size is too high.

✓ Front-Rear Dimension Mismatch - Image height and width do not match between the front and rear images of the source document


Item “usability” – Banks may simply mirror the Federal Reserve settings including:

• Too light

• Too dark.

• Size of item


According to Regulation CC, if a bank transfers or presents an ECI, as the indemnifying bank,

how is that bank at risk?


According to Regulation CC, if a bank transfers or presents an ECI, as the indemnifying bank, how is that bank at risk?

✓ As the indemnifying bank, each bank that transfers or presents an ECI and receives a

settlement or consideration for it, indemnifies each:

• Transferee bank, any subsequent collecting bank, the paying bank, and any subsequent returning bank against losses due to the fact the ECI:

o Was not derived from a paper check; o Was not authorized in the amount or to the payee stated on the item; o Duplicate payment was requested (items was already paid)

✓ Indemnity amounts: Indemnifying bank responsible for:

• Amount of the loss of the indemnified bank, up to the amount of the settlement or other consideration received by the indemnifying bank; and

• Interest and expenses of the indemnified bank (including costs and reasonable attorney's fees and other expenses of representation).

Additional Information Regulation CC indemnity (§229.34(g)) states:

✓ Indemnities with respect to electronically-created items. Each bank that transfers or presents an electronically-created item and receives a settlement or other consideration for it shall indemnify, as set forth in §229.34(i), each transferee bank, any subsequent collecting bank, the paying bank, and any subsequent returning bank against losses that result from the fact that the ECI —

• Electronic image or electronic information is not derived from a paper check;

• Person on whose account the electronically-created item is drawn did not authorize the issuance of the item in the amount stated on the item or to the payee stated on the item (for purposes of this paragraph (g)(2), “account” includes an account as defined in section 229.2(a) as well as a credit or other arrangement that allows a person to draw checks that are payable by, through, or at a bank); or

• Person receives a transfer, presentment, or return of, or otherwise is charged for an electronically-created item such that the person is asked to make payment based on an item or check it has already paid.


What is the timing for a customer to detect and report an unauthorized check conversion?


What is the timing for a customer to detect and report an unauthorized check conversion?

According to Regulation E § 205.6:

✓ A consumer must report an unauthorized electronic fund transfer within 60 days from when the account’s periodic statement is made available to the customer to avoid liability for subsequent transfers.


What warranty and process do “Rule 9” provisions address in the

ECCHO Operating Rules?


What warranty and process do “Rule 9” provisions address in the ECCHO Operating Rules?

“Rule 9” is the commonly used name for special warranty under the ECCHO Rules Section XIX(O) related to Forged/Counterfeit checks

✓ Warranty is made by Sending Bank that is also the Depositary Bank that sends an electronic check to the Paying Bank

• Electronic check must be exchanged under the ECCHO Rules

• Both banks must be ECCHO members and not opted out of participation in Rule 9

o If electronic check is sent in a forward exchange from the depositary bank through an intermediary that is not an ECCHO member (e.g.; the Federal Reserve), the warranty is not made, and no related breach of warranty claim is permitted

✓ Warranty under the ECCHO Rules states the:

• Signature of the drawer of the related physical check (from which the image was created) is not forged or unauthorized and/or

• Related physical check is not counterfeit

✓ Various timing considerations must be met to make this type of claim


✓ Typically, under check law the Paying Bank would be liable for a forged drawer’s signature or counterfeit item if not discovered and returned within UCC midnight deadline

✓ Rule 9 allows a Paying Bank to make a claim to the Depositary Bank after the drawer customer asserts that the item charged to their account is forged or counterfeit

• See ECCHO Rules (O) Forged and Counterfeit Check Warranties and the ECCHO website www.eccho.org for additional information on Rule 9

http://www.eccho.org/


Under what circumstances may a “Rule 9” breach of warranty claim be disclaimed?


Under what circumstances may a “Rule 9” breach of

warranty claim be disclaimed?

An ECCHO member that is the Depositary Bank that makes the Rule 9 warranty is liable to the Paying Bank under the provisions in Section XIX(O)(2). However, the ECCHO member may be able to disclaim a Rule 9 claim under certain conditions (see disclaimer form, available in Exhibit V in the ECCHO Rules).

The disclaimer form must be filed timely, within 15 business days of receipt of the claim if one of the following conditions exists:

• Account closed

• Claim amount exceeds funds in account

• Claim was not made timely, as follows:

o Paying Bank’s customer did not provide customer written statement within 60 calendar days after account statement of check made available

o Paying Bank did not deliver warranty claim within 15 Business Days of receipt of customer written statement

o Paying Bank failed to deliver copy of customer written statement within 15 Business Days to Depositary Bank

• Depositary Bank is not the first bank to which the check was transferred (BOFD)

o Paying Bank must make claim directly to Depositary Bank

• Depositary Bank is opted of of Rule 9 participation

• Other defenses as provided by other applicable law


Describe the function of Cash Management and give an example of a common Cash Management

product.


Describe the function of Cash Management and give an example of a common Cash Management product.

May be referred to as Treasury Management. The Cash Management area in the bank generally has the following goals for its clients and the bank:

✓ Process receipts and payments in an organized and efficient manner

✓ Increase the speed of collections of accounts receivables

✓ Maximize cash to allow for the needed resources to invest (excess or idle cash)

✓ Grow cash reserves

Examples of common Cash Management products and services are:

✓ Lockbox – Cash management service offered by banks to customers to expedite receivables processing

• Bank sets up a post office box, opens mail, and deposits checks received on behalf of its customers

• May be characterized as either retail or wholesale lockbox products:

o Retail Lockbox: Companies such as utilities that receive a large number of payments in the mail, often with a check accompanied by a remittance advice/stub, which can be processed/captured in an automated process

o Wholesale Lockbox: Companies with small numbers of payments, sometimes with detailed requirements for processing such as a doctor’s or dentist’s office

✓ Balance Reporting: Secure, internet-based reporting of account and transaction information at customer’s lead bank. May include balances in foreign currencies, balances at other banks, information on cash positions and float, or investments

✓ Zero Balance Accounting: Designed for customers who fund decentralized accounts from a central main account; as debits are charged to ZBAs, funds automatically transfer from the master account to cover the debit and bring the sub-account balance to zero

✓ ACH Disbursements: Scheduling recurring payments through ACH system for such payments as dividends, interest, pensions, or direct payroll deposit

✓ Account Reconcilement Services: Allows companies to verify checks they issue daily to keep track of which checks have cleared and which have not. Example may include:

• Positive Pay: The bank only pays checks with exactly the same specifications as listed in the Issue File (amount, payee, serial number, etc.)

• Reverse Positive Pay: The bank sends a file to the customer, who compares the information on the file to its internal records and lets the bank know which checks match and should be paid

• Controlled Disbursement: Daily report is provided early in the day to the customer detailing the amount of disbursements that will be charged to the account that day, allowing the customer to fund the account appropriately and invest any excess funds intraday


What are the Regulation CC indorsement requirements for banks handling checks for

forward collection or return?


What are the Regulation CC indorsement requirements for banks handling checks for forward collection or return?

✓ Regulation CC §229.35 – Indorsements outlines these requirements. Specific indorsement

standards are included in the regulation in §229.35(a), which states:

• A bank (other than a paying bank) that handles a check during forward collection of return shall indorse check in a manner that permits a person to interpret the indorsement, in accordance with American National Standard Specifications for:

o Physical Check Endorsements, ANS X9.100-111 for a paper check other than a substitute check;

o Specifications for an Image Replacement Document, ANS X9.100-140, for a substitute check; and

o Specifications for Electronic Exchange of Check and Image Data-Domestic, ANS X9.100-187, for an electronic check

• Note: Federal Reserve Board, by rule or order, can determine that different standards apply


What does the “Presumption of Alteration” mean under Regulation CC?


What does the “Presumption of Alteration”

mean under Regulation CC?

Regulation CC §229.38 provides a uniform rule regarding presumption of alteration when there is a dispute over an imaged item and the original check is unavailable for review

✓ Intended to apply in situations where a dispute arises on whether an image was created from an altered or counterfeit item;

✓ Applies to items that are exchanged as checks and electronic checks;

✓ Establishes an evidentiary presumption of alteration for the physical check

• Check was truncated and then destroyed or otherwise unavailable after creating and exchanging the image


✓ Regulation CC §229.38 (i)

• Applies with respect to any dispute between banks arising under Federal or State law as to whether a substitute check or electronic check transferred between those banks contains an alteration or is derived from an original check that was issued with an unauthorized signature of the drawer

• Presumption may be overcome by proving by a “preponderance of evidence” that the substitute check or electronic check does not contain an alteration or that the substitute check or electronic check is derived from an original check that was issued with an unauthorized signture of the drawer.

• If original check is made available, for examination by all banks involved in the dispute, the presumption in no longer applies


What is a FinCen Advisory?


What is a FinCen Advisory?

✓ Financial Crimes Enforcement Network, or FinCen, is a bureau of the U.S. Treasury Department with a mission to:

• Safeguard the financial system from illicit use;

• Combat money laundering;

• Promote national security through collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities

✓ FInCen’s role is to:

• Collect and analyze information about financial transactions to combat domestic and international money laundering, terrorist financing, and other financial crimes

• Issue public and non-public advisories to financial institutions concerning:

o Money laundering and/or o Terrorist financing threats and vulnerabilities

• Issue advisories for the purpose of enabling financial institutions to guard against such threats

✓ Financial institutions may use the information contained in the advisories to enhance AML monitoring systems for more valuable suspicious activity (SAR) reporting


For more information, visit the website at www.eccho.org

http://www.eccho.org/



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