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Federal R eserve Bank
OF DALLAS
WILLIAM H. WALLACE

DALLAS. TEXAS 7 5 2 2 2

F IR S T V IC E P R E S ID E N T

August 18, 1988
Circular 88-57

TO:

The Chief Executive Officer of all
member banks and other financial
institutions in the Eleventh Federal
Reserve District

SUBJECT
Proposed amendment to Regulation CC —
Collection of Checks

Availability of Funds and

DETAILS
The Federal Reserve Board has issued for public comment a proposed
amendment to Regulation CC to conform the definition of "paying bank" to the
Expedited Funds Availability Act as interpreted by a recent court decision.
Shortly after the Board issued Regulation CC in May 1988, a trade
association of credit unions — and one credit union whose checks are payable
through a nonlocal bank -- filed suit against the Board seeking to overturn
the definition of a paying bank.
In July 1988, the U.S. District Court for the District of Columbia
ruled that the definition of paying bank in Regulation CC is inconsistent with
the Expedited Funds Availability Act. The court further stated that the
terminology is invalid to the extent that it defines a credit union share
draft payable through a bank as local or nonlocal depending on the location of
the bank rather than the location of the payor credit union for the purposes
of availability requirements in Regulation CC.
The Board has adopted an interim amendment conforming to the court
decision to ensure provisions are in place when the act takes effect on
September 1, 1988.
Comments on the interim rule and on longer-term response to the court
decision are requested by September 12, 1988. Those who wish to comment
should do so by addressing comments to Mr. William W. Wiles, Secretary, Board
of Governors of the Federal Reserve System, Washington, D.C. 20551.

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)

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ATTACHMENTS
The Board's text of the interim amendment to Regulation CC is
attached.

MORE INFORMATION
For more information about Regulation CC or the Expedited Funds
Availability Act, please contact Dean Pankonien or Sharon Sweeney at (214)
651-6228.
Sincerely yours,

FEDERAL RESERVE SYSTEM
[Docket No. R-0643]
Regulation CC
12 CFR Part 229
Availability of Funds and Collection of Checks
AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Interim rule with request for comments.

SUMMARY:

The Board is amending Regulation CC to conform the

definition of "paying bank” to the Expedited Funds Availability
Act as interpreted by a recent court decision.
amendments are also being made.

Other conforming

The Board has adopted these

changes on an interim basis to ensure they are in place when the
Act takes effect on September 1, 1988.

The Board is requesting

comment on the interim rule pending adoption of a final rule.
DATES:

The interim rule takes effect on September 1, 1988.

Comments must be received no later than September 12, 1988.
ADDRESS:

Comments, which should refer to Docket No. R-0643, may

be mailed to the Board of Governors of the Federal Reserve
System, 20th and C Streets, N.W., Washington, D.C. 20551,
Attention:

Mr. William W. Wiles, Secretary; or may be delivered

to Room B-2223 between 8:45 a.m. and 5:00 p.m.

All comments

received will be made available to the public, and may be
inspected in Room B-1122 between 8:45 a.m. and 5:15 p.m.

Comments on the changes to the information collection
requirements should be sent to Mr. Robert Neal, Office of
Information and Regulatory Affairs, Office of Management and
Budget, New Executive Office Building, Room 3228, Washington,
D.C. 20503.
FOR FURTHER INFORMATION CONTACT:

Joseph R. Alexander, Senior

Attorney, Legal Division (202/452-2489); Louise L. Roseman,
Assistant Director, Division of Federal Reserve Bank Operations
(202/452-3874); Gerald P. Hurst, Senior Counsel, Division of
Consumer and Community Affairs (202/452-3667).
impaired only;

For the hearing

Telecommunications Device for the Deaf,

Earnestine Hill or Dorothea Thompson (202/452-3544).
Federal Reserve Board Clearance Officer, Nancy Steele,
Division, of Research and Statistics (202/452-3822).
OMB Desk Officer, Robert Neal, Office of Information
and Regulatory Affairs, Office of Management and Budget
(202/395-7340).
SUPPLEMENTARY INFORMATION:

On May 13, 1988, the Board issued

its Regulation CC -- Availability of Funds and Collection of
Checks (12 CFR Part 229) to implement the Expedited Funds
Availability Act (the "Act") (Title VI of Pub. L. 100-86).
FR 19373 (May 27, 1988).

53

In keeping with the Board's view that

the Act established a clear link between the time it normally

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takes a chock to be cleared and returned, and the time within
which the depositary bank1 must make the funds available to
the depositor, the regulations provided that where a check is
payable by one bank but "payable

through"2

another and sent to

the payable through bank for payment or collection, the location
of the payable through bank would determine whether a check is
local or nonlocal vis-a-vis the depositary bank for the purposes
of the funds availability schedules in the regulation.
Shortly after the Board issued Regulation CC, a trade
association of credit unions and one credit union whose checks
are payable through a nonlocal bank filed suit against the Board
seeking to overturn the definition of paying bank to the extent
that the definition included a payable through bank where the
check was drawn on a credit union.

Recently, the court granted

the plaintiffs' motion for summary judgment and invalidated

1
The Act uses the term "receiving depository
institution" to mean "the branch of a depository institution or
the proprietary ATM in which a check is first deposited." 12
U.S.C. 4001(20). Because the term "receiving depository
institution" is unique to the Act, the Board used the term
"depositary bank,” which, because it is used in the Uniform
Commercial Code ("U.C.C.") and the Board's Regulation J (12 CFR
Part 210), is familiar to the banking industry.
2When a check states on its face that it is
"payable through" a bank, that bank is referred to as the
"payable through bank." Under the U.C.C., a payable through
bank is not named as the payor, but is designated as a
"collecting bank to make presentment." U.C.C. § 3-120. Under
the Board's Regulation J, a payable through bank is the "paying
bank." 12 CFR 210.2(j )
.

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Regulation CC's definition of paying bank to the extent that it
includes a payable through bank where the check is drawn on a
credit union.

Credit Union National Association v. Board of

Governors. No. 88-1295 OG (D.D.C. July 28, 1988).

The court

found that the Board's regulation was inconsistent with the Act
to the extent that it defined the payable through bank as the
paying bank for purposes of the Act's funds availability
requirements.
The Expedited Funds Availability Act takes effect on
September 1, 1988.

Regulation CC also takes effect on that

date, except for those portions of it invalidated by the court's
order.

The Board has not determined whether to appeal the

court's decision.

Nevertheless, in order to clarify the duties

of banks and others with respect to checks ir^ light of the
court's order, temporary conforming amendments are being made to
the definitions and to the disclosure rules.

These amendments

primarily affect the classification of checks payable by a
depository institution but payable through another institution
as local or nonlocal.

They do not affect payable through drafts

payable by nonbank payors.

Further, as the payable through

share draft will carry the routing number of the payable through
bank, not the

credit union, provisions in the regulation that

allow a depositary bank to rely on the routing number to
determine whether a check is local or nonlocal are also being
amended.

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5

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The interim rule permits depository institutions whose
initial disclosures are affected by the court's decision to send
simple clarifying notices in regularly scheduled mailings to
existing account customers.

Institutions will be deemed to be

in compliance with the disclosure requirements of the regulation
as long as the disclosures are revised by December 31, 1968.
Finally, depository institutions may have operational
difficulties in identifying credit union payable through share
drafts for availability purposes.

The Commentary to § 229.21(c)

concerning bona fide errors is being amended to clarify that it
may be a bona fide error if a depository institution fails to
identify for availability purposes a local check that is a
payable through draft provided that it has procedures for
identifying such drafts.

If the Board decides not to appeal the

court's decision or if any appeal is unsuccessful, the Board,
after consideration of any comments received with regard to the
interim rule, may adopt the interim rule as a final amendment to
Regulation CC.

In addition, the Board may also consider

additional rulemaking to address operational or disclosure
problems that might result because depositary banks and bank
customers cannot rely on the routing number printed on a payable
through draft to determine whether the check is local or
nonlocal for funds availability purposes.
The Board believes that it is important to clarify
these issues with an amended regulation before September 1, so
that banks and other parties affected by Regulation CC are fully

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aware of their responsibilities under the Act by the time it
takes effect.

Nonetheless, there is not sufficient time for the

Board to publish proposed regulations for comment before that
date.

Accordingly, the Board, for good cause, finds that the

notice and public comment procedure normally required is
impractical and contrary to the public interest under 5 U.S.C.
553(b)(B).

The Board further finds that, for the same reasons,

there is good cause under 5 U.S.C. 553(d)(3) to make the interim
rule effective on September 1, 1988, without regard for the
30-day period provided for in 5 U.S.C. 553(d).
Paperwork Reduction Act Notice.

The Board has

previously submitted the disclosure requirements and model forms
and clauses of Regulation CC to the Office of Management and
Budget ("OMB") for clearance under the Paperwork Reduction Act
(44 U.S.C. 3501 et seq.) and OMB's Regulations for Controlling
Paperwork Burdens on the Public (5 CFR Part 1320).
number:

(OMB Docket

7100-0234.)
The changes to Regulation CC require modifications to

the disclosure requirements and two additional model forms;
these are described elsewhere in this notice.
submitted to OMB for clearance.

These are being

Additional supporting documents

may be obtained from the OMB clearance officer listed above.
The Board estimates that the amended disclosure
requirements will result in an increase in the one-time
reporting burden of Regulation CC requirements of approximately
107,000 hours.

Approximately 11,000 hours of the increase in

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reporting burden will be borne by state member banks and other
Institutions under the Board's jurisdiction.
Any comments on the collection requirements should be
sent to the OMB desk officer listed above.

OMB's usual practice

is not to take any action on an information collection until at
least 10 working days after notice in the Federal Register, but
occasionally the public interest requires more rapid action.
Lift.. f Subjects in 12 CFR Part .,
Q.
229
Banks, banking; Federal Reserve System.
For the reasons set out in the preamble, effective
September 1, 1988, Title 12, Chapter II, Part 229 of the Code of
Federal Regulations is amended as follows:

PART 229 -- AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS
1.

The Authority for Part 229 remains unchanged.

2.

§ 229.2, paragraphs (r), (s), (z), and (dd) are revised to

read as follows:

S 229.2
*

Definitions.

*

*

(r)

*

*

"Local check" means a check payable by or at a

local paying bank, or a check payable by a nonbank payor and
payable through a local paying bank.
(s)

"Local paying bank" means a paying bank that is

located in the same check processing region as the physical
location of --

-

(1)

8

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The branch or proprietary ATM

of the

depositary bank in which that check was

deposited;

(2)

or

Both the branch of the depositary bank at

which the account is held and the nonproprietary ATM at
which the check is deposited.
*

*

*

*

(z)

*

"Paying bank" means -­
(1)

The bank by which a check is payable, unless

the check is payable at another bank and is sent to the
other bank for payment or collection;
(2)

The bank at which a check is payable and to

which it is sent for payment or collection;
(3)

The Federal Reserve Bank or Federal Home Loan

Bank by which a check is payable;
(4)

The bank through which a check is payable and

to which

it is sent for payment or collection, if

check is

not payable by a bank;

(5)

the

The state or unit of general local government

by which a check is payable.
For purposes of Subpart C, and in connection therewith,
SubpartA, "paying bank" includes the bank through which
is payable and to

a check

which the check is sent for payment or

collection, regardless of whether the check is payable by
another bank, and the bank whose routing number appears on a
check in fractional or magnetic form and to which the check is
sent for payment or collection.
*

*

*

*

*

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(dd)

9

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"Routing number" means —
(1)

The number printed on the face of a check in

fractional form or in nine-digit form; or
(2)

The number in a bank's indorsement in

fractional or nine-digit form.
*

*

*

*

*

COMMENTARY
Section 229.2
*

*

*
(o)

Definitions
*

*

Depositary bank.

The regulation uses the term

depositary bank rather than the term "receiving
depository institution."

"Receiving depository

institution" is a term unique to the Act, while
"depositary bank" is the term used in Article 4 of the
U.C.C. and Regulation J.
A depositary bank includes the bank in which the
check is first deposited.

If a foreign office of a

U.S. or foreign bank sends checks to its U.S.
correspondent bank for forward collection, the U.S.
correspondent is the depositary bank since foreign
offices of banks are not included in the definition of
bank.
If a customer deposits a check in its account at a
bank, the customer's bank is the depositary bank with
respect to the check.

For example, if a person

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deposits a check into an account at a nonproprietary
ATM, the bank holding the account into which the check
is deposited is the depositary bank even though another
bank may service the nonproprietary ATM and send the
check for collection.

(Under § 229.35 the depositary

bank may agree with the bank servicing the
nonproprietary ATM to have the servicing bank place its
own indorsement on the check as the depositary bank.
For the purposes of Subpart C, the bank applying its
indorsement as the depositary bank indorsement on the
check is the depositary bank.)
for purposes of Subpart B, a bank may act as both
the depositary bank and the paying bank with respect to
a check, if the check is payable by the bank in which
it was deposited, or if the check is payable by a
nonbank payor and payable through or at the bank in
which it was deposited.

A bank is also considered a

depositary bank with respect to checks it receives as
payee.

For example, a bank is a depositary bank with

respect to checks it receives for loan repayment, even
though these checks are not deposited in an account at
the bank.

Because these checks would not be "deposited

to accounts," they would not be subject to the
availability or disclosure requirements of Subpart B.

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(r)

11

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Local check is defined as a check payable by or at

a local paying bank, or, in the case of nonbank payors,
payable through a local paying bank.

A check payable

by a local bank but payable through a nonlocal bank is
a local check.

Conversely, a check payable through a

local bank but payable by a nonlocal bank is a nonlocal
check.

Where two banks are named on a check and

neither is designated as a payable through bank, the
check is considered payable by either bank and may be
considered local or nonlocal depending on which bank it
is sent to for payment.

Generally, the depositary bank

may rely on the routing number to determine whether a
check is local or nonlocal.

Appendix A includes a list

of routing numbers arranged by Federal Reserve Bank
Office to assist persons in determining whether or not
such a check is local. If, however, a check is payable
by one bank but payable through another

bank, the

routing number appearing on the check will be that of
the payable through bank, not the paying bank.

Many

credit union share drafts and certain other checks
payable by banks are payable through other banks.

In

such cases, the routing number cannot be relied on to
determine whether the check is local or nonlocal.

In a

few cases, a payable through bank will be designated
only by routing numbers and will not be
check.

In such cases also, the routing

named on the
number may not

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be relied on to determine whether the check is local or
nonlocal.
(s)

Local paving bank is defined as a paying bank

located in the same check processing region as the
branch or proprietary ATM of the depositary bank.

Examples
1.

If a check that is payable by a bank that is

located in the same check processing region as the
depositary bank is payable through a bank located in
another check processing region, the check is
considered local or nonlocal depending on the location
of the bank by which it is payable even if the check is
sent to the nonlocal bank for collection.
2.

The location of the depositary bank is

determined by the physical location of the branch or
proprietary ATM at which a check is deposited.

If the

branch of the depositary bank located in one check
processing region sends a check to the depositary
bank's central facility in another check processing
region, and the central facility is in the same check
processing region as the paying bank, the check is
still considered nonlocal.

(See Commentary on

definition of "paying bank".)
For deposits at nonproprietary ATMs, a paying bank
is a local paying bank only if the paying bank is
located in the same check processing region as the

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location of both the branch of the depositary bank at
which the account is held and the nonproprietary ATM at
which the check is deposited.
*

*

*

(z)

*

*

Paying bank.

The regulation uses this term in

lieu of the Act's "originating depository
institution."

For purposes of •
Subpart B, the term

"paying bank" includes the payor bank, the payable at
bank to which a check is sent, or, if the check is
payable by a nonbank payor, the bank through which the
check is payable and to which it is sent for payment or
collection.

For purposes of Subpart C, the term

includes the payable through bank and the bank whose
routing number appears on the check regardless of
whether the check is payable by a different bank,
provided that the check is sent for payment or
collection to the payable through bank or the bank
whose routing number appears on the check.
Under §§ 229.30 and 229.36(a), a bank designated
as a "payable through bank" or "payable at bank" and to
which the check is sent for payment or collection is
responsible for the expedited return of checks and
notice of nonpayment requirements of Subpart C.

The

payable through or payable at bank may contract with
the payor with respect to its liability in discharging
these responsibilities.

The Board believes that the

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Act makes a clear connection between availability and
the time it takes for checks to be cleared and
returned.

Allowing the payable through bank additional

time to forward checks to the payor and await return or
pay instructions from the payor would delay the return
of these checks, increasing the risks to depositary
banks.

Subpart C places on payable through and payable

at banks the requirements of expeditious return based
on the time the payable through or payable at bank
received the check for forward collection.
If a check is sent for forward collection based on
the routing number, the bank associated with the
routing number is a paying bank for the purposes of
Subpart C requirements, including notice of nonpayment,
even if the check is not drawn by a customer of that
bank or the check is fraudulent.
The phrase "and to which [the check] is sent for
payment or collection" includes sending not only the
physical check, but information regarding the check
under a truncation arrangement.
Federal Reserve Banks and Federal Home Loan Banks
are also paying banks under all subparts of the
regulation with respect to checks payable by them, even
though such banks are not defined as banks for purposes
of Subpart B.

-

3.

15

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The Commentary to § 229.11(c) is amended by adding at the

end thereof the following new paragraph:
A reduction in schedules may apply even in those cases
where the determination that the check is nonlocal cannot be
made based on the routing number on the check.

For example, a

nonlocal credit union payable through share draft may be subject
to a reduction in schedules if the routing number of the payable
through bank which appears on the draft is included in
Appendix B, even though the determination that the payable
through share draft is nonlocal is based on the location of the
credit union and not the routing number on the draft.
4.

§ 229.16(b)(2) is amended by adding a footnote to the end of

that paragraph, to read as follows:
No later than December 31, 1988, a bank that
distinguishes in its disclosure between local and nonlocal
checks based on the routing number on the check must disclose
that certain checks, such as some credit union share drafts that
are payable by one bank but payable through another bank, will
be treated as local or nonlocal checks based upon the location
of the bank by which they are payable and not on the basis of
the location of the bank whose routing number appears on the
check.

The statement concerning payable through checks must

describe how the customer can determine whether these checks
will be treated as local or nonlocal, or state that special
rules apply to such checks and that the customer may ask about
the availability of these checks.

The statement may be in the

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form of an attachment or insert to the bank's existing specific
policy disclosures.

In addition, banks subject to this

disclosure requirement must provide a similar notice concerning
the payable through checks to existing account customers no
later than December 31, 1988.

(Even though a bank need not make

a disclosure concerning payable through checks until
December 31, 1988, the bank must characterize these checks
correctly as local or nonlocal checks under amended § 229.2, and
provide availability in accordance with §§ 229.11, 229.12, and
229.13, effective September 1, 1988.)
5.

The Commentary to § 229.21(c) is amended by deleting the

period at the end thereof and adding the following:
; or if it fails to identify whether a payable through
check is a local or nonlocal check despite procedures
designed to make this determination accurately.
6.

§ 229.30, paragraph (a)(1) is revised to read as follows:

§ 229.30

Paying bank's responsibility for return of checks.
(a)

Return of checks.
(1)

*

*

*

Two-dav/four-dav test. A paying bank returns

a check in an expeditious manner if it sends the
returned check in a manner such that the check would
normally be received by the depositary bank not later
than 4:00 p.m. (local time of the depositary bank)
of --

-

(i)

17

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The second business day following the

banking day on which the check was presented to
the paying bank, if the paying bank is located in
the same check processing region as the depositary
bank; or
(ii)

The fourth business day following the

banking day on which the check was presented to
the paying bank, if the paying bank is not located
in the same check processing region as the
depositary bank.
If the last business day on which the paying bank may
deliver a returned check to the depositary bank is not
a banking day for the depositary bank, the paying bank
meets the two-day/four-day test if the returned check
is received by the depositary bank on or before the
depositary bank's next banking day.
COMMENTARY
Section 229.30

Paying Bank's Responsibility for Return of
Checks

(a)

Return of checks. This section requires a paying

bank (which, for purposes of Subpart C, may include a payable
through and payable at bank; see § 229.2(z)) that determines not
to pay a check to return the check expeditiously.

Generally, a

check is returned expeditiously if the return process is as fast
as the forward collection process.

This paragraph provides two

standards for expeditious return, the "two-day/four-day" test,
and the "forward collection" test.

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Under the "two-day/four-day" test, if a check is
returned such that it would normally be received by the
depositary bank two business days after presentment where both
the paying and depositary banks are located in the same check
processing region or four business days after presentment where
the paying and depositary banks are not located in the same
check processing region, the check is considered returned
expeditiously.

In certain limited cases, however, these times

are shorter than the time it would normally take a forward
collection check deposited in the paying bank and payable by the
depositary bank to be collected.

Therefore, the Board has

included a "forward collection" test, whereby a check is
nonetheless considered to be returned expeditiously if the
paying bank uses transportation methods and banks for return
comparable to those used for forward collection checks, even if
the check is not received by the depositary bank within the
two-day or four-day period.
(1)

Two-dav/four-dav test. Under the first test,

a paying bank must return the check so that the check
would normally be received by the depositary bank
within specified times, depending on whether or not the
paying and depositary banks are located in the same
check processing region.
Where both banks are located in the same check
processing region, a check is returned expeditiously if
it is returned to the depositary bank by 4:00 p.m.

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(local time of the depositary bank) of the second
business day after the banking day on which the check
was presented to the paying bank.

For example, a check

presented on Monday to a paying bank must be returned
to a depositary bank located in the same check
processing region by 4:00 p.m. on Wednesday.

For a

paying bank that is located in ,a different check
processing region than the depositary bank, the
deadline to complete return is 4:00 p.m. (local time of
the depositary bank) of the fourth business day after
the banking day on which the check was presented to the
paying bank.

For example, a check presented to such a

paying bank on Monday must be returned to the
depositary bank by 4:00 p.m. on Friday.
This two-day/four-day test does not necessarily
require actual receipt of the check by the depositary
bank within these times.

Rather, the paying bank must

send the check so that the check would normally be
received by the depositary bank within the specified
time.

Thus, the paying bank is not responsible for

unforeseeable delays in the return of the check, such
as transportation delays.
Often, returned checks will be delivered to the
depositary bank together with forward collection
checks.

Where the last day on which a check could be

delivered to a depositary bank under this

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20

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two-day/four-day test is not a banking day for the
depositary bank, a returning bank might not schedule
delivery of forward collection checks to the depositary
bank on that day.

Further, the depositary bank may not

process checks on that day.

Consequently, if the last

day of the time limit is not a banking day for the
depositary bank, the check may be delivered to the
depositary bank before the close of the depositary
bank's next banking day and the return will still be
considered expeditious.

Ordinarily, this extension of

time will allow the returned checks to be delivered
with the next shipment of forward collection checks
destined for the depositary bank.
The times specified in this two-day/four-day test
are based on estimated forward collection times, but
take into account the particular difficulties that may
be encountered in handling returned checks. It is
anticipated that the normal process for forward
collection of a check coupled with these return
requirements will frequently result in the return of
checks before the proceeds of local and nonlocal
checks, other than those covered by § 229.10(c), must
be made available for withdrawal under the temporary
schedules in § 229.11.

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21

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Under this two-day/four-day test, no particular
means of returning checks is required, thus providing
flexibility to paying banks in selecting means of
return.

The Board anticipates that paying banks will

often use returning banks (see $ 229.31) as their
agents to return checks to depositary banks.

A paying

bank may rely on the availability schedule of the
returning bank it uses in determining whether the
returned check would "normally" be returned within the
required time

under this two-day/four-day test, unless

the paying bank has reason to believe that these
schedules do not reflect the actual time for return of
a check.
6.

$ 229.31, paragraph (a)(1) is revised to read as follows:

S 229.31

Returning bank's responsibility for return of checks,
(a)

Return „p£ -Sheafra.
(1)

*

*

*

Two-dav/four-dav test.

A returning bank

returns a check in an expeditious manner if it sends
the returned check in a manner such that the check
would normally be received by the depositary bank not
later than 4:00 p.m. (local time) of -­
(i)

The second business day following the

banking day on which the check was presented to
the paying bank if the paying bank is located in
the same check processing region as the depositary
bank; or

-

(ii)

22

-

The fourth business day following the

banking day on which the check was presented to
the paying bank if the paying bank is not located
in the same check processing region as the
depositary bank.
If the last business day on which the returning bank
may deliver a returned check to the depositary bank is
not a banking day for the depositary bank, the
returning bank meets this requirement if the returned
check is received by the depositary bank on or before
the depositary bank's next banking day.
COMMENTARY
Section 229.31

Paying Bank's Responsibility for Return of
Checks

(a)

Return of checks. The standards for return of

checks established by this section are similar to those for
paying banks in § 229.30(a).

This section requires a returning

bank to return a returned check expeditiously if it agrees to
handle the returned check for expeditious return under this
paragraph.

In effect, the returning bank is an agent or

subagent of the paying bank and a subagent of the depositary
bank for the purposes of returning the check.

A returning bank

agrees to handle a returned check for expeditious return to the
depositary bank if it:

-

(1)

23

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publishes or distributes availability

schedules for the return of returned checks and accepts
the returned check for return;
(2)

handles a returned check for return that it-

did not handle for forward collection; or
(3)

otherwise agrees to handle a returned check

for expeditious return.
As in the case of a paying bank, a returning bank's
return of a returned check is expeditious if it meets either of
two tests.

Under the "two-day/four-day" test, the check must be

returned so that it would normally be received by the depositary
bank by 4:00 p.m. either two or four business days after the
check was presented to the paying bank, depending on whether or
not the paying bank is located in the same check processing
region as the depositary bank.

This is the same test as the

two-day/four-day test applicable to paying banks.
Commentary to § 229.30(a).)

(See

While a returning bank will not

have first hand knowledge of the day on which a check was
presented to the paying bank, returning banks may, by agreement,
allocate with paying banks liability for late return based on
the delays caused by each.

In effect, the two-day/four day test

protects all paying and returning banks that return checks from
claims that they failed to return a check expeditiously, where
the check is returned within the specified time following
presentment to the paying bank, or a later time as would result
from unforeseen delays.

-

24

-

The "forward collection" test is similar to the forward
collection test for paying banks.

Under this test, a returning

bank must handle a returned check in the same manner that a
similarly situated collecting bank would handle a check of
similar size drawn on the depositary bank for forward
collection.

A similarly situated bank is a bank (other than a

Federal Reserve Bank) that is of similar asset size and check
handling activity in the same community.

A bank has similar

check handling activity if it handles a similar volume of checks
for forward collection as the forward collection volume of the
returning bank.
Under the forward collection test, a returning bank
must accept returned checks, including both qualified and other
returned checks ("raw returns"), at approximately the same times
and process them according to the same general schedules as
checks handled for forward collection.

Thus, a returning bank

generally must process even raw returns on an overnight basis,
unless its time limit is extended by one day to convert a raw
return to a qualified returned check.
A returning bank may establish earlier cut-off hours
for receipt of returned checks than for receipt of forward
collection checks, but the cut-off hour for returned checks may
not be earlier than 2:00 p.m.

The returning bank also may set

different sorting requirements for returned checks than those
applicable to other checks.

Thus, a returning bank may allow

itself more processing time for returns than for forward

-

collection checks.

25

-

All returned checks received by a cut-off

hour for returned checks must be processed and dispatched by the
returning bank by the time that it would dispatch forward
collection checks received at a corresponding forward collection
cut-off hour that provides for the same or faster availability
for checks destined for the same depositary banks.
*

*

*

*

*
COMMENTARY

Section 229.36
(a)

Presentment of Checks
Payable through and payable at checks.

For

purposes of Subpart C, the regulation defines a payable though
or payable at bank (which could be designated the collectible
through or collectible at bank) as a paying bank.

The

requirements of § 229.30(a) and the notice of nonpayment
requirements of § 229.33, are imposed on a payable through or
payable at bank and are based on the time of receipt of the
forward collection check by the payable through or payable at
bank.

This provision is intended to speed the return of checks

that are payable through or at a bank to the depositary bank.
(b)

Receipt at bank office or processing center.

This

paragraph seeks to facilitate efficient presentment of checks to
promote early return or notice of nonpayment to the depositary
bank, and clarifies the law as to the effect of presentment by
routing number.

This paragraph differs from § 229.32(b) because

presentment of checks differs from delivery of returned checks.

-

26

-

The paragraph specifies four locations at which the
paying bank must accept presentment of checks.

Where the check

is payable through a bank and the check is sent to that bank,
the payable through bank is the paying bank for purposes of this
subpart, regardless of whether the paying bank must present the
check to another bank or to a nonbank payor for payment.
1.

Delivery of checks may be made, and presentment is
considered to occur, at a location (including a
processing center) requested by the paying bank.
This is the way most checks are presented by banks
today.

This provision adopts the common law rule

of a number of legal decisions that the processing
center acts as the agent of the paying bank to
accept presentment and to begin the time for
processing of the check.
§ 4-204(3).)

(See also U.C.C.

If a bank designates different

locations for the presentment of forward
collection checks bearing different routing
numbers, for purposes of this paragraph it only
requests presentment of checks bearing a
particular routing number at the location
designated for receipt of forward collection
checks bearing that routing number.
2.

Delivery may be made at an office of the bank
associated with the routing number on the check.
The office associated with the routing number of a

-

27

-

bank is found in a publication of Rand McNally,
Key to Routing Numbers, which lists a city and
state address for each routing number.

Checks are

generally handled by collecting banks on the basis
of the nine-digit routing number encoded in
magnetic ink (or on the basis of the fractional
form routing number if the magnetic ink characters
are obliterated) on the check, rather than the
printed name or address.

The definition of a

paying bank in § 229.2(z) includes a bank
designated by routing number, whether or not there
is a name on the check, and whether or not any
name is consistent with the routing number.

Where

a check is payable by one bank, but payable
through another, the routing number is that of the
payable through bank, not that of the payor bank.
As the payor bank has selected the payable through
bank as the point through which presentment is to
be made, it is proper to treat the payable through
bank as the paying bank for purposes of this
section.
There is no requirement in the regulation
that the name and address on the check agree with
the address associated with the routing number on
the check.

A bank may generally control the use

of its routing number, just as it does the use of

-

its name.

28

-

The address associated with the routing

number may be a processing center.
In some cases, a paying bank may have several
offices in the city associated with the routing
number.

In such a case, it would not be

reasonable or efficient to require the presenting
bank to sort the checks by more specific branch
addresses that might be printed on the checks, and
to deliver the checks to each branch.

A

collecting bank would normally deliver all checks
to one location.

In cases where checks are

delivered to a branch other than the branch on
which they may be drawn, computer and courier
communication among branches should permit the
paying bank to determine quickly whether to pay
the check.
3.

If the check specifies the name of the paying bank
but no address, the bank must accept delivery at
any office.

Where delivery is made by a person

other than a bank, or where the routing number is
not readable, delivery will be made based on the
name and address of the paying bank on the check.
If there is no address, delivery may be made at
any office of the paying bank.

This provision is

consistent with U.C.C. § 3-504(2), which states
that presentment for payment may be made at the

-

29

-

place specified in the instrument, or, if there is
none, at the place of business of the party to
pay.

Thus, there is a trade-off for a paying bank

between specifying a particular address on a check
to limit locations of delivery, and simply stating
the name of the bank to encourage wider currency
for the check.
4.

If the check specifies the name and address of a
branch or head office, or other location (such as
a processing center), the check may be delivered
by delivery to that office or other location.

If

the address is too general to identify a
particular office, delivery may be made at any
office consistent with the address.

For example,

if the address is "San Francisco, California,"
each office in San Francisco must accept
presentment.

The designation of an address on the

check is generally in the control of the paying
bank.
This paragraph may affect U.C.C. § 3-504(2)(c) to the
extent that the U.C.C. requires presentment to occur at a place
specified in the instrument.
*

7.

*

*

*

*

.

The introductory paragraphs of Appendix A to Part 229 is

revised to read as follows:

-

30

-

Appendix A
Routing Number Guide to Next-Day Availability
Checks and Local Checks.

Each bank is assigned a routing number by Rand McNally

& Co., as agent for the American Bankers Association.
routing number takes two forms:
nine-digit form.

The

a fractional form and a

A paying bank is generally identified on the

face of a check by its routing number in both the fractional
form (which generally appears in the upper right-hand corner of
the check) and the nine-digit form (which is printed in magnetic
ink in a strip along the bottom of the check). Where a check is
payable by one bank but payable through another bank, the
routing number appearing on the check is that of the payable
through bank, not the payor bank.
The first four digits of the nine-digit routing number
and the denominator of the fractional routing number form the
"Federal Reserve routing symbol," which identifies the Federal
Reserve District, the Federal Reserve office, and the clearing
arrangements used by the paying bank.
*
8.

*

*

*

*

Appendix C to Part 229 is amended by adding two new forms to

the end thereof as follows:
Model C-19 —

Payable through checks

In some instances we will treat checks as local or.
nonlocal based upon the location of the bank by which the check
is payable, not on the routing number on the bottom of the

-

check.

31

-

For example, if a credit union share draft is payable by

a credit union that is located in the same check processing
region as our bank, the share draft will be treated as a local
check, even if the draft is payable through a bank that is
located outside of our check processing region as determined by
the routing number on the check.

If you have any question about

a specific check, please ask your branch manager.
Model C-19A -- Payable through checks
Checks that are payable by one bank but are payable
through another bank, such as credit union share drafts that are
payable through a bank, are considered local or nonlocal based
upon the location of the bank by which the check is payable, not
the payable through bank whose routing number appears on the
check.

If the bank by which the payable through check is

payable (the credit union in the case of a payable through
credit union share draft) is located in the same check
processing region as we are, the check will be considered a
local check.

[(Our check processing region includes . . . .) or

(A map of our check processing region is (attached) (available
upon request).)]

If you would like to know whether a particular

check falls into this category, you may ask your branch manager
for assistance.
9.

The Commentary to Appendix C is amended by adding the

following at the end of the last paragraph to the discussion of
"Models C-l through C-7 generally:"

-

32

-

In addition, a bank that distinguishes in its
disclosure between local and nonlocal checks based on the
routing number on the check (as set forth in model forms C-4
through C-7) must disclose that certain checks, such as credit
union share drafts that are payable through a bank, will be
treated as local or nonlocal based upon the location of the
payor bank and not on the basis of the routing number on the
check.

Model C-19 or C-19A could be incorporated into model

forms C-4 through C-7 to meet this requirement.
10.

The Commentary to Appendix C is amended by adding at the

end thereof the following new paragraph:
Model C-19 and C-19A.

Either of these statements

satisfies the requirements set forth in the footnote to
§ 229.16(b)(2) concerning payable through checks.

The

statements are both model clauses and notices in that they may
be added to a bank's specific policy disclosure to describe how
the bank treats payable through checks, and may be used as the
notice that must be sent to existing customers no later than
December 31, 1988, if the bank's specific policy disclosure
given to the customers did not accurately reflect the treatment
of payable through checks.
★

★

•k

•k

*

By order of the Board of Governors of the Federal
Reserve System, August 12, 1988.

William W. Wiles
Secretary of the Board

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