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Federal R eser v e Bank
O F DALLAS
WILLIAM H. WALLACE
F IR S T V IC E P R E S ID E N T

-

„ _

,

n n r -

August 12, 1985

DALLAS, TEXAS 75222

Circular 85-109

TO:

The Chief Executive Officer of all
depository institutions in the
Eleventh Federal Reserve District
SUBJECT

Information brochures on Regulation J - amendment to improve the
system o f n o tific a tio n for nonpayment o f checks $2,500 or more
DETAILS

As announced in Circular 85-30 dated March 8, 1985, effective October
1, 1985, Regulation J will be amended to strengthen the current requirement
that payor depository institutions provide notice when they are returning
unpaid large dollar checks presented through the Federal Reserve.
The attached brochures were prepared by the Federal Reserve's Check
Product Management Office. They are information brochures designed to explain
the Regulation J amendment to all financial institutions. The Federal Reserve
Bank of Dallas and its Branch Offices will continue the practice of sorting to
the institution of first deposit under the terms and conditions of the Return
Item Pilot for the duration of the pilot. Pricing of return items will remain
the same with no additional charge. However, the new notice of nonpayment
service will require some operational modifications in the notice service now
provided under the pilot. Outlined below are the operational changes we
intend to incorporate into the pilot service.
Under the pilot, the Reserve Bank does not require a paying
institution to separately sort the large dollar return items on which it wants
the Reserve Bank to provide notification of nonpayment. Under the guidelines
of the new service, this District will initiate payor large dollar
notifications only upon receipt of the return check in a special envelope on a
special return item letter. The special envelopes and return item letters
will be furnished prior to October 1, 1985. The language in Appendix D of
Bulletin 8 stating the terms and conditions of the pilot will be changed to
require the paying institutions to make a separate sort of large items and a
deadline of 12:00 noon will be set in order for this District to meet the
System notification deadlines.

For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

-

2

-

Notifications by telephone, on line, or initiated from the special
return item letters for items handled for collection by the Federal Reserve
will be handled at no extra charge for the duration of the pilot. For return
items not handled for collection by the Federal Reserve, the Reserve Bank will
make the necessary operational changes to receive telephone or wire
notifications on such items from Eleventh District paying institutions. The
Bank will pass those notifications on to the institution of first deposit, and
charge the System's proposed $2.25 and $4.25 fees for the service. Payor
institutions will be responsible for the timeliness of notifications.
Eleventh District on-line financial institutions will have the
capability to send and/or receive large dollar return item notifications
utilizing the Response Network. Additional information will be forwarded to
you in the near future on this capability.

ATTACHMENTS
Attached are the Federal Reserve information brochures on return item
notification.

MORE INFORMATION
For further information on the amendment, please contact the
following individuals: Robert L. Whitman, (214) 698-4357 at the Head Office;
Robert W. Schultz, (915) 544-4370 at the El Paso Branch; Vernon L. Bartee,
(713) 659-4433 at the Houston Branch; or John A. Bullock, (512) 224-2141 at
the San Antonio Branch.
Sincerely yours,

Notification

Information About
•

3?
5
S3

s.
3

3

Return Item Notification:
Information About
the New Requirement

This information was prepared by the Federal Reserve’s
Check Product Management Office. For further information or
to obtain a copy of the specific amendment to the regulation
(Regulation J) or the relevant Reserve Bank operating circular,
contact your local Reserve Bank.

August 1985

Contents
General Overview

/ 3

Items That Require Notification /
Party To Be Notified /

4

5

Time Limits for Providing Notification /
Ways of Providing Notification /

5

7

Initiating Notifications—Guidelines
for Payor Institutions / 10
Information To Be Included in the Notification
Voluntary Information To Be Included
Liability /

/

/

13

15

15

Responsibilities of the Institution of First Deposit /
Further Information

/ 20

18

3

General Overview
As a first step in ongoing efforts to resolve the problems associ­
ated with returned checks, the Federal Reserve Board recently
amended one of its regulations (Regulation J) to improve the
notification requirements currently in effect for financial institu­
tions handling large-dollar return items. The amendment,
which affects all financial in stitu tion s receiving
checks collected through the Federal Reserve System,
establishes new notification procedures for returned
checks of $2,500 or more. The amendment is effective
October 1, 1985.
The objectives of the amendment to Regulation J are three­
fold: first, to speed up the notice process on large-dollar return
items; second, to make the actual notification more effective;
and third, to establish liability regarding notifications in order to
promote compliance. These improvements in the timeliness
and usefulness of the notice of nonpayment should reduce the
financial risk to the institution of first deposit. It is hoped that
they also will help depository institutions to reduce the holds
sometimes placed on deposited funds.
Specifically, the amendment to Regulation J:
1.

requires that the institution on which the check is drawn
(the payor institution) notify the institution where the
check was first deposited (the institution of first deposit),
that a large-dollar check ($2,500 or more) is being re­
turned;

2.

establishes time limits for providing notification;

3.

specifies the inform ation to be included in the
notification;

4.

defines the responsibilities of the payor institution and
of the institution of first deposit regarding the receipt of
notifications;

4
5.

establishes the liability an institution incurs if it fails to
meet the notification requirements.

In contrast, prior to October 1, 1985, notification is to be
made to the prior endorsing institution rather than the institu­
tion of first deposit. Moreover, prior to October 1, there are no
specifications regarding the time limits for providing notifica­
tion, the information to be included in the notification or the
liability incurred for failing to provide notification. The Regula­
tion J amendment creates new responsibilities for institutions
both as payors and as collectors.
The following material discusses the specific requirements
under the Regulation J amendment and procedures for fulfill­
ing these requirements.

Items That Require Notification
Notification is required on a returned check if it meets the
following four criteria:
1.

the check was collected through the Federal Reserve
System;

2.

the check is for $2,500 or more;

3.

the check is not endorsed by, or for credit to, the United
States Treasury;

4.

the check itself will not reach the institution of first de­
posit within the time limit for notification.

Not all checks collected through the Federal Reserve System
bear an endorsement from the Fed. For example, if a check
has been processed as a fine sort item there will be no Federal
Reserve endorsement on the check. If the item has been col­
lected through the Federal Reserve System, the payor institu-

5
tion is required to provide notification to the institution of first
deposit whether or not the item bears an endorsement from
the Fed.
Notification should be made on a return item meeting the
above criteria regardless of the reason for return.

Party To Be Notified
The institution on which the check is drawn (the payor institu­
tion) must notify the institution where the check was first de­
posited (the institution of first deposit) that a large-dollar check
is being returned.
If the institution of first deposit is not located in any of the
following areas:
1.

the fifty states of the United States;

2.

the District of Columbia;

3.

Puerto Rico;

4.

a territory, possession or dependency of the United
States;

notification should be made to the first institution located in
one of the above areas that handled the check.

Time Limits for Providing
Notification
The amendment to Regulation J requires that if a payor institu­
tion has decided to return a large-dollar check, the payor insti-

6
tution must notify the institution of first deposit by midnight of
the second banking day following the familiar “midnight dead­
line” for the return of the check. If the day on which notifica­
tion is required is not a business day for the institution of first
deposit, notification may be made on the institution of first
deposit’s next business day. For notification purposes the fol­
lowing are not considered business days:
■

Saturdays and Sundays

■

January 1 (New Year’s Day)

■

the third Monday in January (Martin Luther King Day)

■

the third Monday in February (Washington’s Birthday)

■

the last Monday in May (Memorial Day)

■

July 4 (Independence Day)

■

the first Monday in September (Labor Day)

■

the second Monday in October (Columbus Day)

■

November 11 (Veterans Day)

■

the fourth Thursday in November (Thanksgiving)

■

December 25 (Christmas).

This amendment does not alter in any way the established
deadline for the return of the item itself.
The following example illustrates the time limit established
for providing notification:
If the Federal Reserve presents a check to a payor institu­
tion before 2:00 p.m. on Monday, that institution is re­
quired to initiate the return of the check, if dishonored, by
midnight Tuesday. In addition, if the item is $2,500 or
larger, the payor institution must take steps to ensure that
notification of return is received by the institution of first
deposit by midnight Thursday (48 hours later). The payor
institution should recognize that most depository institu­

7
tions cannot receive telephone or telegraphic notice after
5:00 p.m. local time (of the institution of first deposit). If
the institution of first deposit is closed on the day of notifi­
cation (Thursday in this example), notification should be
made on the next business day of the institution of first
deposit.
Exhibit 1 displays a time line corresponding to the above
example. A time line indicating the impact of a weekend on the
notification process is also included.

Ways

of Providing Notification

Payor institutions may provide notification directly or indirectly
to the institution of first deposit. If a payor institution wants to
provide notification directly, the following two options are
available:
1.

The payor institution can return the unpaid
check to the institution of first deposit within
the notification time limit so that the returned
check serves as the notification. For example, this alter­
native may be feasible when the institution of first de­
posit is nearby and the return item will pass quickly
through the endorsement chain, or when the return can
be made directly to the institution of first deposit. The
Uniform Commercial Code and many state laws allow
direct return to the institution of first deposit, bypassing
the endorsement chain. However, before choosing to
return directly, payor institutions should familiarize
themselves with the state laws and procedures govern­
ing direct return to the specific institution of first deposit.
Paying institutions should also understand the risk they
assume since a delay in returning a check would result
in failure to fulfill the notification requirement.

Exhibit 1
TIME LIMITS FOR NOTIFICATION
MONDAY

TUESDAY

CHECK PRESENTED
TO PAYO R
IN S T IT U T IO N
11 A.M .

PAYO R M UST I N I ­
T IA T E T H E R E T U R N
BY M ID N IG H T

WEDNESDAY

THURSDAY

CHECK PRESENTED
T O PAYOR
IN S T IT U T IO N

PAYO R M U ST I N I ­
T IA T E T H E R E T U R N
BY M ID N IG H T

WEDNESDAY

11 A.M.

THURSDAY

FRIDAY

NO TIC E OF R E T U R N
MUST REACH T H E
IN S T IT U T IO N OF
F IR S T DEPOSIT

FRIDAY

MONDAY
SATURDAY
SUNDAY

NO T IC E OF R E T U R N
M UST REACH T H E
IN S T IT U T IO N OF
F IR S T DEPOSIT

9
2.

The payor institution can provide notification di­
rectly to the institution of first deposit using the
telephone or another telecommunications network that
would pass the message to the institution of first deposit.
If a payor institution chooses to provide notification us­
ing an on-line Fedwire message, a fee of $2.25 per
advice will be charged. Fedwire can be used to notify on
all checks, including those collected outside the Federal
Reserve.

For a payor institution that is not on-line with a telecom­
munications network or does not want to provide notification
directly, the following two services are available from its Re­
serve Bank:
1.

The payor institution can provide the required
information to the Reserve Bank by telephone,
and instruct the Reserve Bank to notify the insti­
tution of first deposit. This option is available for all
checks, including those collected outside the Federal
Reserve. If a payor institution utilizes this option, a fee of
$4.25 per advice will be charged.

2.

The payor institution can return the unpaid
check to the Reserve Bank and instruct the R e­
serve Bank to extract the required information
and notify the institution of first deposit. This op­
tion is only available for checks collected through the
Federal Reserve. The Reserve Bank fee for this service
will be $4.25 per advice.

If the Reserve Bank assists a payor institution in providing
notification, the Reserve Bank is subject to the liabilities dis­
cussed in the section titled Liability. Specific instructions and
deadlines, for those payor institutions planning to use the Re­
serve Bank notification services described above, are available
from your local Reserve Bank.
Other institutions, such as correspondent banks, service bu­

10
reaus and wire services, may provide notification services simi­
lar to those described in this section. Payor institutions
interested in obtaining services from a particular institution oth­
er than the Reserve Bank should contact that institution direct­
ly to find out what services are available.

Initiating Notifications —
Guidelines for Payor
Institutions
Payor institutions should maintain appropriate records indicat­
ing their compliance with the notification requirements. For
example, payor institutions are encouraged to record tele­
phone notifications, keep copies of incoming and outgoing
wires and maintain wire logs.
A notification is considered received under the following
conditions:
1.

Return o f the unpaid item — If the payor institution is
returning the unpaid item within the time limit for notifi­
cation, the item is considered received if it is delivered
by arrangement to a messenger from the institution of
first deposit, or if it is delivered to any of the following
addresses associated with the institution of first deposit:
a.

the address specified by the institution of first de­
posit as the address to receive notifications—this
address could be at the institution or at an alternate
processor;

b.

the address normally used for return items;

c.

the address of the branch named on the endorse­
ment;

d.

the main address of the head office (in many in-

11
stances, this is not the preferred option of the insti­
tution of first deposit).
2.

Telephone notice — If a payor institution is using a
telephone call to provide notification, notification is con­
sidered received if both of the following two conditions
are met:
a.

a phone call is made to any of the following areas
associated with the institution of first deposit:
■

■

the number of the return item unit;

■

the general number of the branch named in the
endorsement;

■

b.

the number specified by the institution of first
deposit—this number could be at the institu­
tion or at an alternate processor;

the general number of the head office (in many
instances, this is not the preferred option of the
institution of first deposit).

the telephone is answered and the notification is
accepted by the institution of first deposit.

The amendment allows an extension of the notification
period if any of the following problems occur during
telephone notification:
a. the telephone is not answered;
b. the telephone is answered but the person who an­
swers it refuses to accept the notification or to trans­
fer the call;
c.

the telephone is answered but the person doesn’t
appear to understand the nature of the call.

In the above circumstances, the notification period is

12
extended to the morning of the next business day of the
institution of first deposit. However, unless the payor
institution has reason to believe that the institution of
first deposit will receive telephone notice after 5:00 p.m.
local time (of the institution of first deposit), the payor
institution should call prior to that time.
3.

Telegraphic or wire notice — If a payor institution is
using Fedwire or any other telegraphic form to provide
notification, notification is considered received if it is
delivered to any of the following areas associated with
the institution of first deposit:
a.

the address specified by the institution of first de­
posit as the address to receive notification—this ad­
dress could be at the institution or at an alternate
processor;

b.

the return item unit;

c.

the main telegraphic or wire address (in many in­
stances, this is not the preferred option of the insti­
tution of first deposit).

If a payor institution knows that the telegraphic notifica­
tion has not been received by the institution of first de­
posit, the payor institution is required to send a followup notice confirming the notification. The confirming
notice should be delivered no later than the morning of
the next business day of the institution of first deposit.
Again, payor institutions are expected to recognize
that most institutions cannot receive wire or telegraphic
notifications after 5:00 p.m. local time (of the institution
of first deposit).
The institutions of first deposit also have specific responsibil­
ities regarding the receipt of notifications. Institutions are ex­
pected to establish the internal procedures necessary to accept
notifications and to make sure that notifications are directed to
the appropriate person or area and acted on accordingly. For

13
example, institutions of first deposit may not instruct telephone
operators to refuse to accept notifications but may establish
procedures to have the operator transfer a call, record the call
or have an appropriate person return the call. Similarly, institu­
tions of first deposit that are receiving notifications over an
electronic link are expected to manage the link so that notifica­
tions can be accepted during daytime hours.
The institutions of first deposit are also encouraged to sim­
plify the notification process by complying with the endorse­
ment standard of the American National Standards Institute
and by using only current routing numbers.

Information To Be Included
in the Notification
The following information must be included in the notification,
to the extent that the information can be obtained from the
check:
1.

name and routing number of the payor institution (the
institution that the check is drawn on);

2.

name of the payee (the person or company to whom
the check is made payable);

3.

amount of the item;

4.

date of the endorsement of the institution of first de­
posit;

5.

account number of the depositor;

6.

name of the branch at which the check was first deposit­
ed (this information is particularly important for those
large financial institutions that may use the same ac­
count numbers at more than one branch);

14
7.

trace number (item sequence number) of the institution
of first deposit;

8.

reason for return.

In the event that there is some question about a given piece
of information, paying institutions are encouraged to include
the questionable information and follow it with question
marks.
Notification does not have to be provided if the payor insti­
tution cannot determine the institution of first deposit at all
(i.e., both the name and the routing number of the institution
of first deposit are illegible). However, if the routing number of
the institution of first deposit is illegible or missing but the name
is legible and is sufficient to identify the institution of first de­
posit (or vice versa), notice is required, even if the payor insti­
tution has to look up the routing number or the name and
address of the institution.
If the payor institution is uncertain as to which of two or
more institutions is the institution of first deposit (because their
endorsements have the same or illegible dates), the payor in­
stitution is authorized but not required to provide notification
to each institution and note its uncertainty as to which is the
institution of first deposit. Each notified institution is then re­
sponsible for determining if it is the institution of first deposit.
In the event that a payor institution provides the above in­
formation to an institution of first deposit and then decides to
pay the check, the payor institution must send a second notice,
as soon as is reasonably possible, cancelling its previous notifi­
cation of nonpayment. The second notice should indicate that
it is a second notice cancelling a previous notice and should
contain all the information included in the original notice so
that the institution of first deposit can match the second notice
with the earlier notice.

15

Voluntary Information
To Be Included
The Federal Reserve encourages payor institutions to provide
some additional information in the notification, even though
this information is not required by Regulation J. This informa­
tion is:
1.

name(s) and account number of the drawer (the person
who wrote the check);

2.

check number;

3.

date of the item;

4.

any other information that might be helpful, such as
a.

the name of the last endorser, other than a deposi­
tory institution, if different from the payee;

b.

an obsolete routing number of the institution of first
deposit if used on the item.

Exhibits 2 and 3 illustrate the information (required and vol­
untary) to be included in the notification.

Liability
The amendment to Regulation J establishes the following li­
ability regarding the new notification requirements:
1.

A payor institution that fails to exercise ordinary care in
meeting the notification requirements will be liable for
losses incurred by the institution of first deposit up to the
amount of the item.

NOTIFICATION

NAME O
F
PAYING
INSTITUTION

INFORMATION

ROUTING
NUMBER O
F
PA Y IN G
IN S T IT U T IO N

OBTAINED

FROM THE FRONT O THE CHECK
F

1

AMOUNT
THE

ITEM

OF

Exhibit 3
NOTIFICATION INFORMATION OBTAINED FROM THE BACK OF THE CHECK
SUBSEQ UENT
ENDORSEMENT

0 1 5 00 03 7 BNB ANYPLACE 100285
O

a
>
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>
"J
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U
O
c)
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C
O
a
>
E N D O R S E M E N T OF
T H E IN S T IT U T IO N
OF F IR S T DEPOSIT

067803457

PAY A N Y BANK 5 -1 22 22222222222
FRB
BOSTON
0 1 1 0 -0 0 0 1 -5
2 10-02-85 85 2453 7 7 1 2 2 4 6 7 1 0 1 3

PAY ANY BANK, P.E.G.

BANK ANY TOWN

/

CITY, STATE

067803457

\Oct 1 85 22281572
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DA T E OF E N D O R S E M E N T
OF T H E IN S T IT U T IO N
OF F IR S T DEPOSIT

TR A C E N U M B ER
OF T H E IN S T IT U T IO N
OF F IR S T DEPOSIT

F E D E R A L RESERVE B ANK
ENDORSEMENT

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A C C O U N T NUM BER
OF T H E DEPOSITOR

18
2.

A payor institution that fails to act in good faith in meet­
ing the requirements may also be liable for other conse­
quential damages suffered by the institution of first
deposit.

3.

The prevailing institution in any lawsuit involving a noti­
fication may recover its court costs and reasonable at­
torneys’ fees.

In cases where the Reserve Bank assists the payor institution
in providing notification, the Reserve Bank is subject to the
liabilities discussed above.
Regulation J allows the payor institution an extension in
complying with the notification requirements if the delay in
complying is due to an interruption of communication facilities,
emergency conditions or other circumstances beyond the insti­
tution’s control, provided that the institution exercises dili­
gence in attempting alternative means of notice.
Both the payor institution and the institution of first deposit
have new responsibilities regarding the dispatch and receipt of
the various forms of notification. If a question of liability arises
over a failure to provide notification in a specific instance, a
decision regarding liability will have to be made by the courts.
As a separate issue, a payor institution also continues to
incur a potential liability if it fails to meet the midnight deadline
specified in the Uniform Commercial Code for timely return of
the item itself.

Responsibilities of the
Institution of First Deposit
The amendment to Regulation J creates new responsibilities
for the institution of first deposit. These responsibilities involve
two areas: notification receipt and endorsement standards.

19
1.

Notification receipt —As detailed in the section titled
Initiating Notifications—Guidelines for Payor Institu­
tions, payor institutions can provide notification to any
one of several areas associated with the institution of
first deposit. Therefore, a major responsibility of the in­
stitution of first deposit is to establish appropriate inter­
nal procedures to accept notifications and to assure that
when notifications are received at any of the areas
specified, the notifications are directed to the person or
area responsible for acting on the information. For ex­
ample, the institution of first deposit may not instruct
telephone operators to refuse to accept notifications but
may establish procedures to transfer calls regarding no­
tifications, to record the calls or to have an appropriate
person return the calls. Similarly, institutions of first de­
posit that are receiving notifications over an electronic
link are expected to manage the link so that notifications
can be accepted during daytime hours.
Once the notification has been received in a timely
manner by the institution of first deposit, at one of the
specified locations, the institution of first deposit be­
comes liable for any losses associated with an unpaid
item.

2.

Endorsement standards — Payor institutions are not
required to provide notification on large-dollar return
items if they cannot decipher the endorsement of the
institution of first deposit. To simplify the notification
process, the institution of first deposit is encouraged to
comply with the endorsement standards of the Ameri­
can National Standards Institute1 and to use only cur-

1 Specifications fo r C heck Endorsem ent, catalogue number x9.3 1981, d e­
tails the standards established for endorsem ent content, color and place­
ment. This publication can be ordered from the American National
Standards Institute (ANSI), 143 0 Broadway, N ew York, N.Y. 10 01 8 at a
cost of $ 5 .0 0 per copy. If you need further information about the publica­
tion please call the Institute at (212) 3 54 -3473.

20
rent routing numbers. Institutions are encouraged to
use the full nine digit routing number, not the fractional
form, and to include the appropriate telephone number
for return notification in the endorsement where
feasible.
Although it is not required, it is also recommended
that large depositors be given a stamp with the name
and routing number (and appropriate telephone num­
ber for return notification if possible) of the institution of
first deposit.

Further Information
If you have any questions regarding the new amendment, or
require further information or assistance, please contact your
local Reserve Bank.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102