Image of a man signing a check

With the July 1st, 2018 effective date fast approaching, we wanted to highlight the Final Reg CC rule changes.

Regulation CC covers the Availability of Funds and the Collection of Checks. The new rule does not affect compliance with the availability of funds as described in the regulation. The changes to the rule only pertain to check collection and return provisions in subparts C and D of the regulation.

The changes made by the Federal Reserve encourage transition to a more electronic, image-based check collection and returns environment.

Here is a simple overview of the Reg CC changes:

Electronic Checks and Reg CC. Images of the original paper check are now included in Reg CC and will now be treated the same as original paper checks.

Warranties for Electronic Checks. New warranties were created that apply to the exchange of “electronic checks” and “electronic returned checks.” The transferring financial institution warrants that check images accurately represent information on the front and back of the original check (and includes an accurate record of all MICR line information). Additionally, the warranty affirms that no person will receive a transfer, presentment, return of, or otherwise be charged again for a check that has already been paid.

Indemnity for Duplicate Payment from Remote Deposit Capture (RDC). This new indemnity protects a depository financial institution that received as unpaid a paper check deposit after the check was previously deposited by RDC at another depository financial institution. Under this indemnity, the depository financial institution accepting the original paper check is able to recover a loss from the depository financial institution receiving the item through RDC.

New Indemnities for Electronically Created Items (ECIs). ECIs are “check-like” items created in electronic form that never existed in paper form, such as electronic remotely created checks (e.g., online bill pay systems, etc.). ECIs are not considered electronic checks as currently defined by Reg cc, however, the amended Reg CC will now govern these “electronically created items.” The new rule states that if a depository institution transfers or presents an ECI and receives settlement, the depository institution will indemnify subsequent financial institutions in the collection chain from losses due to the fact that an “electronically created item” (a) was not derived from a paper check, (b) was unauthorized, or (c) was transferred or presented for payment more than once. The depository institution can still allocate liability to the depositor under a separate written agreement.

Expeditious Return Requirement. Updates made to the expeditious returns requirement, or “two day test,” modify when checks must return to the depository bank. The current requirement of 4 p.m. on the second business day after the item is presented will now be changes to 2 p.m. This change applies to both paper and electronic checks alike. There is a new protection from liability for the paying financial institution if the depository financial institution does not return the check by “commercially reasonable means.” In other words, the Federal Reserve has used these rule changes to encourage financial institutions to begin accepting electronic returns if they are not already doing so.

Non-Payment Notification. The time for receipt has been changed from 4 p.m. to 2 p.m. and the threshold has been raised from $2,500 to $5,000. Both paper and electronic checks must follow this update.

Substitute Check for ATM Deposits. When a depository financial institution rejects a deposit submitted from an ATM and returns a substitute check back, the depository financial institution warrants and indemnifies the check under the new Reg CC.

No More “Non-Local” checks Currently, Reg CC states that a financial institution can hold a “non-local” check (i.e., a check processed in a different region than the depository institution) for five business days after the member’s deposit. The Federal Reserve only has one processing site, as such, all checks are processed in the same region as the depository institution. To sum it up, all checks are now considered “local” and the distinction between “non-local” and “local” checks is now obsolete. All checks being considered “local” now means that they must be available to the member by the second business day, unless an exception otherwise applies under Reg CC.

This has been a summary of some of the Federal Reserve’s amendments to Reg CC. There are many more amendments being made to Reg CC to bring regulations up to date with the current industry practices and with the ever-changing technology we use every day.

Helpful Resources:

Federal Reserve Final Rule

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